DIRECT TAX LAWS AND INTERNATIONAL TAXATION STUDY NOTES FINAL FINAL : PAPER - 16 SYLLABUS The Institute of Cost Accountants of India

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1 FINAL : PAPER - 16 SYLLABUS DIRECT TAX LAWS AND INTERNATIONAL TAXATION FINAL STUDY NOTES The Institute of Cost Accountants of India CMA Bhawan, 12, Sudder Street, Kolkata

2 First Edition : August 2016 Published by : Directorate of Studies The Institute of Cost Accountants of India (ICAI) CMA Bhawan, 12, Sudder Street, Kolkata Copyright of these Study Notes is reserved by the Institute of Cost Accountants of India and prior permission from the Institute is necessary for reproduction of the whole or any part thereof.

3 Syllabus PAPER 16: DIRECT TAX LAWS AND INTERNATIONAL TAXATION Syllabus Structure A Advanced Direct Tax Laws 50% B International Taxation 30% C Tax Practice and Procedures 20% C 20% 10% B 30% A 50% A 70% 50% ASSESSMENT STRATEGY There will be written examination paper of three hours OBJECTIVES To gain an expert knowledge anout the direct and indirect tax laws in force and the relevant rules and principles emerging from leading cases, to provide an insight into practical aspects and apply the provisions of laws to various situations and to understand the various external Auditing Requirements under tax laws. Learning Aims The syllabus aims to test the student s ability to: Tax planning and management under Direct and Indirect Taxes Explain case laws governing core provisions of the above Acts Explain tax assessment for various assessees and return filing procedures Explain powers of various assessing authorities Explain rebate, relief, refund under various provisions of these Acts Explain International Taxation and other relevant issues Skill set required Level C: Requiring skill levels of knowledge, comprehension, application, analysis, synthesis and evaluation. Section A : Advanced Direct Tax Laws 50% 1. Return of Income & Assessment Procedure 2. Assessment of Various Entities & Tax Planning 3. Clubbing of Income 4. Set-Off and Carry forward and Set-Off of Losses 5. Deduction in Computing Total Income 6. Business Restructuring 7. Administrative Procedures under Direct Taxation 8. Grievances Redressal Procedure 9. Settlement of Cases 10. Black Money Act, 2015 Section B: International Taxation 30% 11. Double Taxation Avoidance Agreements (DTAA) 12. Transfer Pricing Issues Section C: Tax Practice and Procedures 20% 13. Case Study Analysis

4 SECTION A : ADVANCED DIRECT TAX LAWS (1) Return of Income & Assessment Procedure (a) Return of Income (b) Annual Information Return [Section 285BA] (c) Assessment Procedure (2) Assessment of Various Entities & Tax Planning (a) Assessment of Individuals (b) Assessment of Hindu Undivided Family (c) Assessment of Firms (d) Assessment of Limited Liability Partnership (LLP) (e) Assessment of Association of Persons/Body of Inndividuals (f) Assessment of Companies (g) Assessment of Co-operative Societies (h) Assessment of Trusts (i) Assessment of Mutual Association (j) Alternate Minimum Tax and Minimum Alternate Tax (k) Different Aspects of Direct Tax Planning (3) Clubbing of Income (a) Income of other person s assessed/clubbed in the hands of the Assessee (4) Set-Off and Carry forward and Set-off of losses (a) Introduction (b) Set-off of loss in the same year (c) Carry forward and set-off of loss in Subsequent Years (5) Deduction in Computing Total Income (a) Introduction (b) Deductions from Gross Total Income (6) Business Restructuring (a) Restructuring business (b) Amalgamation (c) Demerger, Reverse Merger (d) Conversion of sole properietary business to company (e) Conversion of Firm into Company (f) Conversion of Private Company / Unlisted Public Company into Limited Liability Partnership (LLP) (7) Administrative Procedures under Direct Taxation (a) CBDT & Other Authorities (b) Survey (c) Search & Seizure (d) Demand, Recovery, Assessment, appeal, revision and settlement (e) E-commerce Transaction and Liability in special cases (f) Penalties, Fines and Prosecution (g) Income Computation and Disclosure Standards (8) Grievances Redressal Procedure (a) Grievances Redressal Procedure (b) Rectification (c) Appeal and Appellate Hierarchy (d) Revision

5 (9) Settlement of Cases (a) Liability under special cases (b) Settlement of Cases [Section 245A to 245L] (c) Advance Ruling (10) Black Money Act, 2015 (a) Introduction to Black Money Act (b) Highlights of Black Money Act SECTION B : INTERNATIONAL TAXATION [30 MARKS] (11) Double Taxation Avoidance Agreements (DTAA) (a) Double Taxation Relief - Agreement with Foreign Countries or Specified Territories [Section 90] (b) Adoption by Central Government of agreement between Specified Associations for Double Taxation Relief [Section 90A] (c) Countries with which no Agreement Exists [Section 91] (d) Tax Residency Certificate [TRC] [Section 90 & 90A] (12) Transfer Pricing Issues (including international and domestic transactions) (a) International Taxation & Transfer Pricing issues (b) Application of Generally Accepted Cost Accounting Principles and Techniques for determination of Arm s Length Price (c) Advance Pricing Agreement (APA) - Concept and Application SECTION C : TAX PRACTICE AND PROCEDURES [20 MARKS] (13) Case Study Analysis Disclaimer: The Contents of this subject/paper shall be reviewed every 6 months and shall be incorporated accordintly.

6 Contents SECTION A - ADVANCED DIRECT TAX LAWS Study Note 1 : Return of Income & Assessment Procedure 1.1 Return of Income Assessment Procedure Annual Information Return Income Computation and Disclosure Standards (ICDS) 27 Study Note 2 : Assessment of Various Entities & Tax Planning 2.1 Introduction Assessment of Individuals Assessment of HUF Assessment of Firm Assessment of LLP Assessment of AOP / BOI Assessment of Companies Assessment of Co-Operative Societies Assessment of Trusts Assessment of Mutual Association Different Aspects of Direct Tax Planning 102 Study Note 3 : Clubbing of Income 3.1 Clubbing of Income 137 Study Note 4 : Set-Off and Carry Forward and Set-Off of Losses 4.1 Introduction Set-off of Losses in the Same Year Carry Forward and Set-of of Loss in Subsequent Years 150 Study Note 5 : Deduction in Computing Total Income 5.1 Introduction Deduction from Gross Total Income 163

7 Study Note 6 : Business Restructuring 6.1 Introduction Amalgamation, Demerger and Reverse Marger 185 Study Note 7 : Administrative Procedures under Direct Taxation 7.1 Income Tax Authorities & CBDT Survery Under Section 133 of the Income Tax Act Search & Seizure Penalties & Prosecution 218 Study Note 8 : Grievances Redressal Procedure 8.1 Introduction Appeal and Appellate Hierarchy Rectification Revision 260 Study Note 9 : Settlement of Cases and Advance Ruling 9.1 Introduction Settlement of Cases (Related Section - 245A - 245L) Advance Ruling 274 Study Note 10 : Black Money and Imposition of Tax Act, Introduction Highlights of Black Money Act 295 Study Note 11 : Income Declaration Scheme (IDS) Salient Features and Applicability of IDS 303

8 Section B INTERNATIONAL TAXATION Study Note 12 : Double Taxation Avoidance Agreements (DTAA) 12.1 Introduction Types oif Double Taxation Agreement with Foreign Countries or Specified Territories [Section 90] Adoption by Central Government of Agreements between Specified Associations for Double Taxation Relief [Section 90A] Countries with which no Agreement Exists [Section 91] Approaches for Elimination of Double Taxation Methods of Granting Tax Credit Special Cases 316 Study Note 13 : Transfer Pricing 13.1 Meaning of Transfer Pricing Arm s Length Principle Relevance of Cost Accounting Principles in Arm s Length Pricing Advance Pricing Agreements (APA) Base Erosion & Profit Shifting (BEPS) and General Anti Avoidance Rules (GAAR) 354 Section C TAX PRACTICE AND PROCEDURES Case Study Analysis Return of Income & Assessment Procedures, ICDS 373 Assessment of Various entities & Tax Planning 374 Clubbing of Income 380 Set-off and Carry Forward of Losses 381 Deduction in Computing Total Income 381 Business Restructuring, M&A 383 Administrative Procedures under Direct Tax 384 Grievances Redressal Procedure 387 Settlement of Cases 388 Black Money Act 2015 (UFIA) 389 Double Taxation Avoidance Agreements (DTAA) 390 International Taxation - Vodafone 393

9 Section A Advanced Direct Tax Laws (Syllabus )

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11 Study Note - 1 RETURN OF INCOME & ASSESSMENT PROCEDURE This Study Note includes 1.1 Return of Income 1.2 Assessment Procedure 1.3 Annual Information Return 1.4 Income Computation and Disclosure Standards (ICDS) 1.1 RETURN OF INCOME The starting point for assessment of income is furnishing of return of income. Filing of return of income is mandatory for certain category of assessees. Incidental provisions for accompaniments to the return of income, error correction and belated returns have been made. Now filing of the return electronically has been made mandatory for certain category of assessees. Return of income is the format in which the assessee has to furnish information as to his total income and tax payable. The format for filing of returns by different assessees is notified by the CBDT. The procedure under the Income-tax Act for making an assessment of income begins with the filing of a return of income. Section 139 of the Act contains the relevant provisions relating to the furnishing of a return of income. Filing of return is the first step of assessment. On the basis of return of income the income tax authority makes the assessment.. Every individual whose total income before allowing deductions under Chapter VI-A of the Incometax Act 1961, exceeds the maximum amount which is not chargeable to income tax is obligated to furnish his return of income. For AY and Maximum Amount not Chargeable to Tax is: `2,50,000/- (General) `3,00,000/- (Senior Citizen Age between 60 to 79 Years) `5,00,000/- (Super Senior Citizen Age 80 or Above) All taxpayers having Income more than `5 Lakhs are mandatorily required to submit their Income Tax Return online using appropriate ITR. Those taxpayers with Income below `5 Lakhs can either submit their Income Tax Return online or can submit the physical forms as well. CBDT has introduced simplified ITR for Salaried persons in ITR-1 (SAHAJ). To make it more convenient CBDT has introduced Quick E-file option. This option is only for ITR-1 (SAHAJ) and ITR-4S (SUGAM). On-line Return filing : To file online return the assessee needs to Register his PAN. Registration of PAN is a simple process. He has to furnish his own ID and Mobile Number during registration. The assessee must maintain his Income Tax File Properly by filing the Income Tax Return regularly and keeping a record of Income and Investment declared by him in the Income Tax Return. 26 AS Statement : The assessee can view 26AS and keep track of TDS deducted from him. He can periodically check whether the Income tax Deducted has been credited against his PAN. This is very important since many times due to error in filing TDS return (Like quoting wrong PAN) TDS does not get credited in 26AS. So by checking 26AS periodically any such case can be detected at an early stage. From the Income Tax Login assessee can download all the Income Tax Return of earlier years. Only electronically filed return can be downloaded. So in case he has filed Return Online and in case assessee has lost the ITRV, he can login and download the ITRV online from Income Tax Website. Assessee can check the status of refund online from his login. Assessee can also file online Rectification request u/s 154. Assessee can check the Status of Rectification request. Assessee can request for intimation u/s 143(1). Assessee can also submit his response to outstanding demand, if any. Assessee can make refund re-issue request. Assessee can check Pending Actions DIRECT TAX LAWS AND INTERNATIONAL TAXATION 1

12 Return of Income & Assessment Procedure Status on the Dashboard. Assessee can update Address, ID and Mobile No., if required Types of Forms: ITR-1 (SAHAJ) Who can use this Return Form? This Return Form is to be used by an individual whose total income for the assessment year and includes:- (a) Income from Salary/ Pension; or (b) Income from One House Property (excluding cases where loss is brought forward from previous years); or (c) Income from Other Sources (excluding Winning from Lottery and Income from Race Horses) NOTE: Further, in a case where the income of another person like spouse, minor child, etc. is to be clubbed with the income of the assessee, this Return Form can be used only if the income being clubbed falls into the above income categories. So if any Income is not falling in the above category then ITR1-SAHAJ can not be used. Who cannot use this Return Form? This Return Form should not be used by an individual whose total income for the assessment year and includes:- (a) Income from more than one house property; or (b) Income from Winnings from lottery or income from Race horses; or (c) Income under the head "Capital Gains ; or (d) Agricultural income in excess of 5,000; or (e) Income from Business or Profession; or (f) Loss under the head 'Income from other sources; or (g) Person claiming relief under section 90 and/or 91; or (h) Any resident having any asset (including financial interest in any entity) located outside India or signing authority in any account located outside India or (i) Any resident having income from any source outside India ITR-2 Who can use this Return Form? This Return Form is to be used by an individual/huf whose total income for the assessment year and includes:- (a) Income from salary/ Pension (b) Income from house property (c) Income from capital gains (d) Income from other sources (including winning from lottery and income from race horses) (e) Individuals who qualify as ordinarily resident in India and having any overseas income/ assets etc ITR-2 Who cannot use this Return Form? (a) This Return Form should not be used by an individual/huf whose total income for the assessment year and includes:- 2 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

13 (b) (a) Income from Business or Profession. For Income from Business or Profession ITR-4 or ITR-4S (SUGAM) is used. (c) (b) Income from a Partnership Firm. Partner of Partnership Firm are required to file Income Tax Return in ITR-3. ITR-2A (New ITR. Introduced from AY ) Who can use this Return Form? This newly introduced return form can be used by the individuals/ HUFs whose total income includes the following: (a) Income from salary/ Pension (b) Income from house property (c) Income from other sources (including winning from lottery and income from race horses) ITR-2A Who cannot use this Return Form? This Return Form should not be used by an individual/huf whose total income for the assessment year includes:- (a) Income from capital gains; or (b) Income from Business or Profession; or (c) Any claim of relief/deduction under section 90/90A/91; or (d) Any resident having any asset (including financial interest in any entity) located outside India or signing authority in any account located outside India; or (e) Any Resident having Income from any source outside India. ITR-3 Who can use this Return Form? This Return Form is to be used by an individual or an Hindu Undivided Family (HUF) who is a partner in a firm and whose total income for the assessment year and includes:- (a) Income from salary/ Pension (b) Income from house property (c) Income from capital gains (d) Income from other sources (including winning from lottery and income from race horses) Who cannot use this Return Form? This Return Form should not be used by an individual whose total Income for the Assessment year and includes Income from Business or Profession under any proprietorship. In such case ITR4 will be applicable. ITR-4 Who can use this Return Form? (a) ITR-4 can be used by any Individuals or HUF who is earning Income from any Proprietary Business or Profession. Income from Salary, Income from House Property, Income from Capital gain and Income from Other Sources can also be declared in this return. (b) This Return Form can also be used by an individual or an Hindu Undivided Family (HUF) who is a partner in a firm and also carrying out a Proprietary Business or Profession. ITR-4S (SUGAM) Who can use this Return Form? This Return Form can be used by Individual/HUF whose total income for the assessment year and DIRECT TAX LAWS AND INTERNATIONAL TAXATION 3

14 Return of Income & Assessment Procedure includes:- (a) Business income where such income is computed in accordance with special provisions referred to in section 44AD and 44AE (i.e. on presumptive basis) (b) Income from salary/ Pension (c) Income from one house property (excluding cases where loss is brought forward from previous years) (d) Income from other sources (Excluding winning from lottery and income from race horses) New Introduction in ITR Filing ITR-1 even if the exempt income is more than `5000 From the past two years, the Tax Payers were using ITR 2 or ITR 4 if the exempt income was more than ` This created a lot of debate among Tax payers, whether to file ITR 2, even they receive exempt HRA allowance, which is normally more than `5000. Going forward, any Tax Payer enjoying any amount of exempt income such as PPF Interest, House Rent Allowance etc. can file ITR-1or ITR 4S. However, Payers who are enjoying the Agricultural income above `5000 are still required to file ITR 2 / ITR 4. Introduction of Aadhar Card No. based Electronic Verification Code A new system of verification has been rolled out which is called as Electronic verification. In this system, the Tax Payer will receive a verification code (similar to One Time Password (OTP)) on Payer s Mobile number which is associated with Payer s Aadhar card. The Aadhar Card number is also required to be mentioned in the ITR. Once the Payer enters the verification code), the e-filing will be verified. Therefore posting ITR-V to CPC, Bangalore is not required if the Tax Payer opted to file his tax return either through Electronic Verification System or with Digital Signature. In all other cases i.e. Aadhar Card Holders or who don t file through Electronic Verification system are still required to follow the old mechanism of sending ITR-V to CPC, Bangalore. Mandatory e-filing for Income Tax Refunds To speed up and prompt issue of Tax Refunds, e-filing of Income Tax Return has been made mandatory for those who desire any Income Tax Refund. This step will ensure quick refunds to tax Payers. Secondly, it is proposed that all the refunds will be done electronically and cheques will not be issued. Giving Details of Multiple Bank Account No. In New ITR, details of all the bank accounts (excluding accounts that have been non operational for over three years) held in India at any time during the previous year needs to be given. Details required are as follows: # Total number of accounts held # IFSC code of the bank # Name of the bank # Account number # Savings/ Current account # Check box to indicate the bank account in which the taxpayer prefers to get the refund. Introduction of e-filing of Return u/s 119(2)(b) In Return Filed under section new option Under Section 119(2)(b) has been newly inserted. So once delay in filing of Income Tax return is condoned, the return u/s 119(2)(b) can be filed online E-filing of return The process of electronically filing Income tax returns through the internet is known as e-filing. e-filing of Returns/Forms is mandatory for : 1. In the case of an Individual/HUF 4 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

15 a) Where accounts are required to be audited under section 44AB b) Where (a) is not applicable and The return is furnished in ITR-3 or in ITR-4; or The individual/huf being a resident (other than not ordinarily resident) has Assets, including financial interest in any entity, located outside India, or signing authority in any account located outside India, or income from any source outside India Any relief in respect of tax paid outside India under section 90 or 90A or deduction under section 91 is claimed Where an assessee is required to furnish an Audit Report specified under sections 10(23C) (iv), 10(23C) (v), 10(23C) (vi), 10(23C) (via), 10A, 10AA, 12A(1) (b), 44AB, 44DA, 50B, 80-IA, 80-IB, 80- IC, 80-ID, 80JJAA, 80LA, 92E, 115JB, 115VW or give a notice under section 11(2)(a) shall e-file the same. These Audit Reports are to be e-filed and any person required to obtain these Audit Reports are required to e-file the return. Total income exceeds five lakh rupees or any refund is claimed (other than Super Senior Citizen furnishing ITR1 or ITR2) c) In cases covered by (a) above, the return is required to be e-filed using digital signature (DSC). d) In cases covered by (b) above, the return is required to be e-filed using any one of the following Digital Signature Certificate (DSC) or Electronic Verification Code (EVC), or Verification of the return by submitting ITR-V. 2. In all cases of company the return is required to be e-filed using digital signature(dsc) 3. In the case of a person required to file ITR-7: For a political party the return is required to be e-filed using digital signature In any other case of ITR 7, the return is required to be e-filed using any one of the following Digital Signature Certificate (DSC) or Electronic Verification Code (EVC), or Verification of the return by submitting ITR-V. 4. In case of Firm or Limited Liability Partnership or any person (other than a person mentioned in A, B & C above) who are required to file return in Form ITR-5 Where accounts are required to be audited under section 44AB, the return is required to be e-filed under digital signature (DSC) In any other case the return is required to be e-filed using any one of the following Digital Signature Certificate (DSC) or Electronic Verification Code (EVC), or Verification of the return by submitting ITR-V. 5. A company and an assessee being individual or HUF who is liable to audit u/s 44AB are required to furnish Form BB (Return of Net Wealth) electronically using DSC. 6. Information to be furnished for payments, chargeable to tax, to a non-resident not being a company or to a foreign company in Form 15CA. 7. Appeal to the Commissioner (Appeals) in Form 35. DIRECT TAX LAWS AND INTERNATIONAL TAXATION 5

16 Return of Income & Assessment Procedure Types of E-Filing : 3 options to file Income Tax Returns electronically: Option 1: e-file without Digital Signature Certificate. In this case an ITR-V Form is generated. The Form should be printed, signed and submitted to CPC, Bangalore using Ordinary Post or Speed Post ONLY within 120 days from the date of e-filing. There is no further action needed, if ITR-V Form is submitted. Option 2: e-file the Income Tax Return through an e-return Intermediary (ERI) with or without Digital Signature Certificate (DSC). Option 3: Use Digital Signature Certificate (DSC) / EVC to e-file. There is no further action needed, if filed using DSC / EVC. Note: The Digital Signature Certificate (DSC) used in e-filing the Income Tax Return/Forms should be registered on e-filing application. Registration in E-Filing application A user must register at Pre-requisites to register PAN (Permanent Account Number) TAN (Tax Deduction Account Number) Membership with ICAI - For Chartered Accountant Registration process Provide PAN / TAN, Password details, Personal details as per PAN / TAN, Contact details and Digital signature (if available and applicable). Then Submit request. On success, Activation link is sent to user through and a mobile PIN to mobile number. Click on the activation link and provide Mobile PIN to activate e-filing account. Once registered, LOGIN using User ID, Password,Date of Birth/ Incorporation Methods of E-Filing An Income Tax return can be e-filed by: (a) Preparing the Income Tax return offline using return preparation software available free of cost at the Income Tax Department e-filing website and Uploading the Income Tax Return data- A taxpayer can e-file Income Tax Return from ITR 1 to ITR 7. (b) Submit ITR-1/ITR4S Online- An Individual taxpayer can prepare and submit Income Tax Return- ITR 1/ITR4S Online. Uploading return offline operational steps Step 1: Step 2: Step 3: Step 4: Step 5: - e-filing Home Page Click on the ITR under Downloads Click on Download link and save the ZIP file (Excel or JAVA utility) Extract the downloaded ZIP File Open the utility, Click on Import Personal / Tax details from XML à Browse and attached the downloaded Prefill XML file to populate the personal information and TDS details. Step 6: Step 7: Step 8: Enter all the Mandatory Fields à Validate all the sheets à Calculate Tax à Generate XML. Login using e-filing user credentials Navigate to e-file Tab à Click on Upload Return 6 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

17 Step 9: Step 10: Step 11: Step 12: Select ITR Form Name and Assessment Year from the dropdown provided. Browse and attach XML file. Select Do you want to digitally sign? à Submit. On successful submit taxpayer will get an option to e-verify return. Note: 1. To e-file using Digital Signature Certificate (DSC), the DSC should be registered in the application. 2. If the Income Tax Return is uploaded with DSC (digitally signed) or EVC, no further action required. 3. If the return is not uploaded with a DSC (digitally signed) / EVC, The ITR-V should be signed and submitted to CPC. The Return filing process shall be complete only on receipt of the ITR-V at CPC, Bangalore. Steps to submit ITR-1/ITR4S - Online Step 1 - Login to e-filing application Step 2 - GO TO 'e-file' --> 'Prepare and Submit ITR Online' Step 3 - Select the Income Tax Return Form ITR 1/ITR4S and the Assessment Year. Step 4 - Fill in the details and click the SUBMIT button Step 5 - On successful submission, Acknowledgement detail is displayed. Click on the link to view or generate a printout of Acknowledgement/ITR-V Form. Note: 1. To e-file using Digital Signature Certificate (DSC), the DSC should be registered in the application. 2. If the Income Tax Return is uploaded with DSC (digitally signed) or EVC, on generation of "Acknowledgement, the Return Filing process is complete. 3. If the return is not uploaded with a DSC (digitally signed) / EVC, on successful upload of e-return, an ITR-V Form will be generated. This is an Acknowledgement / Verification form. A duly verified ITR-V form should be signed and submitted to CPC. The Return filing process shall be complete only on receipt of the ITR-V at CPC, Bangalore. Modes of Electronic Verification of Returns / Forms The below are the options provided to electronically verify the returns Option 1 : e-verification using e-filing OTP (only available if Total Income is less than or equal to Rupees 5 Lakhs and Refund or Tax payable upto 100 Rupees. Option 2 : e-verification using NetBanking login Option 3 : e-verification using Aadhaar OTP validation. Option 4 : e-verification using Bank ATM (SBI) Option 5 : e-verification using Bank Account Number (PNB) Option 6 : e-verification using Demat Account Note: No Further actions required by the taxpayer post e-verifying the Return. E-Filing functionalities View Status Income Tax Return, ITR-V, Demand/Refund, Rectification View the status of ITR, Demand/ Refund and Rectification details. View e-filed Return/Form DIRECT TAX LAWS AND INTERNATIONAL TAXATION 7

18 Return of Income & Assessment Procedure View the Income Tax Returns, ITR-V Acknowledgment Form and the uploaded XML for the last three assessment years. Tax payer can view these documents online anytime or save and print. Refund Re-issue request Request for refund re-issue if the Income Tax Return has been processed. If a refund is determined and it fails to reach the taxpayer then a request can be raised. File Rectification Rectify e-filed Income Tax Returns online, if required, only after completion of Income Tax Return processing by CPC of the Income Tax department. e-file Defective Income Tax Return u/s 139(9) Taxpayer can e-file Income Tax Return against the Defective Notice issued to them u/s 139 (9) for AY onwards. New users - Chartered Accountant (CA), Tax detector and Collector and Third party Software utility Providers Add / Dis-engage CA - This is a new feature wherein, an assessee can add or Dis-engage a CA and assign / authorize the audit Forms which a CA can submit on their behalf. e-filing Vault - Higher Security - User can use the e-filing Vault - Higher Security, wherein the user can choose the secured option to login and reset password. Refund / Demand Status - User can view the Refund / Demand status under My Account tab post login. ITR1/ITR 4S online - Individual users can use this feature to prepare and submit ITR1 online. The PAN (non-editable) and Tax details (editable) are auto populated. Download ITR Forms, XML and Pre-fill XML - User can download the ITR/XML submitted for three AY and also, download and use the pre-fill XML containing the PAN and Tax details Compliance - This is a new feature wherein, an assessee can update the reason for being non-filer / Mismatch in Return filed. Return of Net Wealth - Form BB, where assessee can submit wealth tax. Its available for Individual, HUF and Company users. Reset Password additional options- This is a new feature where assessee can reset the password using the below additional options- Using PIN (OTP to mobile number and id) Login through Net Banking Using Aadhaar OTP Verification and Validation of Contact details of Taxpayers - Capturing valid mobile number and id of Taxpayers enabling effective communication. Aadhaar Linking Option provided for the taxpayer to link the Aadhaar number, enabling the taxpayer to use the additional options to e-verify the return, Secured login and reset the password. TAN Registration - Enabling TAN users to file Form 15CA, Form 35, Form 15G, Form 15H and TDS. Electronic verification of Returns e-filed Returns are electronically verified using e-filing OTP, NetBanking, Aadhaar OTP, Using Bank ATM (SBI), Using Bank Account number (PNB) and Demat Account. 8 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

19 1.2 ASSESSMENT PROCEDURE UNDER CHAPTER XIV OF INCOME TAX ACT 1961 Assessment procedure covers Regular assessment U/s 143(3) Self Assessment u/s 140A payment of self assessment tax alongwith Challan No 280 Summary Assessment u/s 143(1) Best Judgment assessment u/s 144 Income escaping assessment under section 147 Assessment under search cases Procedure of self assessment : Section 139 and Filling of return, PAN, signing of return, deposit of self assessment tax Procedure of assessment key sections Section Intimation and regular assessment Section Best judgment assessment Section Income escaping assessment Section 153A Assessment in search cases Section Inquiry before assessment including audit Section 142A- Estimations of valuation officer Section Method of Accounting Section 154 Rectification Section Notice of demand Section Intimation of loss Section Power regarding discovery, production of evidence etc. Section 133 (6) - Power to call for information Section 292BB - Notice deemed to be valid Compulsory Filing of Return of Income [Section 139(1)] (1) As per section 139(1), it is compulsory for companies and firms to file a return of income for every Previous Year. (2) In case of a person other than a company or a firm, filing of return of income is mandatory, if his total income or the total income of any other person in respect of which he is assessable under this Act during the Previous Year exceeds the basic exemption limit. (3) Such persons should, on or before the due date, furnish a return of income in the prescribed form and verified in the prescribed manner and setting forth such other particulars as may be prescribed. (4) Further, every person, being an individual or a HUF or an AOP or BOI or an artificial juridical person whose total income or the total income of any other person in respect of which he is assessable under this Act during the Previous Year without giving effect to the provisions of section 10A or 10B or 10BA or Chapter VI-A - exceeded the basic exemption limit is required to file a return of his income or income of such other person. DIRECT TAX LAWS AND INTERNATIONAL TAXATION 9

20 Return of Income & Assessment Procedure (5) For company and certain other assessees like firm having tax audit, filing of return in an electronic form is mandatory. (Section 139D) (6) Compulsory filing of return in relation to assets, etc. located outside India [Fourth proviso to section 139(1)] [W.e.f. A.Y ] A person, being a resident other than not ordinarily resident in India within the meaning of section 6(6), who is not required to furnish a return under this sub-section and who at any time during the previous year, (a) holds, as a beneficial owner or otherwise, any asset (including any financial interest in any entity) located outside India or has signing authority in any account located outside India; or (b) is a beneficiary of any asset (including any financial interest in any entity) located outside India, shall furnish, on or before the due date, a return in respect of his income or loss for the previousyear in such form and verified in such manner and setting forth such other particulars as may be prescribed. Provided also that nothing contained in the fourth proviso shall apply to an individual, being a beneficiary of any asset (including any financial interest in any entity) located outside India when income, if any, arising from such asset is includible in the income of the person referred to in clause (a) of that proviso in accordance with the provisions of this Act. Note:- Beneficial owner in respect of an asset means an individual who has provided, directly or indirectly, consideration for the asset for the immediate or future benefit, direct or indirect, of himself or any other person. Beneficiary in respect of an asset means an individual who derives benefit from the asset during the previous year and the consideration for such asset has been provided by any person other than such beneficiary. (7) Political Parties : Political parties are under a statutory obligation to file return of income in respect of each Assessment Year in accordance with the provisions of the Income-tax Act and the total income for this purpose has to be computed without giving effect to the provision of section 13A and Chapter VI-A of the Act. (8) Liquidator : Under the Companies Act, 2013, a liquidator is not exempt from making an Income-tax return on business managed by him for the beneficial winding up of the company. (9) Charitable Trust : Submission of return by charitable trust is essential even if its income is exempt. If the total income of a charitable trust (without claiming exemption under section 11 and 12) exceeds the maximum amount not chargeable to tax, then submission of return by the trust is essential. (10)No need to file return if Non-agricultural income is less than the amount of exemption limit in the case of an Individual/ HUF. Due date means (a) 30th November of the Assessment Year, where the assessee is required to furnished a report in Form No. 3CEB under section 92E pertaining to international transactions. (b) 30th September of the Assessment Year, where the assessee is - (i) a company; or (ii) a person (other than a company) whose accounts are required to be audited under the Income-tax Act, 1961 or any other law in force; or (iii) a working partner of a firm whose accounts are required to be audited under the Income-tax Act, 1961 or any other law for the time being in force. (c) 31st July of the Assessment Year, in the case of any assessee other than those covered in (a) & (b) above. The return of income required to be furnished in Form No. ITR-1, ITR-2, ITR-3, ITR-4, ITR-5 or ITR-6 shall not be accompanied by a statement showing the computation of the tax payable on the basis of the return, or proof of the tax, if any, claimed to have been deducted or collected at source or the advance tax or self-assessment tax, 10 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

21 if any, claimed to have been paid or any document or copy of any Account or Form or Report of Audit required to be attached with the return of income under any of the provisions of the Act. The return of income referred to in sub-rule (1) may be furnished in any of the following manners, namely: (a) furnishing the return in a paper form; (b) furnishing the return electronically under digital signature; (c) transmitting the data in the return electronically and thereafter submitting the verification of the return in Form ITR-V; (d) furnishing a bar-coded return in a paper form. It shall be mandatory for the following assessees to file the return electronically: (a) every person (not being a co. or a person filing return in ITR 7) having total income exceeding `5,00,000 (b) an individual or a Hindu Undivided Family, being a resident, having assets (including financial interest in any entity) located outside India or signing authority in any account located outside India and required to furnish the return in Form ITR-2 or ITR-3 or ITR-4, as the case may be. (c) Every person claiming tax relief under Section 90, 90A or 91 (d) Persons who are required to get their Accounts audited under Section 44AB, 92E, 115JB. (e) A company required to furnish the return in Form ITR-6. (f) Other tax payers can submit their return in paper format or electronically with or without digital signature. Interest for Default in Furnishing Return of Income [Section 234A] (1) Interest under section 234A is attracted where an assessee furnishes the return of income after the due date or does not furnish the return of income. (2) The interest is payable for the period commencing from the date immediately following the due date and ending on the following dates - When the return is furnished after due date: the date of furnishing of the return Where no return is furnished: the date of completion of assessment (3) The interest has to be calculated on the amount of tax on total income as determined under section 143(1) or on regular assessment as reduced by the advance tax paid and any tax deducted or collected at 1% for every month or part of the month. Option to Furnish Return of Income to Employer [Section 139(1A)] (1) This section gives an option to a person, being an individual who is in receipt of income chargeable under the head Salaries, to furnish a return of his income for any Previous Year to his employer, in accordance with such scheme as may be notified by the CBDT and subject to such conditions as may be specified therein. (2) Such employer shall furnish all returns of income received by him on or before the due date, in such form, including on a floppy, diskette, magnetic cartridge tape, CD-ROM or any other computer readable media and manner as may be specified in that scheme. (3) In such a case, any employee who has filed a return of his income to his employer shall be deemed to have furnished a return of income under sub-section (1). Income Tax Return through Computer Readable Media [Section 139(1B)] (1) This sub-section enables the taxpayer (company or a person other than company) to file his return of income in computer readable media, without interface with the department. (2) Such person may, on or before the due date, furnish a return of income in accordance with such scheme as may be notified by the CBDT, in such form, including on a floppy, diskette, magnetic cartridge tape, CD-ROM or any other computer readable media and manner as may be specified in that scheme. DIRECT TAX LAWS AND INTERNATIONAL TAXATION 11

22 Return of Income & Assessment Procedure (3) In such case, the return furnished under such scheme shall be deemed to be return furnished under subsection (1) of section 139. Return of Loss [Section 139(3)] (1) This section requires the assessee to file a return of loss in the same manner as in the case of return of income within the time allowed under section 139(1). (2) Under section 80, an assessee cannot carry forward or set off his loss against income in the same or subsequent year unless he has filed a return of loss in accordance with the provisions of section 139(3). (3) A return of loss has to be filed by the assessee in his own interest and the non-receipt of a notice from the Assessing Officer requiring him to file the return cannot be a valid excuse under any circumstances for the nonfiling of such return. (4) In particular, a return of loss must be filed by an assessee who has incurred a loss under the heads Profits and Gains from Business or Profession, Capital Gains, and income from the activity of owning and maintaining race horses taxable under the head Income from Other Sources. (5) However, loss under the head Income from House Property under section 71B and unabsorbed depreciation under section 32 can be carried forward for set-off even though return of loss has not been filed before the due date. Self-Assessment Return voluntarily or in response to notice Assessee is required to make his own assessment Compute his income and deposit all tax along with interest Belated Return [Section 139(4)] (1) Any person who has not furnished a return within the time allowed to him under section 139(1) or within the time allowed under a notice issued under section 142(1) may furnish the return for any Previous Year at any time - (i) before the expiry of one year from the end of the relevant Assessment Year; or (ii) before the completion of the assessment, whichever is earlier. (2) Interest is required to be paid under section 234A, as stated earlier. (3) A penalty of `5,000 may be imposed under section 271F if belated return is submitted after the end of Assessment Year. Return of Income of Charitable Trusts and Institutions [Section 139(4A)] (1) Every person in receipt of income (i) derived from property held under a trust or any other legal obligation wholly or partly for charitable or religious purpose; or (ii) by way of voluntary contributions on behalf of such trust or institution must furnish a return of income if the total income in respect of which he is assessable as a representative assessee, computed before allowing any exemption under sections 11 and 12 exceeds the basic exemption limit. (2) Such persons should furnish the return in the prescribed form and verified in the prescribed manner containing all the particulars prescribed for this purpose. (3) This return must be filed by the representative-assessee voluntarily within the time limit. Any failure on the part of the assessee would attract liability to pay interest and penalty. Return of Income of Political Parties [Section 139(4B)] 12 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

23 (1) Under this section, a political party is required to file a return of income if, before claiming exemption under section 13A, the party has taxable income. (2) The grant of exemption from Income-tax to any political party under section 13A is subject to the condition that the political party submits a return of its total income within the time limit prescribed under section 139(1). (3) The chief executive officer of the political party is statutorily required to furnish a return of income of the party for the relevant Assessment Year, if the amount of total income of the Previous Year exceeds the basic exemption limit before claiming exemption under section 13A. Return of Income of University or College or Other Institution [Section 139(4D)] Every university or college or other institution referred to in clause (ii) and clause (iii) of sub-section (1) of section 35, which is not required to furnish return of income or loss under any other provision of this section, shall furnish the return in respect of its income or loss in every Previous Year and all the provisions of this Act shall, so far as may be, apply as if it were a return required to be furnished under sub-section (1). Return of income of business trust which is not covered in any other provision of the Act [Section 139(4E)] Every business trust, which is not required to furnish return of income or loss under any other provisions of this section, shall furnish the return of its income in respect of its income or loss in every previous year and all the provisions of this Act shall, so far as may be, apply if it were a return required to be furnished under sub-section (1). Investment fund referred to in section 115UB mandatory required to furnish return of income [Section 139(4F)] [Inserted w.e.f. A.Y ] Every investment fund referred to in section 115UB, which is not required to furnish return of income or loss under any other provisions of this section, shall furnish the return of income in respect of its income or loss in every previous year and all the provisions of this Act shall, so far as may be, apply as if it were a return required to be furnished under section 139(1). Revised Return [Section 139(5)] (1) If any person having furnished a return under section 139(1) or in pursuance of a notice issued under section 142(1), discovers any omission or any wrong statement therein, he may furnish a revised return at any time before the expiry of one year from the end of the relevant Assessment Year or before completion of assessment, whichever is earlier. In other words : Such return can be submitted at any time :- (a) before the expiry of one year from the end of the relevant Assessment Year; or (b) before the completion of assessment Whichever is earlier (2) It may be noted that a belated return cannot be revised. It has been held in Kumar Jagdish Chandra Sinha vs. CIT Taxman 122 (SC) that only a return furnished under section 139(1) or in pursuance of a notice under section 142(1) can be revised. A belated return furnished under section 139(4), therefore, cannot be revised. A return cannot be revised for any kind of omission or wrong statement. Such omission or wrong statement in the original return must be due to a bona fide inadvertence or mistake on the part of the assessee [Sunanda Ram Deka vs. CIT (1994) 210 ITR 988 (Gau)]. Further, such a bona fide mistake or omission must be discovered by the assessee himself. In case such an omission or mistake is discovered by the Assessing Officer during the assessment proceedings, a revised return filed at that stage will not be a return under section 139(5) [CIT vs. Haji P. Mohammed (1981) 132 ITR 623 (Ker)]. A revised return cannot be filed where assessee merely changes status and the accounting year or method of accounting [Deepnarain Nagu & Co. vs. CIT (1986) 157 ITR 37 (MP)]. If the assessee discovers any omission or any wrong statement in a revised return, it is possible to revise such a revised return provided it is revised within the same prescribed time [Niranjan Lai Ram Chandra vs. CIT (1982) 134 ITR 352 (All); CIT vs. Shrivastava (Dr N.) (1988) DIRECT TAX LAWS AND INTERNATIONAL TAXATION 13

24 Return of Income & Assessment Procedure 170 ITR 556 (MP)]. Once a revised return is filed, the originally filed return must be taken to have been withdrawn and substituted by the revised return [Dhampur Sugar Mills Ltd. vs. CIT (1973) 90 ITR 236 (All)]. Thus where a return was filed under section 139(1) declaring income and later it is revised declaring a loss, the loss shall be allowed to be carried forward as the revised return shall substitute the original return which was filed within time. To sum up, return of income can be revised if the following conditions are satisfied: (i) a return has already been filed on or before the due date mentioned under section 139(1) or within the prescribed time in response to a notice under section 142(1); (ii) the assessee, after filing the above return, discovers any omission/ wrong statement in the return; (iii) revised return should be filed within one year from the end of the relevant assessment year or before completion of the assessment, whichever is earlier. However, there is a distinction between a revised return and a correction of the return. If the assessee files some application for correcting a return already filed or making amends therein, it would not mean that he has filed a revised return. It will still retain the character of an original return but once a revised return is filed, the original return must be taken to have been withdrawn and to have been substituted by a fresh return for the purposes of assessment [Gopaldas Parshottamdas vs. CIT (1941) 9ITR 130 (All)]. A letter addressed to the Assessing Officer informing him that a certain items of income not mentioned in the original return be taken to be the income of the assessee would not be a proper revised return under sub-section (5) [Woman Padmanabh Dande vs. CIT(1952) 22 ITR 339 (Nag)]. Particulars required to be furnished with the Return [Section 139(6)] The prescribed form of the return shall, in certain specified cases, require the assessee to furnish the particulars of - (i) income exempt from tax (ii) assets of the prescribed nature, value and belonging to him (iii) his bank account and credit card held by him (iv) expenditure exceeding the prescribed limits incurred by him under prescribed heads (v) such other outgoings as may be prescribed. (vi) assets of the prescribed nature and value, held by him as a beneficial owner or otherwise or in which he is a beneficiary Defective Return [Section 139(9)] (1) Under this sub-section, the Assessing Officer has the power to call upon the assessee to rectify a defective return. (2) Where the Assessing Officer considers that the return of income furnished by the assessee is defective, he may intimate the defect to the assessee and give him an opportunity to rectify the defect within a period of 15 days from the date of such intimation. The Assessing Officer has the discretion to extend the time period beyond 15 days, on an application made by the assessee. (3) If the defect is not rectified within the period of 15 days or such further extended period, then the return would be treated as an invalid return. The consequential effect would be the same as if the assessee had failed to furnish the return. (4) Where, however, the assessee rectifies the defect after the expiry of the period of 15 days or the further extended period, but before assessment is made, the Assessing Officer can condone the delay and treat the return as a valid return. (5) A return can be treated as defective if it is not properly filled in or the necessary enclosures are not accompanying the return or it is filed without payment of self-assessment tax. Specific defects are only illustrative and not exhaustive - CIT vs. Rai Bahadur Bissesswarlal Motilal Malwasie Trust 195 ITR DIRECT TAX LAWS AND INTERNATIONAL TAXATION

25 Permanent Account Number (PAN) [Section 139A] (1) Where any person in the following category has not been allotted a Permanent Account Number (PAN), he should apply to the Assessing Officer within the prescribed time for allotment of a PAN - (i) Every person whose total income or the total income of any other person in respect of which the person is assessable under this Act during any Previous Year exceeded the basic exemption limit; or (ii) Every person carrying on any business or profession whose total sales, turnover or gross receipts exceeds or is likely to exceed `5 lakhs in any Previous Year; or (iii) Every person who is required to furnish a return of income under section 139(4A); or (2) The CBDT had introduced a new scheme of allotment of computerized 10 digits PAN. Such PAN comprises of 10 alphanumeric characters and is issued in the form of a laminated card. (3) All persons who were allotted PAN (Old PAN) earlier and all those persons who were not so allotted but were required to apply for PAN, shall apply to the Assessing Officer for a new series PAN within specified time. (4) Once the new series PAN is allotted to any person, the old PAN shall cease to have effect. No person who has obtained the new series PAN shall apply, obtain or process another PAN. (5) On receipt of allotment of PAN it must be mentioned on all tax payment challans, returns, correspondence. (6) Where TDS or TCS is made, the person from whom it is made must communicate his PAN to the person deducting or collecting tax. (7) Every person receiving any document relating to a transaction prescribed under clause (c) of subsection (5) shall ensure that the Permanent Account Number or the General Index Register Number has been duly quoted in the document. The Assessing Officer having regard to the nature of transactions as may be prescribed may also allot a Permanent Account Number to any other person (whether any tax is payable by him or not) in the manner and in accordance with the procedure as may be prescribed. However, any person, not falling under any clause above, may suo moto apply to the Assessing Officer for the allotment of a Permanent Account Number and, thereupon, the Assessing Officer shall allot a permanent account number to such person forthwith. Power of Board to dispense with furnishing documents, etc. with the Return [Sec. 139C] (1) The Board may make rules providing for a class or classes of persons who may not be required to furnish documents, statements, receipts, certificates, reports of audit or any other documents, which are otherwise under any other provisions of this Act, except section 139D, required to be furnished, along with the return but on demand to be produced before the Assessing Officer. (2) Any rule made under the proviso to sub-section (9) of section 139 as it stood immediately before its omission by the Finance Act, 2007 shall be deemed to have been made under the provisions of this section. Filing of return in electronic from [Sec. 139D] The Board may make rules providing for (a) the class or classes of persons who shall be required to furnish the return in electronic form; (b) the form and the manner in which the return in electronic form may be furnished; (c) the documents, statements, receipts, certificates or audited reports which may not be furnished along with the return in electronic form but shall be produced before the Assessing Officer on demand; (d) the computer resource or the electronic record to which the return in electronic form may be transmitted. Self Assessment Tax Payment [Section 140A] (1) Where any tax is payable on the basis of any return required to be furnished under section 139 or section 142 or section 148 or section 153A or, as the case may be, section 158BC, after taking into account taxes paid DIRECT TAX LAWS AND INTERNATIONAL TAXATION 15

26 Return of Income & Assessment Procedure earlier. The assessee shall be liable to pay such tax together with interest payable under any provision of this Act for any delay in furnishing the return or any default or delay in payment of advance tax, before furnishing the return and the return shall be accompanied by proof of payment of such tax and interest. (2) If assessee fails to pay the whole or any part of such tax or interest or both on self assessment, the assessee shall be deemed to be an assessee in default in respect of the tax or interest or both remaining unpaid. Penalty can be imposed on any assessee who is in default. (3) With effect from the Assessment Year , the amount of credit available to be set off according to the provisions of section 115JD (Alternative Minimum Tax) will also be taken into account u/s 140A for the purpose of computing the amount of tax payable and interest chargeable under section 234A, 234B and 234C before filing the return of income. 1.3 ANNUAL INFORMATION RETURN - SECTION 285 BA Annual Information Return section 285 BA OBLIGATION TO FURNISH STATEMENT OF FINANCIAL TRANSACTION OR REPORTABLE ACCOUNT [SECTION 285BA] (1) Any person, being (a) an assessee; or (b) the prescribed person in the case of an office of Government; or (c) a local authority or other public body or association; or (d) the Registrar or Sub-Registrar appointed under section 6 of the Registration Act, 1908; or(e) the registering authority empowered to register motor vehicles under Chapter IV of the Motor Vehicles Act, 1988; or (f) the Post Master General as referred to in clause (i) of section 2 of the Indian Post Office Act, 1898; or (g) the Collector referred to in clause (g) of section 3 of the Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013; or (h) the recognised stock exchange referred to in clause (f) of section 2 of the Securities Contracts (Regulation) Act, 1956; or (i) an officer of the Reserve Bank of India, constituted under section 3 of the Reserve Bank of India Act, 1934; or (j) a depository referred to in clause (e) of sub-section (1) of section 2 of the Depositories Act, 1996; or (k) a prescribed reporting financial institution, who is responsible for registering, or, maintaining books of account or other document containing a record of any specified financial transaction or any reportable account as may be prescribed under any law for the time being in force, shall furnish a statement in respect of such specified financial transaction or such reportable account which is registered or recorded or maintained by him and information relating to which is relevant and required for the purposes of this Act, to the income-tax authority or such other authority or agency as may be prescribed. (2) The statement referred to in sub-section (1) shall be furnished for such period, within such time and in the form and manner, as may be prescribed. (3) For the purposes of sub-section (1), specified financial transaction means any (a) transaction of purchase, sale or exchange of goods or property or right or interest in a property; or (b) transaction for rendering any service; or (c) transaction under a works contract; or (d) transaction by way of an investment made or an expenditure incurred; or 16 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

27 (e) transaction for taking or accepting any loan or deposit, which may be prescribed: Provided that the Board may prescribe different values for different transactions in respect of different persons having regard to the nature of such transaction. Provided further that the value or, as the case may be, the aggregate value of such transactions during a financial year so prescribed shall not be less than fifty thousand rupees. (4) Where the prescribed income-tax authority considers that the statement furnished under subsection (1) is defective, he may intimate the defect to the person who has furnished such statement and give him an opportunity of rectifying the defect within a period of thirty days from the date of such intimation or within such further period which, on an application made in this behalf, the said income-tax authority may, in his discretion, allow; and if the defect is not rectified within the said period of thirty days or, as the case may be, the further period so allowed, then, notwithstanding anything contained in any other provision of this Act, such statement shall be treated as an invalid statement and the provisions of this Act shall apply as if such person had failed to furnish the statement. (5) Where a person who is required to furnish a statement under sub-section (1) has not furnished the same within the specified time, the prescribed income-tax authority may serve upon such person a notice requiring him to furnish such statement within a period not exceeding thirty days from the date of service of such notice and he shall furnish the statement within the time specified in the notice. (6) If any person, having furnished a statement under sub-section (1), or in pursuance of a notice issued under sub-section (5), comes to know or discovers any inaccuracy in the information provided in the statement, he shall within a period of ten days inform the income-tax authority or other authority or agency referred to in sub-section (1), the inaccuracy in such statement and furnish the correct information in such manner as may be prescribed. (7) The Central Government may, by rules made under this section, specify (a) the persons referred to in sub-section (1) to be registered with the prescribed income-tax authority; (b) the nature of information and the manner in which such information shall be maintained by the persons referred to in clause (a); and (c) the due diligence to be carried out by the persons for the purpose of identification of any reportable account referred to in sub-section (1). Two stages of processing at Department (1) Processed - to correct arithmetical mistakes, internal inconsistency, tax calculation and verification of tax payment (2) % of tax returns selected for scrutiny- verification of the income Summary Assessment u/s 143(1) Total income/ loss after Adjustments: - Arithmetical errors: - Incorrect claim apparent from records : (i) Inconsistent with any other entry (ii) tax audit report vs computation i.e depreciation, personal expenses (iii) Information required not furnished (iv) Deduction exceeds specified statutory Limit example : u/s 80C, maximum deduction is `1,50,000 Tax and interest Intimation to be sent : refund due / tax payable / loss reduce DIRECT TAX LAWS AND INTERNATIONAL TAXATION 17

28 Return of Income & Assessment Procedure Period : one year from the end of the financial year Inquiry before assessment [Section 142] Inquiry : (1) The Assessing Officer has power to make inquiry from any person (a) who has made a return under section 139 or (b) in whose case the time allowed under sub-section (1) or sub-section (4) of section 139 for furnishing the return has expired. For this purpose a notice can be issued for : (i) where such person has not made a return within the time allowed under section 139(1) or 139(4), to furnish a return of his income, or (ii) to produce such accounts or documents as the Assessing Officer may require, or (iii) to furnish in writing and verified in the prescribed manner information in such form and on such points or matters including a statement of all assets and liabilities of the assessee, whether included in the accounts or not, as the Assessing Officer may require Provided that (i) Previous approval of Joint Commissioner shall be obtained before requiring the assessee to furnish a statement of all assets and liabilities not included in the accounts. (ii) The Assessing Officer shall not require the production of any accounts relating to a period more than three years prior to the Previous Year. (2) For the purpose of obtaining full information in respect of the income or loss of any person, the Assessing Officer may make such inquiry as he considers necessary. Audit provisions If the Assessing Officer, having regard to the nature and complexity of the accounts, volume of the accounts doubts about the correctness of the accounts, multiplicity of transactions in the accounts or specialised nature of business activity of the assessee and the interests of the revenue, opines that it is necessary so to do, he may with the prior approval of the Chief Commisioner or Commisioner, direct the assessee to get the accounts audited by an accountant, as defined in the Explanation below section 288(2) and to furnish an audit report, within such period as may be specified, in the prescribed form. The expenses of such audit shall be paid by the assessee These provisions of audit shall have effect notwithstanding that the accounts of the assessee have been already audited. The direction to get accounts audited can be issued only in the course of assessment proceeding which is pending and not after the completion of assessment [Kumar Films Pvt. Ltd vs. CIT (2002) 258 ITR 257 (Patna)]. Further the assessment also includes reassessment. The Chartered Accountant shall submit the audit report in Form No. 6B to the assessee who will in turn submit it to the Assessing Officer within such period as may be specified by the Assessing Officer [Section 142(2C)]. Such period may, however, be extended by the Assessing Officer suo motu or on the request of the assessee and for any good and sufficient reasons. The aggregate of the period originally fixed and the extended period(s) shall not, in any case, exceed 180 days from the date on which the directions for audit were received by the assessee. As per section 142(2D), where any direction for audit under section 142(2A) is issued by the Assessing Officer on or after , the expenses of and incidental to such audit (including the remuneration of the accountant) shall be determined by the Chief Commissioner or Commissioner, in accordance with such guidelines as may be prescribed and the expenses so determined shall be paid by the Central Government. The remuneration for special auditor to be fixed by the Commissioner as per the scale approved by the ICAI, subject to maximum of `30 lakh per year. Ad hoc remuneration of `20 lakh fixed by the Commissioner was set aside [Dhanesh Gupta & Co. vs. CIT (2010) 42 DTR 7 (Del)]. The twin pre-conditions justifying the special audit under section 142(2A) of the Income-tax Act, 1961 are, the nature and complexity of the accounts and the interests of the Revenue. Before an approval is sought for, the assessing authority must form an opinion as regards the said 18 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

29 twin conditions. There should be an honest attempt to understand the books of account of the assessee. There has to be an application of mind on the part of the assessing authority. Complexity of the accounts cannot be equated with doubts being entertained by the assessing authority either with regard to the correctness thereof or the need for obtaining certain vital information not ascertainable from the accounts. The satisfaction is to be based upon objective considerations [Bata India Ltd. vs. CIT (2002) 257 ITR 622 (Cal)]. Special audit can also be ordered so as to protect the interest of the revenue. Such object may or may not be achieved by the audit contemplated by section 44AB [Super Cassettes Industries Ltd. vs. Asst CIT (1999) 102 Taxman 202 (Del)]. The power under section 142(2A) can be invoked when the Assessing Officer finds that accounts are complicated. The overlapping in certain situation with regard to section 44AB and section 142(2A) do not render the provisions either void or superfluous [Narinder Singh Atwal vs. DCIT (1998)231ITR641(Cal)]. It is the duty of the Commissioner to examine whether the Assessing Officer has examined the books of accounts properly before giving his approval for the special audit under section 142(2A). Approval of special audit cannot be given by the Commissioner mechanically. In the instant case the Assessing Officer, had neither formed any opinion nor given a direction for production of the accounts. The Commissioner should have examined whether the proposal of the Assessing Officer for special audit deserved to be approved. The High Court, therefore, set aside the order for special audit under section 142(2A) [West Bengal State Co-operative Bank Ltd vs. Joint Commissioner of Income Tax (2004) 267 ITR 345 (Cal)]. The Assessing Officer shall give an opportunity to the assessee of being heard in respect of any information gathered by the Assessing Officer on the basis of the aforesaid inquiry under section 142(2) or on the basis of the audit conducted as per section 142(2A) above, where the Assessing Officer proposes to utilise such information for the purpose of any assessment. However, no such opportunity is necessary when the assessment is made under section 144. Failure to comply with notice under section 142(1) or to get accounts audited as per directions issued under section 142(2A) may result in: (a) Best judgment assessment under section 144; (b) Penalty under section 271(1)(b) which has been fixed at `10,000; (c) Prosecution under section 276D with rigorous imprisonment which may extend to one year or with fine which will not be less than `4 or more than `10 for every day during which the default continues, or with both; (d) Issue of a warrant of authorisation under section 132 for conducting search. If the assessee proves that the non-compliance with the direction under section 142(2A) was not because of his fault but negligence or refusal of the auditor, then best judgment assessment shall not be made and the proceedings shall be dropped. In Swadeshi Polytex Ltd. vs. ITO (1983) 144 ITR 171 (SC) the Supreme Court set aside an assessment made under section 144(1)(b) because of the refusal of the nominated auditor to undertake the audit for a frivolous reason and directed the assessment to be done afresh. Opportunity to Assessee : The assessee shall be given an opportunity of being heard in respect of any material gathered on the basis of any inquiry or any audit and proposed to be utilised for the purposes of the assessment. Such opportunity need not be given where the assessment is made under section 144. Notice u/s 142(1) Notice to call for Return of Income (ROI)/ books of Accounts/other information is made. By issuing notice u/s 142(ii) alone, assessment is not possible. Notice can be issued even if the assessee has not filed the ROI. No time limit is prescribed in law for issue of this notice. Books of accounts can be asked for a limited period (3 years) Estimation of value of assets by valuation officer [Section 142A] (1) The Assessing Officer may, for the purposes of assessment or reassessment, make a reference to a Valuation Officer to estimate the value, including fair market value, of any asset, property or investment and submit a copy of report to him. DIRECT TAX LAWS AND INTERNATIONAL TAXATION 19

30 Return of Income & Assessment Procedure (2) The Assessing Officer may make a reference to the Valuation Officer under sub-section (1) whether or not he is satisfied about the correctness or completeness of the accounts of the assessee. (3) The Valuation Officer, on a reference made under sub-section (1), shall, for the purpose of estimating the value of the asset, property or investment, have all the powers that he has under section 38A of the Wealth-tax Act, (4) The Valuation Officer shall, estimate the value of the asset, property or investment after taking into account such evidence as the assessee may produce and any other evidence in his possession gathered, after giving an opportunity of being heard to the assessee. (5) The Valuation Officer may estimate the value of the asset, property or investment to the best of his judgment, if the assessee does not co-operate or comply with his directions. (6) The Valuation Officer shall send a copy of the report of the estimate made under sub-section (4) or sub-section (5), as the case may be, to the Assessing Officer and the assessee, within a period of six months from the end of the month in which a reference is made under sub-section (1). (7) The Assessing Officer may, on receipt of the report from the Valuation Officer, and after giving the assessee an opportunity of being heard, take into account such report in making the assessment or reassessment. Explanation. In this section, Valuation Officer has the same meaning as in clause (r) of section 2 of the Wealthtax Act, Case Law : Assessing Officer can look into documents other than books of account for issuing directions Submission of audited accounts per se would not oust the jurisdiction of the Assessing Officer to pass a direction for special audit. While applying his mind, the Assessing Officer need not confine himself only to the books of account submitted by the assessee, but can take into consideration such other documents related thereto which would be part of the assessment proceedings - Rajesh Kumar Ors. vs. Dy. CIT.287 ITR 91. Assessment [Section 143] Assessment means the act of assessing. After the return of income submitted by assessee, the Department will then make the assessment in order to check whether the Total Income and the tax on that total income as computed by the assessee is correct or not. It will also check whether the penalty, interest, if any, leviable, is correctly added to the tax payable or not. Summary Assessment [Section 143(1)] Assessing Officer can complete the assessment without passing a regular assessment order. The assessment is completed on the basis of return submitted by the assessee. Assessing Officer has adopted a two-stage procedure of assessment as part of risk management strategy. In the first stage, all tax returns are processed to correct arithmetical mistakes, internal inconsistencies, tax calculation and verification of tax payment. At this stage, no verification of the income is undertaken. In the second stage, certain percentage of the tax returns are selected for scrutiny/ audit on the basis of the probability of deducting tax evasion. At this stage, the tax administration is concerned with the verification of the income. Total income of the assessee shall be computed under section 143(1) after making the following adjustments to the total income in the return - (i) any arithmetical errors in the return; or (ii) an incorrect claim, if such incorrect claim is apparent from any information in the return. An intimation shall be sent to the assessee specifying the sum determined to be payable by, or the amount of refund due to, the assessee after the aforesaid corrections. The amount of refund due to the assessee shall be granted to him. No intimation shall be sent after the expiry of one year from the end of the financial year in which the return is made. The acknowledgement of the return shall be deemed to be the intimation in a case where no sum is payable by, or refundable to, the assessee, and where no adjustment has been made. An incorrect claim 20 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

31 apparent from any information in the return has been defined. It means claim on the basis of an entry, in the return - (i) of an item, which is inconsistent with another entry of the same or some other item in such return; (ii) information required to be furnished to substantiate such entry, has not been furnished under the Act; or (iii) in respect of a deduction, where such deduction exceeds specified statutory limit which may have been expressed as monetary amount or percentage or ratio or fraction. As per amendment in section 143(1D) provides that processing of a return under section 143(1) shall not be necessary, where a scrutiny notice has been issued to the assessee under sub-section (2) of Section 143 (w.e.f. July 1, 2012). Notice under section 143(2) Notice for making assessment u/s143(3) is made. Assessment u/s 143(3) is possible only if the notice u/s 143(2) has been issued. Notice can be issued only if the assessee has filed ROI. Time limit of 12 months prescribed for service of notice. No restriction on requisition of Books of Accounts. Regular assessment under section 143(3) Where a return has been furnished under section 139, or in response to a notice under sub-section (1) of section 142, the Assessing Officer shall, if he considers it necessary or expedient to ensure that the assessee has not understated the income or has not computed excessive loss or has not under-paid the tax in any manner, serve on the assessee a notice requiring him under section 143(2)(ii), either to attend his office or to produce, any evidence on which the assessee may rely in support of the return. On the day specified in the notice issued under section 143(2) or as soon afterwards as may be, after hearing such evidence as the assessee may produce and such other evidence as the Assessing Officer may require on specified points and after taking into account all relevant material which Assessing Officer has gathered, the Assessing Officer shall, by an order in writing, make an assessment of the total income or loss of the assessee, and determine the sum payable by him or refund of any amount due to him on the basis of such assessment. Tax has to be determined and such determination is to be made in the assessment order or computation sheet to be annexed with the assessment order. Enquires and investigation Calling for books of accounts or other relevant documents Calling for information in such form and on such point or matters Requiring to furnish a statement of all assets and liabilities Examining the assessee or other parties as witness under section 131 to verify any accounts or transaction Gathering information from banks, financial institutions and such other person with whom assessee has had transaction during the year- section 133(6)/131 Directing to get account audited u/s 142 (2A) Reference to Valuation officer u/s 142A- to determine the value of any investment, bullion, jewellery or other articles Gather all relevant and requisite evidence, properly scrutinizing, Allowing reasonable opportunity, to explain the discrepancies, inaccuracies and omissions Rule of evidence : Adverse inference - if assessee fail to answer or produce evidence to contradict the data/ information gathered by assessing officer Determine the total income, compute tax and interest DIRECT TAX LAWS AND INTERNATIONAL TAXATION 21

32 Return of Income & Assessment Procedure Assessment is void-ab-initio Assessment without serving a notice u/s 143(2) or Notice served after expiry of period Assessment is invalid. After the expiry of 23 months from the relevant year or Fresh assessment on set-aside or cancelled order or on order made under section 263/ 264 made after expiry of 9 months from the financial year Best judgment assessment-u/s 144 Best judgement assessment that is popularly known as ex-parte assessment can be made if the assessee fails to comply with the requirement of law as following :- (1) The assessee fails to file a return u/s 139 and has not made a return or a revised return under subsection (4) or (5) of Section 139. (2) He fails to comply with the terms of the notice issued u/s 142(1) or fails to comply with a direction issued u/s 142(2A). (3) After filing a return he fails to comply with all the terms of the notice issued u/s 143(2). The non-compliances are independent and not cumulative. A single non compliance can lead to best judgement u/s 144. In such a situation the A.O. after taking into account all relevant materials which he has gathered and after giving the assessee an opportunity of being heard shall make an assessment of income or loss to the best of his judgement and determine the sum payable by him. However, where a notice u/s 142(1) has already been issued to the assessee it will not be necessary to give him such opportunity of being heard. Provided that such opportunity shall be given by the Assessing Officer by serving a notice calling upon the assessee to shaw cause, on a date and time to be specified in the notice, why the assessment should not be completed to the best of his judgment. Best judgement assessment is mandatory for any one of the defaults u/s CIT vs. Segn. Buchiah Sethy [1970] 77 ITR 539 (SC). Where Assessing Officer, on finding that assessee had not maintained and kept any quantitative details/ stock register for goods traded in by it; that there was no evidence on record or document to verify basis of valuation of closing stock shown by assessee; and that GP rate declared by assessee during Assessment Year did not match result declared by assessee itself in previous Assessment Years, rejected assessee s books of account and resorted to best judgment assessment under section 144, it was held that since cogent reasons had been given by Assessing Officer for doing so, there was no reason to take a different view - Kachwala Gems vs. Jt. CIT 158 Taxman 71. The assessments made on the basis of the assessee s accounts and those made on best judgment basis are totally different types of assessments - CST vs. H.M. Esufali H.M. Abdulai 90 ITR 271. The mere fact that the material placed by the assessee before the Assessing Officer is unreliable does not empower the officer to make an arbitrary order. The power to make a best judgment assessment is not an arbitrary power - State of Orissa vs. Maharaja Shri B.P. Singh Deo 76 ITR 690. Where the jurisdiction of a notice under section 143(2) is not valid and there has been non-compliance with the same by the assessee, the Assessing Officer cannot resort to section 144 and make an assessment to the best of his judgment [Rajmani Devi vs. CIT (1937) 5 ITR 631 (All)]. An ex parte best judgment assessment under section 144 can only be made for defaults specified in that section. Non-compliance with a summons requiring production of books of account and other documents, etc. is not such a specified default and, therefore, it cannot result in an ex parte best judgment assessment [ITO vs. Luxmi Prasad Goenka (1977) 110 ITR 674 (Cal)]. If assessee fail to submit return, or fail to comply with terms of the notice u/s 142(1)/ 143(2) or fail to comply with direction u/s 142(2A), then Show cause notice -best judgement is done after providing Reasonable opportunity to assessee of being heard. On the basis of all relevant material gathers computation of the income or loss to the best of his judgement is made, determination of the tax payable is arrived at. Cannot assess the income below return income/ loss more than return loss. Assessment is not to be arbitrary or on adhoc basis, it should be based on material and on rational and scientific basis. 22 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

33 Rejection of Books of Accounts Section 145(3) empowers the Assessing Officer to reject the books of account which are unreliable, false or incorrect or incomplete. The Assessing Officer can reject the books of account on certain grounds and may make the assessment in the manner provided in section 144. Directions u/s 144A Joint Commissioner may, on his own motion or on a reference being made to him by the Assessing Officer or on the application of an assessee, call for and examine the record of any proceeding in which an assessment is pending and, if he considers that, having regard to the nature of the case or the amount involved or for any other reason, it is necessary or expedient so to do, he may issue such directions as he thinks fit for the guidance of the Assessing Officer to enable him to complete the assessment and such directions shall be binding on the Assessing Officer. Provided that no directions which are prejudicial to the assessee shall be issued before an opportunity is given to the assessee to be heard. Objective is to Improve the quality of assessment and eliminate avoidable litigation. The Joint commissioner on his own motion or on reference made by assessing officer on application of the assessee can call for and examine the record of the pending proceeding. Reasonable opportunity to assessee to be granted before issue direction being prejudicial to the assessee. Investigation not to be prejudicial to the assessee. The Issue direction will be binding on assessing officer, no appeal against direction can be filed. Reference to Commissioner in certain cases [Section 144BA] [Applicable w.e.f ] If, the Assessing Officer, at any stage of the assessment or reassessment proceedings before him having regard to the material and evidence available, considers that it is necessary to declare an arrangement as an impermissible avoidance arrangement and to determine the consequence of such an arrangement within the meaning of Chapter X-A, then, he may make a reference to the Commissioner in this regard. Officer, and foreign company (Section 144C) [W.e.f ] The dispute resolution mechanism presently in place is time consuming and finality in high demand cases is attained only after a long drawn litigation till Supreme Court. Flow of foreign investment is extremely sensitive to prolonged uncertainty in tax related matter. Therefore, the Act has amended the Income-tax Act to provide for an alternate dispute resolution mechanism, which will facilitate expeditious resolutionof disputes in a fast track basis. The salient features of the alternate dispute resolution mechanism are as under: 1. The Assessing Officer shall not withstanding anything to the contrary contained in this Act, forward a draft of the proposed order of assessment (hereinafter in this section referred to as the draft order) to the eligible assessee if he proposes to make, on or after , any variation in the income or loss returned which is prejudicial to the interest of such assessee. 2. On receipt of the draft order, the eligible assessee shall, within thirty days of the receipt by him of the draft order, (a) File his acceptance of the variations to the Assessing Officer; or (b) File his objections, if any, to such variation with, (i) The Dispute Resolution Panel; and (ii) The Assessing Officer. 3. The Assessing Officer shall complete the assessment on the basis of the draft order, if (a) The assessee intimates to the Assessing Officer the acceptance of the variation; or (b) No objections are received within the period specified in sub-section (2) i.e. 30 days of the receipts of draft order by the eligible assessee. 4. The Assessing Officer shall, notwithstanding anything contained in section 153 or section 153B, pass the assessment order under section 144C(3) within one month from the end of the month in which, (a) The acceptance is received; or DIRECT TAX LAWS AND INTERNATIONAL TAXATION 23

34 Return of Income & Assessment Procedure (b) The period of filing of objections under sub-section (2) expires. 5. The Dispute Resolution Panel shall, in a case where any objections are received under sub-section (2), issue such directions, as it thinks fit, for the guidance of the Assessing Officer to enable him to complete the assessment. 6. The Dispute Resolution Panel shall issue the directions referred to in sub-section (5), after considering the following, namely: (a) Draft order; (b) Objections filed by the assessee; (c) Evidence furnished by the assessee; (d) Report, if any, of the Assessing Officer, Valuation Officer or Transfer Pricing Officer or any other authority; (e) Records relating to the draft order; (f) Evidence collected by, or caused to be collected by, it; and (g) Result of any enquiry made by, or caused to be made by it. 7. The Dispute Resolution Panel may, before issuing any directions referred to in sub-section (5), (a) Make such further enquiry, as it thinks fit; or (b) Cause any further enquiry to be made by any Income Tax Authority and report the result of the same to it. 8. The Dispute Resolution Panel may confirm, reduce or enhance the variations proposed in the draft order so, however, that it shall not set aside any proposed variation or issue any direction under sub-section (5) for further enquiry and passing of the assessment order. Explanation- For the removal of doubts, it is hereby declared that the power of the Dispute Resolution Panel to enhance the variation shall include and shall be deemed always to have included the power to consider any matter arising out of the assessment proceedings relating to the draft order, notwithstanding that such matter was raised or not by the eligible assessee. Income Escaping Assessment [Sec. 147] If the Assessing Officer has reason to believe that any income chargeable to tax has escaped assessment for any Assessment Year, he may, subject to the provisions of section 148 to 153, assess or reassess such income and also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under this section, or recompute the loss or the depreciation allowance or any other allowance, as the case may be, for the Assessment Year concerned. Where an assessment under section 143(3) or section 147 has been made for the relevant Assessment Year, no action shall be taken under this section after the expiry of four years from the end of the relevant Assessment Year, unless any income chargeable to tax has escaped assessment for such Assessment Year by reason of the failure on the part of the assessee to make a return under section 139 or in response to the notice issued under section 142 or section 148 or to disclose fully and truly all material facts necessary for his assessment, for that Assessment Year. Nothing contained in the first proviso shall apply in a case where any income in relation to any assets (including financial interest in any entity) located outside India, chargeable to tax, has escaped assessment for any Assessment Year. The Assessing Officer may assess or reassess such income, other than the income involving matters which are the subject matters of any appeal, reference or revision, which is chargeable to tax and has escaped assessment. Case Laws : (1) A writ petition challenging reassessment, cannot be thrown out at the threshold on the ground that it is not maintainable - Techspan India (P.) Ltd. vs. ITO 283 ITR 212. (2) If the direction by the Commissioner is to reopen the assessment under section 147 by passing the statutory formalities, that would probably amount to dictating his subordinate to act in a particular way thereby taking away the discretion vested in the subordinate - CIT vs. Abdul Khader Ahamed 156 Taxman DIRECT TAX LAWS AND INTERNATIONAL TAXATION

35 (3) Disclosure in wealth-tax proceedings will not suffice - Arun Kumar Maheshwari vs. ITO 144 Taxman 651. (4) Income cannot be said to have escaped assessment if the proceedings have not culminated in a final assessment [CIT vs. Sayed Rafiqur Rahman (1991) 189 ITR 476 (Pat)]. (5) Where an order of remand has been passed, the assessment proceedings become pending and pending such proceedings, notice under section 148 cannot be issued [Jhunjhunwala Vanaspati Ltd. vs. ACIT (2004) 137 Taxman 335 (All)]. (6) Reassessment under section 147 cannot be made within the time available for issuing notice undersection 143(2) and for completion of assessment under section 143(3) [CIT vs. Abad Fisheries (2012) 65 DTR 370: 204 Taxman 267/246 CTR 513 (Ker)]. (7) Original assessments for Assessment Years to were completed, otherwise than in the status of HUF. The Income-tax Officer reopened the assessments and assessed the assessee in the status of HUF. It was held that the issue of status was already decided finally and reopening of the assessments was without jurisdiction [CIT vs. Lakshmikutty Amma (T.) (1995) 211 ITR 1014 (Ker)]. (8) The assessment order was set aside by the Appellate Assistant Commissioner. But the Assessing Officer issued notice under section 148. Held that Assessing Officer was not justified in initiating reassessment proceedings [Saqi Brothers vs. ITO (1996) 54 TTJ 306 (Chd) (AT)]. Issue of notice where income has escaped assessment [Section 148] (1) Before making the assessment, reassessment or recomputation under section 147, the Assessing Officer shall serve on the assessee a notice requiring him to furnish within specified period, a return of his income or the income of any other person in respect of which he is assessable. (2) The Assessing Officer shall, before issuing any notice under this section, record his reasons for doing so. Case Laws : (1) If reasons are supplied along with the notice under section 148(2), it shall obviate unnecessary harassment to the assessee as well as to the revenue by avoiding unnecessary litigation which will save courts also from being involved in unproductive litigation. Above all, it shall be in consonance with the principles of natural justice - Mitilesh Kumar Tripathi vs. CIT 280 ITR 16. (2) The notice prescribed by section 148 cannot be regarded as a mere procedural requirement. It is only if the said notice is served on the assessee that the ITO would be justified in taking proceedings against the assessee. If no notice is issued or if the notice issued is shown to be invalid, then the proceedings taken by the ITO would be illegal and void - Y. Narayana Chetty vs. ITO ITR 388; CIT vs. Thayaballi Mulla Jeevaji Kapasi 66 ITR 147 ; CIT vs. Kurban Hussain Ibrahimji Mithiborwala 82 ITR 821. Time limit for notice [Section 149] (1) No notice under section 148 shall be issued for the relevant Assessment Year (a) if four years have elapsed from the end of the relevant Assessment Year, unless the case falls under clause (b) or clause (c); (b) if four years, but not more than six years, have elapsed from the end of the relevant Assessment Year unless the income chargeable to tax which has escaped assessment amounts to or is likely to amount to one lakh rupees or more for that year. (c) If four years, but not more than sixteen years, have elapsed from the end of the relevant Assessment Year unless the income in relation to any asset (including financial interest in any entity) located outside India, chargeable to tax, has escaped assessment. Time-limit applies for Issue and not for service - R.K. Upadhyaya vs. Shanabhai P Patel ITR 163 (SC). Amended law will apply only if limitation has not already expired - Chandiram vs. ITO Taxman DIRECT TAX LAWS AND INTERNATIONAL TAXATION 25

36 Return of Income & Assessment Procedure 418 (Raj.). Circumstances where time limit given under section 149(1) is not relevant: (1) Action cannot be taken under section 147 after 4 years in some cases if assessment is made under section 143(3)/147 [Proviso to section 147 and Explanation 1 to section 147]: Where an assessment under section 143(3) or 147 has already been made for the relevant assessment year, no action under section 147 is possible after the expiry of 4 years from the end of the relevant assessment year unless any income chargeable to tax has escaped assessment by reason of the failure on the part of the assessee to: (a) make a return under section 139 or in response to a notice under section 142(1) or 148; or (b) disclose fully and truly all material facts necessary for his assessment for that assessment year. However, nothing contained in the first proviso (relating to reopening of assessment upto 4 years) shall apply in a case where any income in relation to any asset (including financial interest in any entity) located outside India, chargeable to tax, has escaped assessment for any assessment year. Production before the Assessing Officer of books of account or other evidence from which material evidence could, with due diligence have been discovered by the Assessing Officer, will not necessarily amount to disclosure of material facts. Proviso to section 147 presupposes an assessment under section 143(3) or section 147. In the absence of such assessment, benefit of this proviso cannot be taken by the assessee. If the return under section 139/142(1)/148 has been furnished and all material facts relating to the assessment for that previous year have been disclosed fully and truly, then notice cannot be served after the expiry of 4 years if the assessment of that assessment year has been made under section 143(3) or 147. Where a notice under section 148 was issued after the expiry of 4 year from the end of the assessment for which income escaped assessment, it was held that full and true disclosure of material facts means that the disclosure should not be garbled or hidden in the crevices of the documentary material which has been filed by the assessee with the AO. The assessee must act with candor. A full disclosure is a disclosure of all material facts which does not contain any hidden material or suppression of fact. It must be truthful in all respects. On facts, though the AO enquired into the matter relating to exemption of capital gain and the assessee furnished a copy of the section 54EC bonds (from which the dates of allotment/investment were evident), there was no (specific) reference by the assessee to the dates on which the amounts were invested in the section 54EC bonds. Also, it was evident that the AO had not applied his mind to the issue of section 54EC exemption. Accordingly, the AO was justified in reopening the assessment. [The Indian Hume Pipe Co. Ltd. vs. ACIT (2012) 204 Taxman 347 (Bom)]. (2) Agent of a non-resident [Section 149(3)]: If the person on whom a notice under section 148 is to be served is a person treated as the agent of a non-resident under section 163 and the assessment, reassessment or recomputation to be made in pursuance of the notice is to be made on him as the agent of such nonresident, the notice shall not be issued after the expiry of a period of six years from the end of the relevant assessment year. (3) No time limit for issue of notice for assessment in pursuance of order on appeal, etc. [Section 150(1)]: Notice under section 148 may be issued at any time for the purpose of making an assessment or reassessment or re-computation in consequence of or to give effect to any finding or direction contained in an order passed: (a) by any authority in any proceeding under this Act by way of appeal or revision under section 250/254/260A/262/263/264, or (b) by a court in any proceeding under any other law. It may be noted that a judgment given by a Court under any other law can also lead to reassessment and the time limit prescribed under section 149 shall not be applicable. In other words, such notice can be issued at any time to make assessment or reassessment in consequence of or in order to give effect to the finding or direction contained in the order of: (i) The Supreme Court passed under the provisions of Income-tax Act or any other law; 26 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

37 (ii) A High Court passed under the provisions of Income-tax Act or any other law; (iii) CIT (Appeal) under section 250/ITAT under section 254/ Commissioner under section 263 or 264 of the Income-tax Act. Further, order passed by Supreme Court will apply generally to all assessees and the order passed by the High Court may apply only to the assessees who fall in the jurisdiction of the High Court but the order under section 250 or 254 or 263 and 264 will apply for the specific assessee. Exception to section 150(1) [Section 150(2)]: The above provision that there will be no time limit to issue notice under section 149(1) shall, however, not apply where any such assessment or reassessment as is referred to in subsection (1) to section 150 relates to an assessment year in respect of which an assessment or reassessment could not have been made at the time the order which was the subject matter of appeal, reference or revision, as the case may be, was made by reason of any other provision limiting the time within which any action for assessment or reassessment may be taken. Although section 150 appears to be of a very wide amplitude, but it would not mean that recourse to reopening of proceedings in terms of sections 147 and 148 can be initiated at any point of time whatsoever; such a proceeding can be initiated only within a period of limitation prescribed therefore as contained in section 149 [CIT, Shimla vs. Greenworld Corporation (2009) 181 Taxman 111 (SC)]. Although the time limits prescribed in section 149 of the Income-tax Act, 1961, will not apply where assessment proceedings are initiated by a notice to give effect to any finding or direction under section 150(1), but under section 150(2), the period of limitation as laid down in section 149 shall come into play, if the action for assessment or reassessment could not be initiated for an assessment year on the date of order which was the subject matter of appeal, reference or revision. Thus, where the High Court by order dated , enhanced compensation and a further sum of `10,30,320 was paid to him as interest for the period to and the Assessing Officer treated the interest taxable in the assessment year , in an order passed on On appeal, the Commissioner (Appeal) by his order dated accepted the claim of the assessee that such interest was assessable only on accrual basis and directed the Assessing Officer to recompute the addition accordingly. While giving effect to the order of Commissioner (Appeal), the Assessing Officer issued the notice under section 148 dated , to assess the interest on accrual basis in the corresponding assessment years to On a writ petition against the reassessment proceedings, it was held by the Punjab and Haryana High Court that in this case, the question of limitation had also to be considered. In the present case, the assessment order which was subject matter of appeal before the Commissioner (Appeal) for the assessment year was passed by the Assessing Officer on Hence no proceeding under section 147 could be initiated in the assessment years for which the period of limitation of 4 years prescribed under section 149 had expired on that date. The years involved in the present writ petitions were assessment years to The period of limitation of four years prescribed under section 149 for the assessment years to had expired on or before , which was prior to the date of order dated These assessment years were clearly covered within the exception provided by section 150(2). Consequently, the notice issued under section 148 dated , in respect of these years were clearly barred by limitation. The notice has to be quashed. However, as far as interest for the assessment year was concerned; the notice is not barred by limitation [Col. Sir Harindar Singh Brar vs. ITO (2006) 282 ITR 371 (P&H)]. 1.4 INCOME COMPUTATION & DISCLOSURE STANDARDS (ICDS) Under Section 145(1), Income chargeable under the heads Profits and Gains from Business or Profession or Income from other Sources subject to 145(2)- as per method of accounting regularly followed. Section 145(2) provides that the Central Government has power to notify ICDS. CBDT vide notification dated 31 March 2015 introduced 10 ICDS to be effective from 1 April 2015 and shall be accordingly apply for AY onwards. Preamble to every ICDS clearly states that in case of conflict between the provisions of the Act and the ICDS - the provisions of the Act shall prevail. Section 145 of the Income Tax Act 1961 provides : (1) Income chargeable under the head "Profits and gains of business or profession" or "Income from other sources" DIRECT TAX LAWS AND INTERNATIONAL TAXATION 27

38 Return of Income & Assessment Procedure shall, subject to the provisions of sub-section (2), be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee. (2) The Central Government may notify in the Official Gazette from time to time income computation and disclosure standards to be followed by any class of assessees or in respect of any class of income. (3) Where the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the assessee, or where the method of accounting provided in sub-section (1) has not been regularly followed by the assessee, or income has not been computed in accordance with the standards notified under sub-section (2), the Assessing Officer may make an assessment in the manner provided in section 144. The Finance Act, 1995 empowered the Central Government to notify, the Accounting Standards for computing the income under the head Profits and Gains of Business or Profession or Income from Other Sources vide Section 145(2) of Income Tax Act,1961. Background of ICDS Central Government vide Notification No. 32/2015, dated has notifies the Income Computation and Disclosure Standards to be followed by all assessees, following the mercantile system of accounting, for the purposes of computation of income chargeable to income-tax under the head Profit and Gains of Business or Profession or Income from Other Sources. This notification shall come into force with effect from 1st day of April, 2015, and shall accordingly apply to the assessment year and subsequent assessment years. Accounting standard 1 on disclosure of accounting policies, and as 2 on disclosure of prior period and extraordinary items and changes in accounting policies notified vide notification dated 25th January, In December 2010, CBDT constituted a Committee to, inter alia, give suggestions to harmonize the ICAI s AS with provision of Income Tax Act for notification under the Act. In August 2012, the Committee submitted its report with draft of 14 Tax Accounting Standards (TAS) out of 31 AS issued by ICAI. In August, 2014, the words Accounting Standards in section 145(2) substituted with Income Computation and Disclosure Standards [ICDS] w.e.f 1st April In January, 2015, after examining the comments received from stakeholders, Committee issued new draft of 12 ICDS inviting stakeholders comments. After prolonged discussions finally, on March 31st 2015, 10 Income Computation & Disclosure Standards ( ICDS ) were notified. These Standards will change the way Income will be computed and will materially impact the assessee. These ICDS are applicable to all the assessees following Mercantile System of accounting for computation of income chargeable under the head Profits and Gains of Business or Profession or Income from Other Sources, and not for the purpose of maintenance of books of accounts complying with ICDS, w.e.f. 01/04/2015 i.e. for the Financial Year or Assessment Year The need for ICDS is to resolve the disputes and gaps between the provisions of the Act and the Accounting Standards so as to calculate and disclose income in accordance of some specific guidelines to avoid litigations and provide an ease in doing the business. Applicability of ICDS ICDS will apply to: An assessee following mercantile system of accounting for computing taxable income under the following heads of income: Profit and gains of business or profession Income from other sources No Net worth or Turnover Criteria prescribed for applicability. It is not for the purpose of maintenance of books of account. In case of conflict between ICDS and Act, the Act shall prevail List of Notified ICDS ICDS Income Computation and Disclosure Standards Equivalent AS Equivalent IND AS ICDS I Accounting Policies AS-1 IND AS-1 and 8 28 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

39 ICDS II Valuation of Inventories AS-2 IND AS-2 ICDS III Construction contracts AS-7 IND AS-11 ICDS IV Revenue Recognition AS-9 IND AS-18 ICDS V Tangible Fixed Assets AS-10 IND AS-16 ICDS VI Effects of Changes in Foreign Exchange Rates AS-11 IND AS-21 ICDS VII Government Grants AS-12 IND AS-20 ICDS VIII Securities AS-13 IND AS-32 ICDS IX Borrowing Costs AS-16 IND AS-23 ICDS X Provisions, Contingent Liabilities and Contingent Assets AS-29 IND AS-37 Tax Accounting Standards Committee had recommended four more standards to be notified on the following subjects: Events occurring after the Balance Sheet Date Prior Period Items Leases Intangible Assets CBDT has not yet notified the standards on the above subjects. ICDS has not yet adequately addressed certain areas such as financial instruments, share-based payments, etc which are prevalent in today s business environment. Basis for taxable profits Prior to introduction of ICDS, the taxable profits were computed based on the commercial accounting principles subject to express provision of the Act. :- Miss Dhun Dadabhai Kapadia v. CIT [(1967) 63 ITR 651(SC)] CIT v. U.P. State Industrial Development Corporation [(1997) 225 ITR 703 (SC)] it was held that :- for the purposes of ascertaining profits and gains the ordinary principles of commercial accounting should be applied, so long as they do not conflict with any express provision of the relevant statute Going Forward for taxation purposes- profits to be computed as per commercial accounting principles as modified by provisions of ICDS Computing Taxable Income under ICDS framework- Specimen Particulars Amount Amount Profits and Gains from Business or Profession XXX Income from Other Sources XXX Total XXX Add/ Less: Adjustments as per ICDS XXX Adjusted Income as per ICDS XXX Add/ Less: Adjustments as per the provisions of the Act XXX Total Income XXX Constitutional validity of ICDS Indian system of governance is broadly divided in three wings Legislative wing, Judicial wing DIRECT TAX LAWS AND INTERNATIONAL TAXATION 29

40 Return of Income & Assessment Procedure Executive wing. The outcome of Delegated legislation culminates in transfer of legislative power to executive wing, hence whether there has been excessive delegation of powers or not has been subject matter of judicial interpretation. Non-compliance of ICDS Section 145(3)-AO has the power to make best judgement assessment u/s. 144 if he is not satisfied about the:- correctness or completeness of the accounts of the assessee ; or method of accounting is not regularly followed ;or Income not computed as per ICDS Hence ICDS has to be mandatorily followed or else best judgement assessment can be done by Assessing Officer. General Impact of ICDS It will result in increase in administration cost. The difference in Accounting Income and Taxable Income will result in increase in deferred tax assets/liabilities. It will reduce cases of litigations because of standards providing the definite method of computation of income and also the proper disclosure required by the authorities. It has been clarified that there is no need to maintain separate set of books of account for the purpose of ICDS Income Computation and Disclosure Standard I relating to accounting policies Preamble This Income Computation and Disclosure Standard is applicable for computation of income chargeable under the head Profits and gains of business or profession or Income from other sources and not for the purpose of maintenance of books of accounts. In the case of conflict between the provisions of the Income-tax Act, 1961 ( the Act ) and this Income Computation and Disclosure Standard, the provisions of the Act shall prevail to that extent. 1. Scope This Income Computation and Disclosure Standard deals with significant accounting policies. 2. Fundamental Accounting Assumptions The following are fundamental accounting assumptions, namely: (a) Going Concern Going concern refers to the assumption that the person has neither the intention nor the necessity of liquidation or of curtailing materially the scale of the business, profession or vocation and intends to continue his business, profession or vocation for the foreseeable future. (b) Consistency Consistency refers to the assumption that accounting policies are consistent from one period to another. (c) Accrual Accrual refers to the assumption that revenues and costs are accrued, that is, recognised as they are earned or incurred (and not as money is received or paid) and recorded in the previous year to which they relate. 3. Accounting Policies The accounting policies refer to the specific accounting principles and the methods of applying those principles adopted by a person. 4. Considerations in the Selection and Change of Accounting Policies 30 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

41 Accounting policies adopted by a person shall be such so as to represent a true and fair view of the state of affairs and income of the business, profession or vocation. For this purpose, (i) the treatment and presentation of transactions and events shall be governed by their substance and not merely by the legal form; and (ii) marked to market loss or an expected loss shall not be recognised unless the recognition of such loss is in accordance with the provisions of any other Income 5. Computation and Disclosure Standard An accounting policy shall not be changed without reasonable cause. 6. Disclosure of Accounting Policies All significant accounting policies adopted by a person shall be disclosed. 7. Any change in an accounting policy which has a material effect shall be disclosed. The amount by which any item is affected by such change shall also be disclosed to the extent ascertainable. Where such amount is not ascertainable, wholly or in part, the fact shall be indicated. If a change is made in the accounting policies which has no material effect for the current previous year but which is reasonably expected to have a material effect in later previous years, the fact of such change shall be appropriately disclosed in the previous year in which the change is adopted and also in the previous year in which such change has material effect for the first time. 8. Disclosure of accounting policies or of changes therein cannot remedy a wrong or inappropriate treatment of the item. 9. If the fundamental accounting assumptions of Going Concern, Consistency and Accrual are followed, specific disclosure is not required. If a fundamental accounting assumption is not followed, the fact shall be disclosed. 10. Transitional Provisions All contract or transaction existing on the 1st day of April, 2015 or entered into on or after the 1st day of April, 2015 shall be dealt with in accordance with the provisions of this standard after taking into account the income, expense or loss, if any, recognised in respect of the said contract or transaction for the previous year ending on or before the 31st March, Comparison ICDS I vs. AS-1 According to AS-1, the concept of prudence is followed in accounting practices wherein provision for expected losses is created but; As per ICDS such expected loss or Mark to Market losses shall not be recognized unless it is in accordance with the provisions of any other ICDS. [Presently not required by any other ICDS] Elimination of Concept of Materiality and Prudence. Unlike AS 1, under ICDS an accounting policy shall not be changed without reasonable cause. ICDS -I : Disclosure All significant policies adopted in preparation of Financial Statements should be disclosed. Any change in accounting policies which has a material effect should be disclosed. Disclosure of accounting policies or of changes therein cannot remedy a wrong or inappropriate treatment of the item. If a fundamental accounting assumption is not followed, the fact should be disclosed. Income Computation and Disclosure Standard II relating to valuation of inventories Preamble This Income Computation and Disclosure Standard is applicable for computation of income chargeable under the head Profits and gains of Business or profession or Income from other sources and not for the purpose of maintenance of books of accounts. In the case of conflict between the provisions of Income Tax Act, 1961 ( the DIRECT TAX LAWS AND INTERNATIONAL TAXATION 31

42 Return of Income & Assessment Procedure Act ) and this Income Computation and Disclosure Standard, the provisions of the Act shall prevail to that extent 1. Scope This Income Computation and Disclosure Standard shall be applied for valuation of inventories, except: (a) Work-in-progress arising under construction contract including directly related service contract which is dealt with by the Income Computation and Disclosure Standard on construction contracts; (b) Work-in-progress which is dealt with by other Income Computation and Disclosure Standard; (c) Shares, debentures and other financial instruments held as stock-in-trade which are dealt with by the Income Computation and Disclosure Standard on securities; (d) Producers inventories of livestock, agriculture and forest products, mineral oils, ores and gases to the extent that they are measured at net realizable value; (e) Machinery spares, which can be used only in connection with a tangible fixed asset and their use is expected to be irregular, shall be dealt with in accordance with the Income Computation and Disclosure Standard on tangible fixed assets. 2. Definitions (1) The following terms are used in this Income Computation and Disclosure Standard with the meanings specified: (a) Inventories are assets: (i) held for sale in the ordinary course of business; (ii) in the process of production for such sale; (iii) in the form of materials or supplies to be consumed in the production process or in the rendering of services. (b) Net realisable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale. (2) Words and expressions used and not defined in this Income Computation and Disclosure Standard but defined in the Act shall have the meanings assigned to them in that Act. 3. Measurement Inventories shall be valued at cost, or net realisable value, whichever is lower. 4. Cost of Inventories Cost of inventories shall comprise of all costs of purchase, costs of services, costs of conversion and other costs incurred in bringing the inventories to their present location and condition. 5. Costs of Purchase The costs of purchase shall consist of purchase price including duties and taxes, freight inwards and other expenditure directly attributable to the acquisition. Trade discounts, rebates and other similar items shall be deducted in determining the costs of purchase. 6. Costs of Services The costs of services in the case of a service provider shall consist of labour and other costs of personnel directly engaged in providing the service including supervisory personnel and attributable overheads. 7. Costs of Conversion The costs of conversion of inventories shall include costs directly related to the units of production and a systematic allocation of fixed and variable production overheads that are incurred in converting materials into finished goods. Fixed production overheads shall be those indirect costs of production that remain relatively constant regardless of the volume of production. Variable production overheads shall be those indirect costs of production that vary 32 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

43 directly or nearly directly, with the volume of production. 8. The allocation of fixed production overheads for the purpose of their inclusion in the costs of conversion shall be based on the normal capacity of the production facilities. Normal capacity shall be the production expected to be achieved on an average over a number of periods or seasons under normal circumstances, taking into account the loss of capacity resulting from planned maintenance. The actual level of production shall be used when it approximates to normal capacity. The amount of fixed production overheads allocated to each unit of production shall not be increased as a consequence of low production or idle plant. Unallocated overheads shall be recognised as an expense in the period in which they are incurred. In periods of abnormally high production, the amount of fixed production overheads allocated to each unit of production is decreased so that inventories are not measured above the cost. Variable production overheads shall be assigned to each unit of production on the basis of the actual use of the production facilities. 9. Where a production process results in more than one product being produced simultaneously and the costs of conversion of each product are not separately identifiable, the costs shall be allocated between the products on a rational and consistent basis. Where by-products, scrap or waste material are immaterial, they shall be measured at net realisable value and this value shall be deducted from the cost of the main product. 10. Other Costs Other costs shall be included in the cost of inventories only to the extent that they are incurred in bringing the inventories to their present location and condition. 11. Interest and other borrowing costs shall not be included in the costs of inventories, unless they meet the criteria for recognition of interest as a component of the cost as specified in the Income Computation and Disclosure Standard on borrowing costs. 12. Exclusions from the Cost of Inventories In determining the cost of inventories in accordance with paragraphs 4 to paragraphs 11, the following costs shall be excluded and recognised as expenses of the period in which they are incurred, namely: (a) Abnormal amounts of wasted materials, labour, or other production costs; (b) Storage costs, unless those costs are necessary in the production process prior to a further production stage; (c) Administrative overheads that do not contribute to bringing the inventories to their present location and condition; (d) Selling costs. 13. Cost Formulae The Cost of inventories of items (i) that are not ordinarily interchangeable; and (ii) goods or services produced and segregated for specific projects shall be assigned by specific identification of their individual costs. 14. Specific identification of cost means specific costs are attributed to identified items of inventory. 15. Where there are a large numbers of items of inventory which are ordinarily interchangeable, specific identification of costs shall not be made. 16. First-in First-out and Weighted Average Cost Formula Cost of inventories, other than the inventory dealt with in paragraph 13, shall be assigned by using the First-in Firstout (FIFO), or weighted average cost formula. The formula used shall reflect the fairest possible approximation to the cost incurred in bringing the items of inventory to their present location and condition. 17. The FIFO formula assumes that the items of inventory which were purchased or produced first are consumed or sold first, and consequently the items remaining in inventory at the end of the period are those most recently DIRECT TAX LAWS AND INTERNATIONAL TAXATION 33

44 Return of Income & Assessment Procedure purchased or produced. Under the weighted average cost formula, the cost of each item is determined from the weighted average of the cost of similar items at the beginning of a period and the cost of similar items purchased or produced during the period. The average shall be calculated on a periodic basis, or as each additional shipment is received, depending upon the circumstances. 18. Retail Method Where it is impracticable to use the costing methods referred to in paragraph 16, the retail method can be used in the retail trade for measuring inventories of large number of rapidly changing items that have similar margins. The cost of the inventory is determined by reducing from the sales value of the inventory, the appropriate percentage gross margin. The percentage used takes into consideration inventory, which has been marked down to below its original selling price. 19. Net Realisable Value Inventories shall be written down to net realisable value on an item-by-item basis. Where items of inventory relating to the same product line having similar purposes or end uses and are produced and marketed in the same geographical area and cannot be practicably evaluated separately from other items in that product line, such inventories shall be grouped together and written down to net realisable value on an aggregate basis. 20. Net realisable value shall be based on the most reliable evidence available at the time of valuation. The estimates of net realisable value shall also take into consideration the purpose for which the inventory is held. The estimates shall take into consideration fluctuations of price or cost directly relating to events occurring after the end of previous year to the extent that such events confirm the conditions existing on the last day of the previous year. 21. Materials and other supplies held for use in the production of inventories shall not be written down below the cost, where the finished products in which they shall be incorporated are expected to be sold at or above the cost. Where there has been a decline in the price of materials and it is estimated that the cost of finished products will exceed the net realisable value, the value of materials shall be written down to net realisable value which shall be the replacement cost of such materials. 22. Value of Opening Inventory The value of the inventory as on the beginning of the previous year shall be (i) the cost of inventory available, if any, on the day of the commencement of the business when the business has commenced during the previous year; and (ii) the value of the inventory as on the close of the immediately preceding previous year, in any other case. 23. Change of Method of Valuation of Inventory The method of valuation of inventories once adopted by a person in any previous year shall not be changed without reasonable cause. 24. Valuation of Inventory in Case of Certain Dissolutions In case of dissolution of a partnership firm or association of person or body of individuals, notwithstanding whether business is discontinued or not, the inventory on the date of dissolution shall be valued at the net realisable value. 25. Transitional Provisions Interest and other borrowing costs, which do not meet the criteria for recognition of interest as a component of the cost as per para 11, but included in the cost of the opening inventory as on the 1st day of April, 2015, shall be taken into account for determining cost of such inventory for valuation as on the close of the previous year beginning on or after 1st day of April, 2015 if such inventory continue to remain part of inventory as on the close of the previous year beginning on or after 1st day of April, Disclosure The following aspects shall be disclosed, namely: 34 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

45 (a) the accounting policies adopted in measuring inventories including the cost formulae used; and (b) the total carrying amount of inventories and its classification appropriate to a person ICDS-II : Disclosure (a) Change in Policy : The accounting policies adopted in measuring inventories including the cost of formulae used. (b) Carrying Amount: The total carrying amount of inventories and its classification appropriate to a person Income Computation and Disclosure Standard III relating to construction contracts Preamble This Income Computation and Disclosure Standard is applicable for computation of income chargeable under the head Profits and gains of business or profession or Income from other sources and not for the purpose of maintenance of books of accounts. In the case of conflict between the provisions of the Income-tax Act, 1961 ( the Act ) and this Income Computation and Disclosure Standard, the provisions of the Act shall prevail to that extent. 1. Scope This Income Computation and Disclosure Standard should be applied in determination of income for a construction contract of a contractor. 2. Definitions (1) The following terms are used in this Income Computation and Disclosure Standard with the meanings specified: (a) Construction contract is a contract specifically negotiated for the construction of an asset or a combination of assets that are closely interrelated or interdependent in terms of their design, technology and function or their ultimate purpose or use and includes: (i) contract for the rendering of services which are directly related to the construction of the asset, for example, those for the services of project managers and architects; (ii) contract for destruction or restoration of assets, and the restoration of the environment following the demolition of assets. (b) Fixed price contract is a construction contract in which the contractor agrees to a fixed contract price, or a fixed rate per unit of output, which may be subject to cost escalation clauses. (c) Cost plus contract is a construction contract in which the contractor is reimbursed for allowable or otherwise defined costs, plus a mark up on these costs or a fixed fee. (d) Retentions are amounts of progress billings which are not paid until the satisfaction of conditions specified in the contract for the payment of such amounts or until defects have been rectified (e) Progress billings are amounts billed for work performed on a contract whether or not they have been paid by the customer. (f) Advances are amounts received by the contractor before the related work is performed. (2) Words and expressions used and not defined in this Income Computation and Disclosure Standard but defined in the Act shall have the meaning respectively assigned to them in the Act. 3. A construction contract may be negotiated for the construction of a single asset. A construction contract may also deal with the construction of a number of assets which are closely interrelated or interdependent in terms of their design, technology and function or their ultimate purpose or use. 4. Construction contracts are formulated in a number of ways which, for the purposes of this Income Computation and Disclosure Standard, are classified as fixed price contracts and cost plus contracts. Some construction contracts may contain characteristics of both a fixed price contract and a cost plus contract, for example, in the case of a cost plus contract with an agreed maximum price. DIRECT TAX LAWS AND INTERNATIONAL TAXATION 35

46 Return of Income & Assessment Procedure 5. Combining and Segmenting Construction Contracts The requirements of this Income Computation and Disclosure Standard shall be applied separately to each construction contract except as provided for in paragraphs 6, 7 and 8 herein. For reflecting the substance of a contract or a group of contracts, where it is necessary, the Income Computation and Disclosure Standard should be applied to the separately identifiable components of a single contract or to a group of contracts together. 6. Where a contract covers a number of assets, the construction of each asset should be treated as a separate construction contract when: (a) separate proposals have been submitted for each asset; (b) each asset has been subject to separate negotiation and the contractor and customer have been able to accept or reject that part of the contract relating to each asset; and (c) the costs and revenues of each asset can be identified. 7. A group of contracts, whether with a single customer or with several customers, should be treated as a single construction contract when: (a) the group of contracts is negotiated as a single package; (b) the contracts are so closely interrelated that they are, in effect, part of a single project with an overall profit margin; and (c) the contracts are performed concurrently or in a continuous sequence. 8. Where a contract provides for the construction of an additional asset at the option of the customer or is amended to include the construction of an additional asset, the construction of the additional asset should be treated as a separate construction contract when: (a) the asset differs significantly in design, technology or function from the asset or assets covered by the original contract; or (b) the price of the asset is negotiated without having regard to the original contract price. 9. Contract Revenue Contract revenue shall be recognised when there is reasonable certainty of its ultimate collection. 10. Contract revenue shall comprise of: (a) the initial amount of revenue agreed in the contract, including retentions; and (b) variations in contract work, claims and incentive payments: (i) to the extent that it is probable that they will result in revenue; and (ii) they are capable of being reliably measured. 11. Where contract revenue already recognised as income is subsequently written off in the books of accounts as uncollectible, the same shall be recognised as an expense and not as an adjustment of the amount of contract revenue. 12. Contract Costs Contract costs shall comprise of: (a) costs that relate directly to the specific contract; (b) costs that are attributable to contract activity in general and can be allocated to the contract; (c) such other costs as are specifically chargeable to the customer under the terms of the contract; and (d) allocated borrowing costs in accordance with the Income Computation and Disclosure Standard on Borrowing Costs. These costs shall be reduced by any incidental income, not being in the nature of interest, dividends or 36 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

47 capital gains, that is not included in contract revenue. 13. Costs that cannot be attributed to any contract activity or cannot be allocated to a contract shall be excluded from the costs of a construction contract. 14. Contract costs include the costs attributable to a contract for the period from the date of securing the contract to the final completion of the contract. Costs that are incurred in securing the contract are also included as part of the contract costs, provided (a) they can be separately identified; and (b) it is probable that the contract shall be obtained. When costs incurred in securing a contract are recognised as an expense in the period in which they are incurred, they are not included in contract costs when the contract is obtained in a subsequent period. 15. Contract costs that relate to future activity on the contract are recognised as an asset. Such costs represent an amount due from the customer and are classified as contract work in progress. 16. Recognition of Contract Revenue and Expenses Contract revenue and contract costs associated with the construction contract should be recognised as revenue and expenses respectively by reference to the stage of completion of the contract activity at the reporting date. 17. The recognition of revenue and expenses by reference to the stage of completion of a contract is referred to as the percentage of completion method. Under this method, contract revenue is matched with the contract costs incurred in reaching the stage of completion, resulting in the reporting of revenue, expenses and profit which can be attributed to the proportion of work completed. 18. The stage of completion of a contract shall be determined with reference to: (a) the proportion that contract costs incurred for work performed upto the reporting date bear to the estimated total contract costs; or (b) surveys of work performed; or (c) completion of a physical proportion of the contract work. Progress payments and advances received from customers are not determinative of the stage of completion of a contract. 19. When the stage of completion is determined by reference to the contract costs incurred upto the reporting date, only those contract costs that reflect work performed are included in costs incurred upto the reporting date. Contract costs which are excluded are: (a) contract costs that relate to future activity on the contract; and (b) payments made to subcontractors in advance of work performed under the subcontract. 20. During the early stages of a contract, where the outcome of the contract cannot be estimated reliably contract revenue is recognised only to the extent of costs incurred. The early stage of a contract shall not extend beyond 25 % of the stage of completion. 21. Changes in Estimates The percentage of completion method is applied on a cumulative basis in each previous year to the current estimates of contract revenue and contract costs. Where there is change in estimates, the changed estimates shall be used in determination of the amount of revenue and expenses in the period in which the change is made and in subsequent periods. 22. Transitional Provisions Contract revenue and contract costs associated with the construction contract, which commenced on or before the 31st day of March, 2015 but not completed by the said date, shall be recognised as revenue and costs DIRECT TAX LAWS AND INTERNATIONAL TAXATION 37

48 Return of Income & Assessment Procedure respectively in accordance with the provisions of this standard. The amount of contract revenue, contract costs or expected loss, if any, recognised for the said contract for any previous year commencing on or before the 1st day of April, 2014 shall be taken into account for recognising revenue and costs of the said contract for the previous year commencing on the 1st day of April, 2015 and subsequent previous years. 23. Disclosure A person shall disclose: (a) the amount of contract revenue recognised as revenue in the period; and (b) the methods used to determine the stage of completion of contracts in progress. 24. A person shall disclose the following for contracts in progress at the reporting date, namely: (a) amount of costs incurred and recognised profits (less recognised losses) upto the reporting date; (b) the amount of advances received; and (c) the amount of retentions ICDS- III : Disclosure the amount of contract revenue recognised as revenue in the period; the methods used to determine the stage of completion of contracts in progress. For contracts in progress at the reporting date: (i) the aggregate amount of costs incurred and recognised profits (less recognised losses) upto the reporting date; (ii) the amount of advances received; and (iii) the amount of retentions. Income Computation and Disclosure Standard IV relating to revenue recognition Preamble This Income Computation and Disclosure Standard is applicable for computation of income chargeable under the head Profits and gains of business or profession or Income from other sources and not for the purpose of maintenance of books of accounts. In the case of conflict between the provisions of the Income-tax Act, 1961 ( the Act ) and this Income Computation and Disclosure Standard, the provisions of the Act shall prevail to that extent. 1. Scope (1) This Income Computation and Disclosure Standard deals with the bases for recognition of revenue arising in the course of the ordinary activities of a person from (i) the sale of goods; (ii) the rendering of services; (iii) the use by others of the person s resources yielding interest, royalties or dividends. (2) This Income Computation and Disclosure Standard does not deal with the aspects of revenue recognition which are dealt with by other Income Computation and Disclosure Standards. 2. Definitions (1) The following term is used in this Income Computation and Disclosure Standard with the meanings specified: (a) Revenue is the gross inflow of cash, receivables or other consideration arising in the course of the ordinary activities of a person from the sale of goods, from the rendering of services, or from the use by others of the person s resources yielding interest, royalties or dividends. In an agency relationship, the revenue is the amount of commission and not the gross inflow of cash, receivables or other consideration. 38 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

49 (2) Words and expressions used and not defined in this Income Computation and Disclosure Standard but defined in the Act shall have the meanings assigned to them in that Act. 3. Sale of Goods In a transaction involving the sale of goods, the revenue shall be recognised when the seller of goods has transferred to the buyer the property in the goods for a price or all significant risks and rewards of ownership have been transferred to the buyer and the seller retains no effective control of the goods transferred to a degree usually associated with ownership. In a situation, where transfer of property in goods does not coincide with the transfer of significant risks and rewards of ownership, revenue in such a situation shall be recognised at the time of transfer of significant risks and rewards of ownership to the buyer. 4. Revenue shall be recognised when there is reasonable certainty of its ultimate collection. 5. Where the ability to assess the ultimate collection with reasonable certainty is lacking at the time of raising any claim for escalation of price and export incentives, revenue recognition in respect of such claim shall be postponed to the extent of uncertainty involved. 6. Rendering of Services Revenue from service transactions shall be recognised by the percentage completion method. Under this method, revenue from service transactions is matched with the service transactions costs incurred in reaching the stage of completion, resulting in the determination of revenue, expenses and profit which can be attributed to the proportion of work completed. Income Computation and Disclosure Standard on construction contract also requires the recognition of revenue on this basis. The requirements of that Standard shall mutatis mutandis apply to the recognition of revenue and the associated expenses for a service transaction. 7. The Use of Resources by Others Yielding Interest, Royalties or Dividends Interest shall accrue on the time basis determined by the amount outstanding and the rate applicable. Discount or premium on debt securities held is treated as though it were accruing over the period to maturity. 8. Royalties shall accrue in accordance with the terms of the relevant agreement and shall be recognised on that basis unless, having regard to the substance of the transaction, it is more appropriate to recognise revenue on some other systematic and rational basis. 9. Dividends are recognised in accordance with the provisions of the Act. 10. Transitional Provisions The transitional provisions of Income Computation and Disclosure Standard on construction contract shall mutatis mutandis apply to the recognition of revenue and the associated costs for a service transaction undertaken on or before the 31st day of March, 2015 but not completed by the said date. 11. Revenue for a transaction, other than a service transaction referred to in Para 10, undertaken on or before the 31st day of March, 2015 but not completed by the said date shall be recognised in accordance with the provisions of this standard for the previous year commencing on the 1st day of April, 2015 and subsequent previous year. The amount of revenue, if any, recognised for the said transaction for any previous year commencing on or before the 1st day of April, 2014 shall be taken into account for recognising revenue for the said transaction for the previous year commencing on the 1st day of April, 2015 and subsequent previous years. 12. Disclosure Following disclosures shall be made in respect of revenue recognition, namely: (a) in a transaction involving sale of good, total amount not recognised as revenue during the previous year due to lack of reasonably certainty of its ultimate collection along with nature of uncertainty; (b) the amount of revenue from service transactions recognised as revenue during the previous year; (c) the method used to determine the stage of completion of service transactions in progress; and DIRECT TAX LAWS AND INTERNATIONAL TAXATION 39

50 Return of Income & Assessment Procedure (d) for service transactions in progress at the end of previous year: (i) amount of costs incurred and recognised profits (less recognised losses) upto end of previous year; (ii) the amount of advances received; and (iii) the amount of retentions. ICDS-IV : Disclosure Following disclosures shall be made in respect of revenue recognition: (a) In a transaction involving sale of good, total amount of claim raised for escalation of price and export incentives but not recognized as revenue during the previous year along with nature of uncertainty about such claims. (b) the amount of revenue from service transactions recognized as revenue during the previous year ; and (c) the methods used to determine the stage of completion of service transactions in progress. (d) For service transactions in progress at the end of previous year: (i) amount of costs incurred and recognized profits (less recognized losses) upto end of previous year; (ii) the amount of advances received; and (iii) the amount of retentions. Income Computation and Disclosure Standard V relating to tangible fixed assets Preamble This Income Computation and Disclosure Standard is applicable for computation of income chargeable under the head Profits and gains of business or profession or Income from other sources and not for the purpose of maintenance of books of accounts. In the case of conflict between the provisions of the Income-tax Act, 1961 ( the Act ) and this Income Computation and Disclosure Standard, the provisions of the Act shall prevail to that extent. 1. Scope This Income Computation and Disclosure Standard deals with the treatment of tangible fixed assets. 2. Definitions (1) The following terms are used in this Income Computation and Disclosure Standard with the meanings specified: (a) Tangible fixed asset is an asset being land, building, machinery, plant or furniture held with the intention of being used for the purpose of producing or providing goods or services and is not held for sale in the normal course of business. (b) Fair value of an asset is the amount for which that asset could be exchanged between knowledgeable, willing parties in an arm s length transaction. (2) Words and expressions used and not defined in this Income Computation and Disclosure Standard but defined in the Act shall have the meanings assigned to them in that Act. 3. Identification of Tangible Fixed Assets The definition in clause (a) of sub-paragraph (1) of paragraph 2 provides criteria for determining whether an item is to be classified as a tangible fixed asset. 4. Stand-by equipment and servicing equipment are to be capitalised. Machinery spares shall be charged to the revenue as and when consumed. When such spares can be used only in connection with an item of tangible fixed asset and their use is expected to be irregular, they shall be capitalised. 5. Components of Actual Cost The actual cost of an acquired tangible fixed asset shall comprise its purchase price, import duties and other taxes, excluding those subsequently recoverable, and any directly attributable expenditure on making the asset ready 40 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

51 for its intended use. Any trade discounts and rebates shall be deducted in arriving at the actual cost. 6. The cost of a tangible fixed asset may undergo changes subsequent to its acquisition or construction on account of (i) price adjustment, changes in duties or similar factors; or (ii) exchange fluctuation as specified in Income Computation and Disclosure 7. Standard on the effects of changes in foreign exchange rates. Administration and other general overhead expenses are to be excluded from the cost of tangible fixed assets if they do not relate to a specific tangible fixed asset. Expenses which are specifically attributable to construction of a project or to the acquisition of a tangible fixed asset or bringing it to its working condition, shall be included as a part of the cost of the project or as a part of the cost of the tangible fixed asset. 8. The expenditure incurred on start-up and commissioning of the project, including the expenditure incurred on test runs and experimental production, shall be capitalised. The expenditure incurred after the plant has begun commercial production, that is, production intended for sale or captive consumption, shall be treated as revenue expenditure. 9. Self-constructed Tangible Fixed Assets In arriving at the actual cost of self-constructed tangible fixed assets, the same principles shall apply as those described in paragraphs 5 to 8. Cost of construction that relate directly to the specific tangible fixed asset and costs that are attributable to the construction activity in general and can be allocated to the specific tangible fixed asset shall be included in actual cost. Any internal profits shall be eliminated in arriving at such costs. 10. Non-monetary Consideration When a tangible fixed asset is acquired in exchange for another asset, the fair value of the tangible fixed asset so acquired shall be its actual cost. 11. When a tangible fixed asset is acquired in exchange for shares or other securities, the fair value of the tangible fixed asset so acquired shall be its actual cost. 12. Improvements and Repairs An Expenditure that increases the future benefits from the existing asset beyond its previously assessed standard of performance is added to the actual cost. 13. The cost of an addition or extension to an existing tangible fixed asset which is of a capital nature and which becomes an integral part of the existing tangible fixed asset is to be added to its actual cost. Any addition or extension, which has a separate identity and is capable of being used after the existing tangible fixed asset is disposed of, shall be treated as separate asset. 14. Valuation of Tangible Fixed Assets in Special Cases Where a person owns tangible fixed assets jointly with others, the proportion in the actual cost, accumulated depreciation and written down value is grouped together with similar fully owned tangible fixed assets. Details of such jointly owned tangible fixed assets shall be indicated separately in the tangible fixed assets register. 15. Where several assets are purchased for a consolidated price, the consideration shall be apportioned to the various assets on a fair basis. 16. Transitional Provisions The actual cost of tangible fixed assets, acquisition or construction of which commenced on or before the 31st day of March, 2015 but not completed by the said date, shall be recognised in accordance with the provisions of this standard. The amount of actual cost, if any, recognised for the said assets for any previous year commencing on or before the 1st day of April, 2014 shall be taken into account for recognising actual cost of the said assets for the DIRECT TAX LAWS AND INTERNATIONAL TAXATION 41

52 Return of Income & Assessment Procedure previous year commencing on the 1st day of April, 2015 and subsequent previous years. 17. Depreciation Depreciation on a tangible fixed asset shall be computed in accordance with the provisions of the Act. 18. Transfers Income arising on transfer of a tangible fixed asset shall be computed in accordance with the provisions of the Act. 19. Disclosures ; Following disclosure shall be made in respect of tangible fixed assets, namely: (a) description of asset or block of assets; (b) rate of depreciation; (c) actual cost or written down value, as the case may be; (d) additions or deductions during the year with dates; in the case of any addition of an asset, date put to use; including adjustments on account of (i) Central Value Added Tax credit claimed and allowed under the CENVAT Credit Rules, 2004; (ii) change in rate of exchange of currency; (iii) subsidy or grant or reimbursement, by whatever name called; (e) depreciation Allowable; and (f) written down value at the end of year. ICDS- V : Disclosure Description of asset/block of assets. Rate of depreciation. Actual cost or written down value, as the case may be. Additions/deductions during the year with dates; in the case of any addition of an asset, date put to use; including adjustments on account of: Central Value Added Tax credit claimed and allowed under the Central Excise Rules, 1944, in respect of assets acquired on or after 1st March, 1994, change in rate of exchange of currency, and subsidy or grant or reimbursement, by whatever name called. Depreciation Allowable. Written down value at the end of year. Income Computation and Disclosure Standard VI relating to the effects of changes in foreign exchange rates Preamble This Income Computation and Disclosure Standard is applicable for computation of income chargeable under the head Profits and gains of business or profession or Income from other sources and not for the purpose of maintenance of books of accounts. In the case of conflict between the provisions of the Income-tax Act, 1961 ( the Act ) and this Income Computation and Disclosure Standard, the provisions of the Act shall prevail to that extent. 1. Scope 42 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

53 This Income Computation and Disclosure Standard deals with: (a) treatment of transactions in foreign currencies; (b) translating the financial statements of foreign operations; (c) treatment of foreign currency transactions in the nature of forward exchange contracts. 2. Definitions (1) The following terms are used in this Income Computation and Disclosure Standard with the meanings specified: (a) Average rate is the mean of the exchange rates in force during a period. (b) Closing rate is the exchange rate at the last day of the previous year. (c) Exchange difference is the difference resulting from reporting the same number of units of a foreign currency in the reporting currency of a person at different exchange rates. (d) Exchange rate is the ratio for exchange of two currencies. (e) Foreign currency is a currency other than the reporting currency of a person. (f) Foreign operations of a person is a branch, by whatever name called, of that person, the activities of which are based or conducted in a country other than India. (g) Foreign currency transaction is a transaction which is denominated in or requires settlement in a foreign currency, including transactions arising when a person: (i) buys or sells goods or services whose price is denominated in a foreign currency; or (ii) borrows or lends funds when the amounts payable or receivable are denominated in a foreign currency; or (iii) becomes a party to an unperformed forward exchange contract; or (iv) otherwise acquires or disposes of assets, or incurs or settles liabilities, denominated in a foreign currency. (h) Forward exchange contract means an agreement to exchange different currencies at a forward rate, and includes a foreign currency option contract or another financial instrument of a similar nature; (i) Forward rate is the specified exchange rate for exchange of two Currencies at a specified future date; (j) Indian currency shall have the meaning as assigned to it in section 2 of the Foreign Exchange Management Act, 1999; (k) Integral foreign operation is a foreign operation, the activities of which are an integral part of the operation of the person; (l) Monetary items are money held and assets to be received or liabilities to be paid in fixed or determinable amounts of money. Cash, receivables, and payables are examples of monetary items; (m) Non-integral foreign operation is a foreign operation that is not an integral foreign operation; (n) Non-monetary items are assets and liabilities other than monetary items. Fixed assets, inventories, and investments in equity shares are examples of non-monetary items; (o) Reporting currency means Indian currency except for foreign operations where it shall mean currency of the country where the operations are carried out. (2) Words and expressions used and not defined in this Income Computation and Disclosure Standard but defined in the Act shall have the meaning assigned to them in the Act. Foreign Currency Transactions 3. Initial Recognition (1) A foreign currency transaction shall be recorded, on initial recognition in the reporting currency, by applying DIRECT TAX LAWS AND INTERNATIONAL TAXATION 43

54 Return of Income & Assessment Procedure to the foreign currency amount the exchange rate between the reporting currency and the foreign currency at the date of the transaction. (2) An average rate for a week or a month that approximates the actual rate at the date of the transaction may be used for all transaction in each foreign currency occurring during that period. If the exchange rate fluctuates significantly, the actual rate at the date of the transaction shall be used. 4. Conversion at Last Date of Previous Year At last day of each previous year: (a) foreign currency monetary items shall be converted into reporting currency by applying the closing rate; (b) where the closing rate does not reflect with reasonable accuracy, the amount in reporting currency that is likely to be realised from or required to disburse, a foreign currency monetary item owing to restriction on remittances or the closing rate being unrealistic and it is not possible to effect an exchange of currencies at that rate, then the relevant monetary item shall be reported in the reporting currency at the amount which is likely to be realised from or required to disburse such item at the last date of the previous year; and (c) non-monetary items in a foreign currency shall be converted into reporting currency by using the exchange rate at the date of the transaction. 5. Recognition of Exchange Differences (i) In respect of monetary items, exchange differences arising on the settlement thereof or on conversion thereof at last day of the previous year shall be recognised as income or as expense in that previous year. (ii) In respect of non-monetary items, exchange differences arising on conversion thereof at the last day of the previous year shall not be recognised as income or as expense in that previous year. 6. Exceptions to Paragraphs 3,4 and 5 Notwithstanding anything contained in paragraph 3, 4 and 5; initial recognition, conversion and recognition of exchange difference shall be subject to provisions of section 43A of the Act or Rule 115 of Income-tax Rules, 1962, as the case may be. Financial Statements of Foreign Operations 7. Classification of Foreign Operations (1) The method used to translate the financial statements of a foreign operation depends on the way in which it is financed and operates in relation to a person. For this purpose, foreign operations are classified as either integral foreign operations or non-integral foreign operations. (2) The following are indications that a foreign operation is a non-integral foreign operation rather than an integral foreign operation: (a) while the person may control the foreign operation, the activities of the foreign operation are carried out with a significant degree of autonomy from the activities of the person; (b) transactions with the person are not a high proportion of the foreign operation s activities; (c) the activities of the foreign operation are financed mainly from its own operations or local borrowings; (d) costs of labour, material and other components of the foreign operation s products or services are primarily paid or settled in the local currency; (e) the foreign operation s sales are mainly in currencies other than Indian currency; (f) cash flows of the person are insulated from the day-to-day activities of the foreign operation; (g) sales prices for the foreign operation s products or services are not primarily responsive on a short-term basis to changes in exchange rates but are determined more by local competition or local government regulation; (h) there is an active local sales market for the foreign operation s products or services, although there also 44 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

55 might be significant amounts of exports. 8. Integral Foreign Operations The financial statements of an integral foreign operation shall be translated using the principles and procedures in paragraphs 3 to 6 as if the transactions of the foreign operation had been those of the person himself. 9. Non-integral Foreign Operations (1) In translating the financial statements of a non-integral foreign operation for a previous year, the person shall apply the following, namely: (a) the assets and liabilities, both monetary and non-monetary, of the non-integral foreign operation shall be translated at the closing rate; (b) income and expense items of the non-integral foreign operation shall be translated at exchange rates at the dates of the transactions; and (c) all resulting exchange differences shall be recognised as income or as expenses in that previous year. (2) Notwithstanding anything stated in sub-paragraph 1, translation and recognition of exchange difference in cases referred to in section 43A of the Act or Rule 115 of Income-tax Rules, 1962 shall be carried out in accordance with the provisions contained in that section or that Rule, as the case may be. 10. Change in the Classification of a Foreign Operation (1) When there is a change in the classification of a foreign operation, the translation procedures applicable to the revised classification should be applied from the date of the change in the classification. (2) The consistency principle requires that foreign operation once classified as integral or non-integral is continued to be so classified. However, a change in the way in which a foreign operation is financed and operates in relation to the person may lead to a change in the classification of that foreign operation. 11. Forward Exchange Contracts (1) Any premium or discount arising at the inception of a forward exchange contract shall be amortised as expense or income over the life of the contract. Exchange differences on such a contract shall be recognised as income or as expense in the previous year in which the exchange rates change. Any profit or loss arising on cancellation or renewal shall be recognised as income or as expense for the previous year. (2) The provisions of sub-para (1) shall apply provided that the contract: (a) is not intended for trading or speculation purposes; and (b) is entered into to establish the amount of the reporting currency required or available at the settlement date of the transaction. (3) The provisions of sub-para (1) shall not apply to the contract that is entered into to hedge the foreign currency risk of a firm commitment or a highly probable forecast transaction. For this purpose, firm commitment, shall not include assets and liabilities existing at the end of the previous year. (4) The premium or discount that arises on the contract is measured by the difference between the exchange rate at the date of the inception of the contract and the forward rate specified in the contract. Exchange difference on the contract is the difference between: (a) the foreign currency amount of the contract translated at the exchange rate at the last day of the previous year, or the settlement date where the transaction is settled during the previous year; and (b) the same foreign currency amount translated at the date of inception of the contract or the last day of the immediately preceding previous year, whichever is later. (5) Premium, discount or exchange difference on contracts that are intended for trading or speculation purposes, or that are entered into to hedge the foreign currency risk of a firm commitment or a highly probable forecast transaction shall be recognised at the time of settlement. DIRECT TAX LAWS AND INTERNATIONAL TAXATION 45

56 Return of Income & Assessment Procedure 12. Transitional Provisions (1) All foreign currency transactions undertaken on or after 1st day of April, 2015 shall be recognised in accordance with the provisions of this standard. (2) Exchange differences arising in respect of monetary items or non-monetary items, on the settlement thereof during the previous year commencing on the 1st day of April, 2015 or on conversion thereof at the last day of the previous year commencing on the 1st day of April, 2015, shall be recognised in accordance with the provisions of this standard after taking into account the amount recognised on the last day of the previous year ending on the 31st March,2015 for an item, if any, which is carried forward from said previous year. (3) The financial statements of foreign operations for the previous year commencing on the 1st day of April, 2015 shall be translated using the principles and procedures specified in this standard after taking into account the amount recognised on the last day of the previous year ending on the 31st March, 2015 for an item, if any, which is carried forward from said previous year. (4) All forward exchange contracts existing on the 1st day of April, 2015 or entered on or after 1st day of April, 2015 shall be dealt with in accordance with the provisions of this standard after taking into account the income or expenses, if any, recognised in respect of said contracts for the previous year ending on or before the 31st March, ICDS- VI : Key issues As per ICDS, any amount outstanding as on 31st March 2016 in the Foreign Currency Translation Reserve, should be credited to P&L account, which will increase profit of current year. Amount of exchange difference which was capitalized earlier should be reversed, which may increase or decrease profit of current year due to change in amount of depreciation. Non recognition of profit or loss on forward contracts on each balance sheet date will increase or decrease the profit of current year if these are not settled in the current year. Income Computation and Disclosure Standard VII relating to government grants Preamble This Income Computation and Disclosure Standard is applicable for computation of income chargeable under the head Profits and gains of business or profession or Income from other sources and not for the purpose of maintenance of books of account. In case of conflict between the provisions of the Income Tax Act, 1961 ( the Act ) and this Income Computation and Disclosure Standard, the provisions of the Act shall prevail to that extent. 1. Scope This Income Computation and Disclosure Standard deals with the treatment of Government grants. The Government grants are sometimes called by other names such as subsidies, cash incentives, duty drawbacks, waiver, concessions, reimbursements, etc. 2. This Income Computation and Disclosure Standard does not deal with: (a) Government assistance other than in the form of Government grants; and (b) Government participation in the ownership of the enterprise. 3. Definitions (1) The following terms are used in the Income Computation and Disclosure Standard with the meanings specified: (a) Government refers to the Central Government, State Governments, agencies and similar bodies, whether local, national or international. (b) Government grants are assistance by Government in cash or kind to a person for past or future compliance with certain conditions. They exclude those forms of Government assistance which cannot have a value placed upon them and the transactions with Government which cannot be distinguished from the normal trading transactions of the person. 46 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

57 (2) Words and expressions used and not defined in this Income Computation and Disclosure Standard but defined in the Act shall have the meaning assigned to them in the Act. 4. Recognition of Government Grants (1) Government grants should not be recognised until there is reasonable assurance that (i) the person shall comply with the conditions attached to them, and (ii) the grants shall be received. (2) Recognition of Government grant shall not be postponed beyond the date of actual receipt. 5. Treatment of Government Grants Where the Government grant relates to a depreciable fixed asset or assets of a person, the grant shall be deducted from the actual cost of the asset or assets concerned or from the written down value of block of assets to which concerned asset or assets belonged to. 6. Where the Government grant relates to a non-depreciable asset or assets of a person requiring fulfillment of certain obligations, the grant shall be recognised as income over the same period over which the cost of meeting such obligations is charged to income. 7. Where the Government grant is of such a nature that it cannot be directly relatable to the asset acquired, so much of the amount which bears to the total Government grant, the same proportion as such asset bears to all the assets in respect of or with reference to which the Government grant is so received, shall be deducted from the actual cost of the asset or shall be reduced from the written down value of block of assets to which the asset or assets belonged to. 8. The Government grant that is receivable as compensation for expenses or losses incurred in a previous financial year or for the purpose of giving immediate financial support to the person with no further related costs, shall be recognised as income of the period in which it is receivable. 9. The Government grants other than covered by paragraph 5, 6, 7, and 8 shall be recognised as income over the periods necessary to match them with the related costs which they are intended to compensate. 10. The Government grants in the form of non-monetary assets, given at a concessional rate, shall be accounted for on the basis of their acquisition cost. 11. Refund of Government Grants The amount refundable in respect of a Government grant referred to in paragraphs 6, 8 and 9 shall be applied first against any unamortised deferred credit remaining in respect of the Government grant. To the extent that the amount refundable exceeds any such deferred credit, or where no deferred credit exists, the amount shall be charged to profit and loss statement. 12. The amount refundable in respect of a Government grant related to a depreciable fixed asset or assets shall be recorded by increasing the actual cost or written down value of block of assets by the amount refundable. Where the actual cost of the asset is increased, depreciation on the revised actual cost or written down value shall be provided prospectively at the prescribed rate. 13. Transitional Provisions All the Government grants which meet the recognition criteria of para 4 on or after 1st day of April, 2015 shall be recognised for the previous year commencing on or after 1st day of April, 2015 in accordance with the provisions of this standard after taking into account the amount, if any, of the said Government grant recognised for any previous year ending on or before 31st day of March, Disclosures Following disclosure shall be made in respect of Government grants, namely: (a) nature and extent of Government grants recognised during the previous year by way of deduction from the actual cost of the asset or assets or from the written down value of block of assets during the previous year; DIRECT TAX LAWS AND INTERNATIONAL TAXATION 47

58 Return of Income & Assessment Procedure (b) nature and extent of Government grants recognised during the previous year as income; (c) nature and extent of Government grants not recognised during the previous year by way of deduction from the actual cost of the asset or assets or from the written down value of block of assets and reasons thereof; and (d) nature and extent of Government grants not recognised during the previous year as income and reasons thereof. ICDS-VII : Disclosure Nature and extent of Government grants recognised during the previous year by way of deduction from the actual cost of the assets or from the WDV of block of assets during the previous year. Nature and extent of Government grants recognized during the previous year as income. Nature and extent of Government grants not recognized during the previous year by way of deduction from the actual cost of the asset or assets or from the WDV of block of assets and its reasons. Nature and extent of Government grants not recognized during the previous year as income and reasons thereof. Income Computation and Disclosure Standard VIII relating to securities Preamble This Income Computation and Disclosure Standard is applicable for computation of income chargeable under the head Profits and gains of business or profession or Income from other sources and not for the purpose of maintenance of books of account. In the case of conflict between the provisions of the Income-tax Act, 1961 ( the Act ) and this Income Computation and Disclosure Standard, the provisions of the Act shall prevail to that extent. 1. Scope This Income Computation and Disclosure Standard deals with securities held as stock in-trade. 2. This Income Computation and Disclosure Standard does not deal with: (a) the bases for recognition of interest and dividends on securities which are covered by the Income Computation and Disclosure Standard on revenue recognition; (b) securities held by a person engaged in the business of insurance; (c) securities held by mutual funds, venture capital funds, banks and public financial institutions formed under a Central or a State Act or so declared under the Companies Act, 1956 or the Companies Act, Definitions (1) The following terms are used in this Income Computation and Disclosure Standard with the meanings specified: (a) Fair value is the amount for which an asset could be exchanged between a knowledgeable, willing buyer and a knowledgeable, willing seller in an arm s length transaction. (b) Securities shall have the meaning assigned to it in clause (h) of section 2 of the Securities Contract (Regulation) Act, 1956, other than Derivatives referred to in sub-clause (la) of that clause. (2) Words and expressions used and not defined in this Income Computation and Disclosure Standard but defined in the Act shall have the meaning respectively assigned to them in the Act. 4. Recognition and Initial Measurement of Securities A security on acquisition shall be recognised at actual cost. 5. The actual cost of a security shall comprise of its purchase price and include acquisition charges such as brokerage, fees, tax, duty or cess. 6. Where a security is acquired in exchange for other securities, the fair value of the security so acquired shall be its actual cost. 7. Where a security is acquired in exchange for another asset, the fair value of the security so acquired shall be its 48 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

59 actual cost. 8. Where unpaid interest has accrued before the acquisition of an interest-bearing security and is included in the price paid for the security, the subsequent receipt of interest is allocated between pre-acquisition and postacquisition periods; the pre-acquisition portion of the interest is deducted from the actual cost. 9. Subsequent Measurement of Securities At the end of any previous year, securities held as stock-in-trade shall be valued at actual cost initially recognised or net realisable value at the end of that previous year, whichever is lower. 10. For the purpose of para 9, the comparison of actual cost initially recognised and net realisable value shall be done categorywise and not for each individual security. For this purpose, securities shall be classified into the following categories, namely: (a) shares; (b) debt securities; (c) convertible securities; and (d) any other securities not covered above. 11. The value of securities held as stock-in-trade of a business as on the beginning of the previous year shall be: (a) the cost of securities available, if any, on the day of the commencement of the business when the business has commenced during the previous year; and (b) the value of the securities of the business as on the close of the immediately preceding previous year, in any other case. 12. Notwithstanding anything contained in para 9, 10 and 11, at the end of any previous year, securities not listed on a recognised stock exchange; or listed but not quoted on a recognised stock exchange with regularity from time to time, shall be valued at actual cost initially recognised. 13. For the purposes of para 9, 10 and 11 where the actual cost initially recognised cannot be ascertained by reference to specific identification, the cost of such security shall be determined on the basis of first-in-first-out method. ICDS-VIII : Key issues ICDS deals with securities held for stock in trade and not for securities held as investments. Therefore, securities held for stock in trade comes in the ambit of ICDS. When fair value of security acquired is taken as its cost of acquisition then it may increase or decrease profit of current year. Category wise comparison may increase the profit because appreciation of one security will not set off from the depreciation of another security. ICDS VIII will not apply to insurance companies, banks, mutual funds, public financial institutions and venture capital funds. Income Computation and Disclosure Standard IX relating to borrowing costs Preamble This Income Computation and Disclosure Standard is applicable for computation of income chargeable under the head Profits and gains of business or profession or Income from other sources and not for the purpose of maintenance of books of account. In the case of conflict between the provisions of the Income-tax Act, 1961 ( the Act ) and this Income Computation and Disclosure Standard, the provisions of the Act shall prevail to that extent. 1. Scope (1) This Income Computation and Disclosure Standard deals with treatment of borrowing costs. (2) This Income Computation and Disclosure Standard does not deal with the actual or imputed cost of owners equity and preference share capital. DIRECT TAX LAWS AND INTERNATIONAL TAXATION 49

60 Return of Income & Assessment Procedure 2. Definitions (1) The following terms are used in this Income Computation and Disclosure Standard with the meanings specified: (a) Borrowing costs are interest and other costs incurred by a person in connection with the borrowing of funds and include: (i) commitment charges on borrowings; (ii) amortised amount of discounts or premiums relating to borrowings; (iii) amortised amount of ancillary costs incurred in connection with the arrangement of borrowings; (iv) finance charges in respect of assets acquired under finance leases or under other similar arrangements. (b) Qualifying asset means: (i) land, building, machinery, plant or furniture, being tangible assets; (ii) know-how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets; (iii) inventories that require a period of twelve months or more to bring them to a saleable condition. (2) Words and expressions used and not defined in this Income Computation and Disclosure Standard but defined in the Act shall have the meaning assigned to them in the Act. 3. Recognition Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset shall be capitalised as part of the cost of that asset. The amount of borrowing costs eligible for capitalisation shall be determined in accordance with this Income Computation and Disclosure Standard. Other borrowing costs shall be recognised in accordance with the provisions of the Act. 4. For the purposes of this Income Computation and Disclosure Standard, capitalisation in the context of inventory referred to in item (iii) of clause (b) of sub-paragraph (1) of paragraph 2 means addition of borrowing cost to the cost of inventory. 5. Borrowing Costs Eligible for Capitalisation To the extent the funds are borrowed specifically for the purposes of acquisition, construction or production of a qualifying asset the amount of borrowing costs to be capitalised on that asset shall be the actual borrowing costs incurred during the period on the funds so borrowed. 6. To the extent the funds are borrowed generally and utilised for the purposes of acquisition, construction or production of a qualifying asset, the amount of borrowing costs to be capitalised shall be computed in accordance with the following formula namely: A B /C Where A = borrowing costs incurred during the previous year except on borrowings directly relatable to specific purposes; B = (i) the average of costs of qualifying asset as appearing in the balance sheet of a person on the first day and the last day of the previous year; (ii) in case the qualifying asset does not appear in the balance sheet of a person on the first day or both on the first day and the last day of previous year, half of the cost of qualifying asset; (iii) in case the qualifying asset does not appear in the balance sheet of a person on the last day of previous year, the average of the costs of qualifying asset as appearing in the balance sheet of a person on the first day of the previous year and on the date of put to use or completion, as the case may be, other than those qualifying assets which are directly funded out of specific borrowings; or C = the average of the amount of total assets as appearing in the balance sheet of a person on the first day 50 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

61 and the last day of the previous year, other than those assets which are directly funded out of specific borrowings; 7. Commencement of Capitalisation The capitalisation of borrowing costs shall commence: (a) in a case referred to in paragraph 5, from the date on which funds were borrowed; (b) in a case referred to in paragraph 6, from the date on which funds were utilised. 8. Cessation of Capitalisation Capitalisation of borrowing costs shall cease: (a) in case of a qualifying asset referred to in item (i) and (ii) of clause (b) of subparagraph (1) of paragraph 2, when such asset is first put to use; (b) in case of inventory referred to in item (Hi) of clause (b) of sub-paragraph (1) of paragraph 2, when substantially all the activities necessary to prepare such inventory for its intended sale are complete. 9. When the construction of a qualifying asset is completed in parts and a completed part is capable of being used while construction continues for the other parts, capitalization of borrowing costs in relation to a part shall cease: (a) in case of part of a qualifying asset referred to in item (i) and (ii) of clause (b) of sub-paragraph (1) of paragraph 2, when such part of a qualifying asset is first put to use; (b) in case of part of inventory referred to in item (Hi) of clause (b) of sub-paragraph (1) of paragraph 2, when substantially all the activities necessary to prepare such part of inventory for its intended sale are complete. 10. Transitional Provisions All the borrowing costs incurred on or after 1st day of April, 2015 shall be capitalized for the previous year commencing on or after 1st day of April, 2015 in accordance with the provisions of this standard after taking into account the amount of borrowing costs capitalised, if any, for the same borrowing for any previous year ending on or before 31st day of March, Disclosure The following disclosure shall be made in respect of borrowing costs, namely: (a) the accounting policy adopted for borrowing costs; and (b) the amount of borrowing costs capitalised during the previous year. ICDS-IX : Disclosure Accounting policy adopted for borrowing costs Amount of borrowing costs capitalised during the Previous Year Income Computation and Disclosure Standard X relating to provisions, contingent liabilities and contingent assets Preamble This Income Computation and Disclosure Standard is applicable for computation of income chargeable under the head Profits and gains of business or profession or Income from other sources and not for the purpose of maintenance of books of accounts. In the case of conflict between the provisions of the Income-tax Act, 1961 ( the Act ) and this Income Computation and Disclosure Standard, the provisions of the Act shall prevail to that extent. 1. Scope This Income Computation and Disclosure Standard deals with provisions, contingent liabilities and contingent assets, except those: DIRECT TAX LAWS AND INTERNATIONAL TAXATION 51

62 Return of Income & Assessment Procedure (a) resulting from financial instruments; (b) resulting from executory contracts; (c) arising in insurance business from contracts with policyholders; and (d) covered by another Income Computation and Disclosure Standard. 2. This Income Computation and Disclosure Standard does not deal with the recognition of revenue which is dealt with by Income Computation and Disclosure Standard - Revenue Recognition. 3. The term provision is also used in the context of items such as depreciation, impairment of assets and doubtful debts which are adjustments to the carrying amounts of assets and are not addressed in this Income Computation and Disclosure Standard. 4. Definitions (1) The following terms are used in this Income Computation and Disclosure Standard with the meanings specified: (a) Provision is a liability which can be measured only by using a substantial degree of estimation. (b) Liability is a present obligation of the person arising from past events, the settlement of which is expected to result in an outflow from the person of resources embodying economic benefits. (c) Obligating event is an event that creates an obligation that results in a person having no realistic alternative to settling that obligation. (d) Contingent liability is: (i) a possible obligation that arises from past events and the existence of which will be confirmed only by the occurrence or nonoccurrence of one or more uncertain future events not wholly within the control of the person; or (ii) a present obligation that arises from past events but is not recognised because: A. it is not reasonably certain that an outflow of resources embodying economic benefits will be required to settle the obligation; or B. a reliable estimate of the amount of the obligation cannot be made. (e) Contingent asset is a possible asset that arises from past events the existence of which will be confirmed only by the occurrence or nonoccurrence of one or more uncertain future events not wholly within the control of the person. (f) Executory contracts are contracts under which neither party has performed any of its obligations or both parties have partially performed their obligations to an equal extent. (g) Present obligation is an obligation if, based on the evidence available, its existence at the end of the previous year is considered reasonably certain. (2) Words and expressions used and not defined in this Income Computation and Disclosure Standard but defined in the Act shall have the meaning respectively assigned to them in the Act. Recognition 5. Provisions A provision shall be recognised when: (a) a person has a present obligation as a result of a past event; (b) it is reasonably certain that an outflow of resources embodying economic benefits will be required to settle the obligation; and (c) a reliable estimate can be made of the amount of the obligation. 52 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

63 If these conditions are not met, no provision shall be recognised. 6. No provision shall be recognised for costs that need to be incurred to operate in the future. 7. It is only those obligations arising from past events existing independently of a person s future actions, that is the future conduct of its business, that are recognised as provisions. 8. Where details of a proposed new law have yet to be finalised, an obligation arises only when the legislation is enacted. 9. Contingent Liabilities A person shall not recognise a contingent liability. 10. Contingent Assets A person shall not recognise a contingent asset. 11. Contingent assets are assessed continually and when it becomes reasonably certain that inflow of economic benefit will arise, the asset and related income are recognised in the previous year in which the change occurs. Measurement 12. Best Estimate The amount recognised as a provision shall be the best estimate of the expenditure required to settle the present obligation at the end of the previous year. The amount of a provision shall not be discounted to its present value. 13. The amount recognised as asset and related income shall be the best estimate of the value of economic benefit arising at the end of the previous year. The amount and related income shall not be discounted to its present value. 14. Reimbursements Where some or all of the expenditure required to settle a provision is expected to be reimbursed by another party, the reimbursement shall be recognised when it is reasonably certain that reimbursement will be received if the person settles the obligation. The amount recognised for the reimbursement shall not exceed the amount of the provision. 15. Where a person is not liable for payment of costs in case the third party fails to pay, no provision shall be made for those costs. 16. An obligation, for which a person is jointly and severally liable, is a contingent liability to the extent that it is expected that the obligation will be settled by the other parties. 17. Review Provisions shall be reviewed at the end of each previous year and adjusted to reflect the current best estimate. If it is no longer reasonably certain that an outflow of resources embodying economic benefits will be required to settle the obligation, the provision should be reversed. 18. An asset and related income recognised as provided in para 11 shall be reviewed at the end of each previous year and adjusted to reflect the current best estimate. If it is no longer reasonably certain that an inflow of economic benefits will arise, the asset and related income shall be reversed. 19. Use of Provisions A provision shall be used only for expenditures for which the provision was originally recognised. 20. Transitional Provisions All the provisions or assets and related income shall be recognised for the previous year commencing on or after 1st day of April, 2015 in accordance with the provisions of this standard after taking into account the amount recognised, if any, for the same for any previous year ending on or before 31st day of March, DIRECT TAX LAWS AND INTERNATIONAL TAXATION 53

64 Return of Income & Assessment Procedure 21. Disclosure (1) Following disclosure shall be made in respect of each class of provision, namely: (a) a brief description of the nature of the obligation; (b) the carrying amount at the beginning and end of the previous year; (c) additional provisions made during the previous year, including increases to existing provisions; (d) amounts used, that is incurred and charged against the provision, during the previous year; (e) unused amounts reversed during the previous year; and (f) the amount of any expected reimbursement, stating the amount of any asset that has been recognised for that expected reimbursement. (2) Following disclosure shall be made in respect of each class of asset and related income recognised as provided in para 11, namely: (a) a brief description of the nature of the asset and related income; (b) the carrying amount of asset at the beginning and end of the previous year; (c) additional amount of asset and related income recognised during the year, including increases to assets and related income already recognised; and (d) amount of asset and related income reversed during the previous year. ICDS-X : Disclosure For each class of provision: - A brief description of the nature of the obligation - carrying amount at the beginning and end of the period - additional provisions made in the previous year and increase in existing provisions. - amounts used, that is incurred & charged against the provision, during the previous year - unused amounts reversed during the previous year - Amount of any expected reimbursement, stating the amount of any asset that has been recognized for that expected reimbursement. For each class of asset: - A brief description of the nature of the asset & related income; - The carrying amount of asset at the beginning and end of the previous year; - Additional amount of asset &related income recognized during the year, including increases to assets and related income already recognized; & - Amount of asset and related income reversed during the previous year. CHAPTER SUMMARY & EXAM PREPARATION NOTES Chapter Summary & Exam Preparation Notes The provisions of the Income-tax Act contained in Sections 117 to 136 specify the procedure relating to the appointment of the various income-tax authorities, their powers, functions, jurisdiction and control. Income-tax authorities are required to exercise or perform such powers or functions as are assigned to them by the Board [Section 120(1)]. 54 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

65 Filing of Return: The procedure under the Income-tax Act for making an assessment of income begins with the filing of a return of income. Section 139 of the Act contains the relevant provisions relating to the furnishing of a return of income. E-Filing of Return: The Income Tax Department has introduced on line facility in addition to conventional method to file return of income. The process of electronically filing of Income Tax return through the mode of internet access is called e-filing of return. Permanent Account Number: Every person, who has not been allotted any permanent account number, is obliged to obtain permanent account number, if; if his total income assessable during the previous year exceeds the maximum amount which is not chargeable to tax or any person carrying on business or profession whose total sales turnover or gross receipts are or is likely to exceed the prescribed limit in any previous year or is required to furnish a return of income under Section 139. Types Of Assessment Self assessment (Section 140A) Regular assessment (Section 143) Best judgment assessment (Section 144) Income escaping assessment or re-assessment (Section 147) Precautionary assessment. Self assessment is the first step in the process of assessments. Self Assessment is simply a process where a person himself assesses his tax liability on the income earned during the particular previous year and submits Income Tax Return to the department. Under summary assessment, Assessing Officer completes the assessment without passing a regular assessment order. The Assessing Officer issue an acknowledgement/intimation under section 143(1) of tax payable or refundable as the case may be on the basis of Return of Income filed by the assessee under section 139 or in response to a notice issued under section 142(1). Where a return has been made under Section 139, or in response to a notice under Sub-section (1) of Section 142, the Assessing Officer shall, if he considers necessary or expedient to ensure that the assessee has not understated the income or has not computed excessive loss or has not underpaid the tax in any manner, serve on the assessee a notice requiring him, on a date to be specified therein, either to attend his office or to produce, or cause to be produced there, any evidence on which the assessee may rely in support of the return. Best Judgment Assessment: The Assessing Officer, after taking into account all relevant material which he has gathered, and after giving the assessee an opportunity of being heard, makes the assessment of the total income or loss to the best of his judgment and determine the sum payable by the assessee on the basis of such assessment. Income Escaping Assessment: If the Assessing Officer has reason to believe that any income chargeable to tax has escaped assessment for any assessment year, he may, subject to the provisions of sections 148 to 153. Dispute Resolution Panel: The Assessing Officer shall, forward a draft order of assessment to the eligible assessee if he proposes to make, any variation in the income or loss returned which is prejudicial to the interest of such assessee. On receipt of the draft order, the eligible assessee shall, within thirty days of the receipt by him of the draft order. DIRECT TAX LAWS AND INTERNATIONAL TAXATION 55

66 Return of Income & Assessment Procedure file his acceptance to the Assessing Officer, or file his objections with the Dispute Resolution Panel; and the Assessing Officer Rectification of Mistake: With a view to rectifying any mistakes apparent from the record, an incometax authority referred to in Section 116 may amend any order passed by it under provisions of this Act or any intimation or deemed intimation under Section 143(1). RETURN OF INCOME : Questions & Answers Question 1. What is the due date of filling of return of income in case of a non-working partner of a firm whose accounts are not liable to be audited? Answer : Due date of furnishing return of income in case of non-working partner shall be 31st July of the Assessment Year whether the accounts of the firm are required to be audited or not. A working partner for the above purpose shall mean an individual who is actively engaged in conducting the affairs of the business or profession of the firm of which he is a partner and is drawing remuneration from the firm. Question 2. What do you mean by annexure less return? What is the manner of filling the return of income? Answer : The return of income required to be furnished in Form No. ITR-1, ITR-2, ITR-3, ITR-4, ITR-5, ITR-6 or ITR-7 shall not be accompanied by a statement showing the computation of the tax payable on the basis of the return, or proof of the tax, if any, claimed to have been deducted or collected at source or the advance tax or tax on selfassessment, if any, claimed to have been paid or any document or copy of any account or Form or report of audit required to be attached with the return of income under any of the provisions of the Act. Manner of filling the return: The return of income referred to in sub-rule (1) may be furnished in any of the following manners, namely:- (i) Furnishing the return in a paper form; (ii) Furnishing the return electronically under digital signature; (iii) Transmitting the data in the return electronically and thereafter submitting the verification of the return in Form ITR-V; (iv) Furnishing a bar-coded return in paper form. Question 3. Is e-filling of return mandatory? State the assessee s for whom e-filling of returns is mandatory? Answer : CBDT has vide notification No. 34/2013 dated has made it mandatory for the following category of the Assesses to file their Income Tax Return Online from A.Y :- (a) It is mandatory for every person (not being a co. or a person filing return in ITR 7) to e-file the return of income if its total income exceeds `5,00, DIRECT TAX LAWS AND INTERNATIONAL TAXATION

67 (b) an individual or a Hindu Undivided Family, being a resident, having assets (including financial interest in any entity) located outside India or signing authority in any account located outside India and required to furnish the return in Form ITR-2 or ITR-3 or ITR-4, as the case may be. (c) Every person claiming tax relief under Section 90, 90A or 91 shall file return in electronic mode. (d) Those who are required to get their Accounts audited under Section 44AB, 92E, 115JB. (e) A company required to furnish the return in Form ITR-6. However, as per instruction of ITR 7 From assessment year onwards in case an assessee who is required to furnish a report of audit under section 10(23C)(iv), 10(23C)(v), 10(23C)(vi), 10(23C)(via), 10A, 12A(1)(b), 44AB, 80-IA, 80-IB, 80-IC, 80-ID, 80JJAA, 80LA, 92E or 115JB he shall file the report electronically on or before the date of filing the return of income. Question 4. Can unabsorbed depreciation be carried forward even if the return is filed after due date? Answer : Unabsorbed depreciation can be carried forward even if the return of loss is submitted after the due date, as it is not covered under Chapter VI of set off or carry forward of losses but covered u/s 32(2).[ East Asiatic Co.(India) Pvt. Ltd. vs.cit (1986) 161 ITR 135(Mad.)] Question 5. Can a belated return of income filed u/s 139(4) be revised? Answer : There was a difference of opinion among various courts regarding filling of revised return in respect of belated returns. However, it has been held that a belated return filed u/s 139(4) cannot be revised as section 139(5) provides that only return filed u/s 139(1) or in pursuance to a notice u/s 142(1) can be revised [ Kumar Jagdish Chandra Sinha vs.cit(1996) 220 ITR 67(SC)]. Question 6. Can a revised return be further revised? Answer : If the assessee discovers any omission or any wrong statement in a revised return, it is possible to revise such a revised return provided it is revised within the same prescribed time [Niranjan Lal Ram Chandra vs.cit (1982) 134 ITR 352 (All.)] Question 7. Can an Assessing Officer himself allot Permanent Account Number to an assessee? Answer: The Assessing Officer having regard to the nature of the transactions as may be prescribed may also allot a Permanent Account Number to any other person( whether any tax is payable by him or not) in the manner and in accordance with the procedure as may be prescribed. Question 8. What are the consequences if a person fails to comply with the provisions of Sec.139A i.e. quoting of PAN? Answer : As per Sec. 272B(2), if a person fails to comply with the provisions of Sec.139A, the Assessing Officer may direct that such person shall have to pay, by way of penalty, a sum of `10,000. DIRECT TAX LAWS AND INTERNATIONAL TAXATION 57

68 Return of Income & Assessment Procedure Question 9. Who can verify the return of HUF, if HUF does not have a major member? Answer : If the HUF has no major members as its Karta, a return may validly be verified by the eldest minor member of the family who manages the affairs of the family [Sridhar Udai Narayan vs.cit(1962) 45 ITR 577 (All.)] ASSESSMENT PROCEDURE : Question 10: What is a protective assessment under Income-tax law? What is the procedure followed for the recovery of tax in such cases? Answer: A protective assessment is made in a case where there are doubts relating to the true ownership of the income. If there is an uncertainty about the taxing of an income in the hands of Mr. A or Mr. B, then at the discretion of the Assessing Officer, the same may be added in the hands of one of them on protective basis. This is to ensure that on finality, the addition may not be denied on the ground of limitation of time. Once finality regarding the identity of the tax payer to be taxed is established, the extra assessment is cancelled. But the Department cannot recover the tax from both the assessees in respect of the same income. Penalty cannot be imposed on the strength of a protective assessment. Question 11: Joseph, engaged in profession, filed his return of income for Assessment Year on 15th November, He disclosed an income of `4,00,000 in the return. In February, 2017 he discovered that he did not claim certain expenses and filed a revised return on 3rd February, 2017 showing an income of `1,80,000 and claiming those expenses. Is the revised return filed by Joseph acceptable? Answer: Joseph is engaged in profession. The due date for filing income tax return for Assessment Year as per section 139(1) of the Income-tax Act is 30th September, 2016 if his accounts are required to be audited under any law. The due date is 31st July, 2016 if the accounts are not required to be audited under any law. The return was filed beyond the due date prescribed in section 139(1). The return so filed is covered by section 139(4) and the time limit is one year from the end of the relevant Assessment Year. The Apex court in Kumar Jagadish Chandra Sinha vs. CIT 220 ITR 67 (SC) has held that a return filed under section 139(4) is not eligible for revision and hence a revised return cannot be filed. Hence, the revised return filed by Joseph is not valid as the original return was not filed before the due date mentioned in section 139(1). Question 12: An assessee filed a return of income on in respect of Assessment Year disclosing an income of `5 lakhs from business. It was not accompanied by proof of payment of tax due on self-assessment. Discuss the validity of such a return. Answer : As per Explanation to sub-section (9) of section 139 a return is regarded as defective unless it is accompanied by proof of tax deducted at source, advance tax and tax on self-assessment, if any, claimed to have been paid. Therefore, the return is prima facie defective. It is not invalid at that stage. On receipt of the return, the Assessing Officer has to intimate the defect to the assessee and give him an opportunity to rectify the defect within a period of 15 days from the date of such intimation or within such further period which, on application by the assessee, he may, in his discretion, allow. If the defect is not rectified within the said period, the return will be treated as an invalid return and the provisions of the Income-tax Act shall apply, as if the assessee has failed to furnish the return. Also, it may be noted that section 140A(3) says that if an assessee fails to pay tax or interest on self assessment he 58 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

69 shall be deemed to be an assessee in default in respect of. Question 13: Can Department make fresh computation, once the assessment is made final? Answer: It is now a well settled principle that an assessment once made is final and that it is not open to the department to go on making fresh computation and issuing fresh notices of demand to the end of all time. [ITO vs.habibullah (S.K.) (1962) 44 ITR 809 (SC)] Question 14: Can an Assessing Officer make an assessment for a year other than the assessment year for which the return is filed? Answer: It is not open to the Assessing Officer to make assessment in respect of a year other than the Assessment Year for which the return is filed. Thus, in respect of a return filed for Assessment Year , assessment cannot be made for the Assessment Year [CIT vs. Amaimugan Transports Pvt. Ltd. (1995) 215 ITR 553 (Mad.)] Question 15: Can an Assessing Officer assess the income below the returned income or assess the loss higher than the returned loss? Answer: The Assessing Officer cannot assess income under section 144 for an assessment below the returned income or cannot assess the loss higher than the returned loss. Question 16: Can incomplete, unsigned or unverified return lead to best judgement assessment? Answer: Incomplete, unsigned or unverified return may lead to best judgement assessment. A best judgement assessment can be made when the return is filed woefully incomplete or not signed and verified. [Behari Lal Chatterji vs.cit (1934) 2 ITR 377 (All.)] Question 17: Can assessee follow different method of accounting for different businesses? Answer: If an assessee is carrying on more than one business, he can follow cash system of accounting for one business and mercantile system (accrual system) of accounting for other business. Similarly, if he had more than one sources of income under the head Income from Other Sources, he can follow accrual system for one source of income under the head Income from Other Sources, and cash system for other sources of income. Question 18: What can Assessing Officer do when the assessment is not set aside for fresh assessment but annulled? Answer: Where an assessment is not set aside for fresh assessment but annulled, no extended limitation is available. However, if the original time limit is available, the Assessing Officer may proceed from the stage at which illegality which resulted into the annulment of the assessment supervened and make the assessment afresh. [CIT vs.mrs. Ratanbai N.K. Dubhash (1998) 230 ITR 495(Bom.)] Question 19: An assessment was made on S originally in the status of a nonresident. In the re-assessment made under section DIRECT TAX LAWS AND INTERNATIONAL TAXATION 59

70 Return of Income & Assessment Procedure 147, he is assessed as resident and ordinarily resident on the ground that the correct status was not disclosed in the return of income filed originally. Is the change of status valid in a re-assessment? Answer: This case is based on a case decided by the Punjab & Haryana High Court in CIT vs. Surmukh Singh Uppal (Dr) (1983) 144 ITR 191(P&H) in which the court held that if an assessee fails to disclose fully and truly all the material facts at the time of original assessment then the question of status could be determined in reassessment proceedings if, on account of the non-disclosure of the facts fully and truly, there had been an escapement of income. In view of the aforesaid case, the action taken by the Assessing Officer in assessing S as a resident and ordinarily resident is correct. MCQ Q1.The checking of the return of income by the taxpayer before filing the return of income is called assessment. (a) True (b) False Correct answer : (b) Justification of correct answer : Once the return of income is filed up by the taxpayer, the next step is the processing of the return of income by the Income Tax Department. The Income Tax Department examines the return of income for its correctness. The process of examining the return of income by the Income-Tax department is called as Assessment. Thus, the statement given in the question is false and hence, option (b) is the correct option. Q2.Assessment under section 143(1),is known as scrutiny assessment. (a) True (b) False Correct answer : (b) Justification of correct answer : Assessment under section 143(1) is like preliminary checking of the return of income. At this stage no detailed scrutiny of the return of income is carried out. This assessment is known as Summary assessment without calling the assessee Thus, the statement given in the question is false and hence, option (b) is the correct option. Q3.Assessment under section 144 is known as best judgment assessment (a) True (b) False Correct answer : (a) Justification of correct answer : Assessment under section 144 is known as best judgment assessment. This is an assessment carried out as per the best judgment of the Assessing Officer. This assessment is carried out in a case where the taxpayer fails to comply with the requirements specified in section 144. Thus, the statement given in the question is true and hence, option (a) is the correct option. Q4.Which of the following can be corrected while processing the return of income under section 143(1)? (a) any arithmetical error in the return (b) any mistake in the return of income (c) any error in the return of income (d) any claim by the taxpayer which is against law Correct answer : (a) Justification of correct answer : Assessment under section 143(1) is like preliminary checking of the return of income. At this stage no detailed scrutiny of the return of income is carried out. At this stage, the total income or loss is computed after making the following adjustments (if any), namely:- (i) any arithmetical error in the return; or (ii) an incorrect claim, if such incorrect claim is apparent from any information in the return. Thus, option (a) is the correct 60 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

71 option. Q5.Assessment under section 143(1) can be made within a period of year from the end of the financial year in which the return of income is filed. (a) (b) (c) (d) four three two one Correct answer : (d) Justification of correct answer : Assessment under section 143(1) can be made within a period of one year from the end of the financial year in which the return of income is filed. Thus, option (d) is the correct option. Q6.Notice under section 143(2) (i.e. notice of scrutiny assessment) should be served within a period of from the end of the financial year in which the return is filed. (a) six months (b) one years (c) two years (d) eighteen months Correct answer : (a) Justification of correct answer : To carry out assessment under section 143(3), the Assessing Officer should serve a notice under section 143(2).Notice under section 143(2) should be served within a period of six months from the end of the financial year in which the return is filed. Thus, option (a) is the correct option. Q7.Assessment under section 143(3) shall be made within a period of years from the end of the relevant assessment year. (a) four (b) three (c) two (d) one Correct answer : (c) Justification of correct answer : As per section 153, assessment under section 143(3) shall be made within a period of two years from the end of the relevant assessment year. Thus, option (c) is the correct option. Q8.Assessment under section 144 shall be made within a period of years from the end of the relevant assessment year. (a) four (b) three (c) two (d) one Correct answer : (c) Justification of correct answer : As per section 153, assessment under section 144 shall be made within a period of two years from the end of the relevant assessment year. Thus, option (c) is the correct option. Q9.The objective of carrying out assessment under section 147 is to bring under the tax net any money, bullion, DIRECT TAX LAWS AND INTERNATIONAL TAXATION 61

72 Return of Income & Assessment Procedure jewellery, valuable article, etc. which are undisclosed. (a) True (b) False Correct answer : (b) Justification of correct answer : The objective of carrying out assessment under section 147 is to bring under the tax net any income which has escaped assessment in original assessment Thus, the statement given in the question is false and hence, option (b) is the correct option. Q10.Assessment under section 147 shall be made within a period of two year from the end of the financial year in which notice under section 148 is served on the taxpayer. (a) True (b) False Correct answer : (b) Justification of correct answer : As per section 153, assessment under section 147 shall be made within a period of one year from the end of the financial year in which notice under section 148 is served on the taxpayer. Thus, the statement given in the question is false and hence, option (b) is the correct option. MULTIPLE CHOICE QUESTIONS (1) What is the due date for e-filing if the assessee is a Charitable Trust? (a) 31st of March (b) 30th of September (c) 31st of July (d) 31st of December (2) What is the time limit for filing revised return at present? (a) Within the assessment year (b) Before the expiry of one year from the end of the relevant assessment year (c) Before the expiry of two years from the end of the relevant assessment year (d) Before the completion of assessment even if it takes more than one year from the end of the relevant assessment year Answers: 1 b, 2 b 62 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

73 Study Note - 2 ASSESSMENT OF VARIOUS ENTITIES & TAX PLANNING This Study Note includes 2.1 Introduction 2.2 Assessment of Individuals 2.3 Assessment of HUF 2.4 Assessment of Firm 2.5 Assessment of LLP 2.6 Assessment of AOP/BOI 2.7 Assessment of Companies 2.8 Assessment of Co-Operative Societies 2.9 Assessment of Trusts 2.10 Assessment of Mutual Association 2.11 Different Aspects of Direct Tax Planning 2.1 INTRODUCTION Meaning of Assessment Every taxpayer / assessee has to furnish the details of his income to the Income-tax Department. These details are to be furnished by filing up his return of income. Once the return of income is filed up by the taxpayer, the next step is the processing of the return of income by the Income Tax Department. The Income Tax Department examines the return of income for its correctness. The process of examining the return of income by the Income-Tax department is called as Assessment. Assessment also includes re-assessment and best judgment assessment under section 144 It is a procedure for determining tax liability and recovery of tax. As per Section 2(8): Assessment includes reassessment. Assessment is wide enough to include all types of assessments including penalty proceedings Types of Assessments Inquiry before Assessment - Section 142(1) Summary Assessment - Section 143(1) Scrutiny Assessment - Section 143(3) Best Judgment Assessment Section 144 Assessment under section 147, i.e., Income escaping assessment Reassessment - Section 147 Search Assessment - Section 153A Inquiry before Assessment --142(1) A.O. can serve notice to the assessee for the following purposes: Submit return of income DIRECT TAX LAWS AND INTERNATIONAL TAXATION 63

74 Produce such documents/accounts as may be required Furnish information on required matters If a person has not furnished his return of income within the due date given under section 139(1), the A.O. can serve a notice under section 142(1)(i) at any time after the expiry of time limit given under section 139(1) Inquiry before Assessment For the purpose of obtaining full information in respect of the income or loss of any person, the Assessing Officer may make such enquiry as he considers necessary, including Special Audit u/s 142[2A] Assessment under section 143(1) This is a preliminary assessment and is referred to as summary assessment without calling the assessee (i.e., taxpayer). It may be said that Assessment under section 143(1) is like preliminary checking of the return of income. At this stage no detailed scrutiny of the return of income is carried out. At this stage, the total income or loss is computed after making the following adjustments (if any), namely:- (i) any arithmetical error in the return; or (ii) an incorrect claim, if such incorrect claim is apparent from any information in the return; For the above purpose an incorrect claim apparent from any information in the return means a claim on the basis of an entry in the return :- (i) of an item which is inconsistent with another entry of the same or some other item in such return; (ii) in respect of which the information is required to be furnished under the Act to substantiate such entry and has not been so furnished; or (iii) in respect of a deduction, where such deduction exceeds specified statutory limit which may have been expressed as monetary amount or percentage or ratio or fraction Procedure of assessment under section 143(1) After correcting arithmetical error or incorrect claim (if any), the tax and interest, if any, shall be computed on the basis of the adjusted income. Any sum payable by or refund due to the taxpayer shall be intimated to him. An intimation shall be prepared or generated and sent to the taxpayer specifying the sum determined to be payable by, or the amount of refund due to the taxpayer. An intimation shall also be sent to the taxpayer in a case where the loss declared in the return of income by the taxpayer is adjusted but no tax or interest is payable by or no refund is due to him. The acknowledgement of the return of income shall be deemed to be the intimation in a case where no sum is payable by or refundable to the assessee or where no adjustment is made to the returned income. The processing of a return under section 143(1) shall not be necessary, where a notice has been issued to the assessee under section 143(2), i.e., a notice for scrutiny assessment has been issued to the taxpayer. Assessment under section 143(1) can be made within a period of one year from the end of the financial year in which the return of income is filed Scrutiny Assessment- 143[ 3] This is a detailed assessment and is referred to as scrutiny assessment. At this stage a detailed scrutiny of the return of income will be carried out. A scrutiny is carried out to confirm the correctness and genuineness of various claims, deductions, etc., made by the taxpayer in the return of income To ensure that the assessee has not understated the income; or computed excessive loss; or underpaid the tax, scrutiny assessment is carried out. Time limit of service of notice - Within 6 months from end of the AY/end of the FY in which Return of Income ( ROI) is filed. The objective of scrutiny assessment is to confirm that the taxpayer has not understated the income or has not computed excessive loss or has not underpaid the tax in any manner. To confirm the above, the Assessing Officer carries out a detailed scrutiny of the return of income and will satisfy himself regarding various claims, deductions, etc., made by the taxpayer in the return of income. Procedure of assessment under section 143(3) 64 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

75 If the Assessing Officer considers it necessary or expedient to ensure that the taxpayer has not understated the income or has not computed excessive loss or has not underpaid the tax in any manner, then he will serve on the taxpayer a notice requiring him to attend his office or to produce or cause to be produced any evidence on which the taxpayer may rely, in support of the return. To carry out assessment under section 143(3), the Assessing Officer shall serve such notice in accordance with provisions of section 143(2). Notice under section 143(2) should be served within a period of six months from the end of the financial year in which the return is filed. The taxpayer or his representative (as the case may be) will appear before the Assessing Officer and will place his arguments, supporting evidences, etc., on various matters/issues as required by the Assessing Officer. After hearing/verifying such evidence and taking into account such particulars as the taxpayer may produce and such other evidence as the Assessing Officer may require on specified points and after taking into account all relevant materials which he has gathered, the Assessing Officer shall, by an order in writing, make an assessment of the total income or loss of the taxpayer and determine the sum payable by him or refund of any amount due to him on the basis of such assessment. As per section 153, assessment under section 143(3) shall be made within a period of two years from the end of the relevant assessment year Assessment under section 144 This is an assessment carried out as per the best judgment of the Assessing Officer on the basis of all relevant material he has gathered. This assessment is carried out in cases where the taxpayer fails to comply with the requirements specified in section 144. As per section 144, the Assessing Officer is under an obligation to make an assessment to the best of his judgment in the following cases:- If the taxpayer fails to file the return required within the due date prescribed under section 139(1) or a belated return under section 139(4) or a revised return under section 139(5). If the taxpayer fails to comply with all the terms of a notice issued under section 142(1). Special audit Section 142(2A) deals with special audit. As per section 142(2A), if the conditions justifying special audit as given in section 142(2A) are satisfied, then the Assessing Officer will direct the taxpayer to get his accounts audited from a chartered accountant nominated by the principal chief commissioner or Chief Commissioner or Principal Commissioner or Commissioner and to furnish a report of such audit in the prescribed form. If after filing the return of income the taxpayer fails to comply with all the terms of a notice issued under section 143(2), i.e., notice of scrutiny assessment. If the assessing officer is not satisfied about the correctness or the completeness of the accounts of the taxpayer or if no method of accounting has been regularly employed by the taxpayer. The best judgment assessment is resorted to in cases where the return of income is not filed by the taxpayer or if there is no cooperation by the taxpayer in terms of furnishing information / explanation related to his tax assessment or if books of accounts of taxpayer are not reliable or are incomplete Procedure of assessment under section 144 If the conditions given above calling for best judgment are satisfied, then the Assessing Officer will serve a notice on the taxpayer to show cause why the assessment should not be completed to the best of his judgment. No notice as given above is required in a case where a notice under section 142(1) has been issued prior to the making of an assessment under section 144. If the Assessing Officer is not satisfied by the arguments of the taxpayer and he has reason to believe that the case demands a best judgment, then he will proceed to carry out the assessment to the best of his knowledge. If the criteria of the best judgment assessment are satisfied, then after taking into account all relevant materials which the Assessing Officer has gathered, and after giving the taxpayer an opportunity of being heard, the Assessing Officer shall make the assessment of the total income or loss to the best of his knowledge/judgment and determine the sum payable by the taxpayer on the basis of such assessment. DIRECT TAX LAWS AND INTERNATIONAL TAXATION 65

76 As per section 153, assessment under section 144 shall be made within a period of two years from the end of the relevant assessment year. Assessment under section 147 This assessment is carried out if the Assessing Officer has reason to believe that any income chargeable to tax has escaped assessment for any assessment year Scope of assessment under section 147 The objective of carrying out assessment under section 147 is to bring under the tax net any income which has escaped assessment in original assessment. Original assessment here means an assessment under sections 143(1), 143(3), 144 and 147 (as the case may be). In other words, if any income has escaped from being taxed in the original assessment made under section 143(1) or section 143(3) or section 144 or section 147, then the same can be brought under tax net by resorting to assessment under section 147. Procedure of assessment under section 147 For making an assessment under section 147, the Assessing Officer has to issue notice under section 148 to the taxpayer and has to give him an opportunity of being heard. The time-limit for issuance of notice under section 148 is discussed in later part. If the Assessing Officer has reason to believe that any income chargeable to tax has escaped assessment for any assessment year, then he may assess or reassess such income and also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under this section. He is also empowered to re-compute the loss or the depreciation allowance or any other allowance, as the case may be, for the assessment year concerned. Items which are the subject matters of any appeal, reference or revision cannot be covered by the Assessing Officer under section 147. As per section 153, assessment under section 147 shall be made within a period of one year from the end of the financial year in which notice under section 148 is served on the taxpayer. Notice under section 148 can be issued within a period of 4 years from the end of the relevant assessment year. If the escaped income is Rs. 1,00,000 or more and certain other conditions are satisfied, then notice can be issued upto 6 years from the end of the relevant assessment year. In case the escaped income relates to any asset (including financial interest in any entity) located outside India, notice can be issued upto 16 years from the end of the relevant assessment year. Critical issues in Assessment Capital vs. Revenue expenditure Software expenses Interest expenditure on new projects Prior period expenses Expenses on abandoned project Bad debts Deemed dividends Gifts Interest on borrowed capital Precautionary measures in Assessment proceedings Punctuality. Promptness and knowledge of the case. Noting of order sheet. Cryptic and relative reply. 66 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

77 Raise alternative arguments. Acknowledgement of replies. Submit written replies. Refer past assessments, in case required. 2.2 ASSESSMENT OF INDIVIDUALS While computing taxable Income of an Individual following points should be considered Nature of Income Income earned by the taxpayer Tax Treatment Except the following all other incomes shall be included (a) Income exempt under sections 10 to 13A Share of Profit from Hindu Undivided Family It is exempt under section 10(2) Share of Profit from a firm assessed as firm Salary and Interest from the aforesaid firm Share of profit from an Association of Persons/Body of Individuals Income earned by others and included in the income of the taxpayer by virtue of section 60 to 64 (b) Incomes to be included in income of others by virtue of section 60 to 64. It is exempt under section 10(2) It is exempt under section 10(2A) These are taxable as business Income If the association/body is taxable at the maximum marginal rate (or at higher rate), then share of profit is not taxable in hands of recipient. Such income shall be included in the income of the taxpayer Special Provisions for persons governed by Portuguese Civil Law (Section 5A) This Section is applicable for the appropriation of income between spouses governed by the Portuguese Civil Code which is in force in the state of Goa and Union territories of Dadra and Nagar Haveli and Daman and Diu. By virtue of this section, income from all other sources, except from salary, should be apportioned equally between husband and wife. The income so apportioned will be included separately in the total income of the husband and of the wife and the remaining provisions of act shall apply accordingly. Salary Income is, however, taxable in the hands of the spouse who has actually earned it. Even the income from profession will be apportioned equally between the husband and the wife- CIT vs. Datta vs. Gaitonde [2002] 241 ITR 241/108/ taxman 533(Bom). Taxable income shall be computed as follows: Step 1- Income under the different heads of income - income under the five heads of income to be computed first Step 2- Adjustment of losses of the current year and earlier years- Losses should be set off according to the provisions of sections 70 to 78. The income after adjustment of losses is the gross total income. Step 3- Deduction from gross total income- Deductions specified under Chapter VI A should be considered while calculating the gross total income. Step 4- Rounding off- The balance should be rounded off to the nearest `10. It is called as net income or taxable income or total income. Calculation of Tax Liability: Step 1 Determine Net Income and tax payable thereon at the slab rate. Step 2 Add 12% incase the total income exceeds `1 crore. DIRECT TAX LAWS AND INTERNATIONAL TAXATION 67

78 Step 3 Add education cess and secondary and higher secondary education cess Step 4 Deduct rebate u/s 86, 87A, 89, 90,90A and 91 Step 5 Add interest payable (if any) Step 6 Deduct amount of prepaid taxes paid (Advance Tax, Tax Deducted at Source, etc.) The Balance so arrived is the amount of tax to be paid. Section 115BB: Gross winnings from lotteries, crossword puzzles, races including horse races (other than income from the activity of owning and maintaining racehorses), card games and other games of any sort or from gambling or betting of any nature whatsoever shall be chargeable to income-tax at a flat rate of 30% on the gross winnings. Section 115BBA: Total income of an assessee, (a) being a sportsman (including an athlete), who is not a citizen of India and is a nonresident, includes any income received or receivable by way of participation in any game or sport or advertisement or contribution of articles in relation to any game or sport in India in newspapers, magazines, journals. (b) being a non-resident sports association or institution, includes any amount guaranteed to be paid or payable to such association or institution in relation to any game or sport played in India. (c) being an entertainer, who is not a citizen of India and is a non-resident, includes any income received or receivable from his performance in India. The income-tax payable on above: 20% Special provisions relating to certain incomes of non-residents - Chapter XII A: The benefit of special provisions can be claimed by non-resident Indians. The following are non-resident Indians for the purpose: (a) citizen of India who is a non-resident ; (b) a person of Indian origin who is a non-residen A person shall be deemed to be of Indian origin if he or either of his parents or any of his grandparents, was born in an undivided India. The Provisions of Section 115C to 115-I are applicable only in respect of the following incomes derived by a non resident Indian: (a) Investment income derived from a foreign exchange assets ; and (b) Long Term Capital Gains on sale or transfer of foreign exchange assets. Concessional method of taxation of certain specified income of non-residents Indian. Foreign exchange asset means any specified asset which the assessee has acquired, purchased with or subscribed to in convertible foreign exchange. Such specified assets are as follows: (a) shares in an Indian company. (b) debentures issued by an Indian company which is not a private company as defined in the Companies Act, (c) deposits with a non-private Indian company. (d) any specified securities of Central Government. (e) units of the Unit Trust of India. Investment Income In computing the Investment income of a non-resident Indian, no deduction in respect of any expenditure or allowance shall be allowed under any provision of the Act. Moreover, no deduction under Sections 80C to 80U 68 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

79 shall be allowed in respect of investment income of non resident Indians. Long Term Capital Gain Long Term Capital Gain on sale or transfer of foreign exchange assets shall be calculated subject to: 1. The benefit of Indexation is not available for the sale or transfer of foreign exchange assets. 2. The non-resident Indian can claim exemption under section 115F by investing sale consideration in another asset. 3. No deduction is permissible under section 80C to 80U in respect of Long Term Capital Gain. Section 115E: Income-tax on investment income at the rate of 20%; Income-tax on long-term capital gains at the rate of 10% Filing of return Similar to resident assessees : However, a non-resident shall not be required to file a return of income u/s 139(1), if his total income consists only of income subject to special rates of tax as mentioned in rate of tax under clauses (iv) supra and the tax has been deducted there from at source. Return of Income not to be filled in certain cases: Where a non-resident Indian has income only from a foreign exchange asset or income by way of Long Term Capital Gains arising on transfer of a foreign exchange asset, or both, and tax deductible at source from such income has been deducted, he is not required to file the return of income under section 139(1). The income from foreign exchange assets and Long Term Capital Gains arising on transfer of such assets would be treated as separate block and charged to tax at a flat rate as explained above. If the non-resident Indian has other Income in India, such other income is treated as an altogether separate block and charged to tax in accordance with other provisions of the Act. Benefit available even after the assessee becomes resident These provisions are as follows: 1. A non-resident Indian in any Previous Year becomes assessable as resident in India in any subsequent year. 2. He may furnish to the Assessing Officer a declaration in writing(along with his return of income under section 139 for the Assessment Year for which he is so assessable)to the effect that the special provisions shall continue to apply to him in relation to the investment income derived from any foreign exchange asset. 3. The foreign exchange assets for this purpose are debentures and deposit with an Indian public limited company and Central Government securities. The special provisions shall continue to apply for that Assessment Year and for every subsequent Assessment Year till the transfer or conversion (otherwise than by transfer) into money of such assets. Special Provisions not to apply if the assessee so chooses (Section 115-I) A non-resident Indian may opt that the special provisions should not apply to him by making a declaration to that effect in his return of income for the relevant Assessment Year. In such case the whole of his Income (including income from foreign exchange assets and Long Term Capital Gains arising on transfer of a foreign exchange asset) is chargeable to tax under the general provisions of the Act. Illustration 1 Salil was running a business. He died on 20th December, 2015, leaving behind his wife Sruti and two minor sons - Sampat and Samar. He did not have any will. Sruti is running the business for and on behalf of herself and the minor children. Salil owned two house properties. Discuss how the rental income and the business income of the financial year 31st March, 2016 will be assessed and in whose hands. Solution: Section 159 provides that if an assessee dies during the Previous Year, the income of the period beginningfrom DIRECT TAX LAWS AND INTERNATIONAL TAXATION 69

80 the commencement of Previous Year and ending with the date of death is taxable in the hands of the legal representative as if the assessee had not died. Therefore, the business profits and the rental income accruing from 1st April, 2015 to 20th December, 2015 will be assessable in the hands of the legal representatives. Sruti represents the estate and hence is liable to be assessed as the legal representative of Salil. Business profits and rental income arise from 21st December, 2015 to 31st March, 2016: As far as rental income is concerned, it will be assessed as income of Sruti, Sampat and Samar according to their shares. According to provisions of Hindu Succession Act, when a male Hindu dies intestate, his estate will devolve on the heirs mentioned in the Schedule by succession and not by survivorship. Hence, the widow and minor children became co-owners and Section 26 will apply since the respective shares are definite and ascertainable. The rental income will be divided into three parts. However, income of Sampat and Samar will be clubbed with income of Sruti by virtue of section 64(1A). As far as business profit is concerned, the Andhra Pradesh High Court in Deccan Wine and General Stores vs. CIT [1977] 106 ITR 111 has held on similar facts that it is to be assessed in the status of Body of Individuals. Illustration 2 Ria, Gia and Ira are persons,aged 30 years, 34 years and 35 years respectively, of Indian origin, though their residential status is non-resident. During the Previous Year relevant for the Assessment Year , their income from investment in India is as follows ( INR) : Particulars Ria Gia Ira a. Interest on deposits with public limited companies received on March 31, ,000 80,000 1,50,000 b. Interest on Government securities received on December 31, ,25,000 2,20,000 2,70,000 c. Interest on deposits with private limited companies on September 30, 2015 Nil 1,00,000 8,80,000 Tax deducted at source, 20.6 per cent in respect of foreign exchange assets (a) and (b); 30.9 per cent in respect of (c) 53,560 92,700 3,58,440 Determine the amount of tax liability/refund for the Assessment Year Also discuss whether the assessee should opt under section 115-I, i.e., not to be governed by provisions of sections 115C to 115-I Solution: Tax liability if the assessee opts under section 115-I, not to be governed under the provisions of sections 115C to 115-I: Particulars Ria Gia Ira Gross Total Income [(a) + (b) + (c)] 2,60,000 4,00,000 13,00,000 Less: Deduction Nil Nil Nil Net Income 2,60,000 4,00,000 13,00,000 Tax 1,000 15,000 2,15,000 Add: Education Cess ,300 Add: Secondary and Higher Secondary Education Cess ,150 Less: Tax Deduction at Source 1,030 15,450 2,21,450 Final tax liability/(-)refund 53,560 92,700 3,58,440 Tax liability if provisions of sections 115C to 115-I are applicable: (-)52,530 (-)77,250 (-)1,36,990 Income from foreign exchange assets eligible for provisions of sections 115C 2,60,000 3,00,000 4,20,000 to 115-I [i.e., (a) + (b)] Tax on income from foreign exchange assets 20.6% in the case of Ria, 53,560 61,800 86,520 Gia and Ira] (1) Other Income [i.e., (c)] Nil 1,00,000 8,80,000 Less: Deduction Nil Nil Nil 70 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

81 Taxable Income Nil 1,00,000 8,80,000 Tax Nil Nil 1,06,000 Add: Education Cess Nil Nil 2,120 Add: Secondary and Higher Secondary Education Cess Nil Nil 1,060 Tax on Other Income (2) Nil Nil 1,09,180 Tax liability [i.e., (1) + (2)] 53,560 61,800 1,95,700 Less: Tax Deducted at Source 53,560 92,700 3,58,440 Final tax liability/(-)refund 2,60,000 Nil (-)30,900 (-)1,62,740 Note: in the problem given above, Ria and Gia should opt under section 115-I (i.e., not to be governed by special provisions of sections 115C to 115-I) by furnishing return of income under section 139. Ira should take the benefit of special provisions of sections 115C to 115-I. 2.3 ASSESSMENT OF HINDU UNDIVIDED FAMILIES Under section 4 of the Income Tax Act, 1961, Income-tax is payable by every person. Person includes a Hindu Undivided Family as defined in sec. 2(31). The definition of Hindu Undivided Family is not found in the Income-tax Act. Therefore the expression Hindu Undivided Family must be construed in the sense in which it is understood under the Hindu Law [Surjit Lal Chhabda vs. CIT 101 ITR 776(SC)]. According to Hindu Law, Hindu Undivided Family is a family which consists of all persons lineally descended from a common ancestor and includes their wives and unmarried daughters. A Hindu Undivided Family is neither the creation of law nor of a contract but arises from status. A Hindu coparcenary includes those persons who acquire by birth an interest in joint family property. Only a male member of a family can be a coparcener while the membership of a HUF consists of both males and females. All the coparceners of the family constitute what is called a Coparcenery. All the coparceners are members of a HUF but all members of a HUF are not coparceners. A coparcener of a joint family, who acquires by birth an interest in the joint property of the family, whether inherited or otherwise acquired by the family, may have a right to enforce partition whereas the members of the family who are not coparcenars have no right to enforce partition. When a partition takes place, member (mother or widow) of the joint family may get a share equal to the sons and also it is necessary to provide for maintenance and marriage of the unmarried daughter out of family property.huf consists of all males lineally descended from a common ancestor and includes their wives and daughters. The relation of a HUF does not arise from a contract but arises from status. Some members of the HUF are called co-parceners. A Hindu Coparcenary includes those persons who acquire an interest in joint family property by birth. It may be noted that only the coparceners have a right to partition. However, other female members of the family, for example, wife or daughter -in-law of a coparcener are not eligible for such coparcenary rights. The income of a HUF is to be assessed in the hands of the HUF and not in the hands of any of its members. This is because HUF is a separate and a distinct tax entity. There are two types of partition as follows : (1) Total partition is a partition by which the entire family property is divided amongst the coparceners. After the total partition, the HUF ceases to exist as such. When a claim of total partition of HUF has been made by any member of the HUF on behalf of the HUF, the Assessing Officer shall inquire into such claim. If partition has been effected in the previous year, the total income of the HUF for the previous year up to the date of partition shall be assessed as income of the HUF. Every member of the HUF is jointly and severally liable for payment of tax on such assessed income of the HUF. The several liability of a member would be proportionate to the share of joint family property allotted to him on such partition. (2) Partial partition is a partition which is partial as regards either the persons constituting the joint family or as regards the properties belonging to the joint family or both. However, partial partitions are not recognized for tax purposes. Such family will continue to be assessed as if no such partial partition has been effected. Every member of the HUF, immediately before such partial partition, and the HUF shall be jointly and severally liable for any sum payable under the Act. The several liability of a member would be proportionate to the share of joint family property allotted to him on such partial partition. DIRECT TAX LAWS AND INTERNATIONAL TAXATION 71

82 Case Laws: (i) A single person, male or female, cannot constitute a Hindu Undivided Family. An individual, who has obtained a share on partition of a joint family, has potentialities of creating a joint family; but until he marries, he alone cannot be considered as a joint family [C. Krishna Prasad vs. CIT97 ITR 493]. (ii) A joint family may consist of a single male member with his wife and daughter(s) and it is not necessary that there should be two male members to constitute a joint family [Gowli Buddanna vs. CIT 60 ITR 193]. Jain & Sikh families are not governed by Hindu Law. However, for the purpose of Income tax Act, such families are treated as Hindu Undivided Families. Where the funds of a HUF are invested in a company or a partnership firm, the dividends or share of profits are generally taxable as the income of the family. In such a case the fee, salary, commission or other remuneration received by the Karta, or any member of the family, in his capacity as director or partner would also be taxable as income of the family. The reasons for this treatment are as follows: (1) The income is earned by the detriment to the joint family funds. (2) It is earned with the aid of joint family funds. (3) There is real and sufficient connection between the investment of the joint family funds and the income by way of remuneration earned. However, where the income is earned by the karta or any other member of the family by the exercise of the personal skill the income should be assessed in their individual hands even if some detriment is caused to the family funds, say, by way of loan, guarantee etc. whose role is only secondary. Salary paid to Karta for managing the family s business: If remuneration is paid to the Karta of Hindu undivided family under a valid agreement which is bona fide and in the interest of and expedient for the business of the family and the payment is genuine and not excessive, such remuneration would be an expenditure laid out wholly and exclusively for the purpose of the business of the family and would be allowable as an expenditure. Salary paid to member: A Hindu undivided family can be allowed to deduct salaries paid to member of the family if the payment is made as a matter of commercial or business expediency, but the service rendered must be to the family. Case law: Remuneration and commission received by the Karta of HUF on account of his personal qualifications and exertions and not on account of investments of the family funds in the company cannot be treated as income of HUF [Subbiah Pillai (K.S.) vs. CIT 103 Taxman 400/237 ITR 11]. Taxable income shall be computed as follows : Step 1 - Income under the different heads of income - First find out income under the five heads of income Step 2 - Adjustment of losses of the current year and earlier years - Losses should be set off according to the provisions of sections 70 to 78. The income after adjustment of losses is the gross total income. Step 3 - Deduction from gross total income - Deductions specified under Chapter VI A should be considered while calculating the gross total income. Step 4 - Rounding off - The balance should be rounded off to the nearest ` 10. It is called as net income or taxable income or total income. Calculation of Tax Liability: Step 1 Determine Net Income and tax payable thereon at the slab rate. Step 2 Add 12% if the total income exceeds ` 1 crore. 72 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

83 Step 3 Add education cess and secondary and higher secondary education cess Step 4 Deduct rebate u/s 86, 90,90A and 91 Step 5 Add interest payable (if any) Step 6 Deduct amount of prepaid taxes paid (Advance Tax, Tax Deducted at Source, etc.) The Balance so arrived is the amount of tax to be paid. Note: (i) From the Assessment Year , tax payable (i.e. amount arrived at Step 3) cannot be less than 18.5 percent of Adjusted Total Income in some Specified Cases. (ii) The total amount payable as income tax and surcharge on total income exceeding `1 crore shall not exceed the total amount payable as income tax on a total income of `1 crore by more than the amount of income that exceeds `1 crore. Illustration 1. Prem was the Karta of HUF. He died leaving behind his major son Anand, his widow, his grandmother and brother s wife. Can the HUF retain its status as such or the surviving persons become co-owners? Solution: Income-tax law does not require that there should be at least two male members to constitute an HUF [Gowli Buddanna vs. CIT (1966) 60ITR 293 (SC)]. The expression Hindu Undivided Family used in the Act should be understood in the sense in which it is understood under the Hindu personal law. The expression Hindu Undivided Family under the Income-tax Act is known as Joint Hindu Family, under the Hindu personal law. A Joint Family may consist of a single male member and the widows of the deceased male members. The property of the Hindu joint family does not cease to be an HUF property merely because that the HUF, consist of one male member at a given point of time, exercising the proprietary rights over the property of HUF property. Illustration 2. J (HUF) was the owner of a house property, which was being used for the purposes of a business carried on by a partnership firm JC & Co. in which the Karta and other members of the HUF were partners in their individual capacity. The Assessing Officer proposes to assess the annual letting value of the said property as the HUF s income from house property. The HUF contends that the building was used for business purposes and, therefore, the annual letting value thereof was not taxable in its hands as income from house property under Sec. 22. Examine the rival contention. Solution: Section 22 directs not to tax the annual value of a house property which is used by the owner for his business profession, the profits of which are chargeable to tax. In the instant case, the HUF is not using its property for its business. The Karta of the Hindu undivided family and other members of the HUF are partners in the firm in their personal capacity. They have not joined the partnership on behalf of the HUF. Therefore, it cannot be said that the HUF property was being used by the HUF for its business. Hence, the Assessing Officer is justified to tax the income of the HUF property as income from House Property. Illustration 3. J.Modi was the Karta of a Hindu Undivided Family which was assessed to income tax. He died in an air crash and his two sons received ` 8 lakhs as compensation and ` 6 lakhs from the insurance company. The said amount of ` 14 lakhs was invested in units. The assessee claims that the income from these units is assessable as income of the Hindu Undivided Family composed of his sons and their families. Discuss. Solution: The right to receive compensation and insurance claim did not vest in the assessee during his life-time. It came into DIRECT TAX LAWS AND INTERNATIONAL TAXATION 73

84 existence only after his death. The income from investment and compensation would be personal income of the assessee [CIT vs. L. Bansi Dhar & Sons (1980) 123 ITR 58 (Del.)]. Illustration 4. Does a married daughter still remain a coparcener/member of the HUF of paternal side after she becomes a member of her husband s or father-in-laws HUF? Solution: A daughter on her marriage ceases to be a member of her father s family and becomes the member of the family of her husband. She cannot be a member of both the families. She had never been a coparcener in her father s family nor will she become one in her husband s family. Her right under Hindu Law is confined to maintenance but Hindu Succession Act, 1956 gives her a right equal to the share of her brother in respect of an individual property of father and the share of her father is the joint family property. Illustration 5. Can there be multiple HUF besides individual status for a person? Solution: There can be more than one HUF. There can be even three families, for example, a person can be a member of a larger family of which the grandfather is the karta, while he may be a member of the smaller family with his father as karta, the smaller family having been formed by partial partition or by will or by gift or blending. He can be a karta of a third family with himself as karta, if he were married, with his wife and children, if any. At the same time, he can have individual status as well. 2.3 ASSESSMENT OF FIRMS From the Assessment Year partnership firm has been classified for the purpose of computation of income and its assessment as under: (a) Partnership Firm assessed as such (PFAS) (b) Partnership Firm assessed as an Association of Person (PFAOP). Provisions relating to assessment of firms and partners are analyzed as under : Specific provisions to firm assessed as an AOP Particulars Sections Disallowance of salary and interest to partner section 40(ba) Method of computing partner s share in the income of PFAOP section 67A Rate of tax in respect of income of AOP/BOI section 167B Taxability of partner s share of income sections 86, 110 Partnership Firm Assessed As Such (PFAS) [Section 184]: Conditions to be fulfilled: (i) Firm should be evidenced by an instrument. (ii) Individual shares of partners must be specified in the instrument. (iii) Certified copy of the instrument should accompany the first return of income of a firm. Instrument shall be certified in writing by all partners other than minors. (iv) If there is any change in the constitution of the firm or profit -sharing ratio during any previous year, a certified copy of the revised instrument of partnership should be filed along with the return of income of the relevant assessment year. 74 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

85 Section 167C: In case of liquidation of an LLP, where tax due from the LLP cannot be recovered, every person who was a partner of the LLP at any time during the relevant previous year will be jointly and severally liable for payment of tax unless he proves that non-recovery cannot be attributed to any gross neglect, misfeasance or breach of duty on his part in relation to the affairs of the LLP. Computation of tax where shares of members in AOP/BOI are unknown [Section 167B]: Tax on the total income would be computed as follows: - If individual share of any partner is not known, tax will be levied at the maximum marginal rate, or at a higher rate. - If individual share of a partner is known but total income of any member/partner exceeds the basic exemption limit, then the firm will pay tax at the maximum marginal rate. - If individual share of a partner is known and no member/partner has total income exceeding the basic exemption limit, the firm will pay tax at the rates applicable to an individual. Computation of member s/partner s share in the total income of association of persons/aop firm [Section 67A]: A member s share in the income of an association of persons/aop firm (wherein the shares of members are determinate/known) will be computed as follows: (a) Any interest, salary, bonus, commission, remuneration, etc. paid to a member/ partner during the previous year will be deducted from the total income of the association, and the balance will be apportioned among the members in proportion to their respective shares. (b) If the amount apportioned to a member/partner as per (a) is a profit, any interest, salary, etc. paid to him by the association or AOP firm during the previous year will be added to that amount and the aggregate sum will be such member s/partner s share in the income of the AOP/AOP firm. (c) If the amount apportioned to a member/partner as per (a) is a loss, any interest, salary, etc., paid to him by the association or AOP firm will be deducted from the amount of loss and the balance sum will be such member s/ partner s share in the income of the AOP/AOP firm. The share of a member in the income/loss of the AOP/AOP firm will, for the purposes of assessment, be apportioned under the various heads of income in the same manner in which income/loss of the association has been determined under each head. Any interest paid by a member on capital borrowed by him for the purpose of investment in the AOP/AOP firm will be allowed as deduction from share while computing his income under Profits and gains of business or profession. Assessment of share in the hands of member/partner [Section 86]: - A member s/partner s share in the total income of an association of persons/aop firm will be treated as follows: - If an AOP/AOP firm has paid tax at the maximum marginal rate, or a higher rate, the partner s share in the total income of the firm will not be included in his total income and will be exempt. - If the AOP/AOP firm has paid tax at regular rates applicable to an individual, the member s/partner s share in the income of the association/aop firm will be included in his total income for rate purposes only. In other words, the member/partner will be allowed rebate at the average rate in respect of such share. If the AOP/AOP firm has not paid tax on its total income, the member s/partner s share in the total income of the association/aop firm will be included in his total income and taxed at regular rates. 2.5 ASSESSMENT OF LLP A Limited Liability Partnership (LLP) is a body corporate formed or incorporated under the Limited Liability Partnership Act, It is a legally separate entity from its partners. It has perpetual succession i.e. any change in its partners will not have any impact on its existence, rights and liabilities. It is a corporate business form which gives benefits of limited liability of a company and the flexibility of a partnership. It contains elements of both a company as well as a partnership firm and thus it is called a hybrid between a partnership and a company. The Income-tax DIRECT TAX LAWS AND INTERNATIONAL TAXATION 75

86 Act provides for the same taxation regime for a Limited Liability Partnership as is applicable to a partnership firm. It also provides tax neutrality (subject to fulfilment of certain conditions) to conversion of a Private Limited Company or an Unlisted Public Company into an LLP. However, Presumptive Tax Scheme u/s 44AD is not applicable to LLP. An LLP being treated as a firm for taxation, has the following tax advantages over a company under the Incometax Act : (i) it is not subject to Minimum Alternate Tax; (ii) it is not subject to Dividend Distribution Tax (DDT); and (iii) it is not subject to surcharge. (iv) It is not subject to Wealth Tax. In order to preserve the tax base vis-a-vis profit-linked deductions, a new Chapter XII-BA has been inserted in the Income-tax Act containing special provisions relating to certain Limited Liability Partnerships. Calculation of Total income: Step 1 - Income under the different heads of income - First find out income under the five heads of income Step 2 - Adjustment of losses of the current year and earlier years - Losses should be set off according to the provisions of sections 70 to 78. The income after adjustment of losses is the gross total income. Step 3 - Deduction from gross total income - Deductions specified under Chapter VI A should be considered while calculating the gross total income. Step 4 - Rounding off - The balance should be rounded off to the nearest `10. It is called as net income or taxable income or total income. Remuneration and interest to partners are deductible if condition of section 40(b) and 184 are satisfied. Taxability: Step 1 Determine Net Income and tax payable thereon at a normal rate of 30%. Step 2 Add 12% if total income exceeds ` 1 crore Step 3 Add education cess and secondary and higher secondary education cess Step 4 Deduct rebate u/s 86, 90, 90A and 91 Step 5 Add interest payable (if any) Step 6 Deduct amount of prepaid taxes paid (Advance Tax, Tax Deducted at Source, etc.) The Balance so arrived is the amount of tax to be paid. Note: (i) From the Assessment Year , tax payable (i.e. amount arrived at Step 3) cannot be lessthan 18.5 percent of Adjusted Total Income if certain conditions are satisfied. (ii) The total amount payable as income tax and surcharge on total income exceeding ` 1 crore shall not exceed the total amount payable as income tax on a total income of ` 1 crore by more than the amount of income that exceeds `1 crore. Share of profit in LLP is not taxable in the hands of partners. However, remuneration and interest are taxable under section 28 under the Profits and Gains of Business or Profession in the hands of partners to the extent these are allowed as deduction in the hands of LLP. Illustration 1 : R (29 years) and S (28 years) are two partners of R&S Co. (a firm of Cost Accountants). On March 31, 2015, there is no provision for payment of salary and interest to partners. On April 1, 2015, the deed of partnership has been amended to provide salary and interest as follows: 76 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

87 Particulars R S Salary ` 21,000 per month ` 23,000 per month Interest 14 per cent per annum 14 per cent per annum The Income and Expenditure Account of R&S Co. for the year ended March 31, 2015 is as follows: Particulars ` Particulars ` Office Expenses 2,59,000 Receipt from clients 10,57,000 Salary to employees 80,000 Interest recovered from R and S on drawings 3,000 Income tax 41,000 Salary to R 2,52,000 Salary to S 2,76,000 Interest on capital to 14% p.a. 14,000 Interest on capital to 14% p.a. 21,000 Net Profit (shared by R and S equally as per the terms of partnership deed) Other Information: 1,17,000 10,60,000 10,60, Out of office expenses, `19,000 is not deductible by virtue of sections 30 to During the year the firm sells a capital asset for `8,10,000 (indexed cost of acquisition being `1,88,865). 1. Personal income and investments of partners are as follows: Particulars R S Interest from Government securities 5,70,000 5,23,000 Fixed Deposit interest 2,00,000 1,08,000 Deposit in public provident fund 1,00,000 85,000 Mediclaim insurance premium 12,000 11,000 Solution : Particulars ` ` Computation of net income/tax liability of the firm Net profit as per Income and Expenditure Account 1,17,000 Add: Income tax 41,000 Office expenses 19,000 Salary to R and S (`2,52,000 + `2,76,000) 5,28,000 Interest to R and S [to the extent not allowed as deduction, i.e., {(`14,000 + `21,000)-12/14 of (`14,000 + `21,000)}] Book Profit Less: Remuneration to partners [maximum deductible amount is 90% of `3,00, % of `4,10,000] 5,000 DIRECT TAX LAWS AND INTERNATIONAL TAXATION 77

88 Income from the Profession 7,10,000 Capital Gains 5,16,000 Sale proceeds 1,94,000 Less: Indexed cost of acquisition 8,10,000 6,21,135 Net income (rounded off) 1,88,865 8,15,135 Tax Income-tax on Long-term Capital Gain [20% of `6,21,135] 1,24,227 Income-tax on balancing amount 58,200 Tax 1,82,427 Add: Surcharge Nil Tax and surcharge 1,82,427 Add: Education cess (2% of tax) 3,649 Add: Secondary and higher education cess (1% of income-tax) 1,824 Tax liability of the firm (rounded off) 1,87,900 Computation of net income and tax liability of partners R S Profits and gains of business or profession Interest from the firm(to the extentallowed as 12,000 18,000 deduction, i.e., 12/14 of `14,000 and `21,000) Salary received from the firm(to the extent allowed as deduction, i.e., `5,16,000 distributed in the ratio of 63:69) Income from profession 2,46,273 2,69,727 Income from other sources 2,58,273 2,87,727 Gross total income 7,70,000 6,31,000 Less: Deduction under sections 80C to 80U 10,28,273 9,18,727 Under section 80C Under section 80D 1,00,000 85,000 Net Income (rounded off) 12,000 11,000 Tax on income 9,16,270 8,22,730 Income-tax 1,08,254 89,546 Add: surcharge Nil Nil Tax and surcharge 1,08,254 89,546 Add: Education Cess (2% of tax) 2,165 1,791 Add: Secondary and Higher Secondary Education Cess (1% of tax) 1, Tax liability (rounded off) 1,11,502 92,232 Illustration 2. At the time of becoming a partner in the firm of M/s. XYZ, X brings in his house property as his share of capital in the firm. Does such bringing in of immovable property to the stock require registration u/s 17(1)(b) of the Registration Act? Solution: Where the property is brought in as capital during formation of partnership deed, there is no transfer at all within the meaning of the Transfer of Property Act, 1882, but u/s 14 of the Partnership Act Therefore, even if a property brought in by one partner be an immovable property, no document registered or otherwise, is required 78 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

89 for transferring the property to the partnership [CIT vs. Royal Amber Resorts (1987) 164 ITR 311 (Raj.)]. Illustration 3. A firm consisting of four partners purchased a plot of land. The plot was all through treated as the property of the firm. By an agreement between the partners, the said plot was taken out of the partnership by crediting the plot account at the book value and debiting the partner s capital account in equal proportion in the books of the account of the firm. The plot was subsequently sold and capital gains offered by tax in the hands of partners? Is it valid? Solution: The capital gains is rightly assessable in the hands of the firm as the entries made in the books of account, the partners had not legally and effectively taken out the immovable property of the firm from its ownership and vested the same in the partners. The transfer could not have been affected to partners without a registered document on Since the firm alone is liable to capital gains tax, assessment of partners is not valid [CIT vs. J.M. Mehta & Bros. (1995) 214 ITR 716 (Bom)]. Illustration 4. Can a minor share loss? If the partnership deed provides for such share, can the firm be recognised as validly formed? Is a fresh deed necessary when the minor attains majority? Solution: A minor is not competent to contract. He cannot also be made liable for loss except to the limited extent of profits earlier made. Where a partnership deed makes a minor liable for share of loss, such partnership cannot be recognised as a firm for purposes of registration. This was followed in CIT vs. Badri Nath Ganga Ram (2005) 273 ITR 485 (All.). It is not necessary that a fresh partnership should be formed with the erstwhile minor, since he will continue as a partner unless he had expressed his intention otherwise , can the dissolved firm be made liable for the tax from A.Y ? Solution: Dissolution does not end the partnership. It only ends mutual agency. It was so pointed out in CIT vs. Pigot Chapman and Co (1982) 135 ITR 620 (SC). A dissolved firm continue till it is wound up under section 45 of the Partnership Act. Section 189 authorises such assessment. Illustration 5. What is the liability of a non-working partner as regards liability of firm after dissolution? Solution: Every partner is jointly and severally liable for the debts of the firm. Intervening dissolution makes no difference. It was so held in Dhanpat Rai Verma vs. TRO (2004) 268 ITR 215 (All). Illustration 6. What is better, whether slump sale or severable itemised sale? Solution: In a slump sale from A.Y , there is no benefit of indexation, the difference between book value and consideration is assessed. In a severable sale, the Capital Gain of asset has to be computed, so that in respect of long-ter m assets, benefit of indexation is available. But where the prospect of shortterm capital gains is higher because of extent of depreciable assets comprised therein in severable sale, slump sale is preferable. Hence, what is preferable will be a matter to be considered with reference to facts in each case. Illustration 7. Is it possible for two firms to merge with each other without any tax consequence? DIRECT TAX LAWS AND INTERNATIONAL TAXATION 79

90 Solution: The concept of merger or amalgamation is unknown to partnership law. Where a partnership business is taken over by another firm, there is a profit liable to Capital Gains Tax. Illustration 8. Is it possible for two firms to convert themselves as companies under Part-IX of Companies Act and thereafter for both the companies to amalgamate so as to avoid capital gains on merger of the business of the two firms? Solution: The conversion and the later merger are two independent steps. Each should be justified by bona fide commercial considerations and not solely for saving tax. There is no liability at both stages, subject to conditions under the relevant provisions of law. 2.6 ASSESSMENT OF ASSOCIATION OF PERSON / BODY OF INDIVIDUALS In computing the total income, salary, bonus, commission, remuneration or interest paid to partners/members will not be allowed. However in the case of payment of interest the following provisions will apply: Explanation 1: If interest is paid by an AOP/BOI to any member who was also paid interest to the AOP/BOI then only that amount of interest paid by the AOP/BOI will be disallowed in its assessment which is in excess of the interest paid by the member to the AOP/BOI. Explanation 2: If an individual is a member of an AOP/BOI in a representative capacity, then interest paid by the AOP/BOI to such individual in his personal capacity the interest payment will be allowed. Explanation 3: If interest is paid to a member who is member in a personal capacity but such interest is received by him in representative capacity, the interest payment will be allowed. Taxable income shall be computed as follows : Step 1 - Income under the different heads of income - First find out income under the five heads of income Step 2 - Adjustment of losses of the current year and earlier years - Losses should be set off according to the provisions of sections 70 to 78. The income after adjustment of losses is the gross total income. Step 3 - Deduction from gross total income - Deductions specified under Chapter VI A should be considered while calculating the gross total income. Step 4 - Rounding off - The balance should be rounded off to the nearest ` 10. It is called as net income or taxable income or total income. Calculation of Tax Liability: Step 1 Determine Net Income and tax payable thereon at a normal rate of 30%. Step 2 Add 12% if the total income exceeds ` 1 crore Step 3 Add education cess and secondary and higher secondary education cess Step 4 Deduct rebate u/s 86, 90, 90A and 91 Step 5 Add interest payable (if any) Step 6 Deduct amount of prepaid taxes paid (Advance Tax, Tax Deducted at Source, etc.) The Balance so arrived is the amount of tax to be paid. Note: (i) From the Assessment Year , tax payable (i.e. amount arrived at Step 3) cannot be less than 18.5 percent 80 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

91 of Adjusted Total Income in some Specified Cases. (ii) The total amount payable as income tax and surcharge on total income exceeding ` 1 crore shall not exceed the total amount payable as income tax on a total income of `1 crore by more than the amount of income that exceeds `1 crore. Change in constitution of a firm [Section 187] Where at the time of making an assessment u/s 143 or u/s 144, it is found that a change has occurred in the constitution of a firm, the assessment shall be made on the firm as constituted at the time of making the assessment. In other words, there will not be a separate assessment of firm even when there is a change in the constitution of the firm. There is a change in the constitution of the firm:- (a) If one or more of the partner cease to be partners or one or more new partners are admitted, in such circumstances that one or more of the persons who were partners of the firm before the change continue as partner or partners after the change; or (b) Where all the partners continue with a change in their respective shares or in the shares of some of them. Where a partnership deed provides that death shall not result into the dissolution of firm, such provision is lawful u/s 42 of the Partnership Act; on the death of the partner, a partnership is not dissolved and the business is continued by the re-constituted partnership, then only one assessment is to be made for the entire year [CIT vs. Empire Estate (1996) 218 ITR 355 (SC)]. Case Laws: (1) The firm will be dissolved on the death of any of its partner, unless there is a specific provision in the partnership deed, that the firm would not be dissolved on the death of a partner. Thus, there will be two separate assessments. [CIT vs. Ayyanarappan & Co. (1999) 236 ITR 410 (SC)]. (2) A perusal of section 187(2)(a) of the Income Tax Act, 1961, shows that by legal fiction for the purposes of the Income Tax Act, if even one of the partners continues to remain in the firm then the firm will not be deemed to be dissolved. Hence, even if the partnership deed says that the firm will stand dissolved on the retirement of a partner, for the purposes of the Income Tax Act, it will not be deemed to be dissolved in view of section 187(2) (a). [CIT vs. Ratanlal Garib Das (2003) 261 ITR 200 (All)]. Illustration 1. A, B and C Ltd. are three members of an AOP, sharing profit and losses in the ratio 2:2:1. The AOP discloses its income for the PY as below: (i) Long-term Capital Gains - `4,00,000 (ii) Business Profits - `6,00,000 Determine tax liability of AOP in the following cases: (i) C Ltd. is an Indian company (ii) C Ltd. is a foreign company Solution: Allocation of income of AOP among partners Particulars of income A B C Ltd Long-term Capital Gains 1,60,000 1,60,000 80,000 Business Profits 2,40,000 2,40,000 1,20,000 Share income of the members 4,00,000 4,00,000 2,00,000 DIRECT TAX LAWS AND INTERNATIONAL TAXATION 81

92 Tax liability of AOP Particulars Case I Case II C Ltd. an Indian company (`) C Ltd. as foreign company (`) Tax on the share of C Ltd. 37, Case I : 1,20,000 x 30.90% --- Case II: 1,20,000 x 41.20% 49,440 Tax on balance income at AOP: (i) Long-term Capital Gain (4,00,000 x 20.60%) 82,400 82,400 (ii) Business Profits (4,80,000 x 30.90%) 1,48,320 1,48,320 Total Tax Payable 2,67,800 2,80,160 Total Tax (Rounded off u/s 288B) 2,67,800 2,80,160 Note : Assumed that the provisions of AMT are not applicable in the above case Illustration 2. R, S and T Ltd. (a widely held domestic company) are members in an AOP for the Previous Year They share profit and losses in the ratio 30%, 40% and 30%. Taxable business income of AOP is determined at ` 8,00,000. Personal incomes of the partners are given below: R - House Property ` 90,000 S Short-term Capital Gain `1,00,000 R deposits ` 20,000 in CTDS-15-year account in Post Office in February S purchases NSC VIII-Issue for ` 25,000 in December Determine the tax liability of the AOP and its partners Solution : (a) Computation of tax liability of AOP for the Previous Year Allocation of AOP income among members: Particulars R (`) S (`) T Ltd (`) Business Profit 2,40,000 3,20,000 2,40,000 Tax liability of AOP: 8,00, % = 2,47,200 (b) Tax liability of members: Particulars R (`) S (`) T Ltd (`) Share income from AOP 2,40,000 3,20,000 2,40,000 AOP charged at maximum marginal rate Exempt Exempt Exempt Personal income of members after deduction under Chapter VIA 70,000 75,000 Nil Personal income below taxable limit Exempt Exempt X Note : Assumed that AMT is not applicable in the above case. Illustration 3. T and Q are individuals, who constitute an Association of Persons, sharing profit and losses in the ratio of 2:1. For the accounting year ended 31st March 2016, the Profit and Loss Account of the business was as under: Particulars ` ( 000) Particulars ` ( 000) Cost of goods sold 6, Sales 9, DIRECT TAX LAWS AND INTERNATIONAL TAXATION

93 Remuneration to: Dividend from companies T Long-term Capital Gains 1, Q Employees Interest to : T Q Other expenses Sales-tax penalty due Net Profit 4, , , Additional information furnished: (i) Other expenses included: (a) entertainment expenses of ` 35,000; (b) wristwatches costing `2,500 each were given to 12 dealers, who had exceeded the sales quota prescribed under a sales promotion scheme; (c) employer s contribution of `6,000 to the Provident Fund was paid on 14th January (d) ` 30,000 was paid in cash to an advertising agency for publicity. (ii) Outstanding sales tax penalty was paid on 15th April The penalty was imposed by the sales tax officer for non-filing of returns and statements by the due dates. (iii) T and Q had, for this year, income from other sources of `3,50,000 and `2,60,000, respectively. Required to : (i) Compute the total income of the AOP for the Previous Year (ii) Ascertain the tax liability of the Association for that year; and (iii) Ascertain the tax liability for that year of the individual members. [Ignore the application of Alternate Minimum Tax] Solution : (i) Computation of total income of the AOP for PY , AY PARTICULARS ` ` Profit and Gains of Business (see Working Note below) 33,12,300 Long Term Capital Gain 16,40,000 Income from Other Sources [dividend is exempt u/s 10(34), assuming it is from domestic NIL companies] Total Income 49,52,300 Working Note: Computation of profits and gains of business: Net profit as per Profit and Loss Account 45,24,300 DIRECT TAX LAWS AND INTERNATIONAL TAXATION 83

94 Add: Inadmissible payments: 4,53,000 Interest to members T & Q (`48,300 + `35,700) 49,77,300 Advertising [disallowance u/s 40A(3) 84,000 16,65,000 Remuneration to members T & Q (`1,30,000 + `1,70,000) 30,000 33,12,300 Sales tax penalty due (See Note 3 below) 3,00,000 Less : Income not taxable under this head 39,000 Dividend from companies Long term Capital Gain 25,000 Profits and Gains of Business 16,40,000 (ii) Computation of tax liability of the AOP for PY PARTICULARS ` ` Long-term Capital Gain (`16,40,000 20%) 3,28,000 Other Income (`33,12,300 30%) 9,93,690 Tax on Total Income 13,21,690 Add : Education 2% 26,434 Add : 1% 13,217 Total Tax due 13,61,341 Total Tax Rounded off (u/s 288B) 13,61,340 Note : 1. Since one of the members has individual income more than the basic exemption limit, the AOP will be assessed at the maximum marginal rate. 2. Since the employer s contribution to PF has been paid during the Previous Year itself, it is allowable as deduction. 3. Penalty imposed for delay in filing sales tax return is not deductible since it is on account of infraction of the law requiring filing of the return within the specified period. 4. Gift paid to dealers are solely for business purpose and hence, fully deductible item. (iii) Computation of Tax Liability of members T & Q for the PY Particulars ` Particulars ` Tax on `3,50,000 10,000 Tax on `2,60,000 1,000 Less: Rebate u/s 87A 2,000 Less: Rebate u/s 87A 1,000 8,000 Add : Surcharge Nil Add : Surcharge Nil Add : Education 2% Nil 8,000 Add : 1% Nil Add : Education 2% 160 Add : 1% 80 Net Tax Payable 8,240 Net Tax Payable Nil 2.7 ASSESSMENT OF COMPANIES 84 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

95 The total income of a company is also computed in the manner in which income of any other assessee is computed. The first and the foremost step in this direction is to ascertain Gross Total Income. Income computed under four heads (salary head is not applicable), is aggregated. While aggregating the income, section 60 and 61 shall be applicable. Further, effect to set off of losses and adjustment for brought forward losses will also be done. From the Gross Total Income so computed, the deductions u/s 80G, 80GGA, 80GGB, 80IA, 80IAB, 80IB, 80IC, 80ID, 80IE, 80JJA, 80JJAA & 80LA of Chapter VIA should be allowed. The following are the special provisions under the Income Tax Act which are applicable to a company in which public are not substantially interested i.e. a closely held company: (A) Carry forward and set off of losses [Section 79]. (B) Deemed dividend u/s 2(22)(e). (C) Liability of directors [Section 179]. Carry forward and set off of losses in case of certain companies [Section 79] In the case of closely held companies where a change in shareholding has taken place in a previous year, no loss under any head incurred in any year prior to the previous year shall be carried forward and set off against the income of the previous year unless on the last day of the previous year in which loss is set off and on the last day of the previous year in which the loss was incurred, the shares of the company carrying not less than 51% of the voting power were beneficially held by the same persons. In other words, where a change in voting power of more than 49% of the shareholding of a closely held company has taken place between two relevant dates (viz., the last day of previous year in which set off is claimed and the last date of the previous year in which the loss was incurred), the assessee will not be entitled to claim set off of such losses. This provision shall not apply to a change in the voting power consequent upon: (i) the death of a shareholder, or (ii) on account of transfer of shares by way of gifts to any relative of the shareholder making such gift. Further, section 79 shall not apply to any change in the shareholding of an Indian company which is subsidiary of a foreign company arising as a result of amalgamation or demerger of a foreign company subject to the condition that 51% of the shareholders of the amalgamating or demerged foreign company continue to remain the shareholders of the amalgamated or the resulting foreign company. Section 79 applies to all losses, including losses under the head Capital Gains. However, overriding provisions of section 79 do not affect the set off of unabsorbed depreciation which is governed by section 32(2). [CIT vs. Concord Industries Ltd. (1979) 119 ITR 458 (Mad)]. Deemed dividend [Section 2(22(e)] Any payment by a company, not being a company in which the public are substantially interested, of any sum by way of advance or loan to a shareholder holding not less than 10% voting power or to a concern in which such shareholder is a member or a partner and in which he has substantial interest or any payment by such company on behalf or for the individual benefit of any such shareholder, to the extent to which company in either case possesses accumulated profit shall be treated as deemed dividend. Liability of directors of private company in liquidation [Section 179] Where any tax due from a private company in respect of any income of any previous year cannot be recovered, then, every person who was a director of the private company at any time during the relevant previous year shall be jointly and severally liable for payment of such tax unless he proves that the non-recovery cannot be attributed to any gross neglect, misfeasance or breach of duty on his part in relation to the affairs of the company. Tax on income from life insurance business: (Section 115B) - Profits and gains derived from the business of life insurance computed in accordance with the First Schedule to the Income-tax Act, 1961, DIRECT TAX LAWS AND INTERNATIONAL TAXATION 85

96 - Income-tax payable (i) Life insurance business included - At the rate of 12½% and (ii) Balance - Regular Rate - Not be subject to MAT Judicial Pronouncements 1. Whether the provisions of MAT applicable to foreign companies or not? Since company defined u/s 2(17) includes any body corporate incorporated under the laws outside India, so foreign companies are also liable to MAT in respect of their income in India. However, foreign companies shall not liable u/s 115JB without physical presence. The Authority for Advance Ruling ( AAR ) has delivered a ruling in the case of Timken India Ltd. In re (2005) 273 ITR 67 (AAR) where it holds that the provisions of section 115JB of the Income-tax Act, 1961 ( the Act ) levying Minimum A ternate Tax ( MAT ) on the book profit of a Company would not apply to a Foreign Company not having any physical presence in India. In this case, the AAR distinguished its earlier ruling of 1998 (234 ITR 828) wherein it had held that a foreign company would be subject to MAT provisions. The critical factor for distinguishing was on the basis that in the earlier ruling the applicant had a project office in India, which constituted a Permanent Establishment and was preparing its financial statements as required under Indian Companies Act, In order to comply with the requirement of MAT provisions regarding preparing Profit & Loss Account in accordance with the provisions of the Indian Companies Act, it is essential that the foreign company should have a place of business within India. Similar view has been upheld by AAR in the recent ruling of Praxair Pacific Ltd. 2. Whether Assessing Officer (AO) has the power to examine correctness of net profits shown in P&L Account [Apollo Tyres Ltd. v. CIT (2002) 255 ITR 273 (SC)] The AO does not have the power to question correctness of P&L A/c prepared by assessee and certified by the statutory auditors of the company as having been prepared in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act, The AO does not have the jurisdiction to go behind the net profits shown in the P&L A/c except to the extent provided in the Explanation 1 to Section 115JB. Interest u/s 234B is payable on failure to pay advance tax in respect of tax payable u/s 115JB. [CIT v. Rolta India Ltd. (2011) 330 ITR 470 (SC) and Circular No. 13/2001] Section 115A: 1. Where the income of a non-corporate non-resident or a foreign company consists of: (i) dividends (other than dividends referred to in section 115-O) (ii) interest received from Government or from an Indian concern on monies borrowed or debt incurred by the Government or the Indian concern in foreign currency; or (iii) income received in respect of units purchased in foreign currency of a mutual fund the same will be taxed at 20%. However, the following interest income would be subject to a concessional rate of 5% on gross interest: (i) Interest income received by a non-corporate non-resident or a foreign company from an infrastructural fund (ii) Interest received by a foreign company or a non-corporate non-resident, in respect of borrowing made by an Indian company or business trust in foreign currency from sources outside India between and or by way of issue of long-term infrastructure bonds between and or by way of issue of long-term bonds between and (194LC) (iii) Distributed income, taxable in the hands of non-resident unit holders of a business trust. (194LBA) 2. No deduction 86 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

97 3. Shall not furnish a return of their income if the total income consisted only of the income referred above, and the tax deductible at source has been deducted from such income. 4. Where the total income of a non-corporate non-resident or a foreign company includes royalty or fees for technical services, other than income referred to in section 44DA(1), received from Government or an Indian concern in pursuance of an agreement made, the same will be subject to the following conditions: (a) such agreement must be made with an Indian concern ; (b) the agreement must be approved by the Central Government, or (c) where it relates to a matter included in the industrial policy for the time being in force. Section 115AC: Liability to pay tax in India does not depend on the nationality or domicile of the Tax payer but on his residential status. Residential Status is determined on the basis of physical presence i.e. the number of days of stay in India in any year. 1. Where the total income of a non-resident includes the following types of income namely, (a) income by way of interest on bonds of an Indian company issued in accordance with such scheme as may be notified by the Government or on bonds of a public sector company, sold by the Government, and purchased by him in foreign currency; or (b) income by way of dividends (other than dividends referred to in section 115-O) on Global Depository Receipts (c) income by way of long-term capital gains arising from the above bonds or GDRs. The income-tax will be at the rate of 10% on the above income. Section 115ACA: This section applies to resident individuals who are employees of an Indian company engaged in specified knowledge based industry or service, or its subsidiary engaged in specified knowledge based industry or service. Income-tax payable shall be the aggregate of: (i) 10% of income by way of dividends (other than dividends referred to in section 115-O) in respect of Global Depository Receipts of an Indian company purchased in foreign currency in accordance with such employees stock option scheme as the Central Government may, notify, (ii) 10%, in case of long-term capital gains arising from the transfer of the aforesaid Global Depository Receipts. Section 115AD: Foreign Institutional Investor, income-tax payable shall be the aggregate of the following: (1) 20% of the income (other than income by way of dividends referred to in section 115-O). However, 194LD, income-tax is payable@5% of gross income. (2) 30% of the short-term capital gains. However, 111A is to be calculated at 15%. (3) 10% of long term capital gains. Section 115BBD: Dividends received by Indian companies from specified foreign companies to be subject to a concessional rate of 15%.Specified foreign company means a foreign company in which the Indian company holds 26% or more in nominal value of the equity share capital of the company. Minimum Alternate Tax on companies [Section 115JB]: As per section 115JB(1), in case of company (domestic or foreign), if the income-tax payable on the total income computed under the Income-tax Act, 1961 is less than 18.5% of its book profit, such book profit shall be deemed to be the total income of the assessee and the tax payable by the assessee on such total income shall be the DIRECT TAX LAWS AND INTERNATIONAL TAXATION 87

98 amount of income-tax at the rate of 18.5% (add surcharge & Cess asapplicable). Section 115JB requires companies to prepare their profit and loss account for the relevant previous year in accordance with the provisions of the Act governing such company. For computing the book profit, the net profit shall be increased by the following amounts if debited to the profit and loss account: (a) income-tax paid or payable, and the provision therefor; or [It may be noted that income-tax includes: (1) dividend distribution tax / tax on distributed income; (2) interest; (3) surcharge; (4) education cess; and (5) secondary and higher education cess] (b) amount carried to any reserves; or (c) amounts set aside to provision for meeting liabilities other than ascertained liabilities; or (d) amount of provision for losses of subsidiary companies; or (e) amount of dividends paid or proposed; or (f) amount of expenditure relatable to any income to which section 10 [other than section 10(38)] or 11 or 12 apply; or (fa) amount of expenditure relatable to income, being share of the assessee in the income of an AOP or BOI, on which no income-tax is payable in accordance with the provisions of section 86; or (fb) the amount or amounts of expenditure relatable to income accruing or arising to an assessee, being a foreign company, from: (A) the capital gains arising on transactions in securities; or (B) the interest, royalty or fees for technical services chargeable to tax at the rate or rates specified in Chapter XII, if the income-tax payable thereon in accordance with the provisions of the Act, other than the provisions of this Chapter, is at a rate less than 18.5%; or (fc) the amount representing notional loss on transfer of a capital asset, being share or a special purpose vehicle to a business trust in exchange of units allotted by that trust or the amount representing notional loss resulting from any change in carrying amount of said units or the amount of loss on transfer of such units; or (g) the amount of depreciation; or (h) the amount of deferred tax and provision therefor; or (i) the amount set aside as provision for diminution in the value of any asset. Further, the net profit shall also be increased by the amount standing in revaluation reserve relating to the revalued asset on the retirement or disposal of such asset, in case the same is not credited to the profit and loss account. Set-off of credit of tax paid under section 115JB [Section 115JAA]: (1) In any assessment year in relation to the deemed income under section 115JB(1), the excess of tax so paid over and above the tax payable under the other provisions of the Income-tax Act, 1961, will be allowed as tax credit in the subsequent years. (2) The tax credit is, therefore, the difference between the tax paid under section 115JB(1) and the tax payable on the total income computed in accordance with the other provisions of the Act. (3) The tax credit shall be allowed to be set off in a year in which tax becomes payable on the total income computed in accordance with provisions of the Act other than section 115JB. Tax on distributed profit of domestic companies: Chapter XII D [Section 115-O]: Flat rate of 15% + Surcharge (12%) + Cess (3%) [Gross up] 88 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

99 A holding company receiving dividend from its subsidiary company can reduce the same from dividends declared, distributed or paid by it. The NPS Trust is exempted from the applicability of dividend distribution tax in respect of dividend paid to any person for, or on behalf of, the NPS Trust. This tax must be paid to the credit of the Central Government within fourteen days from the date of (a) declaration of any dividend or (b) distribution of any dividend or (c) payment of any dividend, whichever is earliest. Simple for every month or part thereof on the amount of such tax for the period beginning from the date following the date on which the tax was payable and ending with the date on which the tax is actually paid. Section 115QA: (1) Distributed income (i.e., consideration paid by the company for buyback of its own unlisted shares which is in excess of the sum received by the company at the time of issue of such shares) would be subject to additional income (plus and education and secondary and higher education in the hands of the domestic company. (2) 14 days (3) Simple for every month or part Section 115VA: Computation of profits and gains from the business of operating qualifying ships: 1. It is optional for a qualifying company, 2. for the income from the business of operating qualifying ships, 3. to compute its income as per tonnage tax scheme, or 4. to compute its income as per normal provisions of the Act. Section 115VC: Qualifying Company: A company is a qualifying company if: (a) it is an Indian company; (b) the place of effective management (i.e., where decisions take place) of the company is in India; (c) it owns at least one qualifying ship; and (d) the main object of the company is to carry on the business of operating ships Section 115VD: Qualifying Ship: A ship is a qualifying ship if: (a) it is a sea going ship or vessel of 15 net tonnes or more; (b) it is a ship registered in India or having licence to operate in India; and (c) a valid certificate in respect of such ship indicating its net tonnage is in force, but does not include, (i) a sea going ship or vessel if the main purpose for which it is used is the provisions of goods or services of a kind normally provided on land; (ii) fishing vessels; (iii) factory ship (iv) pleasure crafts DIRECT TAX LAWS AND INTERNATIONAL TAXATION 89

100 (v) harbor and river ferries; (vi) offshore installations i.e. rigs oil; (vii) a qualifying ship which is used as a fishing vessel for a period of more than thirty days during a previous year. Sunset provisions inserted regarding exemption from Minimum Alternate Tax (MAT) and Dividend Distribution Tax (DDT) in case of Special Economic Zones [Sections 115JB(6), 115-O(6) read with section 10AA & 80-IAB]. Under the existing provisions of section 10AA of the Income-tax Act, a deduction of 100% is allowed in respect of profits and gains derived by a unit located in a Special Economic Zone (SEZ) from the export of articles or things or services for the first five consecutive Assessment Years; of 50% for further five Assessment Years; and thereafter, of 50% of the ploughed back export profit for the next five years. Further, under section 80-IAB of the Income-tax Act, a deduction of 100% is allowed in respect of profits and gains derived by an undertaking from the business of development of an SEZ notified on or after from the total income for any ten consecutive Assessment Years out of fifteen years beginning from the year in which the SEZ is notified by the Central Government. Under the existing provisions of section 115JB(6), an exemption is allowed from payment of Minimum Alternate Tax (MAT) on book profit in respect of the income accrued or arising on or after from any business carried on, or services rendered, by an entrepreneur or a Developer, in a Unit or Special Economic Zone (SEZ), as the case may be. Further, under the existing provisions of section 115-O(6), an exemption is allowed from payment of tax on distributed profits [Dividend Distribution Tax (DDT)] in respect of the total income of an undertaking or enterprise engaged in developing or developing and operating or developing, operating and maintaining a Special Economic Zone for any Assessment Year on any amount declared, distributed or paid by such Developer or enterprise, by way of dividends (whether interim or otherwise) on or after out of its current income. Such distributed income is also exempt from tax under section 10(34) of the Act. The above provisions were inserted in the Income-tax Act by the Special Economic Zones Act, 2005 (SEZ Act) with effect from 10th February, Currently, there is no sunset date provided for exemption from MAT in the case of a developer of an SEZ or a unit located in an SEZ. Similarly, there is no sunset date for exemption from DDT in the case of a developer of an SEZ. The Finance Act, 2011 has sunset the availability of exemption from Minimum Alternate Tax in the case of SEZ Developers and units in SEZs in the Income-tax Act as well as the SEZ Act w.e.f. A.Y Hence, units of SEZ and developers of SEZ shall be liable to MAT w.e.f. A.Y It has further discontinued the availability of exemption from dividend distribution tax in the case of SEZ Developers under the Income-tax Act as well as the SEZ Act for dividends declared, distributed or paid on or after which shall be % [ % + 12% SC + 3% (EC + SHEC)]. Consequential amendments have also be made by omitting Explanation to section 10(34) of the Income-tax Act w.e.f Illustration 1. From the following information, determine the tax liability of Z Ltd., domestic company, for the Assessment Year and Sl. No. Assessment year Book-profits (`) Total income (`) ,80,000 1,30, ,00,000 2,00,000 Solution : Surcharge is not considered assuming, Net Income less than `1 crore Assessment Year Book profit Total income Tax on Book-Profit Tax on Total 30.9% rounded off u/s 288B (`) Tax Credit = Tax on Book Profits ( ) Tax on Total Income (`) Tax Payable after tax credit set off, if any (`) Tax credit balance 90 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

101 ,80, % on 2,80,000 = 53, ,00, % on 3,00,000 = 57,165 Note 30.9% on 1,30,000 = 30.9% on 2,00,000 = 61,800 13,184 53,354 13, ,165 [restricted to `57,165] 8,549 [13,184-4,635] 1. Tax Payable is rounded off to the nearest multiple of ` 10 (Sec. 288B) 2. As per Section 115JD, the tax credit shall be allowed to be set-off to the extent of the excess of regular incometax over the alternate minimum tax and the balance of the tax credit, if any, shall be carried forward. Illustration 2. RQ Ltd. has huge loss and depreciation to be carried forward. ST Ltd. is making profits.what should company RQ Ltd. do wipe off its losses within a reasonable time by taking the help of ST Ltd.? Solution: Amalgamation should not have been for mere tax saving like avoiding capital gains tax or merely for avoiding the benefit of set-off of losses and depreciation of a company, which is going defunct. It should satisfy the conditions u/s 72A, if profit making company is taking over a loss making company. Reverse merger, if genuine, will avoid the application of section 72A. Illustration 3. Company A wants to amalgamate with B. The agreement is entered into on indicating the appointed day to be The Court however passes the order approving the merger on What is the date of amalgamation? Solution: The amalgamation will take effect from , which is the appointed day, unless such date is varied by the High Court [Marshall Sons and Co. (India) Ltd. vs. ITO (1997) 223 ITR 809 (SC)]. Illustration 4. Amalgamation of companies X and Y has been approved by the BIFR. CBDT refuses to allow carry forward of losses u/s. 72A. Is the CBDT justified? Solution: No. According to the Supreme Court in Indian Shaving Products Ltd. vs. BIFR (1996) 218 ITR 140 (SC), once the approval has come from BIFR, Board cannot refuse carry forward of losses. Illustration 5. A certain family has four companies with different members controlling the companies. There are differences. How could they affect a partition of their interest in the companies? Solution: They can shuffle their interest in the companies to ensure independence for each member/ group of members. But capital gains tax cannot be avoided. Demerger is an alternative. Demergers are exempt. It allows set-off of carried forward of past depreciation and unabsorbed loss subject to conditions prescribed under section 72A. Illustration 6. Does the liability of shareholder get altered in amalgamation, demerger or slump sale? Solution: DIRECT TAX LAWS AND INTERNATIONAL TAXATION 91

102 No. Amalgamation, demerger or slump sale by a company constitute a taxable event for company and not the shareholder. Illustration 7. Where there is an acquisition by way of an industrial undertaking or business as a going concern by way of slump sale, can the successor avail the losses and depreciation of the transferred industrial undertaking or business? Solution: The law does not provide for benefit of set-off of losses and depreciation, where a business is transferred by way of slump sale. 2.8 ASSESSMENT OF CO-OPERATIVE SOCIETIES Cooperative society is a society registered under the Cooperative Societies Act, 1912, or under any other law for the time being in force in any State for registration of co-operative societies. The deduction provided to various co-operative societies under section 8OP are as under: (A) Where 100% deduction is allowed In the case of the following co-operative societies, full deduction is allowable in respect of following incomes: (I) Profits attributable to certain specified activities [Section 80P(2)(a)]: 100% of the profits, included in Gross Total Income, attributable to any one or more of the following activities are deductible: (i) carrying on the business of banking or providing credit facilities to its members; or (1) W.e.f. assessment year , the exemption shall not be available to co-operative banks other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank. However, deduction shall still be available to a cooperative society which is engaged in the business of providing credit facilities to its members. (2) Regional Rural Banks are not eligible to take deduction under section 8OP. [Circular No. 6/2010, dated ]. (ii) a cottage industry; or (iii) the marketing of the agricultural produce grown by its members; or (iv) the purchase of agricultural implements, seeds, livestock or other articles intended for agriculture for the purpose of supplying them to its members; or (v) the processing, without the aid of power, of the agricultural produce of its members; or (vi) the collective disposal of the labour of its members; or (vii) fishing or allied activities, that is to say, the catching, curing, processing, preserving, storing or marketing of fish or the purchase of materials and equipment in connection therewith for the purpose of supplying them to its members. However, in case of co-operative societies falling under clauses (vi) and (vii) above, the deduction, is available subject to the condition that the rules and bye-laws of the society restrict the voting rights to the following classes of its members, namely: (1) the individuals who contribute their labour or, as the case may be, carry on the fishing or allied activities; (2) the co-operative credit societies which provide financial assistance to the society; (3) the State Government. (II) Profits of certain primary co-operative societies [Section 80P(2)(b)]: 100% of the profits, included in Gross Total Income are deductible in the case of a co-operative society, being a primary society engaged in supplying milk, oilseeds, fruits or vegetables raised or grown by its members to 92 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

103 (i) a federal co-operative society, being a society engaged in the business of supplying milk, oilseeds, fruits, or vegetables, as the case may be; or (ii) the Government or a local authority; or (iii) a Government company as defined in section 2(45) of the Companies Act, 2013 or a statutory corporation (being a company or corporation engaged in supplying milk, oilseeds, fruits or vegetables, as the case may be, to the public). Where district societies like the assessee collected milk from primary societies at village or taluk level and thereafter processed the milk and supplied it to the affiliated federal societies, it was held that the assessee was one step above the primary co-operative societies. The assessee was a federal cooperative society not only collecting and supplying milk but also processing the milk. The processing activities carried on by the assessee did not match the expression being a primary society engaged in supplying the milk used under section 80P(2)(b) of the Act. Therefore, the assessee was not entitled to deduction under section 8OP of the Act [Asstt. CIT vs. Salem District Co-op. Milk Producers Union Ltd (2009) 313 ITR (AT) 43 (Chennai)]. (III) Income from investment with other co-operative societies [Section 80P(2)(d)]: 100% of the profits, included in Gross Total Income are deductible in respect of any income by way of interest or dividends derived by the cooperative society from its investments with any other co-operative society. (IV) Income from letting of godowns or warehouse [Section 80P(2)(e)]: 100% of the profits, included in Gross Total Income are deductible in respect of any income derived by the co-operative society from the letting of godowns or warehouses for storage, processing or facilitating the marketing of commodities. (B) Where deduction is allowed to a limited extent In the following cases, the co-operative societies are entitled to deduction to a limited extent: (1) Co-operative society engaged in other activities [Section 80P(2)(c)]: In the case of a co-operative society engaged in activities, other than those specified in I and II of (A) above, either independently of, or in addition to, all or any of the activities so specified, the profits and gains attributable to such other activities up to the limits indicated below are deductible (i) where such co-operative society is a consumers cooperative society `1,00,000; (ii) in any other case `50,000. (a) Consumer co-operative means a society for the benefit of consumers. (b) Where the assessee co-operative society, supplied coal and diesel to its members for use in production of bricks and tiles, the society was not a consumer cooperative society as the purchases by the members was not for their own consumption [Tamil Nadu Brick and Tiles Manufacturers Industrial Service Co-operative Society Ltd vs. CIT (2004) 265 ITR 332 (Mad)]. (2) Entire income by way of interest on securities or income from house property if gross total income of a cooperative society (other than specified co-operative society) does not exceed `20,000 [Section 80P(2)(f)]: 100% of the income from interest on securities or income from house property shall be allowed as deduction in case of a co-operative society not being (i) a housing society or (ii) an urban consumer society, or (iii) a society carrying on transport business, or (iv) a society engaged in the performance of any manufacturing operation with the aid of power provided its gross total income does not exceed `20,000. Urban Consumer Co-operative Society means a society for the benefit of the consumers within the limits of municipal corporation, municipality, municipal committee, notified area committee, town area or cantonment. DIRECT TAX LAWS AND INTERNATIONAL TAXATION 93

104 Where an assessee is also entitled to deduction u/s 80-IA, deduction u/s 8OP shall be allowed with reference to such profits and gains as reduced by the deduction allowed under those Sections [Section 80P(3)]. Case Laws: (1) Each clause or sub-clause of section 80P(2) is to be treated as a separate and distinct head of exemption without being influenced by conditions) of any other clause or sub-clause. As section 8OP is introduced with a view to encouraging and promoting the growth of the cooperative sector in the economic life of the country and in pursuance of the declared policy of the Government, the correct way of reading the different heads of exemption enumerated in that section would be to treat each as a separate and distinct head of exemption. Whenever a question arises as to whether any particular category of an income of a cooperative society is exempt from tax what has to be seen is whether the income fell within any of the several heads of exemption. If it fell within any one head of exemption, it would be free from tax notwithstanding that the conditions of another head of exemption are not satisfied and such income is not free from tax under that head of exemption [Kerala State Co-operative Marketing Federation Ltd vs. 077(1998) 231 ITR 814, 819 (SC)]. (2) 100% deduction can be availed only where the income is from the activities specified. Activity which is not so specified shall not enjoy the full exemption. Thus, income from a printing press business run by a co- operative society was held not entitled to full exemption [ACIT vs. U.P. Cooperative Cane Union (1978) 114 ITR 70 (All)]. Steps in computing tax liability of Cooperative Societies The steps are- Step- I : Compute gross total income, ignoring income exempt from tax u/s. 10 to 13A Step-II : Deduct permissible deductions u/ss. 80G, 80GGA, 80I, 80I-A 80IB, 80JJA, etc. and 80P as applicable. Step-III : Apply the tax rates for the relevant Assessment Year to arrive at the tax incidence. However, the tax payable by every cooperative society shall be increased by 12% if total income exceeds `1 crore, education and secondary and higher education 1%. The total amount payable as income tax and surcharge on total income exceeding `1 crore shall not exceed the total amount payable as income tax on a total income of `1 crore by more than the amount of income that exceeds `1 crore. However, from the Assessment Year , tax payable cannot be less than 18.5% of Adjusted Total Income in some specified cases. Illustration 1 Pune Co-operative Society derived the following incomes during the previous year. (1) Marketing of agricultural produce of its members - ` 10,000 (2) Interest from members on delayed payment of the price of goods purchased - `1,000 (3) Processing (without aid of power) of agricultural produce of its members ` 8,000 (4) Supplying milk to the Government (raised by its members) ` 15,000 (5) Agency business `25,000 (6) Dividends from other Co-operative Societies - `15,000 (7) Income from letting of godowns - `20,000 (8) Income from House Property - `30,000 Compute the total income of the Pune Co-operative Society. Solution: Computation of total income of Pune Co-operative Society 94 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

105 (1) Income from House Property 30,000 Letting of godowns 20,000 50,000 (2) Income from Business: Marketing of agricultural product 10,000 Processing of goods 8,000 Supplying milk 15,000 Agency business 25,000 58,000 (3) Income from other sources: Interest from members 1,000 Dividends 15,000 16,000 Gross Income 1,24,000 Deductions under Section 80P: (1) Letting of godowns 20,000 (2) Marketing of agricultural produce 10,000 (3) Processing of goods 8,000 (4) Supplying milk 15,000 (5) Agency business 25,000 (6) Dividends 15,000 93,000 Total income 31,000 Notes: (1) Interest from members `1,000 is not deductible as it is not from the credit facilities provided to the member and for this purpose society cannot be said to be a credit society. (2) The gross total income of the society exceeds `20,000 hence deduction regarding income from house property is not available. Illustration 2. A co-operative society, engaged in the business of banking, seeks your opinion by the matter of eligibility of deduction under Sec. 8OP on the following items of income earned by it during the year ended (i) Interest on investment in Government securities made out of statutory reserves (ii) Hire charges of safe deposit lockers. Solution : From the Assessment Year and onward, no deduction is allowed under Sec. 80P to any cooperative bank. However, a primary agricultural credit society or primary co-operative agricultural and rural development bank is outside the purview of this provision [Sec. 80P(4)]. Illustration 3. A co-operative society was engaged in the business of banking or providing credit facilities to its members. It sold goods on credit to its members. Is the co-operative society entitled to special deduction under Sec. 80P(2)(a)(i) in respect of income derived from such an activity? Solution : Society is not entitled to the special deduction under Sec. 80P(2)(a)(i). DIRECT TAX LAWS AND INTERNATIONAL TAXATION 95 ` `

106 2.9 ASSESSMENT OF TRUSTS Trusts can be broadly classified into two categories, viz (i) Public, (ii) Private. However, there may be trusts which are a blend of both and are known as Public-cum-Private Trusts. In case of private trust, the beneficiaries are individuals or families. Private trusts are further broadly classified into: (i) Private specific trust, also referred to as Private Discretionary Trust with beneficiaries and shares determinate in respect of both. (ii) Private Discretionary Trust where the beneficiaries or their share or either is indeterminate Public trusts may be created inter vivos or by will. In the case of Hanmantram Ramnath vs. CIT (1946) 14 ITR 716 (Bom), it was held that although the Indian Trusts Act does not specifically apply to charitable trusts, there are three certainties required to create a charitable trust. They are: (i) a declaration of trust which is binding on settlor, (ii) setting apart definite property and the settlor depriving himself of the ownership thereof, and (iii) a statement of the objects for which the property is thereafter to be held, i.e. the beneficiaries. It is essential that the transferor of the property viz the settlor or the author of the trust must be competent to contract. Similarly, the trustees should also be persons who are competent to contract. It is also very essential that the trustees should signify their assent for acting as trustees to make the trust a valid one. When once a valid trust is created and the property is transferred to the trust, it cannot be revoked, if the trust deed contains any provision for revocation of the trust, provisions of sections 60 to 63 of the Income-tax Act will come into play and the income of the trust will be taxed in the hands of the settler as his personal income. The following Acts has been decided as acts for charitable purpose by the various courts and authorities: Promotion of sports: The board has clarified that promotion of sports and games can be considered to be a charitable purpose within the meaning of section 2(15) of the Income-tax Act, Therefore, an association or institution engaged in promotion of sports and games can claim exemption under section 11 of the Incometax Act, 1961, even if it is not approved under section 10(23) of the Act relating to exemption from tax of sports associations and institutions having their objects as the promotion, control, regulation and encouragement of specified sports and games [Circular No. 395, dated 24th September, 1984]. Relief of poor: The relief of the poor must not be relief to a body of private individuals but must have a public character [Mercantile Bank of India (Agency) Ltd (1942) 10 ITR 512 (Cal)]. Therefore trusts for the relief of poverty of poor relatives of the settlor were not for a charitable purpose since no element of public benefit was involved [CIT vs. Jamal Mohd. Sahib (1941) 9 ITR 375 (Mad)]. Activity of giving micro finance and earning Interest is charitable: Where an assessee is registered under section 8 of Companies Act, 2013, it in itself shows that the company intends to apply its profit in promoting charity. And where the object of the assessee states that it shall promote micro finance services to poor person and help them arise out of poverty, mere surplus from such micro finance service cannot by itself be a ground to say that no charitable purpose exists. Followed Thanthi Trust (2001) 247 ITR 785 (SC) and Agricultural Produce and Market Committee (2007) 291 ITR 419 (Bom) [Dish India Micro Credit vs. CIT (ITAT-Del). Education: What education connotes in section 2(15) is the process of training and developing the knowledge, skill, mind and character of students by normal schooling [Sole Trustee, Loka Shikshana Trust vs. CIT (1975) 101 ITR 234, 241 (SC); Addl. CIT vs. Victoria Technical Institute (1979) 120 ITR 358, (Mad)]. Education, in order to be charitable, must relate to the public and a trust created for the education of the members of a family or the descendants of a certain named individual are not for charitable purposes [D.V. Arur vs. CIT (1945) 13 ITR 465 (Bom)]. Though newspapers have an educative value, advancement of education results only indirectly. Advancement of education resulting indirectly does not come under the head of education [CIT vs. Sole Trustee, Loka Shikshana Trust (1970) 77 ITR 61, 75 (Mys)]. 96 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

107 Where the objects of society make it abundantly clear that the society exists for charitable purpose and the activities of the society includes letting out of the properties to the educational institution and there was a concurrent finding of the fact on the part of the Commissioner (Appeal) and the ITAT that the rental income earned by the society is being utilised again for the purpose of imparting education by maintaining the buildings and constructing new building for the same purpose, it was held that in this case charitable purpose is not lost and it cannot be said that the assessee is not entitled to exemption claimed by it under section 11 of the Act [CIT vs. Jyoti Prabha Society (2009) 310 ITR 162 (Uttarakhand)]. A Government company meant exclusively for publication and selling text books to the students as per the norms prescribed and approved by the Education Department, could well be treated as an educational institution even though it is not imparting formal education [Assam State Text Book Production and Publication Corporation Ltd. vs. CIT (2009) 319 ITR 317 (SC)]. Any other object of general public utility: General means pertaining to a whole class; public means the body of people at large including any class of the public; and utility means usefulness. Therefore, the advancement of any object of benefit to the public or a section of the public as distinguished from an individual or a group of individuals would be of charitable purpose [CIT vs. Ahmedabad Rana Caste Association (1973) 88 ITR 354 (Guj)]. Treatment of voluntary contributions made to trust with a specific direction that it shall form part of corpus of the trust Any voluntary contribution received by the trust with a specific direction that it shall form part of the corpus of the trust is fully exempt under section 11(1)(d) and the condition that at least 85% of the income should be applied during the previous year in which it is earned is not applicable in this case. Treatment of corpus donations: Corpus donations cannot be treated as income in view of the exception under section 12, so that such corpus donations need not be applied for the objects as required for other donations. It is sufficient, if the income therefrom is applied. It is not unusual for trusts to receive such donations for specified purposes not available for application at the discretion of the trustees according to the objects of the trust, so that the main trust need not lose its right to exemption either for non-application or even for the reason that the specific object of such tied-up donation does not fall within the ambit of the objects of the trust [CIT vs. Sthanakvasi Vardhman VanikJain Sangh (2003) 260 ITR 366 (Guj)]. Taxation of Trust A. Public Trust u/s. 164(2) (i) If income is not exempt u/s 11 or 12, income of Trust is taxable at the rates applicable to an Association of Person. (ii) If the exemption is forfeited due to contravention of Sec. 13(1)(c) or 13(1)(d), such income of trust is taxable at maximum marginal rate. B. Private Trust (shares of beneficiaries are determinate or known) (i) If income does not include business Profits, the trustee is assessable at the rates applicable to each beneficiary. [Sec. 161(1)] (ii) If income includes profits from business, the whole income is taxable at maximum marginal rate. [Sec. 161(1A)] C. Private Trust (share of beneficiaries in determinate or unknown) [Sec. 164(1)] (i) If income does not include business profits, income is taxable at the rates applicable to an AOP if none of the beneficiaries has taxable income or is a beneficiary in any other trust. the trust is non-testamentary trust created before exclusively for the relative dependents of the settle; or it is the only trust declared by a WILL exclusively for the benefit of any dependent relative. DIRECT TAX LAWS AND INTERNATIONAL TAXATION 97

108 In any other case, income is taxable of maximum marginal rate. (ii) If income includes business profits, the whole income is taxable at maximum marginal rate. D. Oral Trust [Sec. 160(1)(v), Sec. 164A] : Oral Trust means a trust which is not declared by a duly executed instrument in writing including any wakf deed which is valid under the Mussalman wakf validating Act, 1913 and which is not deemed to be trust by virtue of Explanation 1 to Sec (i) Income of Oral trust is taxable at maximum marginal rate. (ii) If Oral trust is declared to be a trust by furnishing a statement in writing containing purposes, particulars and details of trust, beneficiaries and property to the assessing officer within 3 months from the date of declaration of the trust, indicating the share of beneficiaries, the income of the trust is assessable in the hands of trustee at the rates applicable to beneficiaries. E. Income from property held under Trust partly for religious purposes and partly for other purposes [Sec. 164(3)] Where property is held under trust partly for religious purposes and partly for other purposes and the individual share of the beneficiaries in the income applicable to purposes other than charitable purposes, is not known, the Income-tax liability will be aggregated as follows : (i) the tax which would be chargeable on the part of the relevant income which is applicable to charitable or religious purposes (as reduced by the income which is exempt u/s 11 as if such part were the total income of an Association of Persons); and (ii) the tax on that part of income attributable to purposes other than charitable or religious and in respect of which shares of beneficiaries are indeterminate or unknown, at the maximum marginal rate. F. Securitisation Trust [Sections 115TA to 115TC]: Securitisation Trust means a trust set up to undertake securitisation activities. (i) If income of the trust consists of business income or the participants have taxable income, then trust is subject to maximum marginal rate of tax. (ii) The income from the activity of securitisation of such trust will be exempt from tax u/s 10(23DA) with effect from the Assessment Year (iii) Such trust will be liable to pay additional income tax on income distributed to its 25% if the income is distributed to investors being Individual or HUF or 30% for other case. Such amount of tax will be subject to increase by Education 2% and Secondary and Higher Secondary Education (iv) The additional income tax shall not be payable if the income so distributed by such trust is received by a person who is exempt from tax under the Act. (v) Amount of tax on distributed income shall be remitted within 14 days from the date of payment or distribution of income. Where any part of income is not exempt u/s 11 or 12 by virtue of sec. 13(1)(c) or (d), tax is charged on the relevant income at the maximum marginal rate. The amount of tax will be increased by 12%, Education 2% and Secondary and Higher Education 1%. However, the total amount payable as income tax and surcharge on total income exceeding `1 crore shall not exceed the total amount payable as income tax on a total income of `1 crore, by more than the amount of income that exceeds `1 crore. Case Laws : (i) For purpose of section 164(1) what is relevant is that income is receivable on behalf of beneficiaries and is not necessary that income is received by beneficiaries - Gosar Family Trust vs. CIT 81 Taxman 146/215 ITR 55. (ii) Provision merely sets out how tax is to be charged and does not create a charge on the income - CIT vs. Kamalini Khatau 209 ITR DIRECT TAX LAWS AND INTERNATIONAL TAXATION

109 Illustration 1. Shri Dubbawala Charitable Trust (Regd.) submits the particulars of its income / outgoing for the Previous Year as below : Particulars (i) Income from property held under trust for charitable purposes: (` 2,20,000 out of ` 10,00,000 10,00,000 is received in PY ) (ii) Voluntary contributions (out of which ` 50,000 will form part of the corpus) 2,00,000 The trust spends `1,77,500 during the Previous Year for charitable purposes. In respect of `2,20,000, it has exercised its option to spend it within the permissible time-limit in the year of receipt or in the year, immediately following the year of receipt. The trust spends `2,00,000 during the Previous Year and `1,00,000 during the Previous Year Compute and discuss the chargeabiliry of the income of the trust. Solution : (a) Computation of taxable income and tax liability of the charitable trust for the PY / AY Particulars (`) (i) Income from property held under trust for charitable purposes 10,00,000 (ii) Voluntary contributions (` 2,00,000 - ` 50,000) 1,50,000 Less: 15% set apart for future application 11,50,000 Balance 1,72,500 Less: Amount spent during the Previous Year for charitable purposes 9,77,500 Balance 1,77,500 Less: Income not received during the Previous Year ,00,000 Taxable Income 2,20,000 Tax payable: Rate of tax 5,80,000 2,50,000 Nil 2,50,000 10% 25,000 80,000 20% 16,000 Add: Education 2% 41,000 Add: 1% 820 Tax Payable 410 (b) Previous Year /AY Income received during the Previous Year ,20,000 Amount spent for charitable purposes during ,00,000 Taxable Income 1,20,000 Illustration 2. Shri Mungeri Ram Temple Trust (Regd.) derived `6,00,000 income from the property held under charitable trust during the Previous Year About 40% of the income has been received by the end of the financial year. The trust could spend `60,000 for charitable purposes during the year and 40% receipts, received by the year end in , are being planned to be applied for charitable purposes during the Previous Year Compute its income for the said two years if the amount planned to be spent during Previous Year for charitable purposes is `1,00,000 DIRECT TAX LAWS AND INTERNATIONAL TAXATION 99 (`)

110 Particulars Income from property held under Trust 6,00,000 Less: 15% set apart for future application for charitable purposes 90,000 Balance 5,10,000 Less : Income applied for charitable purposes during the year ,000 Balance 4,50,000 Less: Income realised by the close of the Previous Year 40% of ` 6,00,000 2,40,000 Taxable Income 2,10,000 (b) Previous Year /AY Amount set apart in to be applied for charitable purposes in ,40,000 Less: Amount applied for charitable purposes 1,00,000 Taxable Income 1,40,000 Illustration 3. Where the private trust is charged at the maximum marginal rate u/s 164(1), whether basic exemption is to be allowed? Solution: No. The tax should be levied at the maximum marginal rate as laid down in the Act itself, without allowing the basic exemption as laid down in the Finance Act. [Surendranath Gangopadhyay Trust vs. CIT (1983) 142 ITR 149 (Cal.)]. Illustration 4. Whether, while computing the income of a private trust, deduction under section 80C is allowable? Solution: Yes. Section 164(1) comes into play only after the income has been computed in accordance with the provisions of the Act. Where the trustees of a discretionary trust are assessed on behalf of a beneficiary, who is an individual, deduction under section 80C or rebate under section 88 is allowable [CIT vs. Shri Krishna Bandar Trust (1993) 201 ITR 989 (Cal.) and Amy F. Cama vs. CIT (1999) 237 ITR 82 (Bom.)] It is available against beneficiary s share of income from the trust, even where assessment is made in the hands of the trustee [CIT vs. Saurin S. Zaveri (2002) 257 ITR 160 (Mad.) and CIT vs. Venu Suresh Sanjay Trust (1996) 221 ITR 649 (Mad.)]. The Supreme Court refused special leave to revenue on the question of deduction under section 80C on income assessable in the hands of the trust [CIT vs. Pradeep J. Kinariwala (1999) 237 ITR (St.) 129]. Illustration 5. Can a trust be created by the legal guardian of the minor in respect of minor s property on behalf of the minor? Solution: In T.A.V. Trust vs. CIT (1999) 236 ITR 788 (SC), it was found that as section 7 of the Indian Trusts Act, 1882 provides that a trust can be created only by persons competent to contract and that in the case of a minor, it can be so done only with the permission of the civil court of original jurisdiction, otherwise, such trust is invalid. (`) 2.10 ASSESSMENT OF MUTUAL ASSOCIATION To constitute a mutual association, a number of persons associate together to subscribe money for a fund for the purpose of its being spent upon a particular object, and the balance, if any, being returned to the subscribers and proportionately distributed among them. This balance is that part of the fund which is not absorbed by the particular object of the subscriptions. Those transactions are mutual dealings and the unrequired balance is 100 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

111 the surplus. This surplus is not assessable to income-tax since it arises out of the mutual dealings. [General Family Pension Fund vs. CIT (1946) 14 ITR 488 (Cal)]. The basis for exemption of the income of the mutual association are as follows: (1) common identity of contributors and participators, (2) the treatment of the assessee, though incorporated, as a mere entity for the convenience of the members, and (3) the impossibility of the contributors deriving profit from the contribution made by themselves to a fund which could only be expended or returned to themselves. The treatment of the assessee, though incorporated, as a mere entity for the convenience of the members. If there is a common identity of contributors and participators, the particular form which the association takes is immaterial. Incorporation as a company or as a registered society is a convenient medium for enabling the members to conduct a mutual concern. The property of the incorporated company or registered society, for all practical purposes, in the case of a mutual enterprise, is considered as the property of the members. The incorporation of any company to carry on the activities of a club does not result in the deprivation of the admissibility of the claim for exemption based on the concept of mutuality. [CIT vs. Madras Race Club (1976) 105 ITR 433 (Mad)]. Even a company assessee can claim exemption on the basis of mutuality principle where its memorandum and articles of association provided that the funds of the company should be utilised solely for the promotion of its objects and that no portion of the income or property shall be paid or transferred directly or indirectly, by way of dividends, bonus to any member or former member. [CIT vs. Escorts Dealers Development Association Ltd. (2002) 253 ITR 305 (P&H)]. Example of Mutual Association: Members' club Members' club are, without doubt, cent per cent mutual associations. They are co-operative bodies whereby the members raise funds by way of entrance fees and periodical subscriptions in order to provide themselves with social, sporting or similar other amenities. One among the popular activities of such a club is the providing of refreshments to the members for a charge to cover the cost of preparation, overheads and service. If such refreshments be served to non-members, it would only be on the basis of such non-members being guests of the member who pays for himself and his guest. Another popular activity of a club is the providing of residential rooms to nonresident members and mofussil members and supplying them with board for a charge to cover the rent of the rooms and the cost of the food and overhead. Interest income of a sports club derived from deposits with bank is not exempt on the ground of mutuality. [Rajpath Club Ltd. Vs. CIT (1995) 211 ITR 379 Guj]. If assessee-company is running a recreation club for its members, the income earned from the members is exempt on the principle of mutuality. Income of the club from FDR's in banks and Government securities, dividend income and profit on sale of investment is also covered by the doctrine of mutuality and is not taxable. [CIT vs. Delhi Gymkhana Club Ltd. (2011) 53 DTR 330 (Del)]. Interest income on investments with banks is not exempt on the principle of mutuality even though the concerned banks are members of the club. [CIT vs. Wellington Gymkhana Club (2010) 46 DTR 22 (Mad)]. Interest income earned on bank deposits made by a club was not income arising out of mutual activities/ arrangement among members of club and hence taxable. [Amur Singh Club vs. Union of India (2009) 184 Taxman 481 (J&K)]. However, in CIT vs. Saraswati Kunj Co-operative House Building Society (2006) 287 ITR 22 (Del) it was held that the DIRECT TAX LAWS AND INTERNATIONAL TAXATION 101

112 interest on money kept in saving bank account would be a capital receipt not liable to tax. The assessee, a club, running on mutuality basis, had collected amounts from non-members for use of the assessee's premises as floor charges for trading in shares and stocks, it was held that the principle of mutuality could have no application to receipts of such charges. [Investors Club Trichur vs. CIT (2009) 318 ITR 427 (Ker)] Steps to be remembers while computation: Step 1 Take expenditure incurred by such association. Expenditure does not include capital expenditure or any expenditure deductible in computing the income under any other provisions of the Act. Step 2 Deduct receipt from members. Such receipts will not include any remuneration for rendering any specific services to the members. Step 3 Step 1 minus Step 2 is the deficiency which is allowed to be set off against taxable income of such association DIFFERENT ASPECTS OF DIRECT TAX PLANNING The provisions of the Income-Tax are contained in the Income-Tax Act, 1961 (the Act), which extends to whole of India and is operative from the 1st day of April, 1962(the Rules). The Act provides for determination of taxable income, Tax liability, procedures for assessment, appeals, penalties, interest levies, the tax payment schedules and its determination, refunds and prosecutions. Depending upon Government polices certain income is exempted from tax, for example SEZ (Special Economic Zone) units income, Agriculture income, etc. and deduction are also provided on fulfillment of prescribed criteria. Provisions relating to such exemptions and deduction are also contained in the Act. Corporate form of business is much in vogue. Therefore, certain taxes specific to companies like Tax on Book profit (115JB), tax on Dividend Distributed (115O), are levied. At times in Cross border transactions income earned get exposed to tax in India as well as in some other countries. Provisions for upholding relief from double taxation are also made in the Income Tax Act. The Act also lays down the powers duties of various income-tax authorities. Being revenue legislation, the act is amended once a year through union budgets and the finance bill is normally presented to the Parliament for approval around February. The Act has empowered the Central Board of Direct Taxes (CBDT) to frame the rules and these rules are implemented after necessary Gazette notifications. The CBDT also issues circulars and clarifications from time to time for implementation by the income-tax authorities by virtue of section 119, which gives such rule making powers to the CBDT. It is impracticable for the Act to provide exhaustively for everything relating to limits, conditions, procedures, forms and various other aspects. Therefore this power has been delegated to CBDT and thus periodical changes and modification by an executive authority is facilitated. The power to frame rules is vested with the Board u/s 295 of the Act and the word prescribed used in section 2(33) means what is prescribed by rules made under the Act. The Income-Tax Act gives definitions of the various terms expressions used in the Act. Unless the context otherwise requires, these definition should be applied. The words means includes and means and includes are used in these definitions and the significance of these terms needs to be understood. When a definition uses the word means the definition is self-explanatory, restrictive and in a sense exhaustive. It implies that the term or expression so defined means only as to what is defines as and nothing else. For example, the terms agricultural income assessment year capital asset, are exhaustively defined. When the legislature wants to widen the scope of a term or expression and where an exhaustive definition cannot be provided, it uses the word includes in the definition. Generally an inclusive definition provides an illustrative meaning and the definition could include what is not specifically mentioned in the definition so long as the stipulated criteria are satisfied. To illustrate refer to the definitions of income, person, transfer in the Act. When the legislature intends to define a term or expression to mean something and also intends to specify certain items to be included, other the words means as well as includes are used. Such definition is not only exhaustive but also illustrative in specifying what is intended to be included. Sometimes specific items are included in an exhaustive definition in order to avoid ambiguity and to provide clarity. The word tax planning connotes the exercise carried out by the taxpayer to meet his tax obligations in proper, 102 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

113 systematic and orderly manner availing all permissible exemptions, deductions and reliefs available under the statute as may be applicable to his case. To illustrate, assessee software company setting up assessee software technology park in assessee notified area to avail benefits of section 10A of the Act is assessee legally allowable course. Planning does not necessarily mean reduction in tax liability but is also aimed at avoiding controversies and consequential litigations. Every taxpayer is expected to voluntarily make disclosures of his incomes and tax liabilities through legal compliance. When a tax payer deliberately or consciously do not furnish material particulars or furnishes inaccurate or false particulars or defrauds the State by violating any of the legal provisions, it shall be termed as tax evasion. It is also illegal, but also unethical and immoral. Inflation of expenditure, suppuration of income, recording of fictitious transactions, claiming deductions wrongly are few examples. Tax Planning is an exercise undertaken to minimize tax liability through the best use of all available allowances, deductions, exclusions, exemptions, etc., to reduce income and/or capital gains. Tax planning can be defined as an arrangement of one s financial and business affairs by taking legitimately in full benefit of all deductions, exemptions, allowances and rebates so that tax liability reduces to minimum. In other words, all arrangements by which the tax is saved by ways and means which comply with the legal obligations and requirements and are not colourable devices or tactics to meet the letters of law but not the spirit behind these, would constitute tax planning. The Hon ble Supreme Court in McDowell & Co. v. CTO (1985) 154 ITR 148 has observed that tax planning may be legitimate provided it is within the framework of the law. Colourable devices cannot be part of tax planning and it is wrong to encourage or entertain the belief that it is honourable to avoid payment of tax by resorting to dubious methods. Tax planning should not be done with intent to defraud the revenue; though all transactions entered into by an assessee could be legally correct, yet on the whole these transactions may be devised to defraud the revenue. All such devices where statute is followed in strict words but actually spirit behind the statute is marred would be termed as colourable devices and they do not form part of tax planning. All transactions in respect of tax planning must to be in accordance with the true spirit of statute and should be correct in form and substance. The form and substance of a transaction is real test of any tax-planning device. The form of transaction refers to transaction, as it appears superficially and the real intention behind such transaction may remain concealed. Substance of a transaction refers to lifting the veil of legal documents and ascertaining the true intention of parties behind the transaction. It means arranging the financial activities in such a way that maximum tax benefits are enjoyed by making use of all beneficial provisions in the tax laws which entitle the assessee to get certain rebates and reliefs. This is permitted and not frowned upon by law. Thus, tax planning would imply compliance with the taxation provisions in such a manner that full advantage is taken of all tax exemptions, deductions, concessions, rebates and reliefs permissible under the Income Tax Act so that the incidence of tax is the least. Tax planning can neither be equated to tax evasion nor to tax avoidance with reference to a person, it is the scientific planning of the person s operations in such a way so as to attract minimum liability to tax or postponement or for that matter deferment of the tax liability for the subsequent period by availing various incentives, concessions, allowances, rebates and relief s provided for in the tax laws. They are meant to be availed of and they have certain clear objectives to achieve. TAX EVASION It refers to a situation where a person tries to reduce his tax liability by deliberately suppressing the income or by inflating the expenditure showing the income lower than the actual income and resorting to various types of deliberate manipulations. Tax Management Planning which leads to filing of various returns on time, compliance of the applicable provisions of law and avoiding of levy of interest and penalties can be termed as efficient tax management. In short, it is an exercise by which defaults are avoided and legal compliance is secured. Through proper tax planning and management, the penalty of upto `1,00,000 for delay in furnishing of tax audit reports u/s 44AB can be avoided. Similarly by applying for Permanent Account Number (PAN), the penalty under the Act can be avoided. The DIRECT TAX LAWS AND INTERNATIONAL TAXATION 103

114 borrowal of loan otherwise than by way of an account payee cheque or bank draft attracts 100% penalty and this can be avoided by conscious planning of the execution of loan transactions. Planning is a perception conceived on legitimate grounds and achieved through genuine transactions within the framework of law e.g. contribution to Public Provident Fund and claiming rebate u/s 88 of the Act. The filing of the returns with all proper documentary evidence for the various claims, rebates, reliefs, deductions, income computations and tax liability calculations would also be termed as tax management. Tax management is also an important aspect of tax planning. Assessee is exposed to certain unpleasant consequences if obligations cast under the tax laws are not duly discharged. Such consequences take shape of levy of interest, penalty, prosecution, forfeiture of certain rights, etc. Therefore, any effort in tax planning is incomplete unless proper discharge of responsibilities is not made. Tax management includes: 1. Compiling and preserving data and supporting documents evidencing transactions, claims, etc. 2. Making timely payment of taxes e.g. advance tax, self assessment tax, etc. 3. TDS and TCS compliance 4. Following procedural requirements e.g. payment of expenses or acceptance of loans or repayment thereof, over `20,000 by account payee bank cheque or bank draft, etc. 5. Compliance with the prescribed requirements like tax audit, certification of international transactions, etc. 6. Timely filing of returns, statements, etc. 7. Responding to notices received from the authorities. 8. Preserving record for the prescribed number of years. 9. Mentioning PAN, TAN, etc. at appropriate places. 10. Responding to requests for balance confirmation from the other assessees. TAX AVOIDANCE The line of demarcation between tax planning and tax avoidance is very thin and blurred. There could be elements of malafide motive involved in tax avoidance also. Any planning which, though done strictly according to legal requirements defeats the basic intention of the Legislature behind the statute could be termed as instance of tax avoidance. It is usually done by adjusting the affairs in such a manner that there is no infringement of taxation laws and by taking full advantage of the loopholes therein so as to attract the least incidence of tax. OBJECTIVES OF TAX PLANNING Tax planning, in fact, is an honest and rightful approach to the attainment of maximum benefits of the taxation laws within their framework. Therefore, the objectives of tax planning cannot be regarded as offending any concept of the taxation laws and subjected to reprehension of reducing the inflow of revenue to the Government s coffers, so long as the tax planning measures are in conformity with the statute laws and the judicial expositions thereof. The basic objectives of tax planning are: (a) Reduction of tax liability (b) Minimisation of litigation (c) Productive investment (d) Healthy growth of economy (e) Economic stability Tax Implications in Planning The main objectives in any exercise on tax planning are to : 1. Avail all concessions and relief s and rebates permissible under the Act. 104 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

115 2. Arrange the affairs in a commercial way to minimize the incidence of tax. 3. Claim maximum relief where taxes are paid in more than one country. 4. Become tax compliant and avoid penalties, prosecutions and interest payments. 5. Fruitful investment of savings. 6. Timely compliance of procedural requirements like tax audit, TDS, TCS, etc. 7. Appropriate record keeping 8. Avoidance of litigation. 9. Growth of economy and its stability. 10. Pay taxes not a penny more, not a penny less. E-Commerce and Taxation: In the era of e-commerce, the determination of the place of source with reference to an item of income may quite often pose difficulty. The source-based taxation of business income depends on physical presence in the form of fixed place of business or a dependent agent in the source country. With e-commerce the need for physical presence virtually ceases. The change in mode of delivery from physical to online raises characterization issues and the lack of physical presence also creates problems in enforcement of tax laws. Therefore the longterm solution of the problems created by characterization lies in making direct taxation identical for all streams of income in a manner aimed at ensuring equitable sharing of revenues between residence country and source country. The following rulings by the Authority for Advanced Ruling may be worth remembering in this context: 1. A company incorporated in Mauritius for sale and distribution of television channels enters into an agreement with an Indian company where under the latter would solicit orders from purchasers of airtime and pass on those orders to the former. The business profits earned by the Mauritian company through Indian company are profits deemed to accrue or arise in India u/s 9 of the Act. However by virtue of Article 7 of the DTAA between India and Mauritius, they are not liable to be taxed in India, if: (a) The liability of the Mauritian company to pay tax in Mauritius was established and (b) The Mauritian company and not the Indian company is shown to exercise generally the power to conclude the advertisement contract for sale of airtime - P No. 296 of 1996 TVM vs. CIT 237 ITR 230 (AAR). 2. An American company is engaged in providing international credit cards, travelers cheques and travel related services. It has Central Processing Unit (CPU) in USA and Consolidated Data Network (CDN) in Hong Kong. Indian company is given access to the CPU through CDN for the reporting and processing of information on travel by customers in India. Charges for the use of CPU and CDN of American company paid by Indian company is royalty for the case of design or model, plan secret formula and process and therefore taxable in India under Article 12(3)(a) of DTAA between India and USA p. no. 30 of ITR 296 (AAR). 3. Where there is a PE for a non resident income attributable to such PE is chargeable to tax in the country in which such PE exist p. no.28 of ITR 208 (AAR). A foreign company having a fixed office will be constructed to have a PE-p. no.13 of ITR 487 (AAR). Strategic Management Decisions Tax Implications In business, the decisions are taken with a view of optimize returns to the stakeholders. A dominant aspect to be considered taking in view the tax consequences of the same on the bottom-line so as to share minimum profits with Government without violating any tax or any other laws in force. It is significant that tax consequences alone need not bind the management to take a decision and it is only a factor which influences the management decisions. Moreover, in case of taxes, there are both direct as well as indirect taxes and in efforts for planning DIRECT TAX LAWS AND INTERNATIONAL TAXATION 105

116 implications of both category of taxes are required to be considered. Management decisions, which have a bearing on the bottom line are analyzed below from the point of view of income-tax implications. (a) Make or Buy (b) Own or Lease (c) Retain or Replace (d) Repair/Scrap or Return (e) Export or Domestic Sale (f) Shut Down or Continue (g) Expand or Contract (h) Demerger (i) New Capital Investments (j) Accounting Standards for Taxes on Income Importance of tax planning (i) Tax planning exercise is more reliable since the Companies Act, 1956 and the new Companies Act 2013 and other allied laws narrow down the scope for tax evasion and tax avoidance techniques, driving a taxpayer to a situation where he will be subjected to severe penal consequences. (ii) Presently, companies are supposed to promote those activities and programmes, which are of public interest and good for a civilised society. In order to encourage these, the Government has provided them with incentives in the tax laws. Hence a planner has to be well versed with the law concerning incentives. (iii) With increase in profits, the quantum of corporate tax also increases and it necessitates the devotion of adequate time on tax planning. (iv) Tax planning enables a company to bear the burden of both direct and indirect taxation during inflation. It enables companies to make proper expense planning, capital budget planning, sales promotion planning etc. Thus, any legitimate step taken by an assessee (being a company) directed towards maximising tax benefits, keeping in view the intention of law, will not only help it but also the society since it promotes the spirit behind the legal provisions Factors of tax planning (a) It should be based on upto date knowledge of tax laws. Not only is an uptodate knowledge of the statute law necessary, assessee must also be aware of judgments made through various decisions of the courts. In addition, one must keep track of the circulars, notifications, clarifications and Administrative instructions issued by the CBDT from time to time. (b) The disclosure of all material information and furnishing the same to the income-tax department is an absolute pre-requisite of tax planning as concealment in any form would attract the penalty clauses the penalty often ranging from 100 to 300% of the amount of tax sought to be evaded. Section 271(1)(c) read together with explanations there to. (c) Whatever is planned should not simply satisfy the requirements of law by complying with legal provisions as stated and meeting the tax obligations but also should be within the framework of law. It means that sham transactions or make-believe transactions or colourable devices, which are entered into just with a view to circumvent the legal provisions, must be avoided (d) A planning model must be capable of attainment of the desired objectives of a business and be amenable to its possible future changes. TYPES OF TAX PLANNING 106 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

117 The tax planning exercise ranges from devising a model for specific transaction as well as for systematic corporate planning. These are: (a) Short-range and long-range tax planning. (b) Permissive tax planning. (c) Purposive tax planning. AREAS OF TAX PLANNING IN THE CONTEXT OF INCOME TAX ACT, 1961 Some of the important areas where planning can be attempted in an organised manner are as under: (a) Form of organisation/ownership pattern; (b) Locational aspects; (c) Nature of business. (d) Tax planning in respect of corporate restructuring; (e) Tax planning in respect of financial management; (f) Tax planning in respect of employees remunerations; (g) Tax planning in respect of specific managerial decisions; (h) Tax planning in respect of Non-Residents. TAX PLANNING RELATING TO CORPORATE RESTRUCTURING The following suggestions could be useful for tax planning in respect of amalgamation merger, demerger, etc. 1. Since the unabsorbed losses and unabsorbed depreciation cannot be allowed to be carried forward and set off in the hands of the amalgamated company, except in the cases prescribed under Section 72A of the Act, it is proposed: (a) that the scheme of the amalgamation can be put off till such time the full benefit of set off is availed of by the amalgamating company; and (b) that the loss carrying company should absorb or take over the business of the profit-making company. In other words, the profit making company should merge itself with the loss incurring company. This would help in carrying to carry forward the benefits of all unabsorbed losses and depreciation to be set off against the profits derived from the business of the profit-making company. TAX PLANNING RELATING TO FINANCIAL MANAGEMENT DECISIONS When a company raises long term loans from financial institutions or by way of public issue of debentures or inviting deposits from the public, it should plan that the expenses incurred on such issues of debentures orexpenses towards stamp duty, registration fees, and lawyer s fees should be incurred only after the date of the setting-up of the business. The interest paid before the commencement of production but after setting up of the business on loans taken by the company for the acquisition of its plant and machinery and other assets, forms part of the actual cost of the asset and it should be capitalized in actual cost of asset. Thus, the company would be allowed to capitalise the expenditure and claim a higher depreciation and investment allowance. The company should also plan the optimum use of the share capital and the borrowed funds. Note that the borrowings should be utilised as far as possible for the acquisition and installation of assets like, buildings, plant and machinery so that interest can be capitalised for the period after setting up of the acquired assets like buildings, plant and machinery but before the commencement of production. The interest and higher amount of depreciation (due to capitalisation of expense) may be claimed as revenue expenditure pertaining to the business of the company. TAX PLANNING RELATING TO NON-RESIDENT Tax planning measures for Non-Resident are: 1. As a Non-resident is not required to pay tax on his income earned and received outside India, an Indian citizen DIRECT TAX LAWS AND INTERNATIONAL TAXATION 107

118 having an assignment abroad could plan his visits to India in such a way so that he could remain to be a Non- Resident for the purpose of the Income Tax Act. This is generally of interest to persons employed in foreign countries. 2. All those dealing with Non-Residents must keep in view the provisions of Sections 162 and 163. They should retain sufficient amounts with them to be paid on behalf of the Non-Resident towards his tax liability, so that they are not obliged to pay such taxes on their own account. They should also keep in view the obligations cast by Section 200, of paying the taxes deducted within the time prescribed so as to avoid applicability of the prosecution provisions under Section 276B. 3. A Non-resident must be very clear as regards his tax liability through agent. He must be aware that the agent will deduct some amount out of the amount payable to the Non-Resident. 4. Persons employed by or on behalf of a Non-Resident, those who have a business connection with Non- Resident and statutory agents are all considered as authorised agents of a Non-Resident. Even a Non- Resident could be treated as the agent of another Non-Resident. TAX PLANNING FOR INDIAN COLLABORATORS While entering into an agreement for foreign collaboration, the Indian collaborator should take into consideration such aspects as will enable him to plan his tax affairs in a manner that ensures maximum after-tax profits and return on investment. In this context, the Indian collaborator may be advised to adopt the following steps for tax planning: (i) Capitalisation of installation expenses (ii) Treating purchase of spares as revenue expenditure (iii) Treating plans and drawings, etc. as Plant for availing of full value as depreciation Questions & Answers Q.1. Why is tax planning necessary? Answer The tax paid is an addition to the cost. Just as every businessman tries to maximise his profit by reducing the cost, he should also arrange his affairs in such a way, that he pays the least amount of tax. This however should be done within the four corners of law and there should be no element of fraud in it. Q. 2. Is tax planning confined only to direct taxes? Answer. No. The effect of other taxes like sales-tax, customs duty and excise duty, are to be taken into account. It is a dynamic concept and the decision once taken is not valid for all times and requires continuous reappraisal. Q.3. Is tax planning harmful? Answer. Tax planning is not harmful. The tax saved can always be recycled in business and not necessarily wasted in conspicuous personal expenditure. The idea behind grant of incentives is to stimulate economy and hence there should be proper planning to make use of these incentives. Q. 4. When should planning be done? Answer. Planning has to be done before the income accrues or arises, i.e., at the source itself. Planning done after receipt of income is only diversion of income and may even lead to an inference of fraud. Q. 5. What are the factors to be taken in tax planning? 108 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

119 Answer. The choice of taxable entity and other choice like time and place have all are common instances. Time is relevant for fixing the year of accrual. Place is relevant for fixing the residential status. The status in which the income is to be assessed, i.e., individuals, HUF firm or AOP or company is also to be considered. Q. 6. Has tax planning any effect on the rate of tax? Answer. Yes. As dispersal of income over different taxable entities, slab rate can be reduced. Q. 7. What is the difference between dispersal and diversion of income? Answer. Dispersal ensures that income accrues separately in different hands. Diversion is said to take place when money is siphoned off to other hands after accrual in one hand. The decision of the Supreme Court in CIT vs. Sitaldas Thirakhdas is as to what constitutes diversion as distinct from dispersal. In this case, an amount of annuity decreed by the court to be paid by son to his mother in view of his obligation was held to be dispersal, i.e., diversion by overriding title, so that he was entitled to reduce such payment from his taxable income. While diversion by overriding title will amount to dispersal, any other diversion without title at source is a mere application of income. The decision of Supreme Court in CIT vs. Thakar Das Bhargava illustrates the principle of application of income, which does not help, where a lawyer who had assigned his right to fees to a charitable institution and had not received the same was still held liable to pay tax on such fees. Q. 8. Does tax planning include compliance within law? Answer. Certainly. Timely filing of returns, payment of advance tax, finally tax deduction at source, etc., are all important to avoid penal interest, penalty, prosecution, etc. Q. 9. Is method of accounting important? Answer. Yes. It is because income for tax purposes is one which is ascertained on the basis of what is computed under ordinary principles of commercial accounting subject only to such adjustments as are specifically required by the statute. Q.10. What is the caution necessary in tax planning? Answer. Tax planning may be legitimate provided it is within the law. But colorable devices are not only dishonorable but should not be recognized by the Assessing Officer. One such device is to avoid tax though not prohibited by the statute. It is not necessary that there should be a specific disapproval of every device or scheme. If they are artificial, they are prone to be rejected. What is to be noted is that the device should be genuine in that the income really goes to the person to whom it is intended and does not come back or held effectively by the devisor of the scheme. Though the decision of the Supreme Court in Union of India vs. Azadi Bachao Andolan has granted great recognition to tax planning, the warning against artificial transactions lacking in commercial credibility in McDowell s case is still valid. The concessional treatment for Short-term Capital Gains is available on such gains under section 111A. It may, however, be noticed that these concessions are available only where the transactions are on capital account and not where the shares are held as stock-in-trade. TAX PLANNING-AVAILABLE AREAS Q. 1. How to choose the most suitable form of organisation for tax planning? Answer. DIRECT TAX LAWS AND INTERNATIONAL TAXATION 109

120 It depends on the rate of tax applicable to the organisation, business needs, risk of non-observation of formalities, ability to raise finance, etc. Q. 2. In what way, does the choice of head of income affect tax? Answer. Actually assessment under different heads has diverse results as regards deduction and taxability. An asset, if it is property, gets a lump sum deduction at one fourth of annual value and as a business asset it gets depreciation on cost. On sale long term capital gains arises in former case and Short Term Capital Gains in latter. Q. 3. How to select a location for business? Answer. Deficiencies in infrastructure have to be balanced against the tax incentives. Excise duty and Sales-tax implications may also prove to be of greater importance. Q. 4. What is the impact of the size of the business? Answer. Small units gets some concession from State authorities. Dispersal amongst separate subsidiaries will give relief under certain sections. Q. 5. Can accounting method have an impact on tax? Answer. Yes. At present, only two methods mercantile and cash are available. For professionals and money lenders cash system is preferred. Also accounting practices to reflect the correct amount of income have to be adopted so that there is no overload in some years and deficiency in others. Inventory valuation is another area of accounting, which has impact on tax. But it should also be borne in mind that where the statute itself determines the income, accounting method has no relevance. Q. 6. In what way capital can be restructured for maximum benefit? Answer. A balance between own and borrowed capital has to be achieved. When own capital is more there will be larger taxable profits and poorer after-tax return. With more borrowed capital, taxable profits are less but after-tax return on own investment is better. There should be a continuous appraisal in this behalf. Q. 7. What is the best investment? Answer. Choice of investment depends on the expectations of the investors. Risky investments may involve larger profit or loss. Safe investments give a lesser but steady return. Period of holding depends upon varying needs of liquidity for the investors. As between investment in shares, deposits and debentures in companies, dividends have an edge because these are not taxed in the hand of the receiver. Interest is fully taxed subject to certain deductions. Q. 8. What should be the consideration regarding investment in plant and machinery? Answer. Depreciation is a significant deduction from taxable income. Plant and machinery relating to generation of power and pollution control equipment, and those relating to Research and Development, etc., are eligible for 100% deduction. Plant and machinery can be acquired, replaced, repaired, purchased or hired or assembled with different tax consequences. There has been drastic reduction in rates of depreciation effective from assessment year Q. 9. Is there any restriction in method of valuing stock? Answer. 110 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

121 Accountancy text books give various methods like: cost, market value, cost or market value whichever is less, FIFO, LIFO, etc. Some value obsolete or slow-moving stocks at lesser cost. At any rate the method adopted should be regular and should not distort the profits inviting rejection of accounts. Q. 10. Is transfer pricing important? Answer. Transfer pricing is important in reckoning of reliefs as well as in matters of non-resident taxation. Adoption of correct transfer pricing is a matter of concern for Revenue, but it should be equally a matter of concern for taxpayer lest the method adopted loses for himself the benefit which is otherwise available. This is all the more important in international transactions. Sections 92 to 92F may be seen. Q. 11. What is the importance of dividend policy? Answer. Dividend policy determines liquidity, possible impact as price of shares, credit rating, borrowing capacity, shareholder satisfaction, etc., which are matters of business policy. It also affects shareholders tax liability. It is of importance in closely held companies particularly because even loans to substantial shareholders are treated as deemed dividends under section 2(22)(e) of the I.T. Act. Q. 12. What are the factors to be borne in foreign collaborations? Answer. The degree of participation of the foreign concern in Indian business, the extent of investment, duration of physical presence in India, the manner in which such participation is expected, whether by way of equity, loan, royalty, technical fees, etc., would decide liability. For the Indian partner the question whether payments made will be allowed as a deduction will be relevant. Double taxation agreements and where there is none section 91 of Income tax Act will also have relevance. The new provision introduced by Finance Act, 2001 in respect of transfer pricing in sections 92 to 92F w.e.f would require consideration in matters of taxation of business income of non-residents. TAX PLANNING-FOR INCOME FROM HOUSE PROPERTY Q. 1. How is income to be computed, if a property is partly let out and partly self-occupied? Answer. It has to be treated as two residential units and income from each unit has to be computed accordingto law by allocating common outgoings on a basis proportionate to area of occupation. Q. 2. Is it necessary that the person must be a legal owner in order that the income should be computed under the head income from property? Answer. No. If a person is entitled to the income under the law, such income is bound to be assessed under the head income from property. Tax laws are generally concerned with beneficial ownership as laid down in CIT vs. Podar Cement Pvt. Ltd. Q.3. Is municipal tax deductible in computation of income from: (i) self-occupied property; and (ii) where demand notice is reserved but it has not been paid? Answer. Since income from one self-occupied property is nil, subject only to deduction of interest the question of deduction of municipal tax does not arise. For let out proper-ties, municipal tax is deductible only if it is paid during the year. Q.4. Is deduction for repairs available, when tenant undertakes repairs under the rental agreement? What is meant by repairs? DIRECT TAX LAWS AND INTERNATIONAL TAXATION 111

122 Answer. By repairs we mean only substantial repairs as held in CIT vs. Parbutty Churn Law and Sir Shadi Lai & Sons vs. CIT. Where even substantial repairs other than normal maintenance is undertaken by tenant, annual value should get enhanced by the extent of repairs which should have been borne by the landlord so that any deduction for repairs then available to landlord will neutralise the amount added to annual rent. It would, therefore, mean that where there is specific stipulation that all repairs will be borne by tenant, there can be no deduction for repairs. Q. 5. Is an annual charge on rent receivable on account of mortgage of property for obtaining funds for business or paying income tax deductible under section 24(1 )(iv) of the Income Tax Act, 1961? Answer. No. Since it is a charge created voluntarily by the assessee, it is not deductible as was held in CIT vs. Indramani Devi Singhcmia1 in case of a business loan and CIT vs. Tarachand Kalyanji in the case of a charge created for payment of excess profit tax In the latter case, it was held that the amount is not deductible even if the charge has been created before 1st April, 1969, when such amount was deductible in law. TAX PLANNING-FOR BUSINESS EXPENDITURE Q. 1. There is a prevailing practice of a businessman taking loan of stock from another businessman and returning the same. Since he may have to pay for replacement at a higher price for return of loan of stock, can a provision made for the extra cost be deductible? Answer. The issue had come up in Welding Rods Manufacturing Co. vs. CIT, where it was found that the price rise at the time of closure of accounts in respect of outstanding loan of stock could be recognised and the provision therefore would be allowed as a deduction. In coming to the conclusion the High Court followed the decision in Calcutta Co. Ltd. vs. CIT. In this context, one may refer to the statutory provision in section 47(xv) in respect of capital gains on stock lending, whereby tax on capital gains is spared on such stock lending, if the guidelines issued by Securities and Exchange Board of India had been followed. The provision, however, is only for exemption from capital gains and the mere act of lending of securities in pursuance of stock lending scheme. It cannot have application for dealers in shares. Similarly, the final outcome of the transaction even in the case of an investor may have to be recognised for capital gains tax purposes under the law as exemption is at the stage of lending and not at the stage when the contractual obligation gets discharged. Q. 2. Should the right to deduction await final result of any claim? Answer. Courts have not taken a uniform view. Ordinarily when a final decision is awaited, deduction could be made only in the year in which the matter gets resolved as in the case of requirement of approval from the authorities following the decision in Nonsuch Tea Estate Ltd. vs. CIT. But in a case on converse facts, it was held that in the accrual concept in mercantile system of accounting, a mere requirement of approval, when it has become available at the time of assessment or even in appeal, such delay in approval need not bar assessment in the year of receipt as was held in CIT vs. Jai Hind Travels (P) Ltd., where the concept of the doctrine of relating back was adopted for accrual system. Such a view cannot be treated as non-controversial. Deduction need not be denied, where ex post facto approval is a formality. It is difficult to draw a line in such cases. It is for the taxpayer to make a provision in such cases in the year of claim, so that even if it is disallowed, it can be claimed in the year of payment. Failure to make the claim in an earlier year may lose the right, if revenue decides that the claim could be allowed only in the first year. Q. 3. Is it open to the Revenue to disallow a portion of electricity charges paid with reference to the refund claim made during the year, but given in a subsequent year? Answer. 112 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

123 Receipt of refund in a subsequent year cannot be taken as a ground for not allowing a deduction at the time, when it was payable as was held in Travancore Chemical and Mfg. Co.Ltd. vs. CIT following the decision in CIT vs. Bharat Iron and Steel Industries, The High Court pointed out that the need for section 41(1) to tax amounts that had been remitted or waived would not have arisen, if allowance due for an earlier year could be modified with reference to the later waiver or remission. Q. 4. Is it possible to value stock by methods other than cost, market value, or cost or market value, whichever is lower? Answer. Any method which is consistently followed and is not likely to distort the income and is consistent with accounting principles should be acceptable. Lower valuation for slow moving goods in the view that future carrying cost would require to be taken into consideration was approved in India Motor Parts and Accessories P. Ltd. vs. CIT. The method, it was pointed out, had been suggested as a proper valuation in Industrial Accountants Hand Book edited by Wyman P Firke of John A. Beckett. Such a view had also the approval of Delhi High Court in CIT vs. Bharat Commerce and Industries Ltd.. Q.5. Where an air-conditioning plant is fixed in a bus, would such air-conditioner and bus be eligible for rates respectively applied to them? Answer. Air-conditioning plant, which is an integral part of bus would not be entitled to rate of depreciation different from what is available for motor vehicles, where they are installed. Q.6. Can fencing be treated as a plant? Answer. No, it can be treated only as a building. Q.7. It is the normal practice of revenue to deduct all depreciation allowed including initial depreciation in arriving at the WDV. Is this correct? Answer. According to Gujarat High Court, depreciation is referable to wear and tear. Initial depreciation being in the form of an incentive is not to be deducted. Q.8. Where a wholly owned subsidiary company acquires depreciable assets from the holding company at market value, is it eligible for depreciation on such market value? Answer. No. Explanation 6 to section 43(1) provides that in the case of acquisition of assets by a wholly-owned subsidiary from its holding company, the written down value of the holding company will be the actual cost to the subsidiary as held in Dalmia Ceramic Industries Ltd. vs. CIT. Q.9. Could a road in a factory building used exclusively for industrial purpose be treated as a plant for purposes of depreciation? Answer. Road could not be treated as a plant, but only as a building for purposes of depreciation. Q.10. Where the assessee undertook gratuity liability of the vendor of the business as per agreement for sale, such liability is also consideration, so that it could be treated as part of the cost of assets entitled to depreciation. Is this orrect? Answer. Since the assessee has undertaken only a future liability, it cannot form part of the cost so as to be entitled to depreciation. DIRECT TAX LAWS AND INTERNATIONAL TAXATION 113

124 Q.11. Is it possible to capitalise expenditure as cost of the asset for purposes of depreciation? Answer. Expenditure which has nexus with the asset can be treated as part of the cost of the asset. Cost of temporary electricity connection, power line and inspection fee relating thereto were held to be part and parcel of cost of machinery for purposes of depreciation. Q.12. Are computers office equipments so as to be ineligible for investment allowance or additional depreciation? Answer. Office equipment has not been defined in the statute. What is barred is plant and machinery installed in office premises. Office premises have also not been defined. In case of a doctor, a clinic may be his office, but at the same time, it is also his place of practice. A computer is not ordinarily an office equipment like a typewriter or a duplicating machine. Computers are, therefore, eligible for investment allowance, when it was in vogue and additional depreciation. Miscellaneous Illustrations on Assessment of various entities Illustration 1. Where the private trust is charged at the maximum marginal rate u/s 164(1), whether basic exemption is to be allowed? Solution: No. The tax should be levied at the maximum marginal rate as laid down in the Act itself, without allowing the basic exemption as laid down in the Finance Act. [Surendranath Gangopadhyay Trust vs. CIT (1983) 142 ITR 149 (Cal.)]. Illustration 2. Whether, while computing the income of a private trust, deduction under section 80C is allowable? Solution: Yes. Section 164(1) comes into play only after the income has been computed in accordance with the provisions of the Act. Where the trustees of a discretionary trust are assessed on behalf of a beneficiary, who is an individual, deduction under section 80C or rebate under section 88 is allowable [CIT vs. Shri Krishna Bandar Trust (1993) 201 ITR 989 (Cal.) and Amy F. Cama vs. CIT (1999) 237 ITR 82 (Bom.)] It is available against beneficiary s share of income from the trust, even where assessment is made in the hands of the trustee [CIT vs. Saurin S. Zaveri (2002) 257 ITR 160 (Mad.) and CIT vs. Venu Suresh Sanjay Trust (1996) 221 ITR 649 (Mad.)]. The Supreme Court refused special leave to revenue on the question of deduction under section 80C on income assessable in the hands of the trust [CIT vs. Pradeep J.Kinariwala (1999) 237 ITR (St.) 129]. Illustration 3. Can a trust be created by the legal guardian of the minor in respect of minor s property on behalf of the minor? Solution: In T.A.V. Trust vs. CIT (1999) 236 ITR 788 (SC), it was found that as section 7 of the Indian Trusts Act, 1882 provides that a trust can be created only by persons competent to contract and that in the case of a minor, it can be so done only with the permission of the civil court of original jurisdiction, otherwise, such trust is invalid. Illustration 4. Where there is a sole beneficiary with the trustee having only the power to determine the time when benefit can be availed by the beneficiary, will such trust attract maximum rate of tax under section 164? Solution: Where the beneficiary is one and is known, it cannot be said that it is a discretionary trust within the meaning of section 164. It is not a case where maximum rate of tax would have application. It was so held in CIT vs. Saroja Raman (1999) 238 ITR 34 (Mad.), Where the High Court pointed out that the object of the provision is directed against trusts, where the benefits could be manipulated and not to deny the normal rate of tax in such cases where there is no choice as between different beneficiaries is left to the trustee. Illustration 5. Where the sole beneficiary is another trust, can the first trust be treated as a representative assessee so as to be entitled to exemption for which beneficiary is eligible? Solution: Yes. It has been held that there is no reason why the role of representative assessee should be different merely because the beneficiary is another trust [Honesty Engineers and Contractors Trust vs. CIT (2003) 262 ITR DIRECT TAX LAWS AND INTERNATIONAL TAXATION

125 (Mad.)]. Illustration 6. Where a trust has both business income and has also other incomes and section 164 is applicable, should maximum rate be applicable for the total income? Solution: No. Only the business income will attract the maximum marginal rate [CIT vs. T.A.V. Trust (2003) 264 ITR 52 (Ker.)]. Illustration 7. A trustee made distribution of income to the beneficiaries, in a manner contrary to the terms of the deed. Does it attract maximum marginal rate? Solution: No. Where the shares are specified, a distribution contrary to specifications does not make it a discretionary trust, so that maximum rate is not applicable [CIT vs. Smt. Gurmail Kaur Trust (2004) 268 ITR 124 (P&H)]. Illustration 8. Is a trustee, as a representative assessee, where minor is a beneficiary, liable for penalty? Solution: The fact that beneficiary is a minor does not offer immunity, so that the issue has to be decided on merits. In a case, where under-statement of income in the return filed by legal representative was alleged, the matter was remanded by the High Court for a finding in this regard in a departmental appeal [CIT vs. Master Sunil R. Kalro (2007) 292 ITR 86 (Kar)]. The reasoning appears to be that the representative, responsible for the default, cannot be excused. Illustration 9. Where a trust attracted maximum marginal rate, can rectification be made to the trust deed, so as to specify shares and avoid such higher rate? Solution: A trust deed can be rectified in the manner permissible under the terms of trust deed and trust law, but it can have effect only from the date on which rectification is made [Ranga Rao Lottery Agencies Vs. CIT (2006) 287 ITR 542 (Mad)]. Illustration 10. Where the income of a beneficiary has been assessed in the hands of the trust, is such income includible in the direct assessment of the beneficiary for rate purposes? Solution: No. Assessing Officer s reliance on section 86 which permits inclusion of share income from Association of Persons, where it has no assessable income, was found to be unjustified, since section 86 can have no application where such income has been assessed in the hands of a representative assessee [CIT vs. P.N. Bajaj (2003) 262 ITR 593 (Mad)]. Illustration 11. Where grandparents had created 45 trusts for 12 grandchildren at the same time, what is tax treatment? Solution: Creation of multiple trusts at the same time for similar benefit was held to be not genuine. The entire income was held to be assessable in the hands of an Association of Persons. The better solution was to assess the settlors on the finding that the trusts were not genuine. Illustration 12. A co-operative society, engaged in the business of banking, seeks your opinion by the matter of eligibility of deduction under Sec. 8OP on the following items of income earned by it during the year ended (i) Interest on investment in Government securities made out of statutory reserves (ii) Hire charges of safe deposit lockers. Solution : From the Assessment Year and onward, no deduction is allowed under Sec. 80P to any cooperative bank. However, a primary agricultural credit society or primary co-operative agricultural and rural development bank is outside the purview of this provision [Sec. 80P(4)]. Illustration 13. A co-operative society was engaged in the business of banking or providing credit facilities to its members. It sold goods on credit to its members. Is the co-operative society entitled to special deduction under Sec. 80P(2)(a)(i) in respect of income derived from such an activity? DIRECT TAX LAWS AND INTERNATIONAL TAXATION 115

126 Solution : Society is not entitled to the special deduction under Sec. 80P(2)(a)(i). Illustration 14. Salil was running a business. He died on 20th December, 2015, leaving behind his wife Sruti and two minor sons - Sampat and Samar. He did not have any will. Sruti is running the business for and on behalf of herself and the minor children. Salil owned two house properties. Discuss how the rental income and the business income of the financial year 31st March, 2016 will be assessed and in whose hands. Solution: Section 159 provides that if an assessee dies during the Previous Year, the income of the period beginning from the commencement of Previous Year and ending with the date of death is taxable in the hands of the legal representative as if the assessee had not died. Therefore, the business profits and the rental income accruing from 1st April, 2015 to 20th December, 2015 will be assessable in the hands of the legal representatives. Sruti represents the estate and hence is liable to be assessed as the legal representative of Salil. Business profits and rental income arise from 21st December, 2015 to 31st March, 2016: As far as rental income is concerned, it will be assessed as income of Sruti, Sampat and Samar according to their shares. According to provisions of Hindu Succession Act, when a male Hindu dies intestate, his estate will devolve on the heirs mentioned in the Schedule by succession and not by survivorship. Hence, the widow and minor children became co-owners and Section 26 will apply since the respective shares are definite and ascertainable. The rental income will be divided into three parts. However, income of Sampat and Samar will be clubbed with income of Sruti by virtue of section 64(1A). As far as business profit is concerned, the Andhra Pradesh High Court in Deccan Wine and General Stores vs. CIT [1977] 106 ITR 111 has held on similar facts that it is to be assessed in the status of Body of Individuals. Illustration 15. J (HUF) was the owner of a house property, which was being used for the purposes of a business carried on by a partnership firm JC & Co. in which the Karta and other members of the HUF were partners in their individual capacity. The Assessing Officer proposes to assess the annual letting value of the said property as the HUF s income from house property. The HUF contends that the building was used for business purposes and, therefore, the annual letting value thereof was not taxable in its hands as income from house property under Sec. 22. Examine the rival contention. Solution: Section 22 directs not to tax the annual value of a house property which is used by the owner for his business profession, the profits of which are chargeable to tax. In the instant case, the HUF is not using its property for its business. The Karta of the Hindu undivided family and other members of the HUF are partners in the firm in their personal capacity. They have not joined the partnership on behalf of the HUF. Therefore, it cannot be said that the HUF property was being used by the HUF for its business. Hence, the Assessing Officer is justified to tax the income of the HUF property as income from House Property. Illustration 16. Does an inherited property always entail assessment as HUF? Solution: There is a distinction between a joint family and coparcenery. Coparceners in Mithakshara have a right in property by birth. Others, particularly females, have other rights like maintenance, etc., though these rights have been enhanced by successive legislation. Though there is a single coparcener, there can be joint family with other members. Illustration 17. Is it open to a female member to convert her property to that of a joint family of which she is a member? Solution: No. The Supreme Court has held in Pushpa Devi vs. CIT (1977) 109 ITR 730 (SC) that it is not possible under the Hindu Law. There is, however, no prohibition against her giving a gift to joint family as long as she makes her intention clear that the gift is to the Hindu Undivided Family. Illustration 18. What is meant by potential HUF? 116 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

127 Solution: An individual who receives family assets by partition or survivorship is an individual and assessable for income-tax purposes as an individual. Since it is generally accepted that he can assume the role of karta of a Hindu Undivided Family on his marriage in respect of such property, he is known as potential HUF, not assessable as HUF till marriage. Illustration 19. When a Hindu throws his assets in common hotchpot, what is the tax incidence? Solution: The income of joint family arising out of blending will continue to be treated as belonging to him because of the clubbing provision under section 64. Even after partition of such family, the income from such converted assets to the extent to which it is allotted to wife will be treated as belonging to him. Gift tax having been abolished, there is no gift tax implication for transfers made on or after 1st October Illustration 20. A Hindu Undivided Family, which was not earlier assessed had disrupted by severance of interests of coparceners without division by metes and bounds. Is it open to the Assessing Officer to treat the same as HUF? Solution: No. It is because an order recognising partition u/s 171 is not necessary for an HUF, which has not been hitherto assessed. Since it had already disrupted within the meaning of Hindu Law, assessment can be made only in the hands of members of their respective shares. Illustration 21. Is it open to the Assessing Officer to keep an application for partition under section 171 open without disposal and continue to make assessment on HUF on the ground that no order has been passed recognising partition so as to enable separate assessments? Solution: No. The Supreme Court in Kapurchand Shrimal vs. CIT (1981) 131 ITR 451 (SC) held that such assessment will not be valid and it has to be set aside so that assessment can be made in conformity with the order under section 171, which the Assessing Officer is bound to pass in accordance with law. Illustration 22. Does a married daughter still remain a coparcener/member of the HUF of paternal side after she becomes a member of her husband s or father-in-laws HUF? Solution: A daughter on her marriage ceases to be a member of her father s family and becomes the member of the family of her husband. She cannot be a member of both the families. She had never been a coparcener in her father s family nor will she become one in her husband s family. Her right under Hindu Law is confined to maintenance but Hindu Succession Act, 1956 gives her a right equal to the share of her brother in respect of an individual property of father and the share of her father is the joint family property. Illustration 23. A firm consisting of four partners purchased a plot of land. The plot was all through treated as the property of the firm. By an agreement between the partners, the said plot was taken out of the partnership by crediting the plot account at the book value and debiting the partner s capital account in equal proportion in the books of the account of the firm. The plot was subsequently sold and capital gains offered by tax in the hands of partners? Is it valid? Solution: The capital gains is rightly assessable in the hands of the firm as the entries made in the books of account, the partners had not legally and effectively taken out the immovable property of the firm from its ownership and vested the same in the partners. The transfer could not have been affected to partners without a registered document on Since the firm alone is liable to capital gains tax, assessment of partners is not valid [CIT vs. J.M. Mehta & Bros. (1995) 214 ITR 716 (Bom)]. Illustration 24. Can a minor share loss? If the partnership deed provides for such share, can the firm be recognised as validly formed? Is a fresh deed necessary when the minor attains majority? DIRECT TAX LAWS AND INTERNATIONAL TAXATION 117

128 Solution: A minor is not competent to contract. He cannot also be made liable for loss except to the limited extent of profits earlier made. Where a partnership deed makes a minor liable for share of loss, such partnership cannot be recognised as a firm for purposes of registration. This was followed in CIT vs. Badri Nath Ganga Ram (2005) 273 ITR 485 (All.). It is not necessary that a fresh partnership should be formed with the erstwhile minor, since he will continue as a partner unless he had expressed his intention otherwise. Illustration 25. Where there is dissolution of the firm during F.Y , but distribution of assets in F.Y , can the dissolved firm be made liable for the tax from A.Y ? Solution: Dissolution does not end the partnership. It only ends mutual agency. It was so pointed out in CIT vs. Pigot Chapman and Co (1982) 135 ITR 620 (SC). A dissolved firm continue till it is wound up under section 45 of the Partnership Act. Section 189 authorises such assessment. Illustration 26. What is the liability of a non-working partner as regards liability of firm after dissolution? Solution: Every partner is jointly and severally liable for the debts of the firm. Intervening dissolution makes no difference. It was so held in Dhanpat Rai Verma vs. TRO (2004) 268 ITR 215 (All). Illustration 27. Are all companies eligible for conversion to LLPs? Solution: No. Only private limited companies and unlisted public companies are eligible for conversion under section 56 and 57 of the Limited Liability Partnership Act, Illustration 28. What happens to partners/ shareholders of firm/ company, where the conversion to LLP does not satisfy the condition under section 47(xiiib)? Solution: Where the firm/ company does not qualify for exemption under section 47(xiiib), the conversion is still valid under Limited Liability Partnership Act, But the tax on capital gains arising on transfer will be the responsibility of LLP. The partners of the firm have no liability which has got converted to LLP on the transfer of shares consequent on conversion. Illustration 29. Which is the regulatory authority of Limited Liability Partnership, whether Registrar of Firms or Registrar of Companies? Solution: Limited Liability Partnership Act, 2008 provides for administration of the Act with company law authorities with all powers for Registrar of Companies as are available to him under the Companies Act, Illustration 30. Can an LLP be understood as body corporate independent of its partners? Solution: Yes. Section 2(d) of Limited Liability Partnership Act, 2008 understands the LLP as body corporate. Illustration 31. Are all partners of LLP equally responsible for the acts of LLP? Solution: The LLP expects, at best, two of the partners to be designated partners whose responsibility will be on par with directors of the company. Illustration 32. What are the formalities of conversion? Solution: 118 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

129 Formalities are prescribed for conversion of firm, private companies and unlisted public companies under the Second, Third and Fourth Schedules respectively of the Limited Liability Partnership Act, Illustration 33. RQ Ltd. has huge loss and depreciation to be carried forward. ST Ltd. is making profits. What should company RQ Ltd. do wipe off its losses within a reasonable time by taking the help of ST Ltd.? Solution: Amalgamation should not have been for mere tax saving like avoiding capital gains tax or merely for avoiding the benefit of set-off of losses and depreciation of a company, which is going defunct. It should satisfy the conditions u/s 72A, if profit making company is taking over a loss making company. Reverse merger, if genuine, will avoid the application of section 72A. Illustration 34. Company A wants to amalgamate with B. The agreement is entered into on indicating the appointed day to be The Court however passes the order approving the merger on What is the date of amalgamation? Solution: The amalgamation will take effect from , which is the appointed day, unless such date is varied by the High Court [Marshall Sons and Co. (India) Ltd. vs. ITO (1997) 223 ITR 809 (SC)]. Illustration 35. Amalgamation of companies X and Y has been approved by the BIFR. CBDT refuses to allow carry forward of losses u/s. 72A. Is the CBDT justified? Solution: No. According to the Supreme Court in Indian Shaving Products Ltd. vs. BIFR (1996) 218 ITR 140 (SC), once the approval has come from BIFR, Board cannot refuse carry forward of losses. Illustration 36. A certain family has four companies with different members controlling the companies. There are differences. How could they affect a partition of their interest in the companies? Solution: They can shuffle their interest in the companies to ensure independence for each member/ group of members. But capital gains tax cannot be avoided. Demerger is an alternative. Demergers are exempt. It allows set-off of carried forward of past depreciation and unabsorbed loss subject to conditions prescribed under section 72A. Illustration 37. Should the character of assets as between investments and stock-in-trade be the same both for amalgamating and amalgamated company? Solution: Answer will be in the affirmative, if the business is taken over as a going concern and earned on by the amalgamated company [Devare (L.M.) vs. CIT (1998) 234 ITR 813 (Bom.)]. Illustration 38. Since there is always a time lag between appointed date under the scheme and court s order, who should be liable for tax compliance during the interregnum? Solution: During the interregnum, the pre-existing management will be in charge. As soon as the amalgamation is approved, legal responsibility will be that of the amalgamated company following the decision of the Supreme Court in Marshall Sons and Company (India) Limited vs. ITO, (1997) 223 ITR 80 (SC). Illustration 39. Is a slump sale an alternative to amalgamation and demerger? Solution: Yes. It is possible for a division or unit to be sold by slump sale or sell the asset in a severable sale to achieve the same object. Illustration 40. Does the liability of shareholder get altered in amalgamation, demerger or slump sale? DIRECT TAX LAWS AND INTERNATIONAL TAXATION 119

130 Solution: No. Amalgamation, demerger or slump sale by a company constitute a taxable event for company and not the shareholder. Illustration 41. Where there is an acquisition by way of an industrial undertaking or business as a going concern by way of slump sale, can the successor avail the losses and depreciation of the transferred industrial undertaking or business? Solution: The law does not provide for benefit of set-off of losses and depreciation, where a business is transferred by way of slump sale. Illustration 42. What is written down value to be adopted for the amalgamated company in cases, where the full eligible depreciation had not been availed by the amalgamating company? Solution: Explanation (2A) to section 43(1) provides that the written down value of the amalgamating company should be the actual cost for the amalgamated company. In CIT vs. Hindustan Petroleum Corporation Ltd. (1991) 187 ITR 1 (Bom.), it was held that the actual cost of the asset need be reduced only by the unabsorbed depreciation availed (absorbed) in the hands of the amalgamating company for purposes of actual cost of such transferred assets in the hands of amalgamated company, unless it satisfies the condition under section 72A. This decision was followed in CIT vs. Kothari Industrial Corporation Ltd. (2005) 274 ITR 600 (Mad.) and CIT vs. Silical Mettalurgic Ltd. (2010) 324 ITR 29 (Mad). If these decisions are correct, there will be double deduction in cases where assessee avails set-off of past unabsorbed depreciation under section 72A. The decision has not taken into consideration Explanation 7 to section 43(1), which provides for determination of actual cost of assets taken over by amalgamated company on amalgamation to be the same as for amalgamating company as if the amalgamated company had continued to hold the asset. It follows that the written down value will have to be taken as that of the amalgamated company. Explanation 2, 2A and 2B to section 43(6) providing for computation of written down value for the amalgamated company is also in conformity with Explanation 7 to section 43(1). The decision, therefore, run counter to these statutory provisions. There is, however, no reaction from revenue to the decisions of the High Court, which should probably work in favour of the taxpayer. Illustration 43. Where the amalgamated company sells the asset obtained from amalgamating company is the option of substituting the cost at market value on specified date available? Solution: It has been decided that such option is available in Harish Mahindra vs. CIT (1982) 135 ITR 191 (Bom.); H.F. Craig Harvey vs. CIT (2000) 244 ITR 578 (Mad.) and Madura Coats Ltd. vs. CIT (2005) 279 ITR 493 (Bom.). In all these cases, it was held that the amalgamated company steps into the shoes of amalgamating company, since amalgamation is not regarded as transfer. It follows, that the benefit of indexation should also be available for amalgamating company including the period of holding of the asset by the amalgamating company. Illustration 44. What is the procedure for service of notice for assessment of amalgamating company, when it has ceased to exist on amalgamation? Solution: The amalgamated company cannot avoid the tax liability of the amalgamating company. Notice of reassessment can be issued on the amalgamated company as successor to amalgamating company to assess or reassess the income of the amalgamating company, subject to conditions therefor [Triveni Engineering and Industries Ltd. vs. Dy. CIT (2006) 280 ITR (AT) 210 (Del.)]. Illustration 45. How is the cost of an asset taken over in a slump sale ascertained? Solution: 120 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

131 Where the asset having been taken over in a slump sale, there is no separate consideration paid for any asset unlike a severable sale. But purchase consideration for the amalgamating company will be available. It is such consideration, which will be the cost for purposes of section 41(2) or 50, as the case may be [CIT vs. Mahindra and Co. Ltd. (2010) 326 ITR 465 (Raj)]. Illustration 46. Whether Gurudakshina received from the members is liable to tax under section 4 of the Income Tax Act? Solution: No. The Gurudakshina is exempt on ground of mutuality. Illustration 47. A co-operative society bought text books at a discount from the Government and sold them at profit to various persons including its members. The society claimed that the profit earned by the sales to its members was not taxable on ground of mutuality. Whether the claim of the society is in order? Solution: The participators in the profit are members; but the contributors to such profit are non-members who are the buyers of the books. There is no identity between the contributors and the participants. Therefore, the profits derived from the sales to the members is not exempt but taxable [Bihar Rajya Sikshak Sahyog Sangh Ltd. vs. CIT (1987) 165 ITR 681 (Pat.)]. Illustration 48. Whether the principle of mutuality is applicable to income from rent received from house property? Solution: The principle may not apply where the use of residential accommodation is not confined to members. In such cases, the rent is taxable under the head Income from house property. Even if the income is treated as business income, it would not be exempt, because only some of the members occupy the accommodation, and there is no identity between the contributors and the participants. Illustration 49. Can a mutual association claim to be a charitable organisation? Solution: If the object is charitable, a mutual association like a trade association can claim exemption under section 11 as was successfully claimed in CIT vs. Andhra Chamber of Commerce (1965) 55 ITR 722 (SC) where the surplus was to use only for public benefit and not to be distributed to its members. If the surplus is to be shared between members, it could claim exemption on grounds of mutuality, if other conditions like participants and contributors are both members with no dealings with outsiders. Illustration 50. A union of truck owners was registered as a trade union formed for the purpose of promoting relationship between truck operators and the employees and for promoting feeling of cooperation among the truck operators themselves. Should such union be eligible for exemption on the principle of mutuality? Solution: Since the activity is not confined to the members as it is intended to promote relationship between workmen, and workmen and the truck operators, mutuality principle can have no application. Under Indian Trade Unions Act, 1926, when such workers are not members, there is no principle of mutuality, and hence tax cannot be avoided [Sumerpur Truck Operators Union vs. ITO (2003) 259 ITR 749 (Raj.). Illustration 51. Can a Nidhi company registered under section 406 of the Companies Act, 2013, be a mutual society, immune from application of section 269SS barring deposits in cash above the specified limit? Solution: A Nidhi company is also a mutual association recognised under section 406 of tie Companies Act, Hence, any transactions as between such company and members should be treated as with self on principle of mutuality, so that sections 269SS and 269T should have no application. It has been so held by the Tribunal [Muslim Urban Cooperative Credit Society Ltd. vs. Jt. CIT (2005) 96 ITD 83 (Pune)]. DIRECT TAX LAWS AND INTERNATIONAL TAXATION 121

132 Illustration 52. Does mutuality get lost, if a mutual association has different classes of members with different corresponding rights? Solution: Principle of mutuality does not get destroyed merely because a club has different classes of members with different rights with entrance fees and subscriptions being different for each such class depending upon their rights to participation in the affairs of the club with some classes of membership not having right to vote. The assessee in this case was held entitled to exemption [CIT vs. Willingdon Sports Club (2008) 302 ITR 279 (Bom)]. Chapter Summary & Exam Preparation Notes Assessment of various entities & tax planning The term Hindu undivided family has not been defined in the Income-tax Act. However, it means an undivided family of Hindus. Creation of a HUF is a God-gifted phenomenon. As soon as a married Hindu gets a child, a new HUF comes into existence. It is not at all necessary that every HUF must have joint property or family income. A Hindu Joint Family consists of Coparceners & members. The gross total income of the family for the relevant previous year shall be computed under the relevant heads (as per the provisions of the Income-tax Act) as it is computed for other assessees. Partition signifies division of property. In the cases of property capable of physical division, share of each member is determined by making physical division thereof. It must be noted that a division of income without physical division of property does not amount to partition. A partnership firm shall be assessed as a firm if the following conditions are satisfied: The partnership is evidenced by an instrument i.e. partnership deed. The individual shares of the partners are specified in that instrument. A copy of the partnership deed certified by all the partners in writing (other than the minors) is submitted along with the return of income in respect of which assessment as a firm is first sought. As per Section 10(2A) of the Act, any person who is a partner of a firm which is assessed as such, his share in the total income of the firm will not be included in computing his total income. Partner includes a minor admitted to the benefits of partnership as per Section 2(23) of the Act. When all the partners in the predecessor firm are replaced by new partners in the successor firm, it is known as succession of one firm by another firm. If a firm is dissolved and some of the partners take over the firm s business or carry on a similar business with or without new partners, it would be a case of succession by a new firm. Where a change has occurred in the constitution of a firm on account of death or retirement, the firm is not entitled to carry forward and set off so much of the loss proportionate to the share of a retired or deceased partner as exceeds his share of profits, if any, in the firm in respect of the previous year. Alternate Minimum Tax: From the assessment year onwards, where the regular income tax payable for a previous year by a person other than a company is less than the alternate minimum tax payable for such previous year then the adjusted total income shall deemed to be the total income such person for such previous year Association of persons: Association of persons means an association in which two or more persons join in a common purpose or common action to produce income, profits or gains. For the formation of an AOP the association need not necessarily be on the basis of a contract, consent and understanding may be presumed. Section 167B makes the following provisions as regards the incidence of charge of tax on the association of persons. 122 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

133 Where shares of members are determinate In this case, tax is chargeable on the income of the association of persons at the same rate as applicable to an individual. However, where the total income of any member of the association of persons for the previous year (excluding his share of income from the association of persons) exceeds the maximum amount not chargeable to tax in the case of an individual, tax will be charged on the total income of the AOP at the maximum marginal rate of 30%, i.e. the highest slab applicable to an individual. Where the shares of the members are indeterminate In these cases, tax will be charged on the total income of the AOP at the maximum marginal rate, that is, the rate of tax as well as surcharge, if any, applicable to the highest slab of income in the case of an individual as specified in the Finance Act of the relevant year Section 67A seeks to provide for the method of computing a member s share in the income of an association of persons or a body of individuals, wherein the shares of the members are determinate, in the same manner as provided for in Sub-sections (1) to (3) of Section 67 for computing a partner s share in a firm. Co-operative Society means a co-operative society registered under the Co-operative Societies Act, 1912, or under any other law for the time being in force in any State for the registration of cooperative societies. The income of a co-operative society is computed in the same manner as provided for other assessees. Section 80P provides for certain deductions from the gross total income of a Co-operative Society. To make the Indian shipping industry more competitive, a tonnage tax scheme for taxation of shipping profits has been introduced. Many maritime nations have introduced tonnage based taxation. Under this scheme, of presumptive taxation whereby the notional income arising from the operation of a ship is determined based on the tonnage of the ship. As per section 2(17) of the Income Tax Act, Company means any Indian Company, or any body corporate incorporated by or under the laws of a country outside India, or any institution, association or body which is or was assessable or was assessed as a company for any assessment year under the Indian Income Tax Act, 1922 (11 of 1922) or was assessed under this Act, as a company for any assessment year commencing on or before April 1, 1970; or any institution, association or body, whether incorporated or not and whether Indian or non-indian, which is declared by general or special order of the CBDT to be a company. Companies under the Income Tax Act are companies in which the public are substantially interested also referred to as widely-held companies and companies in which public are not substantially interested and also referred to as closely held company. Minimum Alternate Tax ( MAT ) on the book profit of a Company would not apply to a Foreign Company not having any physical presence in India. A domestic company is liable to pay tax on the amounts distributed, declared or paid as dividend (whether interim or otherwise), it shall be 15% plus 5% and education cess and in addition to the income tax payable. Section 115BBD provides for taxing foreign dividends received from a foreign company at the rate of 15% plus and education cess and 3%. A non-resident is not liable to pay tax on his foreign income until and unless it is received in India. Further, remittances to India in any previous year out of earlier year s income, i.e. Income received and/or earned abroad in earlier years, are not charged to Indian Income-tax. The Act has provided a large number of concessions to foreigners on their income earned in India. Chapter XII-A containing 7 Sections from 115C to 115-I contains special provisions relating to certain incomes of non-resident Indian. A non-resident Indian is not required to furnish his return of income u/s 139(1) if his total income in respect of which he is assessable under this Act during the previous year consists only of investment income and the tax at source has been deducted under the provisions of Chapter XVII-B. DIRECT TAX LAWS AND INTERNATIONAL TAXATION 123

134 Double taxation arises where various sovereign countries exercise their power to subject the same person to taxes of a similar character on the same income. In case of foreign companies having branches in India, deduction in respect of head office expenditure is allowed in computing their income. Section 44C puts a ceiling on such deduction. A non-resident can be taxed either directly or through his agent. Where there is no duly constituted agent in India, the A.O. may statutorily treat any of the following persons as an agent: (i) who is employed by or on behalf of the non-resident; or (ii) who has any business connection with the non-resident (he may reside any where in the world); or (iii) from or through whom the non-resident is in receipt of any income whether directly or indirectly; or (iv) who is the trustee of the non-resident; or (v) who has acquired by means of a transfer a capital asset in India. Such person transferee) may be resident or non-resident in India. Tax planning, in fact, is an honest and rightful approach to the attainment of maximum benefits of the taxation laws within their framework. The basic objectives of tax planning are: (a) Reduction of tax liability (b) Minimisation of litigation (c) Productive investment (d) Healthy growth of economy (e) Economic stability. Tax Avoidance will be used to describe every attempt by legal means to prevent or reduce tax liability which would otherwise be incurred by taking advantage of some provisions or lack of provisions of law. It excludes fraud, concealment or other illegal measures Tax evasion is a method of evading tax liability by dishonest means like suppression, showing lower incomes, conscious violation of rules, inflation of expenses etc. Exam Notes Basic provisions of MAT As per the concept of MAT, the tax liability of a company will be higher of the following: Tax liability of the company computed as per the normal provisions of the Income-tax Law, i.e., tax computed on the taxable income of the company by applying the tax rate applicable to the company. Tax computed in above manner can be termed as normal tax liability... and Tax 18.5% (plus surcharge and cess as applicable) on book profit. The tax computed by applying 18.5% (plus surcharge and cess as applicable) on book profit is called MAT. Note: MAT is levied at the rate of 9% (plus surcharge and cess as applicable) in case of a company, being a unit of an International Financial Services Centre and deriving its income solely in convertible foreign exchange. MAT credit A company has to pay higher of normal tax liability or liability as per MAT provisions. If in any year the company pays liability as per MAT, then it is entitled to claim credit of MAT paid over and above the normal tax liability in the subsequent year(s).the provisions relating to carry forward and adjustment of MAT credit are given in section 124 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

135 115JAA. Provisions relating to AMT The provisions of MAT are applicable to a corporate taxpayer only. The provisions relating to AMT are applicable to non-corporate taxpayers in a modified pattern in the form of Alternate Minimum Tax, i.e., AMT. Thus, it can be said that MAT applies to companies and AMT applies to a person other than a company. The provisions relating to AMT are given in sections 115JC to 115JF. Basic provisions relating to applicability of the AMT to different taxpayers The provisions of AMT will apply to every non-corporate taxpayer who has claimed (i) deduction under section 80H to 80RRB (except 80P), (ii) deduction under section 35AD and (iii) deduction under section 10AA. Thus, the provisions of AMT are not applicable to a non-corporate taxpayer who has not claimed any deduction under above discussed sections. Following points are relevant in this regard. - The provisions of AMT shall apply to an individual or a Hindu undivided family or an association of persons or a body of individuals (whether incorporated or not) or an artificial juridical person only if the adjusted total income (discussed later) of such person exceeds Rs. 20,00,000.(Section 115JEE) - The provisions of AMT shall apply to every other person (i.e., other than an individual or a HUF or an AOP/BOI or an artificial juridical person) irrespective of its income. Rate of AMT In case of non-corporate taxpayer, AMT is 18.5% of adjusted total income. Surcharge and cess as applicable will also be levied. AMT credit A non-corporate taxpayer to whom the provisions of AMT applies has to pay higher of normal tax liability or liability as per the provisions of AMT. If in any year the taxpayer pays liability as per AMT, then he is entitled to claim credit in the subsequent year(s) of AMT paid above the normal tax liability Adjustment of carried forward AMT credit A non-corporate taxpayer to whom the provisions of AMT applies is entitled to claim AMT credit of excess AMT paid over the normal tax liability. The credit of AMT can be utilised by the taxpayer in the subsequent year(s). The credit can be adjusted in the year in which the liability of the taxpayer as per the normal provisions is more than the AMT liability. The set off in respect brought forward AMT credit shall be allowed in the subsequent year(s) to the extent of the difference between the tax on his total income as per the normal provisions and the liability as per the AMT provisions. Example 1 The taxable income of Singham Metalliks Pvt. Ltd. computed as per the provisions of Income-tax Act is `8,40,000. Book profit of the company computed as per the provisions of section 115JB is `18,40,000. What will be the tax liability of Singham Metalliks Pvt. Ltd. (ignore cess and surcharge)? Solution The tax liability of a company will be higher of: (i) Normal tax liability, or (ii) MAT. Normal tax rate applicable to an Indian company is 30% (plus cess and surcharge as applicable). 30% on `8,40,000 will amount to `2,52,000 (plus cess). Book profit of the company is `18,40,000. MAT liability (excluding cess and 18.50% on `18,40,000 will come to `3,40,400. Thus, the tax liability of Singham Metalliks Pvt. Ltd. will be `3,40,400 (plus cess as applicable) being higher than the normal tax liability. Example 2 The taxable income of Akira Pvt. Ltd. computed as per the provisions of Income-tax Act is `28,40,000. Book profit of the company computed as per the provisions of section 115JB is `18,40,000. What will be the tax liability of Akira Pvt. Ltd. (ignore cess and surcharge)? DIRECT TAX LAWS AND INTERNATIONAL TAXATION 125

136 Solution The tax liability of a company will be higher of: (i) Normal tax liability, or (ii) MAT. Normal tax rate applicable to an Indian company is 30% (plus cess and surcharge as applicable). 30% on ` 28,40,000 will amount to `8,52,000 (plus cess). Book profit of the company is `18,40,000. MAT liability (excluding cess and 18.50% on `18,40,000 will come to `3,40,400. Thus, the tax liability of Akira Pvt. Ltd. will be `8,52,000 (plus cess as applicable), being higher than the MAT liability. Example 3 The tax liability of PK Logistics Ltd. for the financial year under the normal provisions of the Income-tax Act is `8,40,000 and the liability as per the provisions of MAT is `10,00,000. Will the company be entitled to claim any MAT credit in the subsequent year(s) as per the provisions of section 115JAA? Solution A company paying MAT is entitled to claim the credit of MAT paid in excess of normal tax liability. In this case the liability of PK Logistics Ltd. for the year under the normal provisions is ` 8,40,000 and as per the provisions of section 115JB it is `10,00,000 (which is higher than normal tax liability) and, hence, the company has to pay `10,00,000, i.e., liability as per MAT provisions. As per section 115JAA, if in any year a company pays its tax liability as per MAT, then it can claim MAT credit being the excess MAT paid over the normal tax liability. In this case, as the liability of MAT is higher, and, hence, the company will be entitled to claim MAT credit of Rs.1,60,000 (being excess of MAT over normal tax liability of `8,40,000). Example 4 The tax liability of Rustom Aqua Ltd. for the financial year under the normal provisions of the Income-tax Act is `18,40,000 and the liability as per the provisions of MAT is `18,00,000. It has brought forward MAT credit of `2,00,000. Can the company adjust the MAT credit? If, yes then how much and what will be the tax liability of the company after adjustment of MAT credit? Solution MAT credit can be adjusted in the year in which the liability of the company as per the normal provisions is more than the MAT liability. In this case the liability as per the normal provisions of the Income-tax Act is `18,40,000 and the liability as per the provisions of MAT is `18,00,000. Liability as per the normal provisions is more than liability as per the provisions of MAT and, hence, the company can adjust the MAT credit. The set off in respect of brought forward MAT credit shall be allowed in the subsequent year(s) to the extent of the difference between the tax on total income as per the normal provisions and liability as per the MAT provisions. Thus, after set off of MAT credit, the liability of the company cannot be less than liability as per the provisions of MAT. In this case, the liability as per MAT is `18,00,000, and, hence, after claiming set off of the MAT credit, the liability of company cannot be less than `18,00,000. Hence, out of the credit of `2,00,000 the company can claim credit of `40,000 only and the balance credit of `1,60,000 can be carried forward to next year(s). Example 5 The taxable income for the year of Mr. Salman (resident and age 40 years) computed as per the provisions of Income-tax Act is ` 28,40,000. The taxable income has been computed after deduction of `2,00,000 under section 80QQB in respect of royalty on books. Will he be liable to AMT? What will be his tax liability for the year? Solution The provisions of AMT shall apply to a non-corporate taxpayer if he has made any claim for deduction under section 80H to 80RRB (except section 80P), under section 35AD and under section 10AA. Further, the provisions of AMT shall apply to an individual or a Hindu undivided family or an association of persons or a body of individuals (whether incorporated or not) or an artificial juridical person only if the adjusted total income of such person exceeds `20,00,000. In this case, Mr. Salman has claimed deduction under section 80QQB and his adjusted total income exceeds `20,00,000 and, hence, the provisions of AMT will apply to him. By applying the provisions of AMT, the tax liability of Mr. Salman will be higher of the following: 126 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

137 Tax liability computed as per the normal provisions of the Income-tax Law, i.e., tax computed on the taxable income of the taxpayer by applying the tax rate applicable to him. Tax computed in above manner can be termed as normal tax liability. Tax 18.5% (plus surcharge and cess as applicable) on adjusted total income. The tax computed by applying 18.5% (plus surcharge and cess as applicable) on adjusted total income is called AMT. His taxable income is `28,40,000, tax on `28,40,000 by applying the tax rates applicable to an individual below the age of 60 years for the assessment year works out to `6,77,000. Tax liability after cess of 2% and 1% would work out to `6,97,310. Adjusted total income will come to `30,40,000 (`28,40,000 + `2,00,000, i.e., deduction under section 80QQB). 18.5% on `30,40,000 will come to `5,62,400. AMT liability after cess of 2% and 1% will come to `5,79,272. From the above it can be observed that the liability as per the normal provisions of the Income-tax Act is more than the liability as per the provisions of AMT and, hence, the tax liability of Mr. Salman will be `6,97,310. Example 6 The taxable income for the financial year of Mr. Ajay (resident and age 37 years) computed as per the provisions of Income-tax Act is `20,84,000. The taxable income has been computed after deduction of `5,00,000 under section 80JJA. Will he be liable to AMT? What will be his tax liability for the year? Solution The provisions of AMT shall apply to a non-corporate taxpayer if he has made any claim for deduction under section 80H to 80RRB (except section 80P), under section 35AD and under section 10AA. Further, the provisions of AMT shall apply to an individual or a Hindu undivided family or an association of persons or a body of individuals (whether incorporated or not) or an artificial juridical person only if the adjusted total income of such person exceeds `20,00,000. In this case, Mr. Ajay has claimed deduction under section 80JJA and his adjusted total income exceeds `20,00,000 and, hence, the provisions of AMT would apply to him. By applying the provisions of AMT, the tax liability of Mr. Ajay will be higher of the following: Tax liability computed as per the normal provisions of the Income-tax Law, i.e., tax computed on the taxable income of the taxpayer by the tax rate applicable to him. Tax computed in above manner can be termed as normal tax liability. Tax 18.5% (plus surcharge and cess as applicable) on adjusted total income. The tax computed by applying 18.5% (plus surcharge and cess as applicable) on adjusted total income is called AMT. His taxable income is `20,84,000, tax on `20,84,000 by applying the tax rates applicable to an individual below the age of 60 years for the assessment year works out to `4,50,200. Tax liability after cess of 2% and 1% would work out to `4,63,706. Adjusted total income will come to `25,84,000 (`20,84,000 + `5,00,000, i.e., deduction under section 80JJA). 18.5% on `25,84,000 will come to `4,78,040. AMT liability after cess of 3% will come to `4,92,381. From the above computation it can be observed that the liability as per the provisions of AMT is more than the liability as per the normal provisions and, hence, the tax liability of Mr. Ajay would work out to `4,92,381 (i.e., as per AMT). The excess tax paid by Mr. Ajay on account of AMT can be claimed as AMT credit and can be carried forward for adjustment to next year(s) Example 7 The tax liability of Pink & Enterprises (a partnership firm) for the financial year under the normal provisions of the Income-tax Act is `8,40,000 and the liability as per the provisions of AMT is `10,00,000. Will it be entitled to claim any AMT credit in the subsequent year(s)? Solution A non-corporate taxpayer paying AMT is entitled to claim the credit of AMT paid in excess of normal tax liability. In this case the liability of Pink & Enterprises for the year under the normal provisions is `8,40,000 and as per the provisions of AMT is `10,00,000 (which is higher than normal tax liability) and, hence, the firm has to pay `10,00,000, i.e., liability as per AMT provisions. If in any year, the taxpayer pays liability as per AMT, then it can claim AMT credit DIRECT TAX LAWS AND INTERNATIONAL TAXATION 127

138 of the excess of AMT paid over the normal tax liability. In this case, the liability of AMT is higher, hence, the firm will be entitled to claim AMT credit of `1,60,000 (being excess of AMT over normal tax liability of `8,40,000). Example 8 The tax liability of Dabangg & Co. (a partnership firm) for the financial year under the normal provisions of the Income-tax Act is `18,40,000 and the liability as per the provisions of AMT is `18,00,000. It has brought forward AMT credit of `2,00,000. Can the firm adjust the AMT credit? If yes, then how much and what will be the tax liability of the firm after adjustment of AMT credit? Solution The AMT credit can be adjusted in the year in which the liability of the non-corporate taxpayer to whom the provisions of AMT applies as per the normal provisions is more than the AMT liability. In this case, the liability as per the normal provisions of the Income-tax Act is `18,40,000 and the liability as per the provisions of AMT is `18,00,000. Liability as per the normal provisions is more than liability as per the provisions of AMT and, hence, the firm can adjust the AMT credit. The set off in respect of brought forward AMT credit shall be allowed in the subsequent year(s) to the extent of the difference between the tax on his total income as per the normal provisions and the liability as per the AMT provisions. Thus, after set off of the AMT credit, the liability of the firm cannot be less than liability as per the provisions of AMT. In this case, the liability as per AMT is `18,00,000, and, hence, after claiming set off of the AMT credit, the liability of the firm cannot be less than `18,00,000. Hence, out of the credit of `2,00,000 the firm can claim credit of `40,000 only and the balance credit of `1,60,000 can be carried forward to next year(s). MULTIPLE CHOICE QUESTIONS According to Hindu law, a Joint Hindu family may consist of... (a) Persons lineally descended from a common ancestor (b) Married daughters of a deceased person (c) Widows of the members of the family (d) All the above 2. Which member of the family can demand partition in the property? (a) All coparceners (b) Son (c) Mother (d) Wife 3. What is the rate of income-tax applicable to a co-operative society for the Assessment Year when total income does not exceeds ` 10, 000? (a) 8% of the total income (b) 9% of the total income (c) 10% of the total income (d) 11% of the total income 4. Book Profits means the net profit as shown in the profit and loss account for the relevant previous year prepared under this sub-section as increased by; (a) The provision for income tax 128 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

139 (b) Proposed Dividend (c) Depreciation (d) All the above 5. A company is said to be resident in India in any previous year, if: (a) It is an Indian Company (b) The control and management is wholly situated in India (c) Either it is a Indian company or the control and management is wholly situated in India (d) It is both an Indian Company and the control and management is wholly situated in India. 6. MAT Rate is % of book profit as per the Finance Act, 2012: (a) 10 (b) 18 (c) 18.5 (d) Credit of Minimum Alternate Tax (MAT) in respect of excess amount of tax paid under section 115JB could be carried forward for- (a) 8 Assessment Year (b) 5 Assessment Year (c) 7 Assessment Year (d) 10 Assessment Year 8. For which of the following incomes of the Off-shore Fund, the income tax shall be payable at the rate of 10%? (a) Income received in respect of units purchased in foreign currency (b) Income by way of long-term capital gains arising from the transfer of units purchased in foreign currency (c) Both (a) and (b) (d) Neither (a) nor (b) 9. Which of the following incomes of non-residents are taxable in India? (a) Fees for technical services and royalties (b) Income from property in India (c) Profits earned by exports (d) Income from money brought into India and lent on interest 10. State with reasons in brief, whether the following statements are correct or incorrect: (a) A non-resident is not liable to pay income-tax on the income earned and received outside India. (b) As per Section 115A of the Income-tax Act, 1961 where the total income of a foreign company includes any dividend, income tax payable on such dividend will be at the rate of 30%. Multiple Choice Questions 1. (d); 2. (a); DIRECT TAX LAWS AND INTERNATIONAL TAXATION 129

140 3. (c); 4. (d); 5. (c); 6. (c); 7. (d) 8 (c) 9 (a) 10. (b) True / false 1. Creation of a HUF is a legal phenomenon. 2. Every person who was at the time of a discontinuance or dissolution of a AOP shall jointly and severally be liable for the amount of tax, penalty or other sum payable. 3. The subsidy given by the government to a co-operative society for meeting managerial expenses and admission fee collected by the society is liable to tax. 4. Association of Persons means an association in which two or more persons join in a charitable trust for the well-being of society. 5. As per Section 10(2A) of the Act, for any person who is a partner of a firm which is assessed as such, his/her share in the total income of the firm will be included in computing his/her total income. True and False 1. False; 2. True; 3. True; 4. False; 5. False MCQ MAT stands for (a) Minimum Alternate Tax (b) Minimum Allowed Tax (c) Minimum Applicable Tax (d) Minimum Adjustable Tax Correct answer : (a) Justification of correct answer : MAT stands for Minimum Alternate Tax. Thus, option (a) is the correct option. 2. AMT stands for 130 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

141 (a) Applicable Minimum Tax (b) Adjustable Minimum Tax (c) Alternate Minimum Tax (d) Allowed Minimum Tax Correct answer : (c) Justification of correct answer : AMT stands for Alternate Minimum Tax. Initially the concept of MAT was introduced for companies and progressively it has been made applicable to all other taxpayers in the form of AMT. Thus, option (c) is the correct option. 3. As per section 115JB, every taxpayer being a company is liable to pay MAT, if the Income tax payable on the total income, computed as per the provisions of the Income-tax Act in respect of any year is less than 15.50% of its book-profit + surcharge (SC) + education cess (EC) +secondary and higher education cess (SHEC). (a) True (b) False Correct answer : (b) Justification of correct answer : As per section 115JB, every taxpayer being a company is liable to pay MAT, if the Income-tax payable on the total income, computed as per the provisions of the Income-tax Act in respect of any year is less than 18.50% of its bookprofit + surcharge (SC) + education cess (EC) + secondary and higher education cess (SHEC). 4. As per section 115JB(5A) MAT shall not apply to any income accruing or arising to a company from life insurance business referred to in section 115B. (a) True (b) False Correct answer : (a) Justification of correct answer : As per section 115JB(5A) MAT shall not apply to any income accruing or arising to a company from life insurance business referred to in section 115B. Thus, the statement given in the question is true and hence, option (a) is the correct option. 5. The provisions of MAT will apply to shipping income liable to tonnage taxation, i.e., tonnage taxation scheme as provided in section 115V to 115VZC. (a) True (b) False Correct answer : (b) Justification of correct answer : The provisions of MAT will not apply to shipping income liable to tonnage taxation, i.e., tonnage taxation scheme as provided in section 115V to 115VZC. Thus, the statement given in the question is false and hence, option (b) is the correct option. 6. As per Explanation 1 to section 115JB(2) "book profit" for the purposes of section 115JB means net profit as shown in the P&L Account prepared in accordance with of the Companies Act as increased and decreased by certain items prescribed in this regard. (a) Schedule V DIRECT TAX LAWS AND INTERNATIONAL TAXATION 131

142 (b) Schedule VI (Now schedule III) (c) Schedule IV (d) Schedule I Correct answer : (b) Justification of correct answer : As per Explanation 1 to section 115JB(2) "book profit" for the purposes of section 115JB means net profit as shown in the P & L Account prepared in accordance with Schedule VI of the Companies Act [Now Schedule III to the Companies Act, 2013] as increased and decreased by certain items prescribed in this regard. 7. If in any year the company pays liability as per MAT, then it is entitled to claim credit of MAT paid over and above the normal tax liability in the subsequent year(s). (a) True (b) False Correct answer : (a) Justification of correct answer : If in any year the company pays liability as per MAT, then it is entitled to claim credit of MAT paid over and above the normal tax liability in the subsequent year(s). The provisions relating to carry forward and adjustment of MAT credit are given in section 115JAA. 8. In case of non-corporate taxpayer, AMT is % of adjusted total income. (a) (b) (c) (d) Correct answer : (b) Justification of correct answer : In case of non-corporate taxpayer, AMT is 18.5% of adjusted total income. Thus, option (b) is the correct option. 9. Every non-corporate taxpayer to whom the provisions of AMT apply is required to obtain a report from a chartered accountant in Form No. on or before the due date of filing the return of income (a) 29 (b) 29A (c) 29B (d) 29C Correct answer : (d) Justification of correct answer : Every non-corporate taxpayer to whom the provisions of AMT apply is required to obtain a report from a chartered accountant in Form No. 29C on or before the due date of filing the return of income Sec B MCQ, True / False on Assessment procedure 132 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

143 1. The checking of the return of income by the taxpayer before filing the return of income is called assessment. (a) True (b) False Correct answer : (b) Justification of correct answer : Once the return of income is filed up by the taxpayer, the next step is the processing of the return of income by the Income Tax Department. The Income Tax Department examines the return of income for its correctness. The process of examining the return of income by the Income-Tax department is called as Assessment. Thus, the statement given in the question is false and hence, option (b) is the correct option. 2. Assessment under section 143(1),is known as scrutiny assessment. (a) True (b) False Correct answer : (b) Justification of correct answer : Assessment under section 143(1) is like preliminary checking of the return of income. At this stage no detailed scrutiny of the return of income is carried out. This assessment is known as Summary assessment without calling the assessee Thus, the statement given in the question is false and hence, option (b) is the correct option. 3. Assessment under section 144 is known as best judgment assessment (a) True (b) False Correct answer : (a) Justification of correct answer : Assessment under section 144 is known as best judgment assessment. This is an assessment carried out as per the best judgment of the Assessing Officer. This assessment is carried out in a case where the taxpayer fails to comply with the requirements specified in section 144. Thus, the statement given in the question is true and hence, option (a) is the correct option. 4. Which of the following can be corrected while processing the return of income under section 143(1)? (a) any arithmetical error in the return (b) any mistake in the return of income (c) any error in the return of income (d) any claim by the taxpayer which is against law Correct answer : (a) Justification of correct answer : Assessment under section 143(1) is like preliminary checking of the return of income. At this stage no detailed scrutiny of the return of income is carried out. At this stage, the total income or loss is computed after making the following adjustments (if any), namely:- (i) any arithmetical error in the return; or (ii) an incorrect claim, if such incorrect claim is apparent from any information in the return. Thus, option (a) is the correct option. 5. Assessment under section 143(1) can be made within a period of year from the end of the financial year in which the return of income is filed. (a) four (b) three (c) two DIRECT TAX LAWS AND INTERNATIONAL TAXATION 133

144 (d) one Correct answer : (d) Justification of correct answer : Assessment under section 143(1) can be made within a period of one year from the end of the financial year in which the return of income is filed. Thus, option (d) is the correct option. 6. Notice under section 143(2) (i.e. notice of scrutiny assessment) should be served within a period of from the end of the financial year in which the return is filed. (a) six months (b)one years (c) two years (d) eighteen months Correct answer : (a) Justification of correct answer : To carry out assessment under section 143(3), the Assessing Officer should serve a notice under section 143(2).Notice under section 143(2) should be served within a period of six months from the end of the financial year in which the return is filed. Thus, option (a) is the correct option. 7. Assessment under section 143(3) shall be made within a period of years from the end of the relevant assessment year. (a) four (b) three (c) two (d) one Correct answer : (c) Justification of correct answer : As per section 153, assessment under section 143(3) shall be made within a period of two years from the end of the relevant assessment year. Thus, option (c) is the correct option. 8. Assessment under section 144 shall be made within a period of years from the end of the relevant assessment year. (a) four (b) three (c) two (d) one Correct answer : (c) Justification of correct answer : As per section 153, assessment under section 144 shall be made within a period of two years from the end of the relevant assessment year. Thus, option (c) is the correct option. 9. The objective of carrying out assessment under section 147 is to bring under the tax net any money, bullion, jewellery, valuable article, etc. which are undisclosed. (a) True (b) False Correct answer : (b) Justification of correct answer : The objective of carrying out assessment under section 147 is to bring under the tax 134 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

145 net any income which has escaped assessment in original assessment Thus, the statement given in the question is false and hence, option (b) is the correct option. 10. Assessment under section 147 shall be made within a period of two year from the end of the financial year in which notice under section 148 is served on the taxpayer. (a) True (b) False Correct answer : (b) Justification of correct answer : As per section 153, assessment under section 147 shall be made within a period of one year from the end of the financial year in which notice under section 148 is served on the taxpayer. Thus, the statement given in the question is false and hence, option (b) is the correct option. DIRECT TAX LAWS AND INTERNATIONAL TAXATION 135

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147 Study Note - 3 CLUBBING OF INCOME This Study Note includes 3.1 Clubbing of Income 3.1 CLUBBING OF INCOME Introduction Certain provisions are included in the act as anti tax avoidance measures. Provisions for inclusion in assessee s income, income of some other person, which is not at arm s length, are a kind of such provisions. Such provisions arrest tax leakage likely to result from certain transactions with relatives or diversion of title without losing control over the same, etc. In addition to the general provisions which are applicable for computation of total income, there are special provisions in Sections 60 to 65 of the Income-tax Act which provide for inclusion of income of other persons in the total income of assessee. The special provisions in these sections are designed to counter the various attempts which an assessee may make for evading / avoiding or reducing his liability to tax by transferring his assets or income to other person(s) while, at the same time, retaining powers / interest over the property or it s income. These provisions are also be termed as clubbing provisions. Transfer of Income without transfer of assets: (section 60) Where any person transfers income without transferring the ownership of the asset, such income is taxable in the hands of the transferor. Such transfer may be revocable or irrevocable. The provision applies irrespective of the time when the transfer has been made i.e. it may be before or after the commencement of the Income-tax Act. Any income arising to any person by virtue of a transfer, without actual transfer of the assets from which such transfer arises, shall be clubbed in the hands of the transferor. Illustration 1 : Mr A owns a house property fully let out on a rent of `1,20,000 per annum. Mr A transfers the rental income for to his brother Mr B without transferring the property to him. For AY , the rent will be taxable in the hands of Mr A even if Mr B receives the rent. Revocable transfer of assets : ( section 61) Any income arising to a person by virtue of a revocable transfer of assets shall be clubbed in the hands of the transferor. However, Income shall not be clubbed where the transfer is irrevocable, that is in case of a transfer by way of trust which is not revocable during the beneficiary s lifetime (section 62). A revocable transfer contains a provision of re-transfer of the income or assets to the transferor or giving the transferee the right to re-assume control over the income or assets. ( section 63) Note : Transfer includes any settlement, trust, covenant, agreement or other arrangement. Examples of revocable transfers (i) If there is an express clause of revocation in the instrument of transfer; or (ii) If there is a sale with a condition of re-purchase; or (iii) If the transfer is to a trust and if the transfer can be revoked with the consent of two or more beneficiaries; or (iv) If the trustees are empowered in sole discretion to revoke the transfer; or (v) If the transferor has power to change beneficiary or trustees. IRREVOCABLE TRANSFER OF ASSETS FOR SPECIFIED PERIOD [Sec. 62] (1) The provisions of Section 61 shall not apply to any income arising to any person by virtue of a transfer (i) by way of trust which is not revocable during the lifetime of the beneficiary, and, in the case of any other DIRECT TAX LAWS AND INTERNATIONAL TAXATION 137

148 transfer, which is not revocable during the lifetime of the transferee ; or (ii) made before the 1st day of April, 1961, which is not revocable for a period exceeding six years. Provided that the transferor derives no direct or indirect benefit from such income in either case. (2) Notwithstanding anything contained in Sub-section (1), all income arising to any person by virtue of any such transfer shall be chargeable to Income-tax as the income of the transferor as and when the power to revoke the transfer arises, and shall then be included in his total income. TRANSFER AND REVOCABLE TRANSFER DEFINED UNDER SECTION 63 For the purposes of sections 60, 61 and 62 and of this section, (a) A transfer shall be deemed to be revocable if (i) it contains any provision for the re-transfer directly or indirectly of the whole or any part of the income or assets to the transferor, or (ii) it, in any way, gives the transferor a right to re-assume power directly or indirectly over the whole or any part of the income or assets ; (b) Transfer includes any settlement, trust, covenant, agreement or arrangement. Incomes arising to the spouse : Following incomes of the spouse are includible in the income of the individual assessee - (a) salary, commission, fees or any other form of remuneration received by the spouse from a concern where the individual assessee has substantial interest except where the spouse possesses technical or professional qualifications and the income is attributable to these qualifications and experience, shall be included in the income of the spouse having greater income. { sec 64(1)(ii) } REMUNERATION?INCOME FROM ASSETS TO SPOUSE [Sec. 64(1)(iv)] Where an asset (other than house property) is transferred by an individual to his or her spouse directly or indirectly otherwise than for adequate consideration or in connection with an agreement to live apart any income from such asset will be deemed to be the income of transferor. However, this section is not applicable in the following cases (a) if assets are transferred before marriage. (b) if assets are transferred for adequate consideration. (c) if assets are transferred in connection with an agreement to live apart. (d) if on the date of accrual of income, the transferee is not spouse of the transferor. (e) if property is transferred by the Karta of HUF, gifting co-parcenary property to his wife. (f) the property is acquired by the spouse out of the pin money (i.e., an allowance given to the wife by her husband for her dress and usual household expenses). Illustration 2 - Mr C holds 20 % equity shares in Z Ltd. Mrs C, who has no technical or professional qualifications, is employed by Z Ltd on a salary of Rs 50,000 per month. In this case, salary received by Mrs C will be clubbed in the hands of Mr C. (b) Income from assets transferred without adequate consideration by an individual to his / her spouse shall be included in total income of such individual. { sec 64(1)(iv)} Note 1 - the asset transferred should be other than house property. Note 2 - where the assets transferred directly or indirectly by an individual to his spouse, are invested by the transferee in any business or as partner s capital in a firm, then a part of the income arising out of the business will be included in the income of the transferor, as follows : 138 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

149 X= V/W * I Where X = Income or interest liable to be clubbed in hands of the transferor V= value of assets transferred or investments made W= total investment in business or total capital contribution in firm by the transferee I= Total Income arising to transferee from the said business or total interest receivable by the transferee from the said firm. Illustration 3 - Mr A gifts ` 2,00,000 to his wife on Mrs A starts business on investing ` 8 lakhs, including the gift from Mr A and balance is her own funds. Mrs A earns a profit of ` 3,00,000 during Amount of profits to be clubbed in Mr A s income is : (`2,00,000/ `8,00,000 )* `3,00,000 = `75,000 Illustration 4 Mr X transfers his RBI Bonds to a family trust with the condition that the income therefrom shall be utilized for the benefit of Mrs X. In this case, income from such bonds arising to the Trust shall be clubbed with income of Mr X. Illustration 5 - Mr. Vijay is employed as Public Relation Officer in a company where Mrs. Vijay holds 21 per cent equity shares. She has been holding the share before marriage, Mr. Vijay gets a salary of `30,000 per month. The whole salary of `3,60,000 will be included in the income of Mrs. Vijay provided Mr. Vijay has no technical or professional qualification. It is immaterial that the remuneration so paid is genuine and not excessive and that Mrs Vijay had substantial interest in the company even before her marriage. Income arising to minor child : In case the income of an individual includes the income of his minor child in terms of section 64(1A), such an individual shall be entitled to exemption of `1,500/- u/s 10(32) in respect of each minor child if the income of such minor is includible under section 64(1A) exceeds that amount. Section 64(1A)- salient points Any income accruing or arising to a minor child is liable to be clubbed with father or mother whose total income is greater before such clubbing, excluding the income of minor child/ children Clubbing ceases to operate when the minor becomes a major. If marriage of parents does not subsist the income of the minor will be included in the income of the parent who maintains the minor child in the previous year. Where any such income is once included in the total income of either parent any such income arising in any succeeding year shall not included in the total income of the other parent unless AO is satisfied that it is necessary to do so. Clubbing of incomes of minor accruing till the date of attaining majority shall be done and not thereafter. On and from the date of attaining majority the incomes shall be taxed in the hands of child himself. Brought forward loss of an individual assessee can be set off against the business income of minor child which has been so clubbed under this section. Under this section only net incomes shall be clubbed and that too under the same head of income. Deductions of section 80C to 80U shall be allowed till the aggregate of the income of minor child and that of parent. Minor shall not be allowed the deductions under sections 80C to 80U on account of the income, which have been clubbed in the hands of parent. In the following cases income of minor shall not be clubbed: Child is suffering from any disability of the nature specified in Section 80U like physically disability, totally blind etc. Income of child on account of manual work or activity involving skill, talent or specialized knowledge etc. DIRECT TAX LAWS AND INTERNATIONAL TAXATION 139

150 If income of child is so included, the parent shall be entitled to an exemption in respect of each minor child under section 10(32) which shall be of the lower of: `1, 500 pa per child Income of minor so included in income of parent. Such exemption is available from the total income of the minor child that is included in the total income of the assessee. Exemption to parent under section 10(32) for `1,500 shall be available if the clubbing of minor child s income is done as per section 64(1A). If income is added as per section 27 of deemed ownership then exemption of section 10(32) shall not be allowed Similarly, where a minor child does not have parents, clubbing of income does not arise. If both mother and father are dead then the income of minor child will be included in his income and return shall be filed through legal guardian It will be not tenable in the hands of the minor- R.P.Sarath Y vs. GT(2006). Guardian will be representative assessee for assessment purposes. Illustration 6 Mr Kishor Kumar, a widower, owned a house property in Juhu, Mumbai. He fully let it out on a rent of `12,00,000 per annum. Mr Kishor transferred the rental income for to his minor son Amit Kumar without transferring the property to him. Mr Kishor Kumar died suddenly thereafter due to a heart failure. Since Amit Kumar s parents are deceased, he stays with his uncle Mr Jackie, a real estate broker, who takes care of him and acts as his legal guardian. For AY , the rental income will be clubbed with the income of Mr Jackie and it will not be taxable in the hands of Amit Kumar. Mr Jackie is the representative assessee of Amit Kumar. Income arising to son s wife : following income of an individual assessee s son s wife are includible in the income of such assessee Incomes arising from assets transferred directly or indirectly without adequate consideration by the individual { sec 64(1)(vi)} Income arising from assets transferred directly or indirectly by such individual to any person or AOP for the benefit of his son s wife. { sec 64(1)(vi)} Incomes arising to son s minor child shall be clubbed in the income of the child s parent. Incomes arising from assets blended in HUF property - where any individual has converted his own property into the joint family property, any income arising from that converted property, shall be deemed as income of such individual and not the family. {sec 64 (2)(b)} CONVERSION OF SELF-ACQUIRED PROPERTY INTO JOINT FAMILY AND SUBSEQUENT PARTITION [Sec. 64(2)] Where a member of a HUF has converted his self-acquired property into joint family property after , income arising from the converted property will be dealt with as follows :- (i) For the Assessment Year onwards, the entire income from the converted property is taxable as the income of the transferor. (ii) If the converted property is subsequently partitioned amongst the members of the family, the income derived from such converted property, as is receivable by the spouse and minor child of the transferor will be taxable in his hands. Clubbing of Negative Income (explanation to Sec64 ) Since the income includes loss, the loss arising to a minor child will be clubbed in the hands of the parent and can be set-off by him, against his personal income. Income from accretion to assets Income arising from accretion to the assets transferred or from accumulated income of such property is not 140 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

151 included in the total income of the transferor. Illustration 7 Mr Amrish, an assessee transfers 100 shares of Mogambo Ltd to his wife. Subsequently, Mogambo Ltd allotted bonus shares to Mrs Amrish. The dividend income from those bonus shares cannot be taxed in the hands of Mr Amrish CIT vs MP Birla (1982) 10 Taxman 193 Bom Computation of Income liable to be clubbed : Step 1 - compute the income in the hands of actual recipient, availing all eligible deductions / exemptions Step 2 - income computed above will be clubbed in the same head of income in the hands of the other person, in whose income it is to be clubbed Step 3 - compute Gross total income of other person in whose hands the income has been clubbed. Thus any loss can be set off against the clubbed income as per provisions allowed. Step 4 deduction of eligible amounts u/s 80C to 80U from GTI computed in step 3. Tax management strategies for avoiding Clubbing Not to give gifts to wife/daughter in law as income arising thereon may be clubbed with assessee s income. Gifts may be given to major sons, daughters, sisters, niece etc Giving loans to wife, daughter-in-law at reasonable rate of interest. Avoiding employment of a spouse in a concern in which the other spouse has substantial interest. Avoiding gifts to minor child, also avoiding gifts from outsiders as any income arising to the minor shall be clubbed in the income of the parent. Gifts to fiancé or fiancée before marriage will not attract clubbing provisions. Investing minor s funds in real estate, jewellery etc which has capital appreciation rather than regular income. One s property may be thrown into the HUF property by a will for achieving tax savings. Investing minor s funds in tax free items like PPF, Tax-free bonds etc Solved Examples Example 1 Rustom holds 40% of shares in a Company. Mrs. Rustom (a CMA) is employed in the company as a Finance Executive and is getting salalry of `15,000 per month. Compute total income and tax payable by Rustom and Mrs. Rustom for the year assuming other income of Rustom is `2,00,000 from a business and dividend income from company is `3,00,000. Solution In the present case, Mrs. Rustom s salary income will be taxable in her hands only as she is earning the same through her professional qualification. Computation of Total Income and Tax Liability Particulars Rustom Mrs Rustom Income from Salary -- 1,80,000 Business Income 2,00, Income from other sources: Dividend income [Exempt u/s 10(34)] Gross Total Income 2,00,000 1,80,000 Tax Liability (as total income does not exceed `2,00,000): Nil Nil DIRECT TAX LAWS AND INTERNATIONAL TAXATION 141

152 Example 2 Mrs. Kiran, a law graduate, is legal advisor of LLP Ltd. She gets salary of `1,80,000. Mr. Kiran is holding 20% shares in LLP Ltd. His income from business, during the Previous Year is `4,00,000. Compute their Total Income. Solution : Computation of Total Income of Mr. Kiran & Mrs. Kiran for the A.Y Particulars Mr. Kiran (`) Mrs. Kiran (`) 1. Gross salary 1,80, Business profits 4,00,000 Total Income 4,00,000 1,80,000 Note: Since Mrs. C holds professional qualification, salary income is assessable in her hands. Example 3: Mr. A gifts `4,00,000 to Mrs. A on 1st February Mrs. A starts crockery business and invests `1,00,000 from her account also. She earns profit of `60,000 during the period ended 31st March How would you tax the business profits? Solution: Proportionate profits, in proportion to the gifted amount from the spouse on the first day of the Previous Year bears to the total investment in the business on the first day of the Previous Year, will be taxable in the income of the transferor spouse. As Mrs. A has started the new business, the first Previous Year will begin on the date of setting up and will end on 31st March, immediately following. Thus, the first Previous Year will consist a period of 2 months from 1st February 2016 to 31st March, Therefore, proportionate profit of `48,000, computed as below, will be included in the income of Mr. A: 4,00,000 * 60,000 / 5,00,000 = 48,000 Example 4: Mr. A gifts `3,00,000 to Mrs. A on 1st February Mrs. A invests the same in the existing crockery business where she has already invested `5,00,000. Mrs. A earns `3,00,000 from the business during the year ended on 31st March, How would you assess the profits? Solution : The Previous Year of the existing business is April to March. On the first day of the Previous Year (i.e. 1 April 2015), total investment has come from Mrs. A account. As the proportion of the gifted amount from spouse on 1 April 2015 to the total investment in business on the same day is NIL, the whole of the profits of `3,00,000 for the year will be included in the total income of Mrs A. From the Previous Year , 60% [ i.e. 3,00,000/5,00, ] of the business profits will be included in the total income of Mr. A. Example 5 Mr. Goutam, out of his own funds, had taken a FDR for `1,00,000 bearing p.a. payable half-yearly in the name of his wife Latika. The interest earned for the year of `10,000, was invested by Mrs. Latika in the business of packed spices which resulted in a net profit of `55,000 for the year ended 31st March, How shall the interest on FDR and income from business be taxed for the Assessment Year ? Solution: Where an individual transfers an asset (excluding house property), directly or indirectly to his/her spouse, otherwise than for adequate consideration, or in connection with an agreement to live apart, income from such asset is included in the total income of such individual [Sec. 64(1)(iv)]. Accordingly, interest on FDR, accruing to wife, is 142 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

153 included in the total income of her husband. However, business profits cannot be clubbed with total income of husband. Clubbing applies only to the income from assets transferred without adequate consideration. It does not apply to the income from accretion of the transferred assets. Hence, business profit is taxable as the income of wife. Example 6 Sawant is a fashion designer having lucrative business. His wife is a model. Sawant pays her a monthly salary of `20,000. The Assessing Officer, while admitting that the salary is an admissible deduction, in computing the total income of Sawant, had applied the provisions of Sec. 64(1) and had clubbed the income (salary) of his wife in Sawant s hands. Discuss the correctness of the action of the Assessing Officer. Solution: Where an individual has got substantial interest in a concern and his spouse derives any income from such concern by way of salary, commission, fees or by any other mode, such income is clubbed with the total income of such individual [Sec. 64(1)(ii)]. However, clubbing provision does not apply if the earning spouse holds technical or professional qualification and the income is solely attributable to the application of such knowledge and experience. Salary earned by wife as model from the concern where her husband holds substantial interest is assessable as her income. Example 7 Discuss whether the loss could be set-off in the following case: Smt. Vatika carried on business with the gifted funds of her husband Mr. Dabbu. For the Previous Year ending , Vatika incurred loss of `5 lakh which Dabbu wants to set-off from his taxable income. Solution: Funds for business were gifted by husband to wife. Accordingly, income from business should be clubbed with the income of husband [Sec. 64(1)(iv)]. Income includes loss also. Hence, husband is entitled to set-off the business loss of wife against his taxable income. Example 8 Is Section 64(1)(vi) applicable, if one individual gifts assets to wife and children of his brother who similarly gifts to the wife and children of the former individual? Solution: A mutual agreement between the two brothers is inferable, so that it could be treated as indirect transfer as one s own wife and children as decided by the Supreme Court in CIT vs. C.M.Kothari (1963) 49 ITR 107 (SC). Example 9 An assessee in terms of a divorce decree was bound to maintain his minor child. He transfers money to a bank for this purpose. Is clubbing u/s 64 possible? Solution: From the Assessment Year , clubbing of the minor s income in the hands of the parent with the higher income is mandatory. Earlier, what could be clubbed in such parent s hands u/s 64 was only the income from an asset transferred by the parent. Where such transfer to a trust for the benefit of a minor child was consequent on the terms of a divorce decree, income from such transfer could not be treated as transfer by the parent to the child, so as to be covered by section 64 [CIT vs. Behram B. Dubash (2005) 279 ITR 377 (Bom.)]. The reasoning was that the trust was created as a result of legal obligation imposed by the court, so that it could not be treated as transfer within the meaning of section 64, which has to be understood as a voluntary one by the parent to his/her child. But this decision will have no application after provision for automatic aggregation. DIRECT TAX LAWS AND INTERNATIONAL TAXATION 143

154 CHAPTER SUMMARY & EXAM PREPARATION NOTES Sections 60 to 65 of the Income-tax Act provide that in computing the total income of an individual for purposes of assessment, there shall be included all the items of income specified in these sections. Transfer of Income (section 60) : Where a person transfers to any other person income (whether revocable or not) from an asset without transferring that asset, the income shall be included in the total income of the transferor. Transfer includes any settlement, trust, covenant, agreement or arrangement. Revocable transfer: Where a person transfers any asset to any other person with a right to revoke the transfer, all income accruing to the transferee from the asset shall be included in the total income of the transferor. The income under revocable transfer of asset shall be included in the income of transferor even when only a part of income from transferred asset has been applied for the transferor. Irrevocable Transfer: In case of an irrevocable transfer of assets for a specified period, the income from such assets shall not be included in the income of transferor. Income to spouse from a concern in which such individual has substantial interest [Section 64(1)(ii)]: All such income as arises directly or indirectly, to the spouse of an individual by way of salary, commission, fees or any other remuneration, whether in cash or kind from a concern in which such individual has a substantial interest, shall be included in the income of the individual. Income to spouse from the assets transferred [Section 64(1)(iv)]: Where any individual transfers directly or indirectly any asset (other than a house property) to the spouse, the income from such asset shall be included in the income of the transferor. Income To Son s Wife [Section 64(1)(vi)]: Where any individual transfers, directly or indirectly, any asset to his/ her son s wife without adequate consideration, after , the income from such asset shall be included in the income of the transferor. Transfer for Immediate or Deferred Benefit of Son s Wife [Section 64(1)(viii)]: Any income arising, directly or indirectly, to any person or association of persons from assets transferred directly or indirectly after June 1, 1973, otherwise than for adequate consideration to the person or association of persons by such individual shall, to the extent to which the income from such assets is for the immediate or deferred benefit of his son s wife be included in computing the total income of such individual. Income to spouse through a third person [Section 64(1)(Vii)]: Where a person transfers some assets directly or indirectly to a person or association of persons (trustee or body of trustees or juristic person) without adequate consideration for the immediate or deferred benefit of his or her spouse, all such income as arises directly or indirectly from assets transferred shall be included in the income of the transferor. Clubbing of Income Of Minor Child [Section 64(1a)]: All income which arises or accrues to the minor child (not being a minor child suffering from any disability of the nature specified in Section 80U) shall be clubbed in the income of his parent. However, any income which is derived by the minor from manual work or from any activity involving application of his skill, talent or specialised knowledge and experience will not be included in the income of his parent. In case the income of an individual includes any income of his minor child in terms of this section [i.e. Section 64(1A)], such individual shall be entitled to exemption of the amount of such income or Rs. 1,500 whichever is less. Income From The Converted Property [Section 64(2)]: Where an individual, being a member of Hindu Undivided Family, transfers his self-acquired property after 31st December, 1969 to the family for the common benefit of the family, or throwing it into the common stock of the family, or transfers it directly or indirectly to the family otherwise than for adequate consideration, such property is known as converted property. Dual Liability for Tax: The tax on the income of the other person which has been included in the income of the 144 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

155 assessee can either be recovered from the assessee or from the other person. The liability of other person is limited to the portion of the tax levied on the assessee which is attributable to the income so included. Multiple Choice Questions 1. Under which of the following circumstances transfers of income is revocable? (a) If there is a sale with a condition of re-purchase (b) If the transferor has power to change beneficiary or trustees. (c) Both (a) and (b) (d) Neither (a) nor (b) 2. All income which arises to the minor child shall be clubbed in the income of his/her.... (a) Parents (b) Siblings (c) Relatives (d) Neighbours 3. Short term capital loss can be set-off from (a) Short-term capital gain (b) Long-term capital gain (c) Both (a) and (b) (d) Neither (a) nor (b) 4. In which case the firm is not entitled to carry forward and set off so much of the loss proportionate to the share of a retired or deceased partner as exceeds his/her share of profits, if any, in the firm in respect of the previous year? (a) When a change occurred in constitution of firm (b) When a business or profession is succeeded by another person (c) When the public are not substantially interested in companies (d) None of the above Answers 1 c, 2 a, 3 c, 4 a DIRECT TAX LAWS AND INTERNATIONAL TAXATION 145

156

157 Study Note - 4 SET-OFF AND CARRY FORWARD AND SET-OFF OF LOSSES This Study Note includes 4.1 Introduction 4.2 Set-off of Losses in the same year 4.3 Carry Forward and Set-off of Loss in Subsequent Years 4.1 INTRODUCTION If income is one side of the coin, loss is the other side. When a person earns income, he pays tax. However, when he sustains loss, law affords him to have benefit in the form of reducing the said loss from income earned during the subsequent years. Thus, tax liability is reduced at a later date, if loss is sustained. Certain provisions govern the process of carry forward and set off of loss. Set-off and carry forward of losses are covered under section 70 to 79 of the Income Tax Act This may be required if there is a loss from one or more sources from one or more heads of income. Mode of Set-off and Carry Forward STEP 1- INTER SOURCE ADJUSTMENT UNDER THE SAME HEAD OF INCOME u/s Sec 70 STEP 2- INTER HEAD ADJUSTMENT IN THE SAME ASSESSMENT YEAR u/s Sec 71 STEP 3- CARRY FORWARD OF THE UNADJUSTED LOSS Set off of losses within the same head [Section 70] Where the net result for any Assessment Year in respect of any source falling under any head of income is a loss, the assessee shall be entitled to have the amount of such loss set off against his income from any other source under the same head of income for the Assessment Year. (1) Where the result of the computation made for any Assessment Year under sections 48 to 55 in respect of any short-term capital asset is a loss, the assessee shall be entitled to have the amount of such loss set off against the income, if any, as arrived at under a similar computation made for the Assessment Year in respect of any other capital asset. (2) Where the result of the computation made for any Assessment Year under sections 48 to 55 in respect of any capital asset (other than a short-term capital asset) is a loss, the assessee shall be entitled to have the amount of such loss set off against the income, if any, as arrived at under a similar computation made for the Assessment Year in respect of any other capital asset not being a short-term capital asset. (3) Where result of the computation made for the Assessment Year in respect of speculative business is a loss, the assessee shall be entitled to have the amount of such loss set off against the income, if any, as arrived under a similar computation made for the Assessment Year in respect of speculative business only. (4) Where result of the computation made for the Assessment Year in respect of a specified business as per Section 35AD is a loss, the assessee shall be entitled to have the amount of such loss set off against the income, if any, as arrived under a similar computation made for the Assessment Year in respect of other specified business covered by Section 35AD. (5) Where any loss made in the business of owning and maintaining race horses, the assessee shall not be entitled to have the amount of such loss set off against any income except income from the business of owning and maintaining race horses. DIRECT TAX LAWS AND INTERNATIONAL TAXATION 147

158 Set-off and Carry Forward and Set-off of Losses Inter-Source adjustment ( sec.70) If there is a loss in respect of any source under any head of income for any Asst year, it can be set off any other source under the same head. Illustration same head Business A 1,00,000 House Property X 95,000 Business A 70,000 House Property X (40,000) Business A (1,20,000) Net Result 50,000 Net Result 55,000 Exceptions to section 70 - Loss from speculation business - Meaning of speculative transaction- contract for sale or purchase of any commodity including stock and shares, is periodically settled otherwise than by the actual delivery. Mode of adjustment - Loss from a speculation business can be set off against income from any other speculation business. - Long term capital loss Mode of adjustment -- Capital loss ( both short term and long term) can be set off against capital gains only and against no other income 9 Section 71(3) - Loss from activity of owning & maintaining race horses Mode of adjustment - Loss incurred in the activity of owning and maintaining race horses shall be set off only against income, if any, from such activity in that year, and the balance, if any, shall be carried forward to four subsequent assessment years and set off against income, if any, from the same activity. ( section 74 A) - Loss cannot be set off against winnings from lotteries, crossword puzzles, card game etc. - Loss arising from the purchase and sale of securities not to be allowed in certain cases (sec.94(7))- to the extent of loss does not exceed the amount of dividend or income received on such securities or units of MF shall be ignored for the purpose of computing taxable income - Bonus stripping in case of units - provision says, to the person who acquired the bonus units in such tax avoidance transaction, if any loss arising out of sale & purchase of such unit, will not be included in computation of total income. - Loss from exempt income Loss from an exempt source, cannot be set off against gains from a taxable source. Illustration 1: Mr Dhoni has long term capital loss on sale of shares of IPL Ltd ( listed). He has long term capital gains on sale of his ancestral land in Ranchi. However in this case, no set-off can be possible. This is because LT Capital Gains on sale of listed shares on which STT is paid is exempt under section 10 ( 38). Hence loss on sale of listed shares is a loss from an exempt source. So it cannot be set off against LT capital gains on sale of land, which is a profit from a taxable source. 4.2 SET-OFF OF LOSS IN THE SAME YEAR Inter-Head adjustment (section 71) When there is loss in respect of any head of income for any assessment year then it can be set off against income 148 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

159 from other heads. After considering intra head adjustment, if any loss is there in one head that can be adjust against income of any other head except capital gain. However, if there is any loss under the head Capital Gains, it cannot set at against income under the heads of income. Illustration 2 : Salary Income 1,20,000 House Property (40,000) Net Result 80,000 Exceptions to section 71 Loss in a speculation business Loss from specified business u/s 35AD loss from a business specified u/s 35 AD shall be set off against the incpome from any other specified business. The loss which cannot be so set off, shall be carried forward for being set off in subsequent assessment years against income from any specified business carried on by the assessee in that assessment year ( section 73A ) Loss under the head capital gains Loss from activity of owning &maintaining race horses Loss cannot be set off against winnings from lotteries, crossword puzzles, card game etc. Business Loss and unabsorbed depreciation cannot be adjusted against Salary Income. Unabsorbed depreciation shall be carried forward and set off against income in subsequent years without any limit, till it is finally set off. Loss from purchase of securities. (Dividend & Bonus stripping) Dividend Stripping Dividend stripping is a strategy to reduce the tax burden, by which an investor gets tax free dividend by investing in securities (including units), shortly before the record date and exiting after the record date at a lower price, thereby incurring a short-term capital loss. This short-term capital loss is compensated with the tax free dividend. Further the investor can set off such loss against capital gains both short-term and long-term, and can also carry forward the unabsorbed loss for set off in future years the benefits of dividend stripping is that, on one side, the investor would earn a tax-free/exempt dividend or income [under sections 10(34) and 10(35) of the I. T. Act] and, on the other side, he would suffer a short-term capital loss i.e. difference between the cum-dividend price and ex-dividend price, which is available to be utilized or carry forward by the tax payer for reducing his present or future tax liability. Bonus stripping Bonus Stripping u/s 94(8) Section 94(8) has been inserted with effect from AY to curb the practice of creation of losses via Bonus Stripping. Briefly, it says that the loss, if any, arising to a person on account of purchase and sale of original units shall be ignored for the purpose of computing his income chargeable to tax if the following conditions are satisfied: The person buys or acquires any units within a period of 3 months prior to the record date, He is allotted additional units (bonus units) without any payment on the basis of holding of such units on such date, He sells or transfers all or any of the units excluding bonus units within a period of 9 months after such date, On the date of sale or transfer he continues to hold all or any (at least one) of the additional units (bonus units). Then the amount of loss so ignored shall be deemed to be the cost of purchase or acquisition of such additional units as are held by him on the date of such sale or transfer. DIRECT TAX LAWS AND INTERNATIONAL TAXATION 149

160 Set-off and Carry Forward and Set-off of Losses All the above stated conditions have to be cumulatively fulfilled in order to attract section 94(8). Loss from a Source income of which is exempt. Legal Cases on set off and carry forward Benefits u/s 70 can be claimed even in the case of clubbing of income u/s 64, ex. the loss of an individual is eligible for set off against clubbed income of minor child. -- CIT v. JH Gotla [1985] 156 ITR 323 (SC). If there is profit from one source of income and loss from another, the assessee has no option but to set off the loss against such profits if it is permissible under section 70. G. Atherton & Co. v CIT [1989] Tax LR 13 (Cal) AND CIT v. Milling Tdg Co P Ltd [1994] 76 Taxman 389 (Guj) 4.3 CARRY FORWARD AND SET-OFF OF LOSS IN SUBSEQUENT YEAR Carry Forward of Losses Under the Income Tax Act, 1961 the following losses can be carried forward: Loss under head Income from House Property (sec 71B) Loss under head Profits and Gains of business or profession (sec 72 & sec 73) Loss under the head Capital Gains (sec 74) Loss from activity of owning & maintaining race horses (sec 74A) Other remaining losses cannot be carried forward. Accumulated loss in scheme of Amalgamation or Demerger or Business Re-organisation (Sec 72A)? Sec. 71B: Carry forward and set off of loss from House Property Where for any Assessment Year the net result of computation under the head Income from House Property is a loss to the assessee and such loss cannot be or is not wholly set off against income from any other head of income in accordance with the provisions of Section 71 so much of the loss as has not been so set-off or where he has no income under any other head, the whole loss shall, subject to the other provisions of this Chapter, be carried forward to the following Assessment Year and (i) be set off against the income from House Property assessable for that Assessment Year; and (ii) the loss, if any, which has not been set off wholly, the amount of loss not so set off, shall be carried forward to the following Assessment Year, not being more than eight Assessment Years immediately succeeding the Assessment Year for which the loss was first computed. Speculation Business Transaction in which a contract for the purchase or sale of any commodity, including stocks and shares, is periodically or ultimately settled, otherwise than by the actual delivery or transfer of the commodity or scrips. Speculative business in case of a company: Any part of the business of a company consists in the purchase and sale of shares of other companies, such company shall be deemed to be carrying on a speculative business to the extent to which the business consists of purchase and sale of such shares Carry forward and set-off of Speculation Loss ( section 73) Speculation loss can be set off only against speculative income Loss can be carried forward for 4 yrs. Continuity of business not necessary. 150 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

161 Filing of Return of loss u/s 139(3) should be submitted with the specified u/s 139(1) time section 80 : The requirement to file the return of income on or before the due date prescribed u/s 139(1) is applicable only for the carry forward of loss suffered in that particular assessment year. It does not impact the status of carry forward of loss of the previous years. Legal cases and Rulings Speculation Business Delivery based loss on shares also speculation. Paharpur Cooling Towers Ltd v. ACIT (2011) 52DTR41 (Cal). If the money lending business was included in main object, share loss not speculation. CIT v. Frontline Securities Ltd. (2011) 50 DTR 337 (Del.) Test of majority of funds employed for inv activities for deciding principal business ITO v. Bijay Paper Traders & Inv Ltd (2010) 38 SOT 578 (Del) (ITAT). Loss even on a/c of valuation of stock of shares, is speculation loss. Prasad Agencies P Ltd. (2009) 213 Taxman 571 (Bom.) Units of MF can not be treated as shares for the purpose of Explanation to Sec 73. Apollo Tyres v. CIT. [2002] 255 ITR 273 (SC) Carry Forward and set off of Business loss other than Speculation Loss (section 72) Loss carried forward, can be set off only against business income Losses can be carried forward by the person who incurred the loss (exceptions to rule) Loss can be carried forward for 8 yrs (Exceptions Sec 33B, 35AD) Return of loss u/s 139(5) should be submitted within the specified time u/s 139(1 ) Continuity of business not necessary Carry forward of unabsorbed depreciation, capital expenditure on scientific research & family planning expenditure not governed by Sec (7) but by Sec 32(2) Carry Forward of unabsorbed depreciation { section 32(2)} No time limit is fixed for the purpose of carry forward. In the subsequent year(s) it can be set off against any head. except winnings from lotteries, crossword puzzles & Salaries Continuity of business not relevant. Following order of priority is followed. (1) Current Depreciation (2) Brought Forward Business loss (3) Unabsorbed Depreciation Carry forward and set-off of Loss and Depreciation ( section 72 A) Sec 72A: Carry forward and set off of accumulated loss in Scheme of Amalgamation or Demerger or Business Reorganization. Where there has been an amalgamation of - (a) a company owning an industrial undertaking or a ship or a hotel with another company; or (b) a banking company referred to in Clause (c) of Section 5 of the Banking Regulation Act, 1949 (10 of 1949) with a specified bank; or (c) one or more public sector company or companies engaged in the business of operation of aircraft with one or more public sector company or companies engaged in similar business. Accumulated loss and the DIRECT TAX LAWS AND INTERNATIONAL TAXATION 151

162 Set-off and Carry Forward and Set-off of Losses unabsorbed depreciation of such company shall be deemed to be the loss of such amalgamated company for the Previous Year in which the Scheme of Amalgamation was brought into force if the following conditions are satisfied: 1. The amalgamating company should have been engaged in the business for three years or more. 2. The amalgamating company should have continuously held at least three-fourths of the book value of fixed assets for at least two years prior to the date of amalgamation. 3. The amalgamated company will hold continuously for a period of five years at least three-fourths of the book value of the fixed assets of the amalgamated company acquired on amalgamation. 4. The amalgamated company will continue the business of the amalgamated company for a period of at least 5 years. 5. The amalgamated company, which has acquired an industrial undertaking of the amalgamated company by way of amalgamation, shall achieve the level of production of at least 50% of the installed capacity of the amalgamated industrial undertaking before the end of four years from the date of amalgamation and continue to maintain the minimum level of production till the end of five years from the date of amalgamation [this condition may be relaxed by Central Government on an application made by the amalgamated company]. 6. The amalgamated company shall furnish a certificate in Form 62, duly verified by an accountant, to the Assessing Officer. If any of the aforesaid conditions are not fulfilled, then the amount of brought forward business loss or unabsorbed depreciation so set off in any Previous Year in the hands of the Amalgamated Company will be deemed to be the income chargeable to tax, the hands of that Amalgamated Company, for the year in which such conditions are not fulfilled. In case of Demerger, the amount of set off of the accumulated loss and unabsorbed depreciation, if any, allowable to the assessee being a resulting company shall be (i) the accumulated loss or unabsorbed depreciation of the demerged company if the whole of the amount of such loss or unabsorbed depreciation is directly relatable to the undertakings transferred to the resulting company; or (ii) The amount which bears the same proportion to the accumulated loss or unabsorbed depreciation of the demerged company as the assets of the undertakings transferred to the resulting company bears to the assets of the demerged company if such accumulated loss or unabsorbed depreciation is not directly relatable to the undertakings transferred to the resulting company. Unabsorbed loss can be carried forward for the unexpired period of out of total 8 years. Conditions specified in Section 72A are applicable to amalgamation only and not to demerger. However, the Central Government may, for the purposes of this section, by notification in the Official Gazette, specify such other conditions as it considers necessary to ensure that the demerger is for genuine business purposes. In case of Business Re-organisation, set off of the accumulated loss and unabsorbed depreciation, if any, allowable to the assessee being the successor company for a period of 8 years commencing from the Previous Year of such business re-organisation.unabsorbed business loss can be carry forward up to 8 years from the year of amalgamation/ demerger/ change in constitution in case of : 1. Amalgamating to Amalgamated 2. Demerged to Resulting Company 3. Firm or Propriety Concern to Successor Company 4. Closely held Company to LLP Depreciation and Business loss can be carried forward by a person who has incurred the loss Reverse Merger One may see that Sec. 72A is an exception of the general rule that the benefit of carry forward of loss and 152 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

163 unabsorbed depreciation allowance is available to the same person who incurred the loss or suffered depreciation. However, one may also find that Sec. 72D is not available to him as the entity in which the loss is incurred does not qualify as an industrial undertaking or that some of the conditions of Sec. 72D are onerous to fulfil. Therefore, to get over these problems, the concept of reverse merger gained momentum. Under a normal merger, it is a sick industrial undertaking that is wound up and merged with a healthy undertaking. Under a reverse merger, a healthy company is merged with the sick company that has losses and unabsorbed depreciation allowances carried forward. Thus, the profits of the healthy company after amalgamation will be available for set off to the losses and unabsorbed depreciation allowances. The sick company that incurred the losses and suffered depreciation allowance will be the same person as the person who will carry them forward and adjust against the profits. Thus, Sec. 72D will not apply and the purpose of set off of losses and unabsorbed depreciation allowances will still be achieved. Based on facts in given cases the route merger of reverse merger will suit some companies. Conditions to be Satisfied for Carry Forward in case of Amalgamation Amalgamation should be of 1. A company owning an industrial undertaking or a ship or a hotel with another company or with SBI or any subsidiary of SBI or between two public sector airlines. 2. A Banking Company with Specified Bank. 3. PSUs engaged in business of operation of aircrafts. Conditions to be Satisfied by Amalgamating Company The unabsorbed business loss are from the main activity of said company it is in business for preceding 3 or more years. As on date of amalgamation, amalgamating company has held continuously 75% of the book value of fixed assets held by it two years prior to the date of amalgamation. Conditions to be satisfied by amalgamated company The company should holds continuously for a minimum period of 5 years -75% of book value of fixed assets. (2 years for old company) The amalgamated company should continuous the business of amalgamating company for at least 5 years. (Old company should have been in business for 3 yr) Any other conditions to be satisfied if require to ensure genuine amalgamation. In case of non-compliance later, amount set off to be considered as income of that year. Conditions to be Satisfied for Demerger If the Loss directly attributable to transferred undertaking, entire loss to be carried forward by resulting company. If not directly relatable, loss to be apportioned in same ratio as adopted for apportionment of fixed assets. Conditions to be Satisfied for Succession of Firms etc. All the assets/liabilities of firm immediately before succession becomes assets/liabilities of company. In firm, all partners become shareholders in company in same ratio as in partnership (Minimum 50% for five years). In Prop Firm, Sole Proprietor becomes shareholder for at least 50% (For five years). No benefit to partners/proprietor other than shares allotted. For Non Compliance later, set off to be taken as income of that year. Conditions to be Satisfied for Conversion to LLP. All the assets/liabilities of company immediately before conversion becomes assets/liabilities of LLP. DIRECT TAX LAWS AND INTERNATIONAL TAXATION 153

164 Set-off and Carry Forward and Set-off of Losses In firm, all shareholders become partners in LLP in same proportion as in company (Minimum 50% for five years). Turnover of Company <60L for past 3 years. No benefit to shareholders other than share in future profits of LLP. No payments from accumulated profits on conversion date for 3 years. For Non Compliance later, set off to be taken as income of that year. Carry forward and set-off of loss from House Property (section 71B) Applicable from Asst yr Loss can be carried forward for 8 yrs Return of loss need not be submitted within the specified time u/s 139(1) Illustration 3 : Information for the P.Y Income from House I 60,000 Loss from House II (30,000) NET INCOME 30,000 He has brought forward losses H1 (98-99) 30,000 H2 ( ) 35, H1 loss will be ignored.(since carry forward period is lapsed) Loss of will be adjusted with 30,000. Therefore, unadjusted loss of 5,000 will be carried forward. Carry forward of Capital Losses (Sec. 74) Long term capital loss can be set off only against long term capital gains. Return of loss should be submitted in the specified time u/s 139(1 ) Short term capital loss can be set off against short term or long term capital gains. Such loss can be carried forward for 8 assessment years immediately succeeding the assessment year in which the loss was first computed. Such loss can not be carried forward unless return is filed within the time limit u/s 139(1) Capital loss computed by assessee with indexation cost can be setoff against long term capital gains computed without indexation. Keshav S. Phansalkar (2009) 32 DTR 454 (Mum) (ITAT) and Mohanlal N. Shah HUF (2008) 26 SOT 380 (Mum) Nature of Loss No. of Years Set off Against (A) Short term capital Loss 8 Any income under the head capital Gains (B) Long term capital Loss 8 Long term capital Gain Carry forward and set-off of loss from activity of owning and maintaining race Horses (section 74A) Such loss can be set off only against income from such activity. Continuity of Business necessary Loss can be carried forward for 4 yrs Return of loss should be submitted in time 154 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

165 Not applicable for other race animals Allowed only to the extent of stake falls short of revenue expenditure Loss from racing activity can be set off against Profit from sale of horses. CIT v. Mrs. Sunita Kumar [1994] 208 ITR 807 (Cal.) Set Off & Carry Forward some special points for consideration Judicial decisions Where the losses incurred are not set off against the income of the immediately succeeding year/years as the case may be, it was held that it can not be set off in later date (Tyresoles (India) V CIT) For Business, Speculation and Capital Loss C/F, filing of return within due date is mandatory. Sec. 80 r.w.s. 139(3). If belated, no c/f even if assessment u/s 143(3). Joginder Paul HUF v CIT (2011) 239 CTR 566 (P&H). Stock stored in State warehousing corp was destroyed by fire in the Suit filed for reimbursement of loss. Suit dismissed in Loss was allowable in the year New Diwan Oil Mills vs. CIT (2010) 328 ITR 432 (P&H). While computing deduction under section 80HHA with regard to income derived from industrial u/t, loss from a non industrial unit, in terms of section 80AB and section 71, has to be adjusted first. CIT vs. Mentha & Allied Products (2010) 326 ITR 297 / 47 DTR 284 (All) AO must allow set off even if it is not claimed by assessee. CIT v. Mahalakshmi Sugar Mills Co. Ltd [1986] 160 ITR 920 (SC). When there is nothing given in Act regarding mode of set off, the Dept should adopt an approach beneficial to the assessee. Circular No. 26 dated [F.No. 4(53)-IT/54]. Before giving effect to Sec 72 and Sec 74, set off u/s 71 shall be made first. Circular No. 587 dated Recapitulations of the provisions Type of Loss to be carried forward to the next year(s) Income against which carried forward loss can be set off in next year(s) HOUSE PROPERTY LOSS INCOME FROM HOUSE PROPERTY 8 YEARS. SPECULATION LOSS SPECULATION PROFITS 4 YEARS. NON SPECULATION BUSINESS LOSS: Unabsorbed Depreciation, Scientific ANY INCOME (Other than income under Salary ) NO TIME LIMIT Research & Family Planning Expenditure Loss from specified business u/s 35AD INCOME FROM SP. BUS U/S 35 AD NO TIME LIMIT Other Business Losses SPECULATIVE AND NON SPECULATIVE 8 YEARS. SHORT TERM CAPITAL LOSS SHORT AND LONG TERM GAINS 8 YEARS. LONG TERM CAPITAL LOSS LONG TERM CAPITAL GAINS 8 YEARS. LOSS FROM ACTIVITY OF OWNING & MAINTAINING RACE HORSES INCOME FROM SUCH ACTIVITY 4 YEARS. Special provisions Section 78(1) : Where a change has occurred in the constitution of the firm, the firm shall not be entitled to carry forward and set off so much of the loss proportionate to the share of a retired or deceased partner remaining unabsorbed. This restriction shall not apply to unabsorbed depreciation. Change in constitution of the firm for the purpose of this section takes place If one or more of the partners cease to be partners due to retirement or death of anyone or more partners, in such circumstances that one or more of the persons who were partners of the firm before the change, continue as Years DIRECT TAX LAWS AND INTERNATIONAL TAXATION 155

166 Set-off and Carry Forward and Set-off of Losses partner or partners after the change (provided the firm is not dissolved on the death of any of its partners). This section does not cover change in constitution of the firm due to change in the profit sharing ratio or admission of new partners. Section 78(2) : Section 78(2) provides that where any person carrying on business or profession has been succeeded in such capacity by another person otherwise than by inheritance, nothing, in relating to set-off and carry forward of loss, shall entitle any person other than the person incurring the loss to have it carried forward and set off against his income. In other words, the brought forward business losses can be set off only by the same assessee. The assessee, who has suffered the loss and in whose hands the loss has been assessed, is the person who can carry forward the loss and set-off the same against his business income of the subsequent year. The following are the exceptions: (a) Inheritance: Where a business carried on by one person, is acquired by another person through inheritance. For example, A is carrying on a business and there are losses to the extent of `3,00,000 which can be carried forward and set-off against the income of the subsequent years. A dies and his son R inherits his business. The losses incurred by A can be set-off by his son R against the income from a business activity carried on by R. However such loss can be carried forward by the son for the balance number of years for which the father could have carried forward the loss. However, the unabsorbed depreciation cannot be carried forward by the legal heir as inheritance is not covered u/s 32(2). Where there is a succession by inheritance, the legal heirs (assessable as BOI) are entitled to set off the business loss of the predecessor. Such carry forward and set off is possible even if the legal heirs constitute themselves as a partnership firm. In such a case, the firm can carry forward and set-off the business loss of the predecessor. Where the legal heirs of the deceased proprietor enters into partnership and carries on the same business in the same premise under the same trade name, it was held that such loss of sole proprietary firm was allowed to be carried forward by the firm of the legal heirs who have succeeded to the business of the deceased [CIT vs. Madhu Kant M. Mehta (2001) 247 ITR 805 (SC.)] (b) Amalgamation: Business losses and unabsorbed depreciation of an amalgamating company can be set-off against the income of the amalgamated company if the amalgamation is within the meaning of section 72A/72AA of the Income Tax Act. If the amalgamation is not in the nature specified in section 72A/72AA, the business loss and unabsorbed depreciation of the amalgamating company cannot be carried forward by the amalgamating company. Similarly, business losses and unabsorbed depreciation of an amalgamating co-operative bank can be set off against the income of successor co-operative bank i.e. the amalgamated co-operative bank, if the amalgamation is within the meaning of section 72AB. (c) Succession of proprietary concern or a firm by a company : Where there has been reorganization of business whereby a proprietary concern or a firm is succeeded by a company and certain conditions mentioned in section 47(xiii) or (xiv) are fulfilled, the accumulated business loss and the unabsorbed depreciation of the predecessor firm/proprietary concern shall be deemed to be the loss or allowance for depreciation of the successor company for the previous year in which business reorganization was effected and carry forward provisions shall be applicable to the successor company. (d) Conversion of private company or unlisted company into Limited Liability Partnership : Where there has been reorganization of business whereby a private company or unlisted public company is succeeded by a Limited Liability Partnership fulfilling the conditions laid down in the proviso to clause (xiiib) of section 47, then, notwithstanding anything contained in any other provision of this Act, the accumulated loss and the unabsorbed depreciation of the predecessor company, shall be deemed to be the loss or allowance for depreciation of the successor deemed to be the loss or allowance for depreciation of the Limited Liability Partnership for the purpose of the previous year in which business reorganization was effected and other provisions of this Act relating to set-off and carry forward of loss and allowance for depreciation shall apply accordingly. (e) Demerger : Loss of the demerged company can be carried forward by the resulting company subject to the fulfillment of certain conditions, which the Central Government may for this purpose notifiy, to ensure that the demerger is for genuine business purposes. In the following cases, business loss/ unabsorbed depreciation will not be allowed to be carried forward: 156 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

167 (1) Loss/unabsorbed depreciation of HUF cannot be carried forward by the members of HUF on the partition of HUF. (2) Loss/unabsorbed depreciation of a firm succeeded by another firm cannot be carried forward as the assessee has changed. (3) Loss/unabsorbed depreciation of sole proprietary concern taken over by the firm cannot be carried forward by the firm even if sole proprietor also becomes the partner of such firm. (4) Loss/unabsorbed depreciation of a partnership firm taken over by one of the partner cannot be carried forward in the hands of such partner. Where any person carrying on any Business or Profession has been succeeded in such capacity by another person otherwise than by inheritance, then the successor cannot have the loss of predecessor carried forward and set off against his income. Section 79 : Losses (other than unabsorbed depreciation) in case of closely held company: In case of a company in which public are not substantially interested (defined in Sec. 2(18) of the Act), the unabsorbed business loss relating to any Assessment Year can be carried forward and set off against the income in a subsequent Assessment Year only if the shares of the company carrying not less than 51% of the voting power were beneficially held by the same persons both on the last day of the Previous Year(s) in which the loss claimed to be set off and on the last day of the Previous Year in which loss was incurred. Exceptions: The provisions stated supra shall not apply if (a) the change in the voting power takes place due to the following reasons : (i) the death of a shareholder; or (ii) transfer of shares by way of gift to any relative of the shareholder making such gift. (b) W.e.f. AY , this section shall not apply to any change in the shareholding of an Indian company which is subsidiary of a foreign company arising as a result of amalgamation or demerger of a foreign company subject to the condition that 51% of the shareholders of the amalgamating or demerged foreign company continue to remain the shareholders of the amalgamated or the resulting foreign company. Order of Priority in carry forward and set-off of losses Depreciation can be carried forward and set off against the profits from any business in the succeeding Assessment Year upto A.Y The business in which the loss was incurred need not be continued in that year. The effect of depreciation and business loss should be given in the following order: Current year s Depreciation Unabsorbed Business loss Unabsorbed Depreciation A return of loss is required to be furnished for determining the carry forward of such losses, by the due date prescribed for different assesses under section 139(1) of the Act. (Sec. 80). Illustration 4 Will Long Term Capital Loss from transfer of equity shares which have been sold through recognized stock exchange on which securities transaction has been paid be allowed to the set-off from any other Long Term Capital Gain? Solution: Loss incurred by an assessee from a source, income from which is exempt, cannot be set-off against income from a DIRECT TAX LAWS AND INTERNATIONAL TAXATION 157

168 Set-off and Carry Forward and Set-off of Losses taxable source [CIT vs. Thyagarajan (S.S.) (1981) 129 ITR 115 (Mad.)] Since, Long Term Capital Gain from the transfer of equity shares which have been sold through recognized stock exchange on which securities transaction has been paid is exempt u/s 10(38), therefore Long Term Capital Loss from such transfer shall not be allowed to be set-off. Illustration 5. Can business loss be set-off against income from undisclosed sources? Solution: The Madras High Court in the case of CIT vs. Chensing Ventures (2007) 291 ITR 258 (Mad) held that once the loss is determined, the same should be set-off against the income determined under any other head of income. The loss can therefore be set-off even against income from undisclosed sources. Illustration 6. The business of Sia Ltd, an industrial undertaking was discontinued on 25th September, 2012 due to fire and the company had incurred the following business losses: (i) Loss for Assessment Year `4,00,000 (ii) Brought forward business loss of Assessment Years to `6,00,000 The above business is re-established on 25th December, What will be the treatment of the losses if the profit of assessment year is `5,00,000? Solution: Since the business is re-established within three years from the end of the previous year in which it was discontinued due to fire, the loss of `10,00,000 can be set off against `5,00,000 i.e. the income of the year in which it was reestablished. The balance loss of `5,00,000 can be carried forward for seven succeeding Assessment Years. CHAPTER SUMMARY & EXAM PREPARATION NOTES Set-Off of Losses from one source against Income from another source under the same Head of Income [Section 70]: If the net result for any assessment year in respect of any source falling under any head of income is a loss, the assessee is entitled to set off the amount of such loss against his income from any other source under the same head. However, Loss from Speculation Business, Loss from the activity of owning and maintaining race horses, long-term capital loss can be set-off from any other source of income. Where any individual transfers directly or indirectly any asset (other than a house property) to the spouse, the income from such asset shall be included in the income of the transferor. Carry-Forward and Set-Off of Losses If it is not possible to set-off the losses during the same assessment year in which these occurred, so much of the loss as has not been so set-off out of the following losses, can be carried forward to the following assessment year and so on to be set-off against the income of those years provided the losses have been determined in pursuance of a return filed by the asessee and it is the same assessee who sustained the loss. Losses suffered under the following heads are not allowed to be carried forward and set off: (1) Losses under the head salaries. (2) Losses under the head Income from other sources (excepting loss suffered from the activity of owning and maintaining race horses). W.e.f. assessment year , Section 72A has been substituted by new section to provide for carry forward and set off of accumulated loss and unabsorbed depreciation allowance in case of: (i) amalgamation [Section 72A(1), (2) and (3)], or (ii) demerger [Section 72A(4) and (5], or 158 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

169 (iii) reorganisation of business [Section 72A(6)]. Submission of Return for Loss (Section 80): An assessee is not entitled to carry-forward a loss unless he has filed a return of loss to the Department in time and in the prescribed form. It is obligatory on the part of the assessee to file such return; otherwise he will be deprived of the benefit of carry forward of losses. In fact, only that amount of loss is allowed to be carried-forward which has been computed by the AO and not by the assessee. Example Business income (computed as per the provisions of Income-tax Act) of Mr. SRK before allowing deduction on account of depreciation amounted to `84,000. Depreciation as per the provisions of section 32 amounted to `1,00,000. What will be the amount of unabsorbed depreciation in this case? Solution Business income before claiming deduction under section 32 on account of depreciation is `84,000 and depreciation allowable as per section 32 is `1,00,000, hence, after claiming deduction on account of depreciation of `1,00,000, there will be a loss of `16,000. This loss is on account of depreciation and, hence, loss of `16,000 will be termed as unabsorbed depreciation. MCQ 1. If income from a particular source is exempt from tax, then loss from such source cannot be set off against any other income which is chargeable to tax. (a) True (b) False Correct answer : (a) Justification of correct answer : If income from a particular source is exempt from tax, then loss from such source cannot be set off against any other income which is chargeable to tax. Thus, the statement given in the question is true and hence, option (a) is the correct option. 2.The process of adjustment of loss from a source under a particular head of income against income from other source under the same head of income is called. (a) Inter-head adjustment (b) Intra-head adjustment (c) Carry forward of loss (d) Clubbing of income Correct answer : (b) Justification of correct answer: The process of adjustment of loss from a source under a particular head of income against income from other source under the same head of income is called intra-head adjustment. Thus, option (b) is the correct option. 3.While making intra-head adjustment of loss, short-term capital loss cannot be set off against long-term capital gain. (a)true (b) False Correct answer : (b) DIRECT TAX LAWS AND INTERNATIONAL TAXATION 159

170 Set-off and Carry Forward and Set-off of Losses Justification of correct answer : While making intra-head adjustment of loss, short-term capital loss can be set off against short-term capital gain as well as against long-term capital gain. Thus, the statement given in the question is false and hence, option (b) is the correct option. 4.While making intra-head adjustment,loss from the business of owning and maintaining race horses can be set off against only. (a) Income from winnings from lotteries (b) Income from crossword puzzles (c) Income from business of owning and maintaining race horses (d) Income from card game Correct answer : (c) Justification of correct answer : Loss from the business of owning and maintaining race horses cannot be set off against any income other than income from the business of owning and maintaining race horses. Thus, option (c) is the correct option. 5.While making inter-head adjustment of loss, loss from business and profession cannot be set off against income chargeable to tax under the head Salaries. (a) True (b) False Correct answer : (a) Justification of correct answer : While making inter-head adjustment of loss, loss from business and profession (including unabsorbed depreciation) cannot be set off against income chargeable to tax under the head Salaries. Thus, the statement given in the question is true and hence, option (a) is the correct option. 6.Loss under the head Profits and gains of business or profession can be carried forward even if the return of income/loss of the year in which loss is incurred is not furnished on or before the due date of furnishing the return, as prescribed under section 139(1). (a) True (b)false Correct answer : (b) Justification of correct answer : Loss under the head Profits and gains of business or profession can be carried forward only if the return of income/loss of the year in which loss is incurred is furnished on or before the due date of furnishing the return, as prescribed under section 139(1). Thus, the statement given in the question is false and hence, option (b) is the correct option. 7.If loss under the head Income from house property cannot be fully adjusted in the year in which such loss is incurred, then unadjusted loss can be carried forward for years immediately succeeding the year in which the loss is incurred. (a) 2 (b) 5 (c) DIRECT TAX LAWS AND INTERNATIONAL TAXATION

171 (d) 10 Correct answer : (c) Justification of correct answer : If loss under the head Income from house property cannot be fully adjusted in the year in which such loss is incurred, then unadjusted loss can be carried forward for 8 years immediately succeeding the year in which the loss is incurred. Thus, option (c) is the correct option. 8.Restriction of section 78 is applicable only in case of loss and is not applicable in case of adjustment of unabsorbed depreciation, unabsorbed capital expenditure on scientific research or family planning expenditure. (a) True (b) False Correct answer : (a) Justification of correct answer : Section 78 contains provisions relating to carry forward and set off of loss in case of change in constitution of a partnership firm due to death or retirement of a partner (i.e. when a partner goes out of firm by retirement or death). In such a case, the share of loss attributable to the outgoing partner cannot be carried forward by the firm. Restriction of section 78 is applicable only in case of loss and is not applicable in case of adjustment of unabsorbed depreciation, unabsorbed capital expenditure on scientific research or family planning expenditure. Thus, the statement given in the question is true and hence, option (a) is the correct option. 9.In case of a closely held company, if the person beneficially holding of the voting power as on the last day (i.e. 31st March) of the year in which the loss was incurred and on the last day (i.e. 31st March) of the year in which the company wants to set off the brought forward loss are different, then the company cannot set off such brought forward loss. (a) 20% (b) 25% (c) 50% (d) 51% Correct answer : (d) Justification of correct answer : In case of a company in which public are not substantially interested (i.e., closely held company), if the person beneficially holding 51% of the voting power as on the last day (i.e. 31st March) of the year in which the loss was incurred and on the last day (i.e. 31st March) of the year in which the company wants to set off the brought forward loss are different, then the company cannot set off such brought forward loss. Thus, option (d) is the correct option. SHORT NOTES (i) Set-off of losses from one source against income from the same source. (ii) Set-off of losses against income under the same head. (iii) Losses in speculation business (iv) Losses of registered firms. (v) Carry-forward and set-off of losses in the case of companies DIRECT TAX LAWS AND INTERNATIONAL TAXATION 161

172 Set-off and Carry Forward and Set-off of Losses 162 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

173 Study Note - 5 DEDUCTION IN COMPUTING TOTAL INCOME This Study Note includes 5.1 Introduction 5.2 Deduction from Gross Total Income 5.1 INTRODUCTION In order to further the Government Policy of attracting investment and activity in the desired direction and to provide stimulus to growth or to meet social objectives, concession in the form of deduction from Taxable Income is allowed. Chapter VI-A of the Income-tax Act, 1961 contains such deduction provisions. With the advent of new philosophy of giving direct assistance to the desired goal and avoiding indirect route of tax concessions, the numbers of deductions are being omitted. This is also with a view to avoid complexity of tax law. In computing Total Income of an assessee deductions under sections 80CCC to 80U are permissible from Gross Total Income. [Section 80A (1)] Indian tax laws contain certain provisions, which are intended to act as an incentive for achieving certain desirable socio-economic objectives. These provisions are contained in Chapter VIA and are in the form of deductions (80C to 80U) from the Gross Total Income. By reducing the chargeable income, these provisions reduce the tax liability, increase the post-tax income and thus induce the tax-payers to act in the desired manner. The aggregate amount of deductions under sections 80C to 80U cannot exceed the Gross Total Income. Deduction not to be allowed unless return furnished [Sec. 80AC] Where in computing the Total Income of an assessee of the Previous Year relevant to the Assessment Year commencing on the 1st day of April, 2006 or any subsequent Assessment Year, any deduction is admissible under Section 80-IA or Section 80-IAB or Section 80-IB or Section 80-IC or Section 80-ID or Section 80-IE, no such deduction shall be allowed to him unless he furnishes a return of his income for such Assessment Year on or before the due date specified under sub-section (1) of section 139. Gross Total Income means the aggregate of income computed under each head as per provisions of the Act, after giving effect to the provisions for clubbing of incomes (Sections 60 to 64) and set off of losses and but before making any deductions under this chapter. [Section 80B(5)] The deductions under Chapter VIA are not available from the following incomes though these are included in the Gross Total Income : (i) Long Term Capital Gains; (ii) Winnings from lotteries, cross word puzzles etc.; (iii) Incomes referred to in Sections 115A to AD, 115BBA and 115D. The aggregate amount of deductions under Chapter VIA [Sections 80CCC to 80U] shall not exceed the Gross Total Income of the assessee. [Section 80A (2)]. 5.2 DEDUCTIONS FROM GROSS TOTAL INCOME Deductions under chapter VIA u/s.80c,80ccc & 80CCD The following investments are eligible for deduction: Life Insurance Premium, Statutory Provident Fund, RPF, PPF, NSC, ULIP, Notified Units of Mutual Fund, Re-payment of housing loan, Tuition Fee paid, fixed deposit for 5 years or more with a scheduled Bank, Senior Citizen Saving DIRECT TAX LAWS AND INTERNATIONAL TAXATION 163

174 Scheme, five year time deposit scheme in Post Office etc. Amount of deduction allowable; gross qualifying amount or Rs.1,50,000 which ever is lower. Eligible Amount u/s 80C Any sums paid or deposited by the assessee 1. As Life Insurance premium to effect or keep in force insurance on life of (a) self, spouse and any child in case of individual and (b) any member, in case of HUF. Insurance premium should not exceed 10%/15% / 20 % of the actual capital sum assured as follows In case of insurance policy issued upto % of the actual capital sum assured, excluding the value of any premiums agreed to be returned or any bonus. In case of insurance policy issued on or after % of the actual capital sum assured, i.e. minimum amount assured excluding the value of any premiums agreed to be returned or any bonus. In case of insurance policy issued on or after on the life of a person suffering from disability / severe disability referred to u/s 80 U or disease / ailment specifically referred u/s 80DDB - 15 % of the actual capital sum assured, i.e minimum amount assured excluding the value of any premiums agreed to be returned or any bonus 2. To effect or keep in force a Non Commutable deferred annuity contract on life of self, spouse and any child in case of individual 3. By way of deduction from salary payable by or on behalf of the Government to any individual for the purpose of securing to him a deferred annuity or making provision for his spouse or children. The sum so deducted does not exceed 1/5th of the salary. 4. As contribution (not being repayment of loan) by an individual to Statutory Provident Fund 5. As contribution to PPF scheme, 1968 in the name of self, spouse & any child in case of individual and any member in case of HUF. 6. As contribution by an employee to a recognized provident fund. 7. As contribution by an employee to an approved superannuation fund. 8. Subscription to the NSC (VIII issue) and IX issue including accrual interest for 6 years. 9. As a contribution to Unit-linked Insurance Plan (ULIP) of UTI or LIC Mutual Fund (Dhanraksha plan) in the name of self, spouse and child in case of individual and any member in case of HUF. 10. To effect or to keep in force a contract for such specified annuity plan of the LIC (i.e. Jeevan Dhara, Jeevan Akshay and their upgradations) or any other insurer 11. As subscription to any units of any Mutual Fund notified u/s 10(23D) (Equity Linked Saving Schemes). 12. As a contribution by an individual to any pension fund set up by any Mutual Fund notified u/s 10(23D). 13. As subscription to any such deposit scheme of National Housing Bank (NHB), or as a contribution to any such pension fund set up by NHB as notified by Central Government 14. As subscription to notified deposit schemes of (a) Public sector company providing long term finance for purchase/construction of residential houses in India or (b) any authority constituted in India for the purposes of housing or planning, development or improvement of cities, towns and villages. 15. As tuition fees (excluding any payment towards any development fees or donation or payment of similar nature), to any university, college, school or other educational institution situated within India for the purpose of full-time education of any two children of children of Individuals. 16. Ascertainment of payments towards the cost of purchase or construction of a residential house property 164 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

175 (including the repayment of loans taken from Government, Bank, LIC, NHB, assessee s employer etc., and also the stamp duty, registration fees and other expenses for transfer of such house property to the assessee 17. As subscription to equity shares or debentures forming part of any eligible issue of capital of public company or any public financial institution approved by Board. 18. Bank Fixed Deposit with 5 Years Lock in Period 19. Subscription to Notified Bonds of NABARD 20. Deposit with Senior Citizen Saving Scheme 21. Time Deposit with Post Office of 5 Years The following conditions are to be satisfied. (a) Tax Payer is an individual (b) He should have deposited a sum under annuity plan of Insurance Co during the previous year. (c) The amount should be paid of the income chargeable to tax. (d) Maximum Investment is `1,50,000 Cumulative monetary ceiling - 80CCE By virtue of section 80CCE, the aggregate amount of deduction under sections 80C, 80CCC and 80CCD(1) [i.e., contribution by an employee (or any other individual) towards NPS] cannot exceed `1,50,000 (`1,00,000 for the assessment years to ). The ceiling limit is not applicable (from the assessment year ) in respect of employer's contribution towards NPS. Rajeev Gandhi Equity Saving Scheme 80CCG Deductions in respect of investment made under any equity savings scheme: Total Income does not Exceed 12 Lacs Deduction 50% of Investment or `25,000, whichever is higher For 3 Consecutive Years. Lock-in Period 3 Years. Over & above Deduction of `1,50,000/- under 80C Gross total income of the assessee for the relevant assessment year shall not exceed `12 lakhs Deduction u/s.80d Deductions in respect of Medical insurance premia, health check up and medical treatment : Medical insurance premium (Med claim Policy) paid: On the health of taxpayer, spouse, parents and dependent children. The premium can be paid by any mode other than cash Amount of deduction `25,000 additional deduction `5,000 is allowed if the policy is taken on the health of senior citizen. Preventive Medical Check up `5,000 from (included in the above deductions) Following conditions are to be satisfied (a) Tax payer is an individual or HUF (b) Medical Insurance premium is to be paid to Insurance Co (c) Premium is to be paid by cheque (d) It is paid out of Income chargeable to tax. DIRECT TAX LAWS AND INTERNATIONAL TAXATION 165

176 Mediclaim Policy is to be taken on Health of following person : Individual : on the health of taxpayer, spouse or dependent parents or children of taxpayer. HUF : on the health of any member of the taxpayer. Deduction: Insurance Premium paid or ` 25,000 which ever is less. The above limit is increased to ` 30,000 in case any assessee, his spouse or member of family (in case of HUF) is 65 years of age. Additional Limit of ` 25,000 for parents medical insurance premium or preventive health check up (`30,000 - for parents who are senior citizens) The priorities for senior citizens (80 years or more) For medical treatment expenditure of any parents, aged 80 years or above, not having medical insurance cover, maximum limit is `30,000 ( aggregate cover under above 2 points not to exceed `30,000) Following clauses (c) and (d) shall be inserted after clause (b) of sub-section (2) of section 80D by the Finance Act, 2015, w.e.f Deduction on account of medical expenditure incurred (instead of sum paid to effect any insurance of the health) to be allowed in case of very senior citizen; (c) the whole of the amount paid on account of medical expenditure incurred on the health of the assessee or any member of his family as does not exceed in the aggregate `30,000; and (d) the whole of the amount paid on account of medical expenditure incurred on the health of any parent of the assessee, as does not exceed in the aggregate `30,000: Provided that the amount referred to in clause (c) or clause (d) is paid in respect of a very senior citizen and no amount has been paid to effect or to keep in force an insurance on the health of such person. Provided further that the aggregate of the sum specified under clause (a) and clause (c) or the aggregate of the sum specified under clause (b) and clause (d) shall not `30,000. Explanation. For the purposes of clause (a), family means the spouse and dependant children of the assessee. Where the amounts referred to in clauses (a) and (b) of sub-section (2) are paid on account of preventive health check-up, the deduction for such amounts shall be allowed to the extent it does not exceed in the aggregate five thousand rupees. For the purposes of deduction under sub-section (1), the payment shall be made by (i) any mode, including cash, in respect of any sum paid on account of preventive health check-up; (ii) any mode other than cash in all other cases not falling under clause (i). Following sub-section (3) shall be substituted for the existing sub-section (3) of section 80D by the Finance Act, 2015, w.e.f : Where the assessee is a Hindu undivided family, the sum referred to in sub-section (1), shall be the aggregate of the following, namely: (a) whole of the amount paid to effect or to keep in force an insurance on the health of any member of that Hindu undivided family as does not exceed in the aggregate ` 25,000; and (b) the whole of the amount paid on account of medical expenditure incurred on the health of any member of the Hindu undivided family as does not exceed in the aggregate `30,000. Provided that the amount referred to in clause (b) is paid in respect of a very senior citizen and no amount has been paid to effect or to keep in force an insurance on the health of such person. Provided further that the aggregate of the sum specified under clause (a) and clause (b) shall not exceed `30,000. Additional deduction of `5,000: Where the sum specified in the above para of quantum of deduction is paid to 166 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

177 effect or keep in force an insurance on the health of any person specified therein, and who is a senior citizen, an additional deduction of `5,000 shall be allowed. Deduction u/s.80dd Deduction in respect of maintenance including medical treatment of a handicapped dependent : Furnish a certificate issued by the medical authority in form No.10-IA. Amount of deduction `75,000 is allowed, irrespective of actual amount of expenditure incurred In case severe disability (of 80% or more) - `1,00,000 is allowed. The person claiming deduction under this section, he should not claim any deduction under section 80U The following conditions should be satisfied. (a) Tax payer is a resident individual (b) Tax payer has incurred an expenditure for medical treatment of a dependent OR Tax payer has paid or deposited under a scheme of Insurance Co for maintenance of dependent person with disability Deduction u/s.80ddb Deductions in respect of : Medical treatment of dependent or self for specified disease/ailment. Amount of deduction `40,000 or amount of expenditure whichever is lower: if the person is a senior citizen `80,000 is allowed. This deduction is not allowable by the employer Following conditions has to be satisfied (a) Taxpayer is resident Individual or HUF (b) Taxpayer has actually incurred expenditure for the medical treatment of a specified disease or ailment as prescribed by the Board. (c) The expenditure is actually incurred for medical treatment of the assessee himself or dependent spouse, parents, childrens, brothers & sisters. (d) The assessee shall have to submit a certificate in the prescribed form Deductions -u/s.80e Deductions in respect of : Payment of interest on loan taken for higher education: spouse or children The loan has to be taken from any financial institution or approved charitable institution, including HDFC Ltd, for himself / herself, spouse, children or student for whom the assessee is the legal guardian in respect of interest or loan paid by the assessee. The deduction is available for a maximum of 8 years (initial year and 7 successive years) Following conditions is to be satisfied. (a) The assessee is an individual. (b) He had taken a loan from any financial institution or approved charitable institution (c) The Loan was taken for the purpose of pursing his higher education- i.e., Full time course or of his children DIRECT TAX LAWS AND INTERNATIONAL TAXATION 167

178 (d) Amount is paid by the individual during the previous year by way of payment of interest on such loan (e) Such amount is paid out of his income chargeable to tax Interim question What is the upper limit of deduction (including interest) on loan, taken by an individual from any financial institution or any approved charitable institution for the purpose of pursuing his/ her higher education? (a) ` 30,000 (b) ` 40,000 (c) ` 50,000 (d) Any amount (e) none of the above Section 80EE This is a new proposal which has been made in Budget Deduction for interest on loan on Residential House Property. Deduction upto `50,000 Conditions: Loan taken during FY Loan Amount does not Exceed `35 Lacs Value or Residential Property does not Exceed `50 Lacs Assessee does not own any residential house property on the date of sanction of loan Deductions -u/s.80g Deduction in respect of donations to certain funds, charitable institutions etc. Deduction can be allowed by the employer only in respect of donations made to Prime Minister Relief Fund, Chief Ministers Relief Fund, Earthquake Fund, National Childern Fund, etc. In respect of donations to charitable institutions, deductions cannot be allowed by the employer. Deduction is available to any Taxpayer Conditions: (a) Donation should not be in kind (b) Donation exceeding `10,000 must not be paid by cash, may be paid by other mode (c) Donation should be made to specified funds or institution Donation to Certain Funds or institution can be given without any restrictions. Other Donations are eligible for deduction subject to limit of 10 % of Gross Total Income Less Long Term Capital Gains & other Deduction 100 % Deduction in some cases (A) Donations made to the following are eligible for 100% deduction without any qualifying limit. 168 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

179 1. Prime Minister s National Relief Fund 2. National Defence Fund 3. Prime Minister s Armenia Earthquake Relief Fund 4. The Africa (Public Contribution - India) Fund 5. The National Foundation for Communal Harmony 6. Approved university or educational institution of national eminence 7. The Chief Minister s Earthquake Relief Fund, Maharashtra 8. Donations made to Zila Saksharta Samitis. 9. The National Blood Transfusion Council or a State Blood Transfusion Council. 10. The Army Central Welfare Fund or the Indian Naval Benevolent Fund or The Air Force Central Welfare Fund. 11. The National Illness Assistance Fund 50 % Deduction in other cases (B) Donations made to the following are eligible for 50% deduction without any qualifying limit. 1. Jawaharlal Nehru Memorial Fund 2. Prime Minister s Drought Relief Fund 3. National Children s Fund 4. Indira Gandhi Memorial Trust 5. The Rajiv Gandhi Foundation. (C) Donations to the following are eligible for 100% deduction subject to qualifying limit (i.e. 10% of adjusted gross total income). 1. Donations to the Government or a local authority for the purpose of promoting family planning. 2. Sums paid by a company to Indian Olympic Association or other notified association or institution established in India for development of infrastructure for sports or for sponsorship of sports in India. (D) Donations to the following are eligible for 50% deduction subject to the qualifying limit (i.e. 10% of adjusted gross total income). Donation to the Government or any local authority to be utilized by them for any charitable purposes other than the purpose of promoting family planning. Donations to statutory authority engaged in the activities of providing housing accommodation or of development and improvement of cities, towns or villages. Donations to a corporation established by Central Govt. or any State Govt. for promoting the interests of the members of a minority community. Donations for renovation or repairs of any temple, mosque, gurudwara, church or any other place notified by Central Govt. to be of historical, archaeological or artistic importance Donations to any Regimental Fund or Non-Public Fund established by the armed forces of the Union for the welfare of the past or present members of such forces or their dependents. Amount of deduction The quantum of deduction is as follows :- Category A- 100 % of amount donated DIRECT TAX LAWS AND INTERNATIONAL TAXATION 169

180 Category B - 50 % of the amount donated in the funds Category C 100% of the amount donated in the funds subject to maximum limit of 10% of Adjusted GTI. Category D 50% of the amount donated in the funds subject to maximum limit of 10% of Adjusted GTI. Deductions -u/s.80gg Deduction in respect of rent paid The assessee, his spouse, or minor child or the HUF of which he is a member should not own any residential house at the place of his employment / business or profession, Assessee should not be in receipt of HRA. The least of the following amount is exempted Rent paid in excess of 10% of total income before allowing deduction under this section. Rs.5,000 per month. 25% of total income before allowing deduction under this section Following conditions is to be satisfied (a) Tax payer is an individual (b) Tax payer is a self employed person or salaried person who is not receipt of HRA (c) Tax payer/spouse/minor child does not own a residential accommodation at a place of employment or business Donations for scientific research or rural development u/s 80GGA Deduction is available to : Donations for Scientific Research or Rural Development or Conservation of Natural Resources or to National Urban Poverty Eradication Fund Assessee should not have income under the Head Profits and Gains of Business or Profession. The deduction is available in respect of the payments made during the previous year to the following institutions: To an approved scientific research association, university, college or other institution to be used for scientific research To an approved university, college or other institution for research in social science or statistical research To an association or institution engaged in any approved programme for rural development, or which is engaged in training of persons for implementation of rural development programmes or to a notified rural development fund or to notified National urban Poverty Eradication Fund. Assessee should furnish certificate under Section 35CCA. To a public sector company or a local authority or to an institution approved by the National Committee, for carrying out any eligible project or scheme. Assessee should furnish certificate under Section 35AC. Deduction - 100% of the sum paid to the said institutions. Note: Deduction allowed to the assessee shall not be denied if subsequent to the payment of the sum by the assessee, the approval granted to any of the above institutions is withdrawn DEDUCTIONS BY COMPANIES TO POLITICAL PARTIES [SEC. 80GGB] Allowable to : An Indian Company Condition : Amount should be contributed by any mode other than cash. Amount of Deduction : 100% of sum contributed during a Previous Year to any political party, registered u/s 29A of Representation of the People Act, DIRECT TAX LAWS AND INTERNATIONAL TAXATION

181 Deduction-u/s.80GGC Any amount of contribution made by a person to a political party or an electoral trust is deductible. This deduction is not allowable by the employer. Allowable to : Any person except local authority and an artificial juridical person wholly or partly funded by the Government. Condition : Amount should be contributed by any mode other than cash. Amount of Deduction : 100% of sum contributed during a Previous Year to any political party, registered u/s 29A of Representation of the People Act, Deductions in respect of profits and gains from industrial undertakings or enterprises engaged in infrastructural development ( sec 80IA) Amount of deduction - In case of undertaking providing telecom services % of profits and gains for initial 5 AY, 30 5 for next 5 AY In case of other eligible undertaking, 100 % of profits and gains for 10 consecutive AYs Deductions for profits and gains of an undertakings or enterprises engaged in development of SEZ ( sec 80IAB) Amount of deduction % of profits and gains for 10 consecutive AY s (1) Where the Gross Total Income of an assessee, being a Developer, includes any profits and gains derived by an undertaking or an enterprise from any business of developing a Special Economic Zone, notified on or after the 1st day of April, 2005 under the Special Economic Zones Act, 2005, there shall, in accordance with and subject to the provisions of this Section, be allowed, in computing the Total Income of the assessee, a deduction of an amount equal to one hundred per cent of the profits and gains derived from such business for ten consecutive Assessment Years. (2) The deduction specified in sub-section (1) may, at the option of the assessee, be claimed by him for any ten consecutive Assessment Years out of fifteen years beginning from the year in which a Special Economic Zone has been notified by the Central Government Provided that where in computing the Total Income of any undertaking, being a Developer for any Assessment Year, its profits and gains had not been included by application of the provisions of sub-section (13) of Section 80-IA, the undertaking being the Developer shall be entitled to deduction referred to in this Section only for the unexpired period of ten consecutive Assessment Years and thereafter it shall be eligible for deduction from income as provided in sub-section (1) or sub-section (2), as the case may be Provided further that in a case where an undertaking, being a Developer who develops a Special Economic Zone on or after the 1st day of April, 2005 and transfers the operation and maintenance of such Special Economic Zone to another Developer (hereafter in this Section referred to as the transferee Developer), the deduction under sub-section (1) shall be allowed to such transferee Developer for the remaining period in the ten consecutive Assessment Years as if the operation and maintenance were not so transferred to the transferee Developer. (3) The provisions of sub-section (5) and sub-sections (7) to (12) of Section 80-IA shall apply to the Special Economic Zones for the purpose of allowing deductions under sub-section (1). Deductions in respect of profits and gains of an eligible start-up from eligible business ( sec 80-IAC) Amount of deduction % of profits and gains for 3 consecutive AYs. Conditions : 1. The eligible start up should fulfil the specified conditions. Where deduction is claimed under this provision in respect of profits of an eligible start up, deduction to the extent of such profits shall not be allowed under sections 80 HH to 80 RRB and deduction under this provision shall not exceed the profits of the start-up. DIRECT TAX LAWS AND INTERNATIONAL TAXATION 171

182 2. The accounts of the start-up are required to be audited and an audit report is to be furnished in the prescribed form. Deductions for profits and gains from developing and building affordable housing projects ( sec 80-IBA) Amount of deduction % of profits and gains from business of such housing projects Interim question Deduction under Section 80-IB is available to: (a) Charitable Trust (b) Tour and Travels (c) Industrial Research (d) Convention Centre Which of the following gets 50% deduction on the profits and gains derived from its business for a period of five consecutive years beginning from the initial assessment year in any place? (a) Multiplex Theatre (b) Convention Centre (c) Hospital (d) Charitable Trust Deduction under section 80-IB in respect of profits and gains from certain industrial undertakings other than infrastructure development undertakings: Deduction under section 80-IB is available to different industrial undertakings as follows - Business of an industrial undertaking Operation of Ship Hotels Industrial research Production of mineral oil Developing and building housing projects Integrated handling, storage and transportation of food grains units Multiplex theatres Convention centre Operating and maintaining hospital in rural area Hospital located in certain areas It whould be a new undertaking - The industrial undertaking is not formed by splitting up, or the reconstruction, of a business already in existence. However, if a new industrial undertaking is set up in an old building, deduction shall be admissible as this section provides for new undertaking and does not provide for new building. It should not be formed by transfer of machinery or plant previously used for any purpose - it is not formed by a transfer to a new business of machinery and plant previously used for any purpose. Two exceptions - In the two cases given below, the aforesaid rule is not applicable - 20 per cent old machinery is permitted Second-hand imported machinery is treated as new 172 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

183 It should not manufacture or produce articles specified in the Eleventh Schedule - It manufactures or produces any article or thing (not being an article or thing specified in the list in the eleventh Schedule) or operates cold storage plant, in any part of India. It must start manufacturing between a specified period. It should employ 10/20 workers Return of Income - Form the assessment year , return of income should be submitted on or before the due date of submission of return of income given by section 139(1). Deduction should be claimed in the return of income. Deduction in respect of certain undertakings in North-Eastern States [Sec. 80-IE] Section 80-IE is applicable from the assessment year Conditions - The following conditions should be satisfied 1. The taxpayer begins manufacture or production of goods or undertakes substantial expansion during April 11, 2007 and March 31, Alternatively, the taxpayer has begun to provide eligible services during April 1, and March 31, However, deduction under this section is not available in respect of manufacture or production of tobacco, pan masala, plastic carry bags of less than 20 microns or goods produced by [petroleum oil and gas refineries. Eligible services for this purpose are hotel (2-star or above), nursing home 1(25 beds or more), old age homes, vocational training institutes for hotel management, catering and food [crafts, entrepreneurship development, nursing and paramedical, civil aviation related training, fashion designing and industrial training, IT related training centres, IT hardware manufacture units and bio technology. 2. The aforesaid activity takes place in any North-Eastern States (i.e., Arunachal Pradesh, Assam, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim and Tripura). 3. The aforesaid business is not formed by the splitting up, or the reconstruction, of a business already in existence. 4. The aforesaid business is not formed by the transfer to a new business of machinery or plant used for any purpose. 5. Audit report should be submitted! along with the return of income. 6. Return of income is submitted on or before the due date of submission of return of income given under section 139(1). 7. Deduction under section 80-IE is not available unless it is claimed in the return of income Amount of deduction - If the aforesaid conditions are satisfied, 100 per cent of profit from the aforesaid business / services shall be deductible for 10 years beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture/produce article or things or complete substantial expansion. Substantial expansion for this purpose means increase in the investment in the plant ail machinery by at least 25 per cent of the book value of plant and machinery (before taking depreciation in any year), as on the first day of the previous year in which the substantial expansion is undertaken. Other points - If deduction is claimed and allowed under the aforesaid provisions, the taxpayer will not be able to avail any deduction under sections 10A, 10AA, 10B, 10BA, 80C to 80U in relation to profits and gains of the above noted undertaking. Moreover, no deduction shall be allowed to an undertaking under section 80-IE where the total period of deduction under section 10C, second proviso to section 80-IB(4), section 80-IC and section 80-IE exceeds 10 assessment years. Deduction in respect of profits and gains from business of collecting and processing of bio-degradable waste (Section 80JJA) Where the gross total income of an assessee includes any profits and gains derived from the business of collecting DIRECT TAX LAWS AND INTERNATIONAL TAXATION 173

184 and processing or treating of bio-degradable waste for: (a) Generating power, or (b) Producing bio-fertilisers, bio-pesticides or other biological agents, or (d) Producing bio-gas, or (e) Producing pellets or briquettes for fuel, or (f) Organic manure, A deduction under Section 80JJA shall be allowed. Amount of deduction : The whole of such profits or gains shall be allowed as a deduction for a period of five consecutive assessment years beginning with the assessment year relevant to the previous year in which such business commences. DEDUCTION IN RESPECT OF EMPLOYMENT OF NEW WORKMEN [SEC 80JJAA] All assessee having manufacturing units is allowed for deduction provided the following conditions are satisfied : (i) The Gross Total Income of the assessee includes profits and gains derived from the manufacture of goods in a factory. (ii) The factory is not hived off or transferred from another existing undertaking or amalgamation with another industrial undertaking or as a result of any business re-organization. (iii) The assessee employs new regular workmen in the Previous Year in such factory. (iv) The assessee furnishes the report of a Chartered Accountant in Form No. 10DA [Rule 19AB] Deduction is available for 3 Previous Years commencing from the Previous Year in which such employment is provided. Amount of deduction (i) New industrial undertaking : 30% of the wages paid to new regular workmen in excess of 50 regular workmen employed during the year. (ii) Existing undertaking : 30% of the wages paid to new regular workmen provided these is at least 10% increase in number of regular workmen over the existing member of workmen employed in such undertaking, as on the last day of the preceding year. Regular workmen It does not include : (a) a casual workmen or (b) a workmen employed through contract labour; or (c) any other workman employed for a period of less than 300 days during the Previous Year. For the purpose of this section, factory shall have the same meaning as assigned to it in clause (m) of Section 2 of the Factories Act, DEDUCTION IN RESPECT OF CO-OPERATIVE SOCIETIES [SEC. 80P] The following amounts are allowed as deduction under this Section (i) 100% of the profits attributable to any or more of the following activities in the case of a cooperative society engaged in (a) carrying on business of banking or providing credit facilities to its members; or (b) a cottage industry; or (c) the marketing of the agricultural produce of its members; or 174 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

185 (d) the purchase of agricultural implements, seeds, live stock or other articles intended for agriculture for the purpose of supplying them to its members; or (e) processing, without aid of power, of the agricultural produce of its members; or (f) the collective disposal of the labour of its members; or (g) fishing or allied activities; or (h) primary cooperative society engaged in supplying milk raised by its member to a Federal Milk Coop. Society or to the Government or a local authority or a Govt. Company or Corporation established under Central/State or Provincial Act. Similar benefit is also extended to a primary Cooperative Society engaged in supplying oilseeds, fruits and vegetables raised or grown by its members. (ii) The whole of interest and dividend income derived by a Cooperative Society from its investments in any other Cooperative Society; (iii) The whole of interest income from securities and property income in the case of a Cooperative Society other than housing society or an urban Consumer Society or a Society carrying on transport business where Gross Total Income does not exceed ` 20,000. Urban Consumer Cooperative Society means a society for the benefit of consumers within the limits of Municipal Corporation, municipality, municipal committee, notified area committee, town area or cantonment. (iv) The whole of the income from letting of godowns or warehouses for storage, processing or facilitating the marketing of commodities. (v) In respect of other activities carried on either independently or in addition to above activities upto a sum of ` 50,000 (`1,00,000 in case of Consumer Corporation Society) U/s. 80P(2)(c). Deduction in respect of royalty income, etc. of authors of certain books other than text books (Section 80QQB) Conditions to be satisfied for claiming deduction under this section: a) The deduction is available to an individual who is resident in India and is an author of a book b) The book should be a work of literary, artistic or scientific nature c) The income must be derived by him in the exercise of his profession d) The income must be either: On account of any lump sum consideration for the assignment or grant of any of his interests in the copyright of such book, or Of royalty or copyright fees (whether recoverable in lump sum or otherwise) Amount of deduction a) 100% of the royalty income or b) `3,00,000, whichever is less. Other Parts: Where the income by way of royalty or the copyright fee is not a lump sum consideration in lieu of all rights of the assessee in the book, then such royalty, etc. before allowing expenses, in excess of 15% of the value of such books sold during the previous year, shall be ignored. Lump sum includes an advance payment on account of such royalties or copyright fees which is not returnable. Where any income is earned from any source outside India, only so much of the income shall be taken into account for the purpose of this section as is brought into India by, or on behalf of, the assessee in convertible DIRECT TAX LAWS AND INTERNATIONAL TAXATION 175

186 foreign exchange within a period of six months from the end of the previous year in which such income is earned or within such further period as the competent authority may allow in this behalf. The assessee is required to furnish the certificate in prescribed Form No. 10CCD duly verified by any person responsible for making such payment. Deduction in respect of royalty on patents (Section 80RRB) Conditions to be satisfied for claiming deduction under this section: a) The deduction is available to an individual who is resident in India and is a patentee b) The patent should be registered on or after under the Patents Act, 1970 c) His gross total income of the previous year includes royalty in respect of such patent. Amount of deduction 100% of such royalty income or Rs. 3,00,000, whichever is less. Where any income is earned from any source outside India, only so much of the income shall be taken into account for the purpose of this section as is brought into India by, or on behalf of, the assessee in convertible foreign exchange within a period of six months from the end of the previous year in which such income is earned or within such further period as the competent authority may allow in this behalf. Where a compulsory license is granted in respect of any patent under the Patents Act, 1970, the income by way of royalty for the purpose of allowing deduction under this section shall not exceed the amount of royalty under the terms and conditions of a license settled by the Controller under that Act. DEDUCTION IN RESPECT OF INTEREST ON DEPOSITS IN SAVINGS ACCOUNTS TO THE MAXIMUM EXTENT OF ` 10,000 [SECTION 80TTA] [W.E.F. A.Y ] Allowable to: an individual or a Hindu Undivided Family Conditions: Where the Gross Total Income of an assessee, includes any income by way of interest on deposits (not being time deposits) in a saving account with- (a) a banking company to which the Banking Regulation Act, 1949 applies (including any bank of banking institution referred to in Section 51 of that Act); (b) a co-operative society engaged in carrying on the business of banking (including a co-operative land mortgage bank or a co-operative land development bank); or (c) a Post Office as defined in clause (k) of Section 2 of the Indian Post Office Act, Allowable Deduction: A deduction of such interest shall be allowed to the maximum extent of ` 10,000. However, where the income referred to in this Section is derived from any deposit in a savings account held by, or on behalf of, a Firm, an Association of Persons or a Body of Individuals, no deduction shall be allowed under this Section in respect of such income in computing the Total Income of any partner of the firm or any member of the association or any individual of the body. Deduction allowed to a person with disability - u/s.80u Deduction in case of a person with disability: blindness, low vision, leprosy, hearing impairment, mental retardation and mental illness. Conditions: Furnish a certificate issued by the medical authority in form No.10-IA. For this section, the following conditions must be satisfied: The assessee is an individual being a resident He is a person with disability like. 176 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

187 He is certified by the medical authority to be a person with disability, at any time during the previous year. He furnishes a certificate issued by the medical authority in the prescribed form along with the return of income Amount of deduction A fixed deduction of ` 75,000 in case of a person with disability `1,25,000 in case of a person with severe disability.( having any disability over 80%) Relief u/s 87A Assessment Year The rebate is available to a resident individual if his total income does not exceed `5,00,000. The amount of rebate shall be 100% of income-tax or ` 2,000, whichever is less. Assessment Year The rebate is available to a resident individual if his total income does not exceed `5,00,000. The amount of rebate shall be 100% of income-tax or `5,000, whichever is less. Relief u/s.89(1) Relief is available when salary is received in arrears or advance. Application in Form-10E has to be obtained from the employee. Form 10E is required for allowing claim of relief u/s. 89(1) However, it is not applicable in case of Sec10(10 c). Illustration- 1 During the P.Y , the gross total income of Mr. A is `4,00,000. During the P.Y. he pays the following premiums on Mediclaim insurance policy by cheque. Compute the amount of tax benefit under section 80 D. 1. Mr. A `10, Mrs. A `8, Son (not dependent) `4, Daughter (dependent) `8, Father (not dependent) `2, Mother (dependent) (age 68 years & resident in India) `3,000 Solution The insurance premium paid for son and father will not qualify for deduction under section 80D as they are not dependent upon Mr. A. Amounts qualifying for deduction are:- Mr. A 10,000 Mrs. A 8,000 Daughter 8,000 Total 26,000 ( limited to 25,000) Additional deduction for mother 3,000 Additional deduction for Father 2,500 Hence total deduction under section 80 D is ` (25, ,000+ 2,500)) = `30,500 Note The condition of dependency of parents is not applicable w.e.f AY Illustration- 2 DIRECT TAX LAWS AND INTERNATIONAL TAXATION 177

188 B, an Indian citizen gives the following particulars of his income and expenditure Business income 1,10,000 Long term capital gain 2,00,000 Short term capital gain on sale of shares taxable u/s 111A 10,000 Other short-term capital gain 5,000 Donation to the Prime Minister s National Relief Fund 11,000 Donation to the Government of India for promotion of family planning 3,000 Donation to an approved institution 12,000 Payment of medical insurance premium on own life 5,000 Determine the net income of B for the assessment year Solution Computation of Total Income of B ` Business income 1,10,000 Capital gain: Long-term 2,00,000 Short-term u/s 111A 10,000 Other short-term 5,000 Gross Total Income 3,25,000 Deduction u/s 80D 5,000 Less: Deduction: u/s 80G 18,000 23,000 Total Income 3,02,000 Note: Deduction u/s 80G is computed as under: (i) Donation to PMNRF fully qualifies for deduction & the rate of deduction is 100% = 11,000 (ii) Qualifying amount of donations for family planning and Approved Institution cannot exceed 10% of Adjusted gross total income [i.e. 3,25,000-2,00,000(LTCG) - 10,000 (STCG-u/s 111A) - 5,000( 80 D)] of `1,10,000 = 11,000 a) Deduction on donation for family planning on ` 100% 3,000 D) Deduction on other donation ` 50% 4,000 Total 18,000 Illustration 1. A handicapped person in business has an income of `25 lakhs per annum. He claims the concession u/s 80U. The Assessing Officer declines to grant the same on the ground that his disability has not affected his opportunity to a gainful employment. Is he right? Solution: The Assessing Officer is not right, since eligibility for deduction u/s 80U depends upon the nature of permanent physical disability as prescribed under the rules. As long as he qualifies for the same under the rules and files a certificate to that effect from a medical practitioner with prescribed qualification, relief cannot be denied. 178 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

189 Illustration 2. Whether photographers and TV news film cameraman can avail of the benefit u/s 80RR? Solution: Yes, as per Circular No.31 dated , photographers and TV news film cameraman can be regarded as artists for the purpose of Sec. 80RR. Illustration 3. Is it necessary that the assessee to link his savings eligible for deduction u/s 80C with the current taxable income? Solution: As long as the assessee has taxable income and the eligible investments are made during the year, there can be no bar for deduction. Section 80C as presently worded would admit the deduction without any pre-qualification of such investments having to be made out of current income. Illustration 4. A book written by G was recommended as text book by the Annamalai Univesity for the first time for the academic year Whether G is entitled to special deduction u/s 80QQA? Solution: Yes. It is not necessary that the book should have been recommended for the first time during the relevant previous year. G would get special deduction even if the book has been recommended prior to the insertion of section 80QQA, vide Circular No.258 dated Illustration 5. What is the present position as regards availability of processing of living things? Solution: It was considered that relief for processing of living things will no longer be available after the decision of the Supreme Court in CIT vs. Venkateswara Hatcheries (P) Ltd (1999) 237 ITR 174 (SC), and in respect of hotel in CIT vs. Relish Foods (1999) 237 ITR 59 (SC) in respect of processing of shrimps. However, some hope is offered as regards processing for making them marketable treated it as an issue, which is left open by the Supreme Court in Indian Poultry vs. CIT (2001) 250 ITR 664 (SC). The Supreme Court did not deal with the issue only because the relevant material for decision had not been placed by the assessee before the Appellate Tribunal. The Supreme Court, in CIT vs. Relish Foods(1999) 237 ITR 59 (SC), held that processing of marine products for export may not constitute industrial activity, and reiterated this view in CIT vs. Kala Cartoons P. Ltd. (2001) 252 ITR 658 (SC). But in both the decisions, it found an exception in CIT vs. Marwell Sea Foods (1987) 166 ITR 624 (Ker), on the ground that it was a case where detailed description of the processes was given and that such description spelt out manufacture as found by the Tribunal. It would, therefore, mean that where the assessee is able to show that various processes involved use of skilled labour, and sophisticated machinery, there is no reason why the deduction should not be available. Illustration 6. An assessee does not make a claim for relief u/s 80-IA, because it returned a loss. The Assessing officer has computed positive income by making certain disallowances but does not grant relief as no claim had been made. Is the Assessing Officer correct in his view? Solution: In CIT vs. Gujarat Agro Oil Enterprises (2000) 244 ITR 3 (Guj), the High Court pointed out that the deduction is permissible, though no specific claim had been made if the conditions therefore are satisfied. The Assessing Officer should, therefore, give an opportunity to the taxpayer to file such audit report. Illustration 7. DIRECT TAX LAWS AND INTERNATIONAL TAXATION 179

190 Where a co-operative society is eligible for relief u/s 80-IA as well as u/s 80P, which relief will have precedence? Solution: Relief u/s 80-IA will be first given and balance will be reckoned for relief u/s 80P. Illustration 8. Should the past losses or unabsorbed depreciation in respect of the same activity in the past be set-off against current income eligible for deduction? Solution: The controversy based upon Cambay Electric Supply Industrial Co. Ltd. vs. CIT (1978) 113 ITR 84 (SC) continues to haunt the incentive provisions and concessions. Co-operative sector is no exception. The Supreme Court, in CIT vs. Kotagiri Industrial Co-operative Tea Factory Ltd. (1997) 224 ITR 604 (SC) has held that the definition of gross total income would taken into consideration the past losses or unabsorbed depreciation as well as has been decided even for the purposes of sections 80HHC, 80-I and 80-IB. Further, the more liberal language attributable to instead of derived from has been used for section 80P. Past unabsorbed loss, it was held, would go to reduce the eligible profit for section 80P, since it is required to set-off against current income for the purposes of relief, in CIT vs. Ganganagar Sahkari Spinning Mills Ltd. (2004) 265 ITR 540 (Raj.) following Kotagiri Industrial Co-Operative Tea Factory s Case. Illustration 9. For purposes of relief u/s 80P(e) meant for co-operative societies engaged in letting of godowns and warehouses for storage, processing or facilitating marketing of commodities, is it possible to get relief for a co-operative society having income from cold storage? Solution: Cold storage, on a liberal interpretation, would be construed as godown and warehouse considering the purpose of marketing agricultural produce in a condition fit for marketing should merit a favourable interpretation. Illustration 10. Is commission earned by a co-operative society from public distribution of controlled commodities exempt? Solution: No. In Udaipur Shahakari Upbhokta Thok Bhandar Ltd. vs CIT (2009) 315 ITR 21 (SC), the society was storing goods given by the Government and supplying it to fair price shops. The Supreme Court held that the Commission earned was not from letting on hire of godowns and so was not entitled to exemption, the goods having stored in its own godown not for the purpose of storing, processing or facilitating the marketing of the commodities. Illustration 11. Is a co-operative society engaged in collective disposal of labour be entitled to relief u/s 80P(2)(a) when firms and associations are its members? Solution: No. In view of the retrospective amendment to clause (iii) of section 80P(2)(a) in 1988, it is not possible to treat firms and associations as members of the same status as individuals. The decision in CIT vs. Salem District Printers Service Industrial Co-operative Society Ltd. (2007) 290 ITR 371 (SC), following Kerala State Co-operative Marketing Federation Ltd. vs. CIT (1998) 231 ITR 814 (SC), is no longer good law. Illustration 12. Can interest on loans advanced to nominal members by a credit society be entitled to exemption? Solution: Yes, exemption is available in view of the decision of CIT vs. Punjab State Co-operative Bank Ltd. (2008) 300 ITR 180 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

191 24 (P&H), following CIT vs. Bangalore District Co-operative Central Bank Ltd. (1998) 233 ITR 282 (SC), and CIT vs. Karnataka State Co-operative Apex Bank (2001) 251 ITR 194 (SC). Illustration 13. Is concession given for cottage industries vulnerable because of some payment to outside agency for bleaching, dyeing, transport arrangement, etc.? Solution: No. Board s Circular No. 722 dt points out that as long as cottage industry is carried on at the residence or at a common place provided by weavers society without any outside labour, the use of outside agency for some activity does not lose the benefit for cottage industry. CHAPTER SUMMARY & EXAM PREPARATION NOTES Section 80C: Deduction on life insurance premia, contribution to provident fund, etc - Available to individual/huf for a maximum amount of ` 1,50,000. Section 80CCC: Deduction for contribution to pension fund - Available to individual Section 80CCD: Deduction in respect of contribution to pension scheme of Central Government available to individual. Section 80CCE: Limit on deductions under Sections 80C, 80CCC and 80CCD - can not exceed `1,50,000. Section 80CCG: Deduction in respect of investment made under any equity saving scheme : Available to resident individual Section 80D: Deduction in respect of medical insurance premia - Available to individual/huf. Section 80DD: Deduction in respect of maintenance including medical treatment of a dependant who is a person with disability Available to resident individual/huf for a fixed amount Section 80DDB read with Rule 11DD: Deduction in respect of medical treatment, etc.: Available to Resident individual/resident HUF. Section 80E: Deduction in respect of repayment of loan taken for higher education: Available to individual. Section 80G: Deduction in respect of donations to certain funds, charitable institutions, etc. Available to all assessees subject to maximum of 50% of qualifying amount, 100% as the case may be. Section 80GG: Deduction in respect of rent paid Available to individual Section 80GGA: Deduction in respect of certain donations for scientific research or rural development Section 80GGB: Deduction in respect of contributions given by companies to political parties Section 80GGC: Deduction in respect of contributions given by any person to political parties Section 80-IA: Deduction in respect of profits and gains from industrial undertakings or enterprise engaged in infrastructure development Section 80-IAB: Deduction in respect of profit and gains by an undertaking a enterprise engaged in development of Special Economic Zone Section 80-IB: Deduction in respect of profits and gains from certain industrial undertakings other than infrastructure development undertakings Section 80-IC: Special provisions in respect of certain undertakings or enterprises in certain special category States DIRECT TAX LAWS AND INTERNATIONAL TAXATION 181

192 Section 80-JJA: Deduction in respect of profits and gains from the business of collecting and processing biodegradable waste Available to all assessees carrying on the business of collecting and processing biodegradable waste. Section 80-JJAA: Deduction in respect of employment of new workmen Available to Indian company of 30% of additional wages paid to new regular workmen. Section 80LA: Deduction in respect of certain incomes of Offshore Banking Units 100% of certain income for 5 years, 50% of such income for 5 years. Section 80P: Deduction in respect of income of co-operative societies - Specified incomes subject to amount specified in sub section (2). Section 80QQB: Deduction in respect of royalty income, etc., of authors of certain books other than text books Available to resident individual, Section 80RRB: Deduction in respect of royalty on patents Available to Resident Individual Section 80TTA: Deduction in respect of interest on deposits in savings account Available to Individual/ HUF Section 80U: Deduction in case of a person with disability Available to Resident individual MULTIPLE CHOICE QUESTIONS (1) Deduction under section 80C can be claimed for fixed deposit made in any scheduled bank, if the minimum period of deposit is (a) 5 years (b) 8 years (c) 10 years (d) 12 years. (2) Deduction available to an individual in respect of maintenance including medical treatment of a dependent being a person with 80% disability, when amount incurred in this respect is ` 40,000 will be (a) ` 40,000 (b) ` 50,000 (c) ` 1,00,000 (d) None of the above. (3) Which of the following is covered under section 80D of the Income Tax Act, 1961 (a) Repayment of loan taken for higher education (b) Medical treatment of handicapped dependent (c) Medical Insurance Premium (d) Reimbursement of medical expenses (4) Maximum qualifying limit for deduction under section 80C is (a) `50,000 (b) `1,10,000 (c) `1,00,000 (d) `1,50, DIRECT TAX LAWS AND INTERNATIONAL TAXATION

193 Answers Multiple Choice Question 1 (a); 2 (c); 3 (c); 4 (d); FILL IN THE BLANKS 1. Deduction available under section 80QQB in respect of royalty income of authors shall not exceed in a previous year. 2. Deduction available under section 80GG towards rent paid shall not exceed ` per month. 3. The amount of deduction under section 80DD in respect of maintenance including medical treatment of a dependent with 60% disability will be ` when no amount is actually spent on treatment by the resident assessee and the handicapped person does not claim any deduction under section 80U. Answers : Fill In The Blanks 1. `3,00,000; 2. `5000 pm ; 3. `75,000 ; DIRECT TAX LAWS AND INTERNATIONAL TAXATION 183

194

195 Study Note - 6 BUSINESS RESTRUCTURING This Study Note includes 6.1 Introduction 6.2 Amalgamation, Demerger and Reverse Marger 6.1 INTRODUCTION Liberalization of economy and reforms programs have resulted in a boost in the industrial and services sector. Companies are resorting to acquisitions as a means to consolidate and grow rapidly in an ever changing business environment. Globalization has given importance to size for competing effectively with the multinationals and exploring world markets. As a result, there is an increase in the level of M&A activity in various sectors banking, e-commerce, automotives, steel and so on. The purpose of a suitable business strategy for restructuring must increase efficiency, consolidate operations, increase market share, assist in turn around, increase market capitalization and create entry barrier for competitors. Corporate Restructuring includes - - Mergers - Acquisitions - Conversion to LLP 6.2 AMALGAMATION, DEMERGER AND REVERSE MERGER M&A can be segmented into the following types on the basis of Value Chain - Horizontal M&A acquiring and target companies are competing firms in the same industry Vertical M&A combination of firms in the client-supplier or buyer-seller relationships Conglomerate M&A acquiring companies which operate in unrelated business M&A can be segmented into the following types on the basis of relationship Friendly M&A acquisition in a friendly manner with approval from Board and shareholders of the target company Hostile M&A pitting the offer against the wishes of the target M&A can be segmented into the following types on the basis of economic area Domestic M&A - the firms involved originate from one country and operate in that economy-country Cross-border M&A - two firms located in different economies, or two firms operating within one economy but belonging to two different countries Definition of Amalgamation / Merger -Section 2(1B) All the properties and liabilities to be transferred Shareholders holding not less than 75% of value of shares become shareholders of Transferee Co. Capital Gain Tax Sec 47(vi) & 47(vii) Not a transfer - no liability for capital gains tax in the hands of the transferor Company as well as for shareholders Cost of acquisition ( COA) of shares of transferee Company in the hands of Shareholders DIRECT TAX LAWS AND INTERNATIONAL TAXATION 185

196 Business Restructuring COA of shares of Transferor Company = COA of shares of Transferee Company Depreciation on the Assets being transferred Transferee Company will be entitled to Depreciation on the written down value (WDV) of the block of assets transferred which will be the same as in the case of Transferor Company had it continued to hold such assets. Depreciation to transferor company and transferee company in the year of merger shall be apportioned in the ratio of the number of days for which the assets were used. An acquisition, also known as a takeover, is the buying of one company (the target ) by another. There may be the following types: Asset Purchase: This type of transaction leaves the target company as an empty shell. It is divided into: a) Slump Sale: The term slump sale means the sale of an entire business undertaking, comprising of various assets net of liabilities relating to the undertaking for a lump sum or slump consideration. b) Itemised Sale: Sale of assets & liabilities with values assigned separately for each item of assets & liabilities Section 2(42C) of the Income Tax Act, 1961 defines Slump Sale as the transfer of one or more undertakings as a result of the sale for a lump sum consideration without values being assigned to the individual assets and liabilities. The consideration may be discharged by issuing shares and/or cash to the Transferor Company. Share purchase: The buyer buys the shares, and therefore control, of the target company Features of Conversion of firm to Company under the Companies Act No Stamp Duty Tax Neutral (subject to conditions) Registration - a vesting order Arrangements pursuant to the Companies Act 1956 / 2013 Merger - Consolidation of two or more entities, involves transfer of assets and liabilities from transferor companies to the transferee company and in consideration, transferee company issues shares. It has a lengthy process under the Companies Act However, it is largely, tax neutral. Generally, losses can be carried forward and set-off by the transferee company. Tax Neutrality in Merger Direct tax neutralized in a merger. No income to amalgamating company/shareholders on the transfer of business undertaking/receipt of income. (Sec 47(vi)). Depreciation to amalgamated company on the basis of tax w.d.v in the hands of the amalgamating company (Explanation 7 to Sec 43). ccumulated losses and unabsorbed depreciation of amalgamating company can be carried forward by the amalgamated company if specified conditions are fulfilled. (Sec 72A) De-merger - Transfer of identified business from one company to another, as a consideration, such acquiring company issues shares to the shareholders of the selling company. This also has a lengthy process under the Companies Act 2013 and is largely, tax neutral. Generally, losses can be carried forward and set-off by the transferee company Reverse Merger Hiving off Re-organization of Capital Compromise with Creditors Reduction of capital as part of Composite Scheme Concept of a reverse merger 186 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

197 A merger usually takes place when a smaller company merges into a larger one through exchange of shares or cash. But when the acquiring company is weaker or smaller than the one being taken up, this is termed a reverse merger. Typically, reverse mergers take place through a parent company merging into a subsidiary, or a profitmaking firm merging into a loss-making one. Reverse mergers are quite common in the US, but are few in India. One example of a reverse merger was when ICICI merged with its arm ICICI Bank in The parent company s balance sheet was more than three times the size of its subsidiary at that time. The rationale for the reverse merger was to create a universal bank that would lend to both industry and retail borrowers. The ICICI group retained ICICI Bank as the brand name for the new entity. But when Godrej Soaps, which was profitable and with a turnover of INR 437 crore did a reverse merger with loss-making Gujarat Godrej Innovative Chemicals (turnover of INR 60 crore), the resulting firm was named Godrej Soaps. Tax impact in reverse merger A profit making company merges into a loss making company to take advantage of the accumulated losses of the surviving company which shall be set off against the profits of the combined entities. The motive is carrying forward tax losses of the smaller firm, which allows the combined entity to pay lower taxes. In some cases, the smaller entity may have rights to trademark or assets making it necessary for it to survive. Another popular incentive to opt for the reverse route is "backdoor listing" on exchanges. A large company may reverse merge with a smaller listed one and become public without an IPO. De-merger Recognized as a concept under Income Tax Act, 1961 In place of merging the company as a whole entity, an undertaking (business division or SBU) is spun off to a separate company at book value. Differs from a hiving off arrangement in that shares of the resulting company is issued to the shareholders of the de-merged company as opposed to shares being issued to the de-merged company itself in a hiving off arrangement. Hiving off- main features Resorted to enable holding the hived off undertaking in a subsidiary Not recognized for exemption as transfer under Income Tax Act, 1961 Normal practice is to carry out the hiving at book value to make it tax neutral Involves transfer of business undertaking on a comprehensive basis from one company to another. Values are not ascribed to each item of asset / liability Consideration is lump sum and most often is by way of cash settlement between the companies. It is a simpler process compared to merger / demerger Capital gains arises in the normal course Reorganization of capital This process involves Consolidation of shares of different classes, division of shares into shares of different classes, combination of both the above. A typical case is to convert preference shares into equity or debentures when redemption is not possible Tax Consequences On Companies Tax implications Amalgamations under Sec. 2(1 B) of Income Tax, Act, 1961 not a transfer u/s 47 De-merger under Sec.2 (19 AA) of Income Tax Act, 1961 not a transfer u/s 47 DIRECT TAX LAWS AND INTERNATIONAL TAXATION 187

198 Business Restructuring Income/ Loss transferred w.e.f Appointed date Capital Gains: To Transferor To Shareholders NIL NIL Depreciation basis for: Transferee Transferor Quantum Tax incentives of undertaking Subsequent Expenditure Existing w.d.v Remaining w.d.v Prorated Continue Allowed Holding Period benefit For Asset Transferred Continue 1/4/81 Option For resulting shares Continue B/f - carried forward Depreciation Loss Cessation of liability Expenses on process Allowed Allowed Taxed Deductible Tax implications carry forward and set off of losses u/s 72A Qualifying Companies include Companies owning Industrial Undertaking or Ship or Hotel Banking Companies Business Losses 8 Years (Fresh Life) Unabsorbed Depreciation Unlimited Period Closely held Company - Section 79 : Carry forward Business loss would lapse if shareholding pattern changes by more than 49 %, it applies only to Business loss and not to unabsorbed depreciation Conditions prescribed: For Amalgamating Co. Has been engaged in business in which accumulated losses occurred/depreciation remained unabsorbed for 3 or more years Has held continuously as on date of Amalgamation 3/4 of book value of fixed assets held by it 2 years prior to date of Amalgamation For Amalgamated Co: Holds continuously for 5 years 3/4 of book value of fixed assets of Amalgamating co. Continues business of Amalgamating co. for 5 years Fulfill conditions prescribed under Rule 9C Conditions prescribed under Rule 9C 188 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

199 Amalgamated Co. to achieve production level of 50% of installed capacity of undertaking of Amalgamating Co. before end of 4 yrs & continue to achieve it till the end of 5 yrs Amalgamated Co. to furnish a CA report to AO in Form No. 62 along with ROI for AY in which above condition is satisfied and for subsequent AY falling within 5 yr period Demerger - Direct tax neutrality for company/shareholder. Demerger indicates hiving off a division/unit/business of a company into a new/existing company. Demerger involves a vertical split of company, whereby business is transferred on a going concern basis to a new/existing company. This division may either form a new company and operate separately from the original one or may get merged into another existing company. Demerger U/s Section 2(19AA) of Income Tax Act, 1961 All the properties and liabilities of the demerged undertaking to be transferred on going concern basis Properties and liabilities are transferred at book value The resulting company issues shares to shareholders of demerged company on a proportionate basis Shareholders holding minimum 75% of the value of shares become shareholders of resulting company No income to demerging company on transfer of undertaking (Section 47(vib)) No income to shareholder on receipt of shares in the other company (Section 47(vid)) Proportionate depreciation in the year of demerger. Depreciation to the other company on the basis of tax W.D.V. in the hands of demerging company.[explanation to Section 43(1)] Accumulated business losses and unabsorbed depreciation (Section 72A):- directly relatable to the demerged undertaking - allowed to be carried forward by the other company not directly relatable to the demerged undertaking - to be apportioned in the ratio of assets transferred to other company and assets retained by demerging company Demerged business undertaking eligible for most tax exemption - benefits available even as part of other company (deduction u/s 80IA, 80IB available for unexpired period to resulting Co.) Demerger : Tax consequences if conditions of demerger not satisfied Capital gain to transferor / shareholder Deemed dividend to shareholder dividend distribution tax Section 72A not applicable Depreciation to transferee on consideration paid Cost of shares issued to shareholders of demerging company Transferor Company in Slump Sale Transferor Company liable to short/long term capital gains (holding period 36 months)(section 50B) Capital gains computed by deducting net worth from the sale consideration Step up of Depreciation - possible as transferee entitled to depreciation on the cost of assets.(section 32 & 72) Valuation of assets required A sale in order to constitute a slump sale must satisfy the following tests: The business has been sold off as a whole and as a going concern at its realisable value The seller has not withdrawn any assets or liabilities from the business sold or the buyer has not rejected any assets or liabilities comprised in the business DIRECT TAX LAWS AND INTERNATIONAL TAXATION 189

200 Business Restructuring Materials available on record do not indicate item-wise value of the assets transferred The business or the undertaking should have a separate existence in the books of accounts Profit arising on Slump Sale of one or more undertakings Long term capital gain where held for more than 36 months Short term Capital gains where held for less than 36 months. The Net worth of the undertakings would be regarded as cost of Acquisition. No Indexation benefit would be allowed Net worth = Aggregate value of Aggregate value total assets of total liabilities Tax matters Transferor Company can claim Capital gains exemption u/s 47(vi) WDV of depreciable assets of transferor co. as on the appointed day to be added to the respective block of transferor co. Other Assets can be taken at actual cost Expl (2) to Section 43(6)( C). Depreciation claim to be split up between both cos. as per number of days Only accumulated business loss & unabsorbed depreciation can be transferred. Capital loss to lapse. Transferee co. should be an Industrial undertaking, Shipping Company, Hotel or a Bank to claim benefits. Tax benefits u/s 10A,10B,80IA,80IB shall be available continuously. Amalgamation expenses can be claimed as deduction equally over 5 years period. No transfer for shareholders of transferor Co. hence no tax liability. Period for which shares are held in transferor co. to be considered for indexation. Illustration on Slump Sale In the books of Selling Company PARTICULARS BEFORE (` In cr.) Share Capital 50 Reserves & Surplus 150 Loan Funds 300 Total Liabilities 500 Fixed Assets 100 Net Current Assets 400 Total Assets 500 PARTICULARS BEFORE (` In cr.) Share Capital 50 Reserves & Surplus 150 Add: Profit on sale of business 440 Loan Funds 200 Total Liabilities 840 Fixed Assets 90 Net Current Assets 250 Cash & Bank (on sale of business) 500 Total Assets DIRECT TAX LAWS AND INTERNATIONAL TAXATION

201 The Business with the book value of INR 60 crores sold at INR 500 crores on slump sale basis. In the books of the Acquiring Company (buyer) PARTICULARS BEFORE (` In cr.) Share Capital 500 Loan Funds 100 Total Liabilities 600 Fixed Assets 100 Goodwill 100 Net Current Assets 150 Intangible Assets (Patents, Trademark, Copyrights etc.,) 250 Total Assets 600 The undertaking transferred is held for more than 36 months therefore it will be long term capital gains. It is to be noted that in case of Slump sale Indexation benefit is not available, therefore the Cost of Acquisition will be INR 60 crores. The Long term capital gain will be computed as follows - PARTICULARS (` In crores) Sales Consideration 500 Less : Cost of Acquisition (without Indexation) 60 Long term capital Gain 440 Tax aspects for Transferor Carry forward of loss / depreciation Capital gains tax. Transfer pricing. Depreciation. Tax impact of alternate funding. Capital receipt. Tax Aspects for Transferee Carry forward of loss Production / asset holding criteria. Depreciation on tangible / intangibles. Tax credit under MAT. Deduction for 43B liabilities. Deduction for liabilities of predecessor / remission of liabilities. Cost of acquisition / fair market value. Continuity of tax exemptions / deductions. Restatement of value. Succession of business. DIRECT TAX LAWS AND INTERNATIONAL TAXATION 191

202 Business Restructuring Capital Reduction - concept Capital Reduction - Capital Reduction is the process of decreasing a company s shareholder equity through share cancellations and share repurchases so as to: increase shareholder value produce a more efficient capital structure Situations in which a Company may reduce its capital: Where the capital is unrepresented by assets; Where substantial trading losses have accumulated; Where there are extensive capital losses requiring revaluation of assets; To return excess cash to its shareholders where there is no likelihood of the cash ever being required for the business Reduction of share capital can be effected in the following ways: In respect of share capital not paid-up, extinguishing or reducing the liability on any of its shares; Cancel any paid-up share capital, which is lost, or is not represented by available assets. This may be done either with or without extinguishing or reducing liability on any of its Shares; or Pay off the paid-up share capital, which is in excess of the needs of the company. This may be achieved either with or without extinguishing or reducing liability on any of its shares. Illustration PARTICULARS BEFORE (` in Cr.) AFTER (` in Cr.) (Face Value `10) (Face Value `5) Share Capital Reserves & Surplus Loan Funds , Fixed Assets Net Current Assets Profit & Loss , Buyback of Shares Buyback is acquiring its own shares from the existing shareholders by the company to reduce its paid-up capital. Reasons for buy back include: putting unused cash to use raising earnings per share helping capital restructuring by way of capital reduction reduced equity base strengthens management control obtaining stock for employee stock option plans or pension plans increasing the value of shares by reducing supply eliminating any threats of takeovers / by shareholders looking for a controlling stake 192 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

203 In case of Buyback of shares the shareholder is liable to tax based on the following - Gains on transfer of Capital Assets is taxable at rates prescribed below: Short-Term (unlisted less than 36 Months) Corporate tax rate ** Short-Term (Listed Shares & units of equity fund subjected to STT) 10% ** Long-Term (Listed Shares & units of equity fund subjected to STT) Exempt Other Long-Term Gains 20% ** ** Plus applicable Education Cess & Surcharge Tax implications for buyback / sale of shares Indexation of the cost of acquisition and improvement of a long-term capital asset other than debentures is available to residents. In case of unlisted securities the assessee has tax benefit u/s 112 of the Income Tax Act, Assessee has an option to take cost of acquisition either with or without Indexation benefit. Accordingly, the tax rate applicable for calculating the Long Term Capital Gain tax will be as follows: Option Available Tax Rate Applicable With Indexation benefit 10% Without Indexation benefit 20% Illustration 1 crore shares bought back at ` 50 premium. PARTICULARS BEFORE BUYBACK (` In Crores) ADJUSTMENTS (` In Crores) AFTER BUYBACK (` In Crores) (Face Value `10) (Face Value `10) Share Capital Free Reserves 400 (60) 340 Capital Redemption Reserve Loans & Advances Total Liabilities 1,000 (60) 940 Fixed Assets Net Current Assets 250 (60) 190 Total Assets 1,000 (60) 940 Subsidiarisation Subsidiarisation implies transferring the business to a wholly owned subsidiary(wos). The transfer may be made either at book value or at fair value. Companies resort to subsidiarisation when the undertaking needs to be sold but there is no buyer ready to buy all the assets at a given point of time. As per this method, business gets transferred to a subsidiary and the parent company continues to hold 100% equity stake in the subsidiary. This option facilitates process of disinvestment, as only the shares of subsidiary company will have to be handed over when the suitable buyer is found out. This option shifts the control of business from the shareholders to the holding company. Tax aspects Transfer of a capital asset by a company to its subsidiary company is not regarded as transfer in following cases; (a) the parent company or its nominees holds the whole of the share capital of a subsidiary company, (b) the subsidiary company is an Indian company, (c) the capital asset is not transferred as stock-in- trade, DIRECT TAX LAWS AND INTERNATIONAL TAXATION 193

204 Business Restructuring (d) the subsidiary company does not convert such capital asset into stock-in-trade for a period of 8 years from the date of transfer, and (e) the parent company or its nominees continue to hold the whole of the share capital of the subsidiary company for 8 years from the date of transfer Illustration - Division with a Net Book value of INR 60 crores is transferred to WOS. In the books of Holding Company PARTICULARS BEFORE (` in Cr) Share Capital 50 Reserves & Surplus 150 Loan Funds 300 Total Liabilities 500 Fixed Assets 100 Net Current Assets 400 Total Assets 500 PARTICULARS AFTER (` in Cr) Share Capital 50 Reserves & Surplus 150 Loan Funds 200 Total Liabilities 400 Fixed Assets 90 Net Current Assets 250 Investment in subsidiary 60 Total Assets 500 Illustration 1. Is it possible for two firms to merge with each other without any tax consequence? Solution: The concept of merger or amalgamation is unknown to partnership law. Where a partnership business is taken over by another firm, there is a profit liable to Capital Gains Tax. Illustration 2. Is it possible for two firms to convert themselves as companies under Part-IX of Companies Act and thereafter for both the companies to amalgamate so as to avoid capital gains on merger of the business of the two firms? Solution: The conversion and the later merger are two independent steps. Each should be justified by bona fide commercial considerations and not solely for saving tax. There is no liability at both stages, subject to conditions under the relevant provisions of law. Illustration 3. Is it possible to avoid capital gains tax, where cost is not ascertainable? 194 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

205 Solution: No. Cost has to be based on best estimate, where evaluation is not possible for lack of details. Law itself in some cases attributed nil cost for certain categories of assets listed u/s 55(2)(a). Written down value will be taken as cost in case of depreciable assets u/s 50. Net worth on the basis of book value will be taken in a slump sale under section 50B. Illustration 4. Where a company has already been formed for takeover of the business of an existing firm, is it really necessary to get the benefit of Part IX conversion in a case where firm s business is taken over by company? Solution: The difference between conversion of firm to a company by registration under Part IX and takeover of a business by a company from a firm, was pointed out in Stewart & Co. Ltd. vs. C. Marshal AIR 1963 Cal 198 (DB). The incidence under property law and tax laws should be different. The liability to stamp duty is one difference. This can be avoided by registration under Chapter IX of the Companies Act. DIRECT TAX LAWS AND INTERNATIONAL TAXATION 195

206

207 Study Note - 7 ADMINISTRATIVE PROCEDURES UNDER DIRECT TAXATION This Study Note includes 7.1 Income Tax Authorities & CBDT 7.2 Survey under section 133 of the Income Tax Act Search & Seizure 7.4 Penalties & Prosecution 7.1 INCOME TAX AUTHORITIES & CBDT The Income Tax Department is a government agency in charge of monitoring the income tax collection by the Government of India. It functions under the Department of Revenue of the Ministry of Finance. The Central Board of Direct Taxes (CBDT) is a part of Department of Revenue in the Ministry of Finance. The CBDT provides inputs for policy and planning of direct taxes in India, and is also responsible for administration of direct tax laws through the IT Department. The CBDT is a statutory authority functioning under the Central Board of Revenue Act, The officials of the Board in their ex officio capacity also function as a division of the Ministry dealing with matters relating to levy and collection of direct taxes. The CBDT is headed by Chairman and also comprises six members, all of whom are ex officio Special Secretary to the Government of India. The Chairman and members of the CBDT are selected from the Indian Revenue Service (IRS), whose members constitute the top management of the IT Department. The Chairman and every member of CBDT are responsible for exercising supervisory control over definite areas of field offices of IT Department, known as Zones. Various functions and responsibilities of the CBDT are distributed amongst Chairman and six members, with only fundamental issues reserved for collective decision by the CBDT. The areas for collective decision by the CBDT include policy regarding discharge of statutory functions of the CBDT and of the Union Government under the various direct tax laws. The Central Government may appoint such persons as it thinks fit to be income-tax authorities. Without prejudice to the provisions and subject to the rules and orders of the Central Government regulating the conditions of service of persons in public services and posts, the Central Government may authorise the Board, or a Director- General, a Chief Commissioner or a Director or a Commissioner to appoint income-tax authorities below the rank of an Assistant Commissioner or Deputy Commissioner. Subject to the rules and orders of the Central Government regulating the conditions of service of persons in public services and posts, an income- tax authority authorised in this behalf by the Board may appoint such executive or ministerial staff as may be necessary to assist it in the execution of its functions. Income Tax Authorities [Section 116] In order to discharge executive and administrative functions relating to the Act, the following Income tax Authorities have been constituted (a) (aa) (b) (bb) (c) The Central Board of Direct Taxes; Principal Directors General of Income-tax or Principal Chief Commission of Income-tax; Directors General of Income-tax or Chief Commissioners of Income-tax; Principal Directors of Income-tax or Principal Commissioners of Income-tax; Directors of Income-tax or Commissioners of Income-tax or Commissioners of Income-tax (Appeals); (cc) Additional Directors of Income-tax or Additional Commissioners of Income-tax or Additional Commissioners DIRECT TAX LAWS AND INTERNATIONAL TAXATION 197

208 of Income-tax (Appeals); (cca) (d) (e) (f) (g) (h) Joint Directors of Income-tax or Joint Commissioners of Income-tax; Deputy Director of Income-tax or Deputy Commissioner of Income-tax or Deputy Commissioner of Incometax (Appeals); Assistant Directors of Income-tax or Assistant Commissioners of Income-tax; Income-tax Officers; Tax Recovery Officers; Inspectors of Income-tax. Income Tax Authorities Hierarchy: CBDT CHAIRMAN MEMBERS CHIEF COMMISSIONER OF INCOME TAX COMMISSIOENR OF INCOME TAX ADDITIONAL COMMISSIONER OF INCOME TAX JOINT COMMISSIONER OF INCOME TAX DEPUTY COMMISSIONER OF INCOME TAX ASSTT. COMMISISONER OF INCOME TAX INCOME TAX OFFICER INCOME TAX INSPECTOR SUBORDINATE STAFF i.e.; TAX ASSISTANT, CLERK, SUPERITENDENT, RECORD KEEPER ETC. Appointment of Income-Tax Authorities [Section 117] (1) The Central Government may appoint such persons as it thinks fit to be Income-tax Authorities. (2) Without prejudice to the provisions of sub-section (1), and subject to the rules and orders of the Central Government regulating the conditions of service of persons in public services and posts, the Central Government may authorize the Board, or a Director-General, a Chief Commissioner or a Director or a Commissioner to appoint Income-tax Authorities below the rank of an Assistant Commissioner or Deputy Commissioner. (3) Subject to the rules and orders of the Central Government regulating the conditions of service of persons in public services and posts, an Income-tax Authority authorised in this behalf by the Board may appoint such 198 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

209 executive or ministerial staff as may be necessary to assist it in the execution of its functions. Control of Income-Tax Authorities [Section 118] The Board may, by notification in the Official Gazette, direct that any Income-tax Authority or authorities specified in the notification shall be subordinate to such other Income-tax Authority or authorities as may be specified in such notification. CENTRAL BOARD OF DIRECT TAXES (CBDT) [Section 119] The Central Board of Direct Taxes (CBDT) has been constituted under the Central Board of Revenue Act, It works under the Ministry of Finance. The important powers of CBDT are: (i) To make rules for carrying out purposes of the Act [Sec. 295]. (ii) To decide jurisdiction of the Income-tax Authorities [Sec. 120]. (iii) (iv) To issue instructions, orders and directions to other Income-tax Authorities for proper administration of this Act and all other persons employed in the execution of this Act. However, it cannot issue instructions to the Commissioner of Income-tax (Appeals). It cannot issue a direction to any Income-tax Authority to dispose of a case in a particular manner. [Sec. 119] To declare an organization as company [Sec. 2(17) (iv)]. (v) To entertain objections in respect of search and seizure under the Act. [Sec. 132(1)]. (vi) To relax the provisions of Sections 139, 143, 144, 147, 148, 154, 155, 158BFA, 201(1A), 210, 211, 234A, 234B, 234C, 271 and 273 or otherwise [Section 119(2)(a)]. (vii) Power of relaxing any requirement contained in Chapter IV (provisions for computation of income under various heads) or Chapter VI-A (provisions for deductions from Gross Total Income) [Section 119(2)(c)]. (viii) To issue such general or special orders for relaxation of the provisions of sections relating to FBT viz; 115WD, 115WE, 115WF, 115WG, 115WH, 115WJ and 115WK [Section 119(2)(a)]. (ix) To prescribe categories of transactions and documents pertaining to business or profession, where quoting of PAN is necessary [Sec, 139A(4)]. (x) Prescribing qualifications for Authorized Representatives [Sec. 288]. (xi) To condone delay for seeking CBDT s approval, where it is required [Sec. 293B] and authorize any Income Tax Authority not being Commissioner of Income-tax (Appeals), to admit belatedly ant claim for exemption, deduction, refund or relief [Section 119(2)(b)]. (xii) The Act also assign powers and functions in Sections 2(18), 11(1)(c), 35(3), 36(1)(iv), 44AA, 80RRA, 80U, 118, 124(2), 127, 132(1), 138, 197(2A), 200, 228A, 246, 273A(2), 279, the Second Schedule and the Fourth Schedule. Circulars issued by the CBDT are legally binding on the revenue and this binding character attaches to the circulars even if they are found not in accordance with the correct interpretation of a statutory provision and they depart or deviate from such construction - K.P. Varghese vs. ITO 131 ITR 597 (SC). It is well-settled that circulars can bind the ITO but will not bind the appellate authority or the Tribunal or the Court or even the assessee - CIT vs. Hero Cycles (P.) Ltd. 228 ITR 463 (SC). CBDT has power, interalia, to tone down the rigor of the laws and ensure fair enforcement of its provision by issuing circular. Circular contemplated in Sec.119 (2)(a) cannot be adverse to the assessee. Power is given for the purpose of just, proper and efficient management of work of assessment. Circular, however are not meant for contradicting or nullifying any provision of the statue. They are meant to mitigate the rigor of application of a particular provision. So long as such a circular is in favour, it would be binding on the departmental authorities in view of the provision of sec. 119 to ensure a uniform and proper administration & application of the IT Act - UCO Bank vs. CIT 237 ITR 899 (SC). As per section 120, Incometax Authorities shall exercise all or any of the powers and perform all or any of the functions conferred on or, assigned to such authorities by or under this Act in accordance with such directions as the Board may issue or the Board may authorise any other Income-tax Authority to issue orders in writing for the exercise of the powers and DIRECT TAX LAWS AND INTERNATIONAL TAXATION 199

210 performance of the functions by all or any of the other Income-tax Authorities who are subordinate to it. W.r.e.f. assessment year , Explanation to sub-section (1) of section 120 has been inserted so as to provide that any Income-tax Authority, being an authority higher in rank, may exercise the powers and perform the functions of the Income-tax Authority lower in rank, if it is so directed by the Board under the said section. It has also been provided that any such direction issued shall be deemed to be a direction issued by the Board under the said sub-section (1). As per section 120(3) in issuing the directions or orders, the Board or other Income-tax Authority authorised by it may have regard to any one or more of the following criteria, namely: (a) territorial area; (b) persons or classes of persons; (c) incomes or classes of incomes; and (d) cases or classes of cases. According to section 120(4), the Board may, by general or special order, and subject to such conditions, restrictions or limitations as may be specified therein (a) authorise any Director General or Director to perform such functions of any other Income-tax Authority as may be assigned to him by the Board; (b) empower the Director General or Chief Commissioner or Commissioner to issue orders in writing that the powers and functions conferred on, or assigned to, the Assessing Officer by or under this Act in respect of any specified area or persons or classes of persons or incomes or classes of income or cases or classes of cases, shall be exercised or performed by a Joint Commissioner. Further, the Board may require two or more Assessing Officers (whether or not of the same class) to exercise and perform, concurrently, the powers and functions in respect of any area or classes of cases. Notification issued under section 120 conferring jurisdiction acts only prospectively and cannot be retrospective in effect [West Bengal State Electricity Board vs. DCIT (2005) 278 ITR 218 (Cal)]. Where the assessee claims the status as non-resident, then the AO (International Taxation) had the jurisdiction to make the assessment. [Manoj Kumar Reddy vs. ITO (2010) 42 DTR 171 (Bang)(Trib)]. As per section 129, whenever in respect of any proceeding under this Act an Income-tax Authority ceases to exercise jurisdiction and is succeeded by another who has and exercises jurisdiction, the Income-tax Authority so succeeding may continue the proceeding from the stage at which the proceeding was left by his predecessor: However, the assessee concerned may demand that before the proceeding is so continued the previous proceeding or any part thereof to be reopened or that before any order of assessment is passed against him, he be reheard. Such period which the Assessing Officer has taken to rehear the case, on the request of assessee, shall be excluded while determining the time limit of completion of assessment given under section 153. Commissioners of Income-tax Commissioners of Income-tax are appointed by the Central Government. A Commissioner of Income tax enjoys the following administrative as well as judicial powers and functions under the different provisions of the Act. (i) (ii) powers pertain to registration of a charitable trust or institution [Sec. 12A(1)(a)]; approval of an annuity contract [Sec. 80E]; (iii) appointment of Income-tax Officers (Class II) and Inspectors of Income-tax [Sec. 117(2)]; (iv) instructions to subordinate authorities [Sec. 119] ; (v) shifting of jurisdiction [Sec. 125] ; (vi) transfer of cases [Sec. 127] ; (vii) assignment of functions to Inspectors of Income-tax [Sec. 1281; (viii) discovery, production of evidence [Sec. 131] ; 200 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

211 (ix) search and seizure [Sec. 132] ; (x) requisite books of account [Sec. 132A] ; (xi) any enquiry [Sec. 135] ; (xii) disclosure of information respecting assesses [Sec.138] ; (xiii) granting sanction for issue of notice to reopen assessment after the expiry of 4 years [Sec. 151(2)]; (xiv) authorising Income-tax Officers to recover any arrear of tax due from an assessee by sale of his movable property [Sec. 226(5)] ; (xv) set off of refunds against tax remaining payable [Sec. 245] ; (xvi) directing the Assessing Officer to prefer an appeal to Appellate Tribunal against the order of the Commissioner (Appeals) [Sec. 253(2)] ; (xvii) appeal to High Court [Sec. 260A] ; (xviii) revision of orders passed by Assessing Officer which are prejudicial to the revenue [Sec. 263] ; (xix) revision of orders passed by subordinate authorities on his own motion or on the application of the assessee [Sec. 264] ; (xx) reduction or waiver of penalty in certain cases [Sec. 273A] ; (xxi) to award and withdraw recognition to provident funds [Schedule IV]. Commissioner of Income-Tax (Appeals) Appointment is made by the Central Government. The following are important powers: (i) Power regarding discovery, production of evidence etc. [Sec. 131] (ii) To condone delay in filing of appeal. (iii) Power to call for information. [Sec. 133] (iv) Power to inspect register of companies. [Sec. 134] (v) To dispose of an appeal and to confirm, reduce, enhance or annul the assessment. - [Sec. 251] (vi) Power to impose a penalty. [Sec. 271 and 272A] (vii) Power to set off any refund against arrears of tax. [Sec. 245]. (viii) The Commissioner (Appeals) has inherent powers to stay recovery proceedings Paulsons Litho Works vs. ITO 208 ITR 676 (Mad.). Joint Commissioner of Income Tax They are appointed by the Central Government. They enjoy the following powers :- (i) Power regarding discovery, production of evidence, etc. [Sec. 131] (ii) Power of search and seizure, if authorised. [Sec. 132] (iii) Power to call for information [Sec. 133] (iv) Power to survey [Sec. 133A] (v) Power to make an enquiry [Sec. 135] (vi) Power to collect certain information [Sec. 133B] (vii) Power to inspect register of companies [Sec. 134] (viii) To sanction reopening of assessment after the expiry of 4 years, if the assessment is made under any section DIRECT TAX LAWS AND INTERNATIONAL TAXATION 201

212 other than sections 143(3) and 147. (ix) Instruction to the Assessing Officers. [Sec. 119(3)] Assessing Officer Assessing Officer means the Assistant Commissioner or Deputy Commissioner or Assistant Director or Deputy Director or the Income-tax Officer who is vested with the relevant jurisdiction by virtue of directions or orders issued under Section 120 or any other provision of this Act, and the Additional Commissioner or Additional Director or Joint Commissioner or Joint Director who is directed under the said section 120 to exercise or perform all or any of the powers and functions conferred on, or assigned to, an Assessing Officer under this Act [Sec. 2(7A)] The following are some of the powers of Income-tax Officers (i) Power regarding discovery, production of evidence, etc. [Sec. 131] (ii) Power of search and seizure, if authorised. [Sec. 132] (iii) Power to requisition books of accounts. [Sec. 132A] (iv) To apply the assets seized and retained u/s. 132 in satisfaction of the existing liabilities of the assessee under Direct Taxes Act. [Sec. 132B] (v) Power to call for information. [Sec. 133] (vi) Power to survey. [Sec. 133A] (vii) Power to collect certain information [Sec. 133B] (viii) Power to inspect register of companies. [Sec. 134] (ix) Power to allot Permanent Account Number. [Sec. 139A] (x) Power to impose penalties. [Sec. 142] (xi) Power to issue direction for setting accounts audited. [Sec. 142] (xii) Power to make assessment. [Sec. 143, 144] (xiii) Power to reassess income which has escaped assessment. [Sec. 147] (xiv) Power to rectify mistakes apparent from the records, either on his own or on an application made by the assessee. [Sec. 154] (xv) Power to grant a certificate to an assessee to receive a payment without deduction of tax at source or deduction of tax at source at a lower rate than prescribed [Sec. 197] (xvi) Power to grant refund. [Sec. 237, 240] As per section 127(1), the Director General or Chief Commissioner or Commissioner may, after giving the assessee a reasonable opportunity of being heard in the matter, wherever it is possible to do so, and after recording his reasons for doing so, transfer any case from one or more Assessing Officers subordinate to him (whether with or without concurrent jurisdiction) to any other Assessing Officer or Assessing Officers (whether with or without concurrent jurisdiction) also subordinate to him. There may be situations where the Assessing Officer from whom the case is transferred and the Assessing Officer to whom the case is transferred do not fall under the control of the same Director General or Chief Commissioner or Commissioner of Income tax. In such cases, the Director General or the Chief Commissioner or Commissioner of Income Tax from whose jurisdiction the case is transferred shall pass an order, if such concerned higher authorities mutually agree for such transfer. If the higher authorities are not in agreement about the transfer, then, the Board or any such authority authorised by the Board may pass the order. If the case is transferred between Assessing Officers within the same city or locality or place, then, it is not necessary to give the assessee an opportunity of being heard. 202 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

213 The transfer of a case may be made at any stage of the proceedings and it is not necessary to reissue any notice already issued by the Assessing Officer or Assessing Officers from whom the case is transferred. As per section 127, the case of any assessee may be transferred from jurisdiction of an Assessing Officer or Assessing Officers (whether or not holding concurrent jurisdiction) to the jurisdiction of another Assessing Officer or Assessing Officers (whether or not holding concurrent jurisdiction). However, before such order of transfer is made, reasons there for have to be recorded and where the transfer is to the jurisdiction of the Assessing Officer or Assessing Officers which is not situated in the same city, locality or place, the assessee has to be given an opportunity of being heard and the reasons recorded for transfer have also to be intimated to him [Ajantha Industries vs. CBDT and Ors (1976) 102 ITR 281(SC)]. It is mandatory to record reasons for transferring the case, hence, transfer of case without any notice and reasons quashed [Chaitanya vs. CIT (2010) 328 ITR 208 (Bom)]. Impugned order made under section 127(2) without reflecting any reasons for transferring the cases from one Assessing Officer to another Assessing Officer cannot be sustained [Hemang Ashvinkumar Baxi (Dr) vs. Dy. CIT & Anr. (2010) 45 DTR 38 (Guj)]. Not only is the requirement of recording reasons under section 127(1) a mandatory direction under the law, but that non communication thereof is not saved by showing that the reasons exist in the file although not communicated to the assessee. Further, opportunity of being heard has to be provided before making the order of transfer of case [Madhu Khurana vs. CIT (2010) 47 DTR 289 (Guj)]. Reasons are not required to be recorded nor an opportunity of being heard required to be given when the case is transferred from one Assessing Officer to another at the same station [Kashtram Agarwalla vs. UOI and Ors (1965) 56 ITR 14 (SC)]. In the case of intra-city transfers, though opportunity of hearing as postulated in section 127(1) and 127(2) has been dispensed with other statutory formalities, which include issuing an order are required to be complied, with Assessing Officer on his own could not transfer an income tax file to another officer without an order under section 127(3) [Kusum Goyal vs. ITO (2010) 48 DTR 343 (Cal)]. In the matter of transfer of a case under section 127 of the Act, it is necessary that the authority which proposes to transfer the case must, wherever it is possible to do so, give the assessee a reasonable opportunity of being heard with a view to enable him to show cause against the proposed transfer. The notice must propose to give a personal hearing. It is also necessary to mention in the notice the reasons for proposed transfer so that the assessee could make an effective representation with reference to the reasons set out. It is not sufficient merely to say in the notice that the transfer is proposed to facilitate detailed and coordinated investigation. The reason cannot be too vague and general in nature and should be based on material facts. It is again not sufficient to record reasons in the file but it is also necessary to communicate the same to the affected party [Melco India Pvt. Ltd. and Ors vs. CIT (2003) 260 ITR 450 (Del)]. Where the assessee had made a representation against the proposed transfer, a speaking order is required to be passed in his case [Parmeshwar Nath Rai vs. Chief CIT and Ors (2002) 258 ITR 591 (Cal)]. The order of transfer has to be made by a Commissioner, Chief Commissioner or Director General to whom the Assessing Officer holding jurisdiction over the assessee is subordinate. However, where the Assessing Officer to whom case is to be transferred is subordinate to another Director General, Chief Commissioner who is not in agreement with his counterpart, the order of transfer is to be made by the Board or a Director General or Chief Commissioner notified by it. No assessee has a vested right to have his assessment decided by any officer at any place. It is for the head of the Department to allocate work among the officers under him subject to the Act and Rules. There is no scope for interference by the High Court in these matters which are purely administrative in nature, except when there is allegation of mala fides or want of jurisdiction [Redwood Hotel Pvt. Ltd. vs. Chief CIT (2003) 259 ITR 191 (Ker)]. Where there is any change in the address or status of the assessee or there is a change in the employment or any other reason due to which the jurisdiction of the Assessing Officer has changed, the assessee can make an application for the transfer of income-tax file. For getting the file transferred, the assessee should take the following steps: Step 1: The assessee should submit an application in duplicate before the following authority: (a) Where the Assessing Officer from whom the case is to be transferred and to whom the case is to be transferred, DIRECT TAX LAWS AND INTERNATIONAL TAXATION 203

214 are subordinate to the same Director General or Chief Commissioner of Income-tax or Commissioner of Income Tax : The application stating full facts in duplicate should be filed before the concerned Director General or Chief Commissioner of Income Tax or CIT, as the case may be. In this case such officer shall pass necessary orders after recording the reasons and giving opportunity to the assessee of being heard, if necessary. (b) Where the transferor and transferee Assessing Officers are within the jurisdiction of different Director General/ Chief Commissioner of Income Tax/CIT : The application giving full facts and particulars should be filed before the DGIT/CCIT or CIT, as the case may be, from whose jurisdiction the file is to be transferred, with a copy to the Commissioner to whose jurisdiction the file is to be transferred and to both the transferor and transferee Assessing Officers. After receiving the application if both the Commissioners are in agreement, then the DGIT/ CCIT/CIT from whose jurisdiction the file is to be transferred shall pass the necessary order giving effect to such transfer. However, if they are not in agreement, the order may be passed by CBDT. Step 2: The assessee should clearly mention the reasons for seeking the transfer of file in the application. In case of a transfer to a new place, new address should also be mentioned. Step 3: An appropriate Court Fee stamp (presently Re 1) should be affixed on the original copy of the application. Change of incumbent of an Office [Section 129] Whenever in respect of any proceeding under this Act an Income-tax Authority ceases to exercise jurisdiction and is succeeded by another who has and exercises jurisdiction, the Income-tax Authority so succeeding may continue the proceeding from the stage at which the proceeding was left by his predecessor. Provided that the assessee concerned may demand that before the proceeding is so continued the previous proceeding or any part thereof be reopened or that before any order of assessment is passed against him, he be reheard. Powers of Income Tax Authority (1) Power to issue summons, etc. regarding discovery, production of evidence, etc. [Section 131]. (A) Same power as of Court [Section 131(1)]: The Assessing Officer, Joint Commissioner, Commissioner (Appeals), Commissioner and Chief Commissioner shall have the same powers as are vested in a Court under the Code of Civil Procedure, 1908, (when trying a suit) in respect of the following matters: (i) Discovery and inspection; (ii) Enforcing the attendance of any person including any officer of a Banking Company and examining him on oath; (iii) Compelling the production of books of account and other documents; and (iv) Issuing commissions. These powers can be exercised by the aforesaid authorities only in respect of proceedings pending before them. Summons under this section will have to be issued by the Assessing Officer at the request of the assessee where the burden of proof lies on the assessee. (B) Power can be exercised whether any proceedings are pending or not [Section 131(1A)]: If the Director General or Director or Joint Director or Deputy Director or Assistant Director or the Authorised Officer referred to in section 132(1), before he takes action regarding search and seizure, has reason to suspect that any income has been concealed or is likely to be concealed by any person within his jurisdiction, then for the purpose of making an enquiry or investigation relating thereto, he will be competent to exercise the powers mentioned in section 131(1) above, whether any proceedings in respect of such person or class of persons are pending before him or any Income-tax Authority or not. Power can also be exercised for making an inquiry or investigation in respect of any person on request from Tax Authorities outside India [Section 131(2) inserted by the Finance Act, 2011, w.e.f ]. For the purpose of making an enquiry or investigation in respect of any person or class of persons in relation to an agreement referred to in section 90 or section 90A, it shall be competent for any Income-tax Authority, not 204 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

215 below the rank of Assistant Commissioner of Income Tax, as notified by the Board in this behalf, to exercise the powers currently conferred on Income-tax Authorities referred to in section 131(1). The authority so notified by the Board shall be able to exercise the powers under section 131(1) notwithstanding that no proceedings with respect to such person or class of persons are pending before it or any other Income-tax Authority. (C) Power to impound and retain books of account and documents [Section 131(3)]: The Officers mentioned in sections 131(1), (1A) and (2) above, may impound and retain in its custody for such period as it thinks fit any books of account or other documents produced before it in any proceedings under this Act. However, an Assessing Officer or an Assistant Director/Deputy Director shall not impound any books of account or documents without recording his reasons for doing so. Further, he cannot retain in his custody such books of account and documents for a period exceeding 15 days(exclusive of holidays) without obtaining the approval of the Chief Commissioner or Director General or Commissioner/Director. The books of account and documents can be requisitioned for a period beyond 3 years. Section 131(3) empowers Income-tax Authorities to impound and retain, inter alia, any documents produced before them and there is no precondition that such power can be exercised only when some proceedings are pending against a particular or specified individual [Suman Sehgal vs. Union of India (2006) 154 Taxman 195 (Del)]. Consequence of defaults in compliance with the terms of summons issued under section 131 As per section 272A(1), a penalty of `10,000 can be imposed on a person for each of the following defaults (i) Omission to attend to give evidence or produce the books of account or documents called for, (ii) Refusal to answer questions put to him, (iii) Refusal to sign the statement made by him. (2) Power to call for information [Section 133]: The Assessing Officer, the Joint Commissioner or the Commissioner (Appeals) may require the furnishing of the following information for the purpose of this Act, (I) require any firm to furnish him with a return of the names and addresses of the partners of the firm and their respective shares; (II) require any Hindu Undivided Family to furnish him with a return of the names and addresses of the manager and the members of the family; (III) require any person whom he has reason to believe to be a trustee, guardian or agent, to furnish him with a return of the names of the persons for or of whom he is trustee, guardian or agent, and of their addresses; (IV) require any assessee to furnish a statement of the names and addresses of all persons to whom he has paid in any previous year, rent or interest or commission or royalty or brokerage or any annuity, not being any annuity taxable under the head Salaries amounting to more than one thousand rupees, or such higher amount as may be prescribed, together with particulars of all such payments made; (V) require any dealer or broker or agent or any person concerned in the management of a stock or commodity exchange to furnish a statement of the names and addresses of all persons to whom the exchange has paid any sum in connection with the transfer, whether by way of sale, exchange or otherwise, of assets, or on whose behalf or from whom he or the exchange has received any such sum, together with particulars of all such payments and receipts; (VI) require any person, including a banking company or any officer thereof, to furnish information in relation to such points or matters, or to furnish statements of accounts and affairs verified in the manner specified by the Assessing Officer or the Joint Commissioner or the Commissioner (Appeals) giving information in relation to such points or matters as, in the opinion of the Assessing Officer or the Joint Commissioner or the Commissioner (Appeals) will be useful for, or relevant to, any inquiry or proceeding under this Act. However, the powers referred to in section 133(6) may also be exercised by the Director-General, the Chief Commissioner, the Director and the Commissioner. DIRECT TAX LAWS AND INTERNATIONAL TAXATION 205

216 Further that the power in respect of an inquiry, in a case where no proceeding is pending, shall not be exercised by any Income-tax Authority below the rank of Director or Commissioner without the prior approval of the Director or the Commissioner, as the case may be. Power to collected information on requests received from Tax Authorities outside India [Third proviso to section 133] [Inserted by the Finance Act, 2011, w.e.f ]: For the purposes of an agreement referred to in section 90 or section 90A, an Income Tax Authority not below the rank of Assistant Commissioner as may be notified by the Board under section 131(2) may exercise all the powers conferred under this section notwithstanding that no proceedings are pending before it or any other Income Tax Authority. Failure to furnish details, information, etc. requisitioned under section 133 shall attract a penalty under section 272AA of `100 per day for the period during which the default continues. (3) Power to collect certain information [Section 133B]: An Income-tax Authority may, for the purpose of collecting any information which may be useful for, or relevant to the purposes of Income-tax Act, enter: (a) any building or place within the limits of the area assigned to such authority; or (b) any building or place occupied by any person in respect of whom he exercises jurisdiction, at which a business or profession is carried on, whether such place be the principal place or not of such business or profession, and require any proprietor, employee or any other person who may at that time and place be attending in any manner to, or helping in, the carrying on of such business or profession to furnish such information as may be prescribed in Form 45D. The Income-tax Authority may enter any place of business or profession only during the hours at which such place is open for the conduct of business or profession. The Income-tax Authority shall, on no account, remove or cause to be removed from the building or place wherein he has entered, any books of account or other documents or any cash, stock or other valuable article or thing. The Income-tax Authority who is authorised to collects information under section 133B shall be (a) Joint Commissioner of Income Tax or Additional Commissioner of Income Tax. (b) Assistance Director of Income Tax or Deputy Director of Income Tax. (c) Assessing Officer. (d) An Income Tax Inspector, so authorised by the Assessing Officer. Failure to furnish information in Form No. 45D shall attract a maximum penalty of `1,000 under section 272AA. (4) Power to call for information by prescribed income-tax authority [Section 133C]: The prescribed income-tax authority, may for the purposes of verification of information in its possession relating to any person, issue a notice to such person requiring him, on or before a date to be specified therein, to furnish information or documents verified in the manner specified therein, which may be useful for, or relevant to, any inquiry or proceeding under this Act. (5) Power to inspect registers of companies [Section 134]: The Assessing Officer, the Joint Commissioner or the Commissioner (Appeals), or any person subordinate to him authorised in writing in this behalf by the Assessing Officer or the Joint Commissioner or the Commissioner (Appeals), may inspect, and if necessary take copies, or cause copies to be taken, of any register of the members, debenture holders or mortgages of any company or of any entry in such register.failure to allow inspection of such register or to allow copies to be taken shall attract a penalty under section 272A(2)(d) of `100 for every day during which the failure continues. (6) Power of DGIT/DIT/CCIT/CIT/JCIT to make enquiry [Section 135]: The Director General or Director, the Chief Commissioner or Commissioner and the Joint Commissioner are competent to make any enquiry under this Act and for that purpose they shall have all the powers that an Assessing Officer has under this Act in relation to the making of enquiries. Stages of Income Tax proceedings FILING OF RETURN 206 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

217 PROCEESSING OF RETURN ASSESSMENT PROCEEDINGS (SCRUITNY) FIRST APPEAL BEFORE CIT(A) SECOND APPEAL BEFORE ITAT HIGH COURT SUPREME COURT OF INDIA 7.2 SURVEY UNDER SECTION 133 OF THE INCOME TAX ACT 1961 Survey under section 133 of the Income Tax Act 1961 Meaning of Survey - to collect data and information at the place of business or profession of the assessee, for the purpose of assessment under the Income Tax Act Purpose and objectives : Conduct a surprise visit to the place of business/profession Personally inspect books of account and/or other documents Verify stocks, cash and other valuable articles Impound relevant books of accounts and/or documents. Collect information about evasion of Taxes. Bring new assessees on record. Verify whether books of accounts are being maintained adequately. Types of Survey : Internal Survey Survey in connection with functions, ceremonies, events etc. External General Survey (Door to Door Survey) of business premises External (Specific) Survey of business premises Survey to check compliance with TDS provisions. Recovery Survey Income Tax authorities who are competent to conduct surveys include : Commissioner of Income Tax, Joint Commissioner of Income Tax Director of Income Tax, Joint Director of Income Tax Assistant Director of Income Tax, Deputy Director of Income Tax Assessing Officer, Tax Recovery Officer DIRECT TAX LAWS AND INTERNATIONAL TAXATION 207

218 Inspector of Income Tax (subject to proper authority but only with limited powers ) No action u/s 133A(1) can be conducted, without the prior approval of the Joint Director or Joint Commissioner [including Additional director/ Addl. Commissioner by any of the following authority: Deputy Director / Deputy Commissioner of Income Tax Assistant Director / Assistant Commissioner of Income Tax Assessing Officer Tax Recovery Officer Inspector of Income Tax, to a limited extent Judicial Pronouncement CIT vs. Kamal and Company [2009] 308 ITR 129 (Raj.) Illegality does not vitiate evidence collected during survey The action of the Inspector to conduct survey under section 133A was not legal under section 133A of the Act. Though no prohibition had been imposed on the Inspector to conduct such a survey, unless an authority was given under the provisions of section 133A, the survey conducted by the Inspector could not be held to be legal. The inventory stock was prepared by the Inspector during the course of an illegal survey and material was then used by the Assessing Officer for making additions. The Revenue was entitled to use the material collected during the course of illegal survey. Jurisdiction for conducting Survey u/s 133 A(1) An Income Tax Authority may enter : (a) Any place falling in his jurisdictional area. (b) Any place occupied by any assessee falling in his jurisdiction. (c) Any place in respect of which he is authorized for the purpose of this section by such income tax authority, who is assigned the area within which such place is situated or who exercises jurisdiction in respect of any person occupying such place at which a business or profession is carried on, not necessarily be the principal place of business Powers of authorities while conducting surveys : Enter place of business during business but only after sunrise and before sunset Enter place other than business premises if assessee states that cash, stock, etc., are lying there Place marks of identification on books of account Take extracts from books of accounts and documents Impound books of accounts after recording reasons Make an inventory of cash, stocks and other valuables Record statement of any person Collect information regarding nature and quantum of expenditure on personal functions and events Discovery and production of evidence etc. when there is non-cooperation on the part of the Assessee Authority having jurisdiction as to the Tax deduction at source matters, has the power to conduct survey Cash, bank accounts, stocks and other valuables cannot be verified/seized during TDS survey Survey can be carried out at any place where business or profession is carried on i.e., Head Office, Branches, Godowns etc. 208 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

219 Authorized Officer can enter only if premises are open and only during business hours Sub section (4) of section 133A does not empower the authority to seize any article and/or asset found during survey Survey with respect to Functions u/s 133 A(5) If the income tax authority is of view, of any lavish expending on any function or ceremony, it can call for the information from the assessee or from any other person who is likely to be in possession of the information with respect to the expenditure incurred. However, ITA cannot call for such information before or at the time of such function, ceremony or event. Power prescribed be exercised only when the said function, ceremony or event is over. Note: All the powers given in this section are available with Inspector also. [Explanation (a) to s.133a] Powers To collect information about the nature and scale of expenditure incurred in any ceremony or other events Information can be collected from various sources including third parties and external agencies. Action can be taken only after the function is over and not during the function Video recording of the function is not permissible Survey findings may include Stock found in excess or short, Cash found in excess or short and / or discovery of undisclosed Turnover Power to impound books of accounts I.T. authorities empowered to impound and retain books of accounts/other documents inspected during survey Power to be exercised after recording reasons for doing so Approval of the Chief Commissioner of Income Tax/ Director General of Income Tax required for retaining books/documents for more than ten working days Assessee can ask for copies of impounded records at the time of survey or even subsequently Impounding of Computers, laptops and IT equipments Computer is outside definition of Books or Books of Accounts u/s 2(12A) Surveying authority can only insist for copy of data on Computer disc, hard drive or print out. Provisions of Information Technology Act, 2000 Section 43 provides for penalty for accessing, tampering etc, of a computer without proper authority Section 81 provides that the said Act has overriding effect over all other Acts Recording of Statements Statement of the person surveyed should be recorded under oath and in a language which the person understands.instructions of CBDT for extracting confessions to be followed. Confession as to the Undisclosed Income should be voluntary and based on reliable evidence. Assistance of Tax Consultants during the survey may be made subject to rules. Retraction of Statements made Retraction is permissible subject to certain conditions and should be made as early as possible without delay. Sec. 94 of the Evidence Act provides that a presumption can be rebutted by proving that admission or confession was caused by inducement, threat or promise. Burden to prove that the admission made is untrue lies on the party who made the admission Sarwan Singh Rattan Singh vs. State of Punjab AIR 1957 SC 637 DIRECT TAX LAWS AND INTERNATIONAL TAXATION 209

220 Karam Chand vs. ACIT 73 ITD 434 (Chandigarh) Penalties & Prosecution Penalty leviable u/s 272A for failure to answer questions, sign statements and furnish information, returns or statements Excess Stock found in survey could not lead to presumption u/s 276C calling for prosecution 203 ITR 866 (Pb. & Har.) ITO vs. Mohinder Pal Penalty leviable u/s 272AA for failure to Comply with S. 133B Penalty for Concealment of Income leviable in Assessment Proceedings for existing Assessees Duties of Tax authorities while conducting Surveys To disclose the purpose and to commence survey of the business premises, without disturbing the ongoing business and without dislocating the normal business To provide copy of inventories of cash, stock and other valuable articles or things, books of account and documents found in the course of the survey To prepare a report containing details of survey and findings on the material found in the course of the survey To keep, maintain and preserve all the inventories copies of the documents and books of account Survey can also be conducted on a person who is not an existing tax-payer Business or residential premises of third parties, including a Chartered Accountant, a pleader, or Income Tax Practitioner, of whom the assessee may be a client, are not places which could be entered into for the purpose of section 133A. However the above restrictions do not apply to cases of search and seizure specifically authorized u/s 132. However, if the books of account, documents, or any part of the cash or stock or any other valuable article or thing of an assessee is stated by be kept in any place other than the place of business or profession, the income-tax authority can survey such a place, but same may be for a limited purpose for obtaining information relating only in respect of that assessee. Restriction of entry u/s 133A(2) An Income tax authority may enter any place of business or profession ref. in s.s(1) only during the hours at which such place is open for the conduct of business or profession and, In respect of other place, wherein the books of accounts, other documents, cash etc. has been stated to be kept the survey party can enter only after sunrise and before sunset. See also Mohnot (N.K.) vs. DCIT, [1995] 215 ITR 0275 (Mad) The restriction is only in respect of entry in to the place of business or profession and not related to the exit, survey may continue after office hours and even after sun set. Powers of Income Tax authorities : The ITA may require any proprietor, employee or any other person attending or helping in carrying on such business or profession- to afford him necessary facility (i) to inspect books of accounts or other documents available at such place. (Power is also available with Inspector of Income Tax in view of Explanation (a) to s.133a] ) (ii) Check or verify the cash, stock or other valuable or thing found therein [However, An income tax authority acting under this section shall, on no account, remove or caused to be removed from the place wherein he has entered, any cash, stock or any other valuable article or thing. [s.133a(4)] (iii) May require to furnish any information as may be useful for any proceedings under the Act Powers of ITA in case of non-cooperation by assessee { sec 133 A(6)} Where during the course of survey assessee does not- 210 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

221 Afford the facility to inspect books of accounts Afford facility to check or verify cash, stock etc. Furnish any information or to have his statement recorded. The Income tax authority shall have all powers u/s 131(1) to enforce compliance with the requirement made. For the purpose of this sub-section, the Income Tax Authority has been empowered to record the statement of the assessee or such other person. It is to be specifically noted that the statement thus recorded may be used as evidence in any proceedings under the Act. Powers of Survey Team i. To place marks of identification on the books of account & can make extracts & copies there from. (This power is also available with Inspector of Income Tax also in view of Explanation (a) to s.133a] ii. To make an inventory of cash, stock or other valuable article or thing verified by him (Section 133A(4) specially prohibits the removal of cash, stock other valuable article or thing w.e.f. 01/06/2002 ). iii. Record statement - Not on oath U/s 133A [Paul Mathews & Sons vs. CIT, [2003] 263 ITR 101(Ker)], however statement can be recorded on Oath, only under circumstances where S. 133A(6) is invoked : United Chemical Agency vs. R.K. Singh, ITO [1974] 097 ITR 0014 (All) Note: There is no provision of sealing for business premises either u/s 133A or sec. 132 or any other section of the IT Act. {Shyam Jewellers & Anr. Vs Chief Commissioner (Administration) U.P & others (1992)196 ITR 243(All)} Tax authorities cannot : remove, take in possession or seize cash, stock in trade and other valuable articles found in the course of the survey pressurize the tax payer to surrender any specific amount issue any summon u/s 131(3) of the Act without recording reasons Duties of Assessee during Survey To assist in preparing inventory of various items To give statements truthfully and completely, accurately, correctly and unambiguously To sign the inventories and statements after carefully reading, vouching its correctness and obtaining its copies The assessee should ensure : Computer hard disk does not contain any irrelevant data. That Books of accounts are properly updated. That person in-charge of business have proper acquaintance of business affairs. That stock register are maintained and kept updated. That if no stock registers are maintained then inventory verification list is prepared at regular dates. That physical cash available and cash in books of account matches. Registered value of property in name of every relevant person should be known. Where records are maintained at various levels for cross verification, they should be in reconciliation up to date e.g. records maintained at Gate, Security Guard, Stores Keeper etc. Assessment particulars of Directors in case of company, partners in case of firms,members in case of AOP and trustees in case of trust should be readily available. The assessee should ensure not : DIRECT TAX LAWS AND INTERNATIONAL TAXATION 211

222 To keep Books of accounts at any place other than Registered Office. To share common premises, since it could lead to Multiple Operations. To Keep Personal documents of workers and employees in business premises. To do backdating and editing in books of Account. Can survey be converted into search? Law prescribes no bar on initiating search proceedings during the course of survey but will depend upon the facts and circumstances prevailing at the time of survey. The survey ordered at the premises of the petitioners u/s 133A of the Act and conversion of the said operation on the basis of the authority given by the Additional Director are legal : Vinod Goel & Others vs Union of India and others [2001]252 ITR 029 (P&H). Survey authorisation in the name of doctor, then search operation at the residence of doctor and hospital premises belonging to trust is not valid, where no reasons for conversion of survey operation into search operation were given. Dr. Nalini Mahajan v. Director of Income Tax (Inv.) [2002] 257 ITR 123 (Del.) SLP Dismissed by Hon ble SC Assessment vis a vis material collected during survey CIT vs Diplast Plastics Limited[2010] 186 Taxman 317 / 327 ITR 399 (P & H )[Related to section 133A] It has been held that loose sheets found during survey has no evidential value unless and until proved by some cogent material and the books of account of the assessee, which are audited, are of great evidentiary value. [2011] 43 SOT 651 ( Mum.) Chawla Brothers (P.) Ltd. v. Asstt. CIT Merely on the basis that at the time of survey, some differences were found in stock did not mean that there would be an automatic addition on account of differences. Such differences are always subject to explanation and reconciliation. Where, the assessee had reconciled the differences with reasons and the revenue authorities did not point out anything contrary that how the reconciliation done by the assessee was incorrect. no addition was warranted. Addition made to assessee s income on basis of admission during survey without any supportive material is not sustainable [2010] 39 SOT 379 (HYD.) B. Ramakrishnaiah vs. ITO/ Ashok Manilal Thakkar vs ACIT [2005] 97 ITD 361(AHD.) CIT vs UTTAMCHAND JAIN (BHC) -182 Taxman 243(2009)/[2010] 320 ITR 554(Bom) As the VDIS 1997 certificate issued by the department is valid and subsisting, it is not open to the revenue to contend that there was no jewellery which could be sold by the assessee on 20/1/1999. Reference of material collected during survey Can materials found in course of survey can be used in block assessment? GMS Technologies Ltd v Dy. CIT. (2005) 93 TTJ 218 (Del F )). In block assessment, material found during survey u/s 133A can be used only if it has some relation with the material seized during search, otherwise not. where during continuance of survey proceeding, search proceedings under section 132 are initiated on basis of information obtained in survey, it can be said that survey proceeding has lost its identity and in fact, has merged with search proceedings and, in such a case, unaccounted income is liable to be assessed in block assessment proceedings only ACIT v Mangaram Chaudhary (HUF) [2010] 123 ITD 359 (HYD.) No penalty on income surrendered during survey CIT vs. Bedi Karyana Store [1999] 235 ITR 0351 (P&H). Assessee surrendered Rs. 2 lakhs and applied under section 273A for spread over of the surrendered amount. Penalty was imposed on the grounds that firstly, the assessee-firm had surrendered the amount when stock taking was in progress; secondly there was no evidence that the firm had surrendered the sum on condition that no penalty would be levied and, thirdly, the assessee-firm had surrendered the amount on account of excess stock found. The assessee-firm did not offer any explanation for introducing cash instead of surrender of excess stock. 212 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

223 The Income-tax Officer held that all this showed that the assessee had not strictly adhered to voluntary disclosure already made and introduced cash in its account books out of its concealed income. However, the Commissioner of Income-tax (Appeals) accepted the plea of the assessee that the assessing authority could not have enhanced the liability of the assessee after partially accepting the assessee's request for spread over of the surrender. On that premise, the Commissioner of Income-tax (Appeals) cancelled the penalties. The Tribunal dismissed the appeal filed by the Revenue, High Court referred to the decision of CIT(A). Presumption as to ownership ( Sec 292 C) Section 292C of the Income Tax Act, 1961 states the presumption regarding the assets, documents and books found in possession or control of any person in the course of a search or survey operation that: Such book of account, other documents, money, bullion, jewellery, other valuable article or thing belong or belongs to such person. The contents of such books of account and other documents are true. The signature and every other part of such books of account and other documents which purports to be in the handwriting of any particular person or which may reasonably be assumed to have been signed by, or to be in the handwriting of, any particular person, are in that person s handwriting, and in the case of a document stamped, executed or attested, that it was duly stamped and executed or attested by the person by whom it purports to have been so executed or attested. Surendra M. Khandhar vs ACIT & Ors. (2009) 224 CTR (Bom.) 409 Assessee having failed to rebut the presumption u/s 292C, addition u/s 69 on the basis of documents seized from the possession of the assessee was rightly made by AO & sustained by the tribunal. Important Judicial Pronouncements Survey is possible even to enquire about tax deducted at source : Reckitt and Colman of India Ltd. vs. ACIT [2001] 251 ITR 306 (Cal). Survey team has no power to break open any locked premises as power to break open any lock is not conferred u/s 133A as against specific provisions contained u/s 132. please see 196 ITR 243 (All) U K Mahapatra and Co and Others vs. Income Tax Officer and Others [2009] 308 ITR 0133 (ORI.) Revenue conducts survey u/s 133A in the premises of Petitioner, a Chartered Accountant Firm which was the auditor of the assessee, and impounded certain files Held that although Explanation to Sec 133A allows survey of any other place where the books of accounts of assessee are kept but the precondition for conducting survey u/s 133A, is that the client in course of survey must state that his books of accountant/documents and records are kept in the office of his chartered accountant/ lawyer/tax practitioner. No addition to income on the basis of disclosure could be made where the assessee had retracted certain income after disclosing it and no material had been found to prove this income during the survey. [Ashok Manilal Thakkar vs ACIT 279 ITR 143 [ITAT AHM] Under survey the AO is not authorised to record a statement on oath, though he can record the statement of any person which may be useful for or relevant to any proceedings under the Act. Thus the said statement is only an information and has no evidentiary value - The information so obtained can be used only for corroboration purposes for taking a decision on an issue either in favour or against an assessee. [Unitex Products Ltd. vs ITO SOT 429 [ITAT Mumbai see also (2010) 323 ITR 353 (Ker.), CIT v. Hotel Samrat] No reliance could be placed upon a statement regarding surrender of loss by the assessee, which was retracted soon after a survey under s.133a of the Income Tax Act 1961 was carried out. Further, the statements recorded by the Inspector and the ITO, without reading and explaining them to the assessee before obtaining his signature, were invalid. [ITO vs Vardhman Industries - 99 TTJ 509 [ITAT - Jodhpur] Before making retraction the assessee must prove beyond doubt the circumstances for such retraction are DIRECT TAX LAWS AND INTERNATIONAL TAXATION 213

224 bonafide and are not after thoughts. Case: DCIT vs. Bhogilal Moolchand (2005) 3 SOT 211 (Ahd.) Dr. S.S. Gulati. v DCIT I.T.A. No.671 of 2009 [P&H HC] Where the appellant had himself surrendered the amount voluntarily, paid the taxes in advance on the surrendered amount ;the allegation of coercion and duress is baseless and it is an after thought, (since it could have stopped the payment of cheques given in advance to the Department, had it been convinced that the statement has been given under coercion and duress). The statement given in a spontaneous and natural manner, cannot be ignored keeping in view the facts and circumstances of the case where there does not appear to be any reason for the appellant for retracting from the surrender, which it has already made during survey and on which it has already paid advance tax voluntarily. CIT vs. SAS Pharmaceuticals [2011] 11 taxmann.com 207 (Delhi) Whether where income surrendered by assessee during survey had been shown by it in its regular income-tax return filed within prescribed time, penalty could be imposed upon it under section 271(1)(c) - Held, no CIT Vs. MAK Data Ltd., Delhi HC, ITA No. 415/2012, Date of decision Whether the voluntary surrender of income for taxation by the assessee without any supporting evidences is liable for penalty u/s 271(1)(c)?- Held Yes: Where the amount is merely offered for taxation with no underlying explanation as to its source, it could not be considered as voluntary and thereby attracts the clause A of Explanation 1 to section 271(1)(c). Stay Applications Sections 220 to 232 of the Income-tax Act deals with collection and recovery of taxes. Each officer or Commissioner may have to report to the higher authority the taxes outstanding, and total collection of taxes in their charge. Recovery proceedings under the Act can be started against a person only when he is in default or deemed to be in default in making payment of taxes. The assessee who is in default or is deemed to be in default in making payment of taxes may make an application, requesting the Assessing Officer not to treat him as the assessee in default in respect of the amount in dispute in the appeal preferred by the assessee. The Assessing Officer may in his discretion and with or without imposing any conditions pass an order, not treating the assessee as an assessee in default in respect of such disputed amount till the appeal is pending. It may be noted that mere filing of an appeal does not suo motu stay the proceedings of recovery of the tax in demand. Therefore, it is necessary that as soon as an order raising the demand is received, assessee must make an application to stay and keep the demand in abeyance. While filing Stay application before the Assessing Officer, the assessee will have to give the brief facts as under: 1. The assessment history of the assessee, 2. His conduct and co-operation with the department, 3. Points raised in the appeal, 4. The chances of recovery in case the appeal is dismissed and 5. The hardship that would be caused to the assessee by persistent demand of the tax by the department. If an assessee's application u/s. 220(6) is not replied by the Assessing Officer, even though the same was filed in time, the assessee can always contend before the Tax Recovery Officer that before taking any action against the assessee, his application for stay of demand should be disposed of. The Tax Recovery Officer can also consider the assessee's applications u/s. 225(1) and grant time for the payment of any tax till the disposal of the assessee's appeal by the First Appellate Authority. In the event of Assessing Officer rejecting assessee's application u/s. 220(6) of the Income-tax Act, the assessee can prefer an application to the Commissioner of Income-tax under whose jurisdiction assessee's case falls for staying the demand of tax in dispute till the hearing and final disposal of the assessee's appeal by the Commissioner of 214 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

225 Income-tax (Appeals). If the Commissioner fails to discharge his duty, the assessee may file a Writ Petition under Article 226 of the Constitution of India. However, when an appeal is pending before the Income Tax Appellate Tribunal, the assessee can file a Stay Petition before the Income Tax Appellate Tribunal to stay the recovery proceedings. Judicial Pronouncements : The discretionary power conferred by section 220 (6) upon the Assessing Officer is coupled with a duty and if he does not exercise it when the occasion calls for it or if he exercise it in such a manner that it is no exercise of discretion at all, he can be compelled to discharge his duty by an order of the court. [Ladhuram Taparia vs. B. K. Bagchi, 20 ITR 51, (Cal.) Shivangi Steels P. Ltd. vs ACIT, 226 ITR 62, 63 (All)] Protective recovery of tax is not permissible even though protective assessment can be validly made. [Sunil Kumar vs. CIT, 139 ITR 880 (Bom.)] Representative assessee Where an assessee expires before the issue of the certificate, unless his legal representatives are served with a notice of demand under section 156 and they fail to comply with that notice within 30 days from the date of receipt of the notice, they cannot be said to be "assessee in default" and consequently no recovery proceedings can be initiated against them. A recovery certificate issued or drawn up by Tax Recovery Officer against a person who is already dead, is a nullity. The certificate must be against a defaulter who is alive. If an assessee in default dies before the issue of a certificate in his name, proceedings under Section 159 of the Act are necessary to bring on record the name or names of the legal representative or representatives. 7.3 SERACH & SEIZURE Circumstances for conducting Search & Seizure When any summons or notice issued by IT Department is not responded When Summons is issued for production of books of accounts, however no response is received from the asseessee. When Competent Authority forms belief that a person is having unaccounted income inform of cash, bullion, jewellery, etc on the basis of information in his possession CBDT Guideline on Search & Seizure - Searches not to be conducted casually - Minimum expected disclosure of Rs Lacs - Professionals of high repute not to be searched Authorisation for Search - Director of Investigation (DI) - Deputy Director of Investigation (DDI) - Assistant Director of Investigation Overview of Search & Seizure process Investigation & Inquiry Formation of Reasonable Belief Authorisation by Competent Authority Actual Operation DIRECT TAX LAWS AND INTERNATIONAL TAXATION 215

226 Seizure of Books, Documents, Valuables, Cash Etc Recording of Statement & Disclosure Appraisal Report Issuance of Notice Payment of Tax & Filing of Returns in response to Notice Assessment of Returns filed Release of Items Seized Process of Search The first step is the Issuance of Search Warrants Specifying Person and Places to be searched. Thereafter the time of commencement and continuance of Search and the manner of Search is to be finalized, followed by the closing of search operation Search can be authorised by a CCIT/CIT other than jurisdictional CCIT/CIT: (1) The Chief Commissioner/Commissioner of Income Tax has the power to authorise a search of any building, place, vessel, vehicle or aircraft of a person which is under his jurisdiction and also in cases where such building, place, vessel, vehicle or aircraft is in his area of jurisdiction but he has no jurisdiction over the persons concerned, if he has reason to believe that any delay in obtaining authorisation from the Commissioner having jurisdiction over the person would be prejudicial to the interests of revenue. Such authorization shall be given in Form 45A. [First proviso to section 132(1)]. For example, if the search is to be conducted in the premises of a person in Mumbai but such person is an assessee in Kolkata i.e. the jurisdiction of the assessee is with Chief Commissioner of Kolkata, then the Chief Commissioner/Commissioner of Income Tax Mumbai can authorise such search instead of getting authorisation from jurisdictional Chief Commissioner i.e. Chief Commissioner Kolkata. (2) Where a search for any books of account or other documents or assets has been authorised by any authority who is competent to do so, and some other Chief Commissioner / Commissioner in consequence of information in his possession has reason to suspect that such books of account or other documents and asset, etc. of the assessee are kept in any building, place, vessel, vehicle or aircraft not specified in the search warrant issued by such authority, he may authorise the Authorised Officer to search such other building, place, vessel, vehicle or aircraft [Section 132(1A)]. Such authorization shall be given in Form 45B. For example, if a search warrant is issued by the Director of Income Tax, Chennai, authorising the search of a premises in Mumbai and the Authorised Officer finds that the books of account or other documents and/or assets have been secreted in a building or place not specified in the search warrant, he could request any of the local Commissioner of Mumbai to authorise him to search that building or place. The Authorised Officer for search and seizure, shall have the powers to (a) enter and search any building, place, vessel, vehicle or aircraft where he has reason to suspect that such books of account, other documents, money, bullion, jewellery or other valuable article or thing are kept; (b) break to open the lock of any door, box, locker, safe, almirah or other receptacle for exercising the powers conferred where the keys thereof are not available; (c) search any person who has got out of, or is about to get into, or is in the building, place, vessel, vehicle or aircraft, if the Authorised Officer has reason to suspect that such person has secreted about his person any such books of account, other documents, money, bullion, jewellery or other valuable article or thing; (d) require any person who is found to be in possession or control of any books of account or other documents maintained in the form of electronic records, to afford the necessary facility to the Authorised Officer to inspect all such books of account or other documents; (e) seize any such books of account, other documents, money, bullion, jewellery or other valuable article or thing 216 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

227 found as a result of such search. However, w.e.f , the Authorised Officer shall have no power to seize any bullion, jewellery or other valuable article or thing being stockin- trade of the business found as a result of search. He shall make a note or inventory of such stock-in-trade of the business, (f) place marks of identification on any books of account or other documents or make or cause to be made extracts or copies therefrom; (g) make a note or an inventory of any such money, bullion, jewellery or other valuable article or thing. If any person searched holds any bullion, jewellery or any other valuable article or things is held as stock-in-trade of the business, it cannot be seized, whether or not the person is able to explain the source of acquisition of such stock. Whether such stock is disclosed or undisclosed, it is immaterial and the same cannot be seized in any circumstance. However, the restriction on seizure of stock-in-trade does not apply to cash. Unaccounted cash can be seized even if it forms part of stock-in-trade of the assessee. For example for a person carrying on business of money lending or exchange of currency, cash in hand is stock-in-trade but it can still be seized. Case Laws: (1) Where the client of the auditor was subject to search and the audit firm itself had not been subject to search, on a writ petition by the auditors, it was held the search party does not have access to data of the other clients contained in the laptops of the auditor. [S. R. Batliboi & Co. vs. Department of Income-tax (Investigation) (2009) 315 ITR 137 (Del)]. (2) Survey of Chartered Accountant s office and impounding the books of accounts of the assessee would not constitute breach of privilege to which professional like a practicising accountant or lawyer would be entitled. Hence, both survey and consequent impounding of documents would be in order. [U.K. Mahapatra and Co. vs. Income-tax Officer (2009) 308 ITR 133 (Ori)] Rights of persons subjected to Search Right to check and confirm identity of each of the member of search party Right to have authorised representative Right to have witnesses Right to search every person of search party when they leave the place To call doctor for the ill person To send children to school after verification of their school bags Female members to be searched by female only To have inventory of items found and seized To use phones / other communication devices To have copy of statements recorded To have copy of books and documents seized Duties of persons subjected to Search To allow search party of enter in premises without creating obstacles To sign search warrant To give explanation when asked Restrict entry of any unauthorised persons Move any items without permission of search party To Co Operate search party DIRECT TAX LAWS AND INTERNATIONAL TAXATION 217

228 Measures to be taken prior to Search To maintain cash book upto date and have cognizance of average cash balance in every account / file To keep stock book up to date and keep on tallying the same with physical stock at reasonable intervals Not to keep unnecessary rough notes containing any financial data To have idea of fixed and movable assets which are on record To record household items, major expenses, personal expenses on books of accounts of business and to make payment through cheque for major items To cooperate and assist the search party To have knowledge of firm names, partnership, director ship held, companies operated and their businesses, their bank accounts Not to keep any alcoholic Drugs without permit To maintain expenses of marriage and functions on books Not to have undue entries on books of accounts, registers etc Items which can be Seized Unaccounted cash, jewellery, gold, bullion, lockers, promissory notes, cheques, drafts and other instruments Books of accounts, diaries etc Computer Hard Disks and other data storage devises Documents of property, title deeds etc Items which cannot be Seized Immovable assets Stock held in business Items disclosed in Income Tax and Wealth tax Returns Items appearing in books of accounts Cash for which explanation can be given Jewellery mentioned in wealth tax return Jewelley as per the status of the family if so appear to investigating officer Post Search process Completion of statements recorded Further explanations of the documents seized Appraisal report Issuance of Notice Assessment 7.4 PENALTIES & PROSECUTION Overview For the purpose of effective and satisfactorily implementation of any legislation certain penalties and prosecutions are provided. Hence under the IT Act certain penalties and prosecution have been provided. As the number of 218 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

229 tax payers is increasing, the tax administration has necessity to rely more and more on voluntary compliance of tax laws by the assessees and therefore appropriate penal and prosecution provisions are provided. Penalty under section 140A(3) NATURE OF DEFAULT: Failure to pay the whole or any part of self assessment tax or interest or both in accordance with the provisions of se. 140A(1). MINIMUM PENALTY: Amount impose by AO for default or continuing default. MAXIMUM PENALTY: Amount of tax in arrears. WHO CAN IMPOSE PENALTY? Assessing Officer. Penalty under section 221(1) NATURE OF DEFAULT: Failure in making payment of tax within prescribed time. MINIMUM PENALTY: As amount impose by AO. MAXIMUM PENALTY: Amount of tax in arrears. WHO CAN IMPOSE PENALTY? Assessing Officer. Penalty under section 271(1)(b) NATURE OF DEFAULT: Failure to comply with a notice u/s 142(1) or 143(2) or with a direction issued u/s 142(2A) Sec. 142(1): regarding giving notice to the assessee for return of income, furnishing document and accounts, furnishing other information, Sec. 143(2): regarding the producing any evidence Sec. 142(2A): direction regarding books of accounts audited WHO CAN IMPOSE PENALTY? Assessing Officer Sec. 273(B): if assessee having a reasonable cause for said failure then no penalty or prosecution shall be imposed. Penalty under section 271(1)(c) / (d) NATURE OF DEFAULT: Concealment of the particulars of income or furnishing inaccurate particulars of income. MINIMUM PENALTY: 100% of tax sought to be evaded MAXIMUM PENALTY: DIRECT TAX LAWS AND INTERNATIONAL TAXATION 219

230 300% of tax sought to be evaded WHO CAN IMPOSE PENALTY? AO / CIT(appeal)/ CIT Sec. 271(1)(c) is applicable if the following conditions are satisfied- penalty can be imposed by AO / CIT(appeal)/CIT It can be imposed in the course of proceedings and Assessee has concealed particulars of his income or furnished inaccurate particulars Penalty under section 271 A NATURE OF DEFAULT: Failure to keep, maintain or retain books of account, documents, etc. as required u/s 44AA and rules there under MINIMUM PENALTY: Fixed at ` WHO CAN IMPOSE PENALTY? AO / CIT (Appeal) Sec. 273(B): if assessee having a reasonable cause for said failure then no penalty or prosecution shall be imposed Penalty under section 271 AA NATURE OF DEFAULT: Failure to keep and maintain any such information and document as required u/s 92D(1) & (2) in relation to international transaction. MINIMUM PENALTY: 2% of the value of each inter-national transaction. MAXIMUM PENALTY; Same as minimum WHO CAN IMPOSE PENALTY? AO / CIT (Appeal) Sec. 273(B): if assessee having a reasonable cause for said failure then no penalty or prosecution shall be imposed Penalty under section 271 B NATURE OF DEFAULT: Failure to get accounts audited or to furnish a report of such audit as required u/s 44AB MINIMUM PENALTY: 0.5 % of total sales, turnover or gross receipts, as the case may be. MAXIMUM PENALTY: ` 1,00,000 WHO CAN IMPOSE PENALTY? Assessing Officer Points to note 220 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

231 When a person commits the offence u/s 44 AA, the offence is complete. After that there can be no possibility of any offence as contemplated by sec 44 AB and therefore, penalty cannot be imposed u/s 271 B. Where the accountant left service without finalising accounts, another accountant was engaged and that resulted in delay in finalising accounts as well as getting accounts audited and assessment year under consideration was the first A.Y for compliance of Sec 44AB Where the assessee contended that as its books of accounts were seized by Customs Department, which had been later taken over by the Income Tax Department, audit was completed late, the assessee had a reasonable and sufficient cause for not getting accounts audited in time as provided in Act. Penalty is impossible in case of failure of Assessee Builder to get accounts audited on ground that it has only received Advance from Customers and as such there is no receipt, sales or turnover as required u/s 44 AB. Judicial pronouncement Delay on part of the statutory auditors in completing audit of the assessee co-operative society would not justify levy of penalty on the assessee. - Ahmedabad Co-operative dept.stores ( Apna Bazaar) v. ITO[2001] 73 TTJ (Ahd.) 784 Where total sales by the assessee does not exceed `40 lakh but by including interest receipt, his total receipts exceed `40 lakh, and the assessee is under bona fide belief that it is, in view of above position, not required to get its accounts audited, imposition of penalty on the assessee is not justified Patel Ambalal Somnath Sarkar v. ITO (2006) 100 TTJ ( Ahd.) 735. Penalty under section 271 BA NATURE OF DEFAULT: Failure to furnish report from an accountant as required u/s 92E MINIMUM PENALTY: Fixed at ` WHO CAN IMPOSE PENALTY? Assessing Officer. Sec. 273(B): if assessee having a reasonable cause for said failure then no penalty or prosecution shall be imposed Penalty under section 271 C ( part 1) NATURE OF DEFAULT: Failure to deduct the whole or any part of tax as required under Chapter XVIIB MINIMUM PENALTY: Amount equal to tax which has not been deducted. MAXIMUM PENALTY: Same as minimum WHO CAN IMPOSE PENALTY? Joint Commissioner Sec. 273(B): if assessee having a reasonable cause for said failure then no penalty or prosecution shall be imposed Judicial pronouncements Where tax has already been paid by the payee, on penalty can be levied on the assessee payer for the failure to deduct tax at source Wipro GE Medical Systems Ltd. V. Ito [2005] ( Bang.) Penalty is leviable for default in payment of tax and not for default in payment of interest Great Valule DIRECT TAX LAWS AND INTERNATIONAL TAXATION 221

232 Foods v. CIT [2009] (Asr.) (Mag.). Penalty under section 271 C ( part 2) NATURE OF DEFAULT: Failure to pay the whole or any part of the corporate dividend tax as required u/s 115-O or 194B MINIMUM PENALTY: Amount equal to tax which has not been paid. MAXIMUM PENALTY: Same as minimum WHO CAN IMPOSE PENALTY? Joint Commissioner Sec. 273(B): if assessee having a reasonable cause for said failure then no penalty or prosecution shall be imposed Penalty under section 271 CA NATURE OF DEFAULT: Failure to collect the whole or any part of tax as required under Chapter XVIIBB MINIMUM PENALTY: Amount equal to tax which has not been collected. MAXIMUM PENALTY: Same as minimum WHO CAN IMPOSE PENALTY? Joint Commissioner Sec. 273(B): if assessee having a reasonable cause for said failure then no penalty or prosecution shall be imposed Penalty under section 271 D NATURE OF DEFAULT: Any loan or deposit taken or accepted in contravention of section 269SS MINIMUM PENALTY: Amount equal to the loan or deposit taken or accepted. MAXIMUM PENALTY: Same as minimum WHO CAN IMPOSE PENALTY? Joint Commissioner Sec. 273(B): if assessee having a reasonable cause for said failure then no penalty or prosecution shall be imposed Penalty under section 271 E NATURE OF DEFAULT: Any loan or deposit which is repaid in contravention of section 269T MINIMUM PENALTY: Amount equal to the deposit which is repaid 222 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

233 MAXIMUM PENALTY: Same as minimum WHO CAN IMPOSE PENALTY? Joint Commissioner Sec. 273(B): if assessee having a reasonable cause for said failure then no penalty or prosecution shall be imposed Penalty under section 271 F NATURE OF DEFAULT: Failure to furnish a return of income as required by section 139(1) before the end of the relevant assessment year. MINIMUM PENALTY: Fixed at `5000 WHO CAN IMPOSE PENALTY? Assessing Officer. Sec. 273(B): if assessee having a reasonable cause for said failure then no penalty or prosecution shall be imposed Other major penalties Section Offence Penalty 271 FA Failure to furnish statement of financial transaction or reportable `100 / 500 per day of default account 271 FAA Furnishing inaccurate statement of financial transaction or reportable account by prescribed financial institution ` 50, FAB Failure to furnish statement, document, information required u/s `5,00,000 9A(5) within prescribed time by an eligible investment fund 271G Failure to furnish requisite information/document as per sec 92D(3) 2% of value of such transaction in respect of international transaction or SDT 271 GA Failure to furnish requisite information/document as per sec 285A in respect of Indian concern 2% of value of such transaction 271 GB Failure to furnish requisite information / report of international group as per sec I Failure to furnish requisite information / document or furnishing inaccurate information of payments to non resident / foreign companies u/ sec 195(6) Prosecution `5000 per day of default upto 1 month, `15,000 per day thereafter `1,00,000 The Income Tax Act provides for punishment in respect of certain offences. These are covered under sections 275A, B, 276, 276A, 276AB, 276 B, BB, 276 (C)(1), 276(C)(2), 276 CC, CCC, 276 D, 277 A and 278. These are applicable for a wide variety of offences involving : Removal, parting with or tampering books of accounts, money, bullion, jewellery etc during search Fraudulent transfer, concealment of any property, Failure to deposit additional income tax Wilful attempt to evade any tax, penalty or interest Failure to enter into written agreement or furnish statement of immovable property Wilful failure to furnish details of undisclosed income DIRECT TAX LAWS AND INTERNATIONAL TAXATION 223

234 Falsification of books of accounts, documents etc Wilful failure to furnish return of income in due time beyond threshold limit The punishment for the above offences may go upto 7 years of rigorous imprisonment If there is a reasonable cause, it can be offered as a defense against penalty, prosecution, etc. Reasonable cause can be reasonably said to be a cause which prevents a man of average intelligence and ordinary prudence, acting under normal circumstances, without negligence or inaction or want of bona fides - Azadi Bachao Andolan vs. Union of India 252 ITR 471 (Delhi). Reasonable cause as applied to human action is that which would constrain a person of average intelligence and ordinary prudence. It means an honest belief founded upon reasonable grounds, of the existence of a state of circumstances, which, assuming them to be true, would reasonably lead any ordinary prudent and cautious man, placed in the position of the person concerned, to come to the conclusion that the same was the right thing to do - Woodward Governors India (P.) Ltd. vs. CIT 118 Taxman 433 (Delhi). The words reasonable cause in the section must necessarily have a relation to the failure on the part of the assessee to comply with the requirement of the law which he had failed to comply with. Kalakrithi vs. ITO 125 Taxman 97 (Mad.). Liability of directors of private company in liquidation. Under certain circumstances directors of private company in liquidation are liable to tax liability of the company. Care should be taken to ensure that directors are not exposed to this risk. Section 179 provides that where any tax due from a private company in respect of any income of any Previous Year or from any public company of any Previous Year during which such other company was a private company cannot be recovered, then, every person who was a director of the private company at any time during the relevant Previous Year shall be jointly and severally liable for the payment of such tax. No recovery can be made from a director if the non-recovery cannot be attributed to any gross neglect, misfeasance or breach of duty on his part in relation to the affairs of the company. Section 179 operates without regard to any contrary provision about limited liability, etc. contained in the Companies Act, Illustration 1. Ram, an individual had filed a return of income of `4,00,000 for the Assessment Year He paid a sum of `10,000 as tax whereas the tax payable on such income was `20,600 (including Education Cess + SHEC). His income is assessed at `4,90,000 and the tax payable on the assessed income is `29,870. Ram wishes to file an appeal against the above order. Advise Ram about the procedure of filing an appeal? Solution: (a) Ram should deposit tax of `10,600 i.e. tax payable on returned income minus tax deposited by him (` 20,600 - ` 10,000). (b) Ram should deposit `1,000 as filing fee as the income assessed is more than `2,00,000. (c) He should file an appeal in Form 35 (in duplicate). (d) Appeal should be filed within 30 days of the receipt of the assessment order. (e) He should apply to the Assessing Officer for stay of demand of `9,270 (`29,870 - `20,600). Illustration 2. X did not file any return of income for the Assessment Year The Assessing Officer assessed his income at `3,20,000 under section 144 after giving him show cause notice to which X did not respond. Besides the tax, the interest was charged under sections 234A, 234B and 234C. The notice of demand of `22,500 (including interest) was sent to X on which was received by him on Advise X, the procedure of filing an appeal? Solution: (a) The appeal against the order passed by the Assessing Officer under section 144 should be filed to Commissioner 224 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

235 (Appeal) within 30 days of the receipt of notice of demand i.e. on or before (within 30 days starting from ). (b) A filing fee of `1,000 shall have to be deposited before filing such appeal. (c) X should apply to the Commissioner (Appeal) for exemption of the payment of tax and interest of `22,500 on or before If the Commissioner (Appeals) exempts the payment of tax, then appeal filed shall be valid appeal. On the other hand, if the Commissioner (Appeal) asks the assessee to deposit full/part amount of the demand say by then the appeal shall be admitted only if the money is deposited by and proof of same is filed. Illustration 3. Can a CIT make a revision in regard to an order that has been earlier rectified due to some mistake? Solution: Where an original order of assessment has been rectified, there remains no initial order in existence and as such the Commissioner cannot exercise his power of revision with reference to the original order [CIT vs. Vippy Solvex Products (P) Ltd (1997) 228 ITR 587 (MP)]. Illustration 4. Can a CIT direct an Assessing Officer under section 263 to pass an order? Solution: The Commissioner is not empowered under section 263 to direct the Assessing Officer to pass an order [Dinwala (P.P.) vs. CIT (1995) 78 Taxman 421 (Cal)]. Illustration 5. Is it necessary for the order of the Assessing Officer to be served before making it subject matter of proceedings under section 263? Solution: An order passed by the Assessing Officer is not effective till it is served on the assessee. Therefore, where the assessment order was passed but was not served it could not be made the subject-matter of proceedings under section 263 [Jijeebai Shinde vs. CIT (1986) 157 ITR 122 (MP)]. Illustration 6. Can a CIT revise the order of the Income Tax Officer even if the same has been passed with the directions of the superior authorities? Solution: The Commissioner of Income-tax has jurisdiction under section 263 to revise an order passed by the Income-tax Officer with the approval of superior authority under section 144A or 144B [T.N. Civil Supplies Corpn. Ltd vs. CIT (2003) 260 ITR 82 (SC)]. Illustration 7. Can you make a revision petition u/s 264 if application made u/s 197 is rejected by the Assessing Officer? Solution: If an application u/s 197 relating to obtaining a certificate from Assessing Officer for no deduction or deduction of tax at lower rate is rejected by the Assessing Officer, it can be revised by the Commissioner under section 264 [Larsen & Toubro Ltd. vs. CIT (2010) 190 Taxman 373 (Bom)]. Illustration 8. Who is responsible for initiating penalty? Can the First Appellate Authority initiate penalty on the findings of Assessing Officer? DIRECT TAX LAWS AND INTERNATIONAL TAXATION 225

236 Solution: Penalty should be imposed by the Assessing Officer or the First Appellate Authority on their respective findings only [CIT vs. Shadiram Balmukund (1972) 84 ITR 183 (All)]. The fact that during the original assessment proceedings, the Assessing Officer did not initiate penalty proceeding, is no bar to the exercise of such power by the First Appellate Authority [Kamlapat Motilal vs. CIT (1962) 45 ITR 266 (SC)]. Illustration 9. If the facts of the transactions are disclosed in the return can a penalty for concealment be imposed? Solution: Penalty should not be imposed, if the assessee has claimed any exemption after disclosing the relevant basic facts of the transaction of the income and under ignorance of the provisions of the Act of 1961 has not offered that amount for tax. In such cases rather it is the duty of the Assessing Officer to ask for further details and tax the income if it is liable to tax. If the assessee had shown Long-term Capital Gain and claimed exemption, but the transaction had been disclosed in the return. There was no concealment of income and penalty could not be imposed [Chandrapal Bagga vs. Income-tax Appellate Tribunal (2003) 261 ITR 67 (Raj)]. Illustration 10. Sampat filed a return of income declaring an income of `6,25,000. Assessing Officer added unexplained cash credits of `2,00,000 and assessed the income at `8,25,000. Sampat filed an appeal to Commissioner (Appeal) who further enhanced the income by `1,12,500 to `9,37,500. Now, Sampat decided not to go for further appeal. Assessing Officer wants to levy penalty under section 271(1)(c) on `3,12,500. Is the Assessing Officer justified? Solution: The Supreme Court held in CIT vs. Shadiram Balmukund (1972) 84 ITR 183 (All) that the Assessing Officer can levy penalty on the additions made by him and not on the additions made by Commissioner (Appeal). Similarly Commissioner (Appeal) can levy penalty on the additions made by him and not on the additions made by the Assessing Officer. Therefore Assessing Officer can levy penalty on `2,00,000 and is not justified in levying penalty on `3,12,500. In this case Assessing Officer had initiated the penalty proceedings before completing the assessment, but Commissioner (Appeal) had not initiated the penalty proceedings before passing the order under section 250. If the Assessing Officer had levied penalty on `3,12,500, in view of the above judgement, he will revise the penalty order and levy penalty on `2,00,000. Commissioner (Appeal) cannot levy penalty since he has not initiated the penalty proceedings before passing the order under section 250. Illustration 11. If there were certain disallowances while computing income under normal provisions but the assessment was made on income computed under section 115JB, will the penalty for concealment be leviable? Solution: Where Assessing Officer made certain disallowance while computing income under normal provisions of the Act and still the tax on income so computed is less than tax payable under section 115JB and the assessment was made on income computed under section 115JB, penalty under section 271(1) (c) cannot be levied as concealment in the form of disallowance of expenditures did not lead to tax evasion [CIT vs. Nalwa Sons Investments Ltd (2010) 194 Taxman 387 (Del)]. Illustration 12. Who is liable for prosecution for the offences made by HUF under Income Tax Act? Solution : As per section 278C(1), where an offence under the Income Tax Act has been committed by a Hindu Undivided Family, the karta thereof shall be deemed to be guilty of the offence and shall be liable to be proceeded against and punished accordingly. 226 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

237 The karta shall not be liable to any punishment if he proves that the offence was committed without his knowledge or that he had exercised all due diligence to prevent the commission of such offence. As per section 278C(2), where an offence under this Act has been committed by a Hindu Undivided Family and it is proved that the offence has been committed with the consent or connivance of, or is attributable to any neglect on the part of, any member of the Hindu Undivided Family, such member shall also be deemed to be guilty of that offence and shall be liable to be proceeded against and punished accordingly. Illustration 13. Kunal feels that an offer of additional income cannot be avoided during the course of hearing, but before concealment was established against him. What are the alternatives available to him? Solution : An admission of concealment prima facia attracts penalty. Following are the alternatives available to him: (1) He can offer additional income and claim that the admission or offer of a higher amount as income is to purchase peace and that penalty is not attracted in such circumstances. (2) He can claim waiver of penalty, if it is exigible, before Commissioner u/s 273A by showing that admission is prior to detection, if he pays the tax and otherwise co-operates with the Department. (3) He can file a petition before Settlement Commission, if he can show that computation of income is complex, so that he can get immunity from penalty and prosecution. Exam Notes Offences liable to prosecution: 1. Removing, parting or otherwise dealing with seized assets 2. Failure to provide necessary facility to inspect books of account or other documents tax authorities conducting search 3. Removal, concealment, transfer or delivery of property to prevent tax recovery 4. Failure by the liquidator of a company 5. Failure to pay TDSor DDT to the credit of the Government 6. Failure to pay the tax collected under the provisions of section 206C 7. Wilful attempt to evade tax, penalty or interest 8. Wilful failure to furnish return of income 9. Wilful failure to produce accounts and documents under section 142(1) or to comply with a direction issued under section 142(2A) 10. Delivery of false statement 11. Enable any other person to evade any tax, penalty or interest 12. Abetment of false return, account, etc. 13. Disclosure of particulars by public servants 14. Second and subsequent offences under sections 276B, 276C(1), 276CC, 277 or Punishment in case of offence by a company 16. Punishment in case of offence by Hindu Undivided Family Rectification of Mistake u/s 154 Sometimes there may be a mistake in any order passed by the Assessing Officer. In such a situation, mistake which is apparent from the record can be rectified under section 154. DIRECT TAX LAWS AND INTERNATIONAL TAXATION 227

238 Order which can be rectified under section 154 With a view to rectifying any mistake apparent from the record, an income-tax authority may, - (a) Amend any order passed under any provisions of the Income-tax Act. (b) Amend any intimation or deemed intimation sent under section 143(1). (c) Amend any intimation sent under section 200A(1)(*) [section 200A deals with processing of statements of tax deducted at source i.e. TDS return]. (d) amend any intimation under section 206CB*. (*) Under section 200A, a TDS statement is processed after making correction of any arithmetical error in the statement or after correcting an incorrect claim, apparent from any information in the statement Similarly a new section 206CB is inserted by Finance Act, 2015 to provide for the processing of TCS statement. If due to rectification of mistake, the tax liability of the taxpayer is enhanced or refund is reduced, the taxpayer shall be given an opportunity of being heard. Time Limit No order of rectification can be passed after the expiry of 4 years from the end of the financial year in which order sought to be rectified was passed. The period of 4 years is from the date of order sought to be rectified and not 4 years from original order. Hence, if an order is revised, set aside, etc., then the period of 4 years will be counted from the date of such fresh order and not from the date of original order. In case an application for rectification is made by the taxpayer, the authority shall amend the order or refuse to allow the claim within 6 months from the end of the month in which the application is received by the authority. Procedure to be followed for making an application of rectification Before making any rectification application the taxpayer should consider - The taxpayer should carefully study the order against which he wants to file the application for rectification. Many times the taxpayer may feel that there is any mistake in the order passed by the Income-tax Department but actually the taxpayer s calculations could be incorrect and the CPC might have corrected these mistakes. Hence, to avoid application of rectification in above discussed cases the taxpayer should study the order and should confirm the existence of mistake in the intimation, if any. If he observes any mistake in the order then only he should proceed for making an application for rectification under section 154. Further, he should confirm that the mistake is one which is apparent from the records and it is not a mistake which requires debate, elaboration, investigation, etc. The taxpayer can file an online application for rectification of mistake. Before making an online application for rectification the taxpayer should refer to the rectification procedure prescribed at For rectification of intimation under Section 200A(1)/206CBonline correction statement is to be filed; the procedure thereof is given at An amendment or rectification which has the effect of enhancing the assessment or reducing a refund or otherwise increasing the liability of the taxpayer (or deductor) shall not be made unless the authority concerned has given notice to the taxpayer or the deductor of its intention to do so and allowed the taxpayer (or the deductor) a reasonable opportunity of being heard. Prosecution & Punishment Apart from penalty for various defaults, the Income-tax Act also contains provisions for launching prosecution proceedings against the taxpayers for various offences as outlined below : Contravention of order made under section 132(1) (Second Proviso) or under section 132(3) in case of search and seizure 228 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

239 Failure to afford necessary facility to authorised officer to inspect books of account or other documents as is required under section 132(1)(iib) Removal, concealment, transfer or delivery of property to thwart tax recovery Failure to comply with provisions of section 178(1) and (3) dealing with company-in liquidation Failure to pay tax deducted at source or the tax payable under section 115-O(2) or second proviso to section 194B Failure to pay the tax collected under the provisions of section 206C Wilful attempt to evade tax, penalty or interest Wilful failure to furnish return of income Punishment for the above failures shall be as under: Rigorous imprisonment which shall not be less than 6 months but which may extend to seven years and with fine where tax sought to be evaded exceeds `25 lakh (`1 lakh upto ). Rigorous imprisonment which shall not be less than 3 months but which may extend to two years (3 years upto ) and with fine in other cases. The taxpayer shall not be proceeded against under this section for failure to furnish in due time the return of income under section 139(1), if: (a) the return is furnished by him before the expiry of the assessment year; or (b) the tax payable by him on the total income determined on regular assessment, as reduced by advance tax and TDS, if any, does not exceed `3,000. Wilful failure to produce accounts and documents under section 142(1) or to comply with a direction issued under section 142(2A) Section 142(2A) deals with special audit. As per section 142(2A) if the conditions justifying special audit given in section 142(2A) are satisfied, the Assessing Officer may direct the taxpayer to get his accounts audited or reaudited from a chartered accountant as nominated by the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner and to furnish a report of such audit in the prescribed form. False statement in verification or delivery of false account, etc. Section 277 provides for prosecution for making false statement or producing false accounts / documents. If a taxpayer makes statement in any verification under the Act or under any rules made there under, or delivers an account or statement which is false, and which he either knows or believes to be false, or does not believe it to be true, he shall be punishable as follows: With rigorous imprisonment which shall not be less than 6 months but which may extend to seven years and with fine where tax sought to be evaded exceeds `25 lakh (`1 lakh upto ). With rigorous imprisonment which shall not be less than 3 months but which may extend to two years (3 years upto ) and with fine in other cases. Falsification of books of account or document, etc., to enable any other person to evade any tax, penalty or interest chargeable/ leviable under the Act Section 277A provides for prosecution in the case of falsification of books of account or document etc. Abetment to make a false return, etc As per section 278 if a person abets or induces in any manner another person to make and deliver an account or a statement or declaration relating to any income chargeable to tax which is false and which he either knows to be false or does not believe it to be true or to commit an offence under section 276C(1), he shall be punished as under: DIRECT TAX LAWS AND INTERNATIONAL TAXATION 229

240 With rigorous imprisonment which shall not be less than 6 months but which may extend to seven years and with fine where tax sought to be evaded exceeds `25 lakh (`1 lakh upto ). With rigorous imprisonment which shall not be less than 3 months but which may extend to two years (3 years upto ) and with fine in other cases. Punishment in case of offence by a company As per section 278B, where an offence under the Income-tax Act has been committed by a company, then every person who, at the time the offence was committed was in charge of and was responsible to the company for the conduct of the business of the company as well as the company shall be deemed to be guilty of the offence and shall be liable to be proceeded against and punished accordingly. No imprisonment in case of reasonable cause for failure. As per section 278AA no person is punishable for any failure under section 276A and 276B if he proves that there was reasonable cause for such failure. Immunity from prosecution As per section 278AB, a person may apply to the Principal Commissioner or Commissioner for granting immunity from prosecution, if he has applied for settlement under section 245C and the proceedings have abated under section 245HA Penalties Under the Income-tax Act, penalties are levied for various defaults committed by the taxpayer. Some of the penalties are mandatory and a few are at the discretion of the tax authorities. Penalty for default in making payment of Self Assessment Tax As per section 140A(3), if a person fails to pay either wholly or partly self assessment tax or interest, then he will be treated as assessee in default in respect of unpaid amount. As per section 221(1), if a taxpayer is treated as an assessee in default, then he shall be held liable to pay penalty of such amount as the Assessing Officer may impose and in the case of a continuing default, such further amount or amounts as the assessing officer may, from time to time, direct. The total amount of penalty cannot exceed the amount of tax in arrears. Penalty for default in making payment of Tax As per section 220(1), when a demand notice under section 156 has been issued to the taxpayer for payment of tax (other than notice for payment of advance tax), then such amount shall be paid within a period of 30 days of the service of the notice at the place and to the person mentioned in the notice. Late filing fees for delay in filing the TDS/TCS statement As per section 200(3) every person liable to deduct tax at source is liable to file the statement in respect of tax deducted by him i.e. TDS return. Further, as per proviso to section 206C(3) every person liable to collect tax at source has to furnish statement in respect of tax collected by him i.e. TCS return. Section 234E provides for levy of late filing fees for the delay in filing TDS/TCS return. Penalty for failure to comply with notice issued under section 142(1) or 143(2) or direction for audit under section 142(2A). Penalty under section 272A is levied if a taxpayer fails to comply with notice issued to him under section 142(1) or section 143(2) or fails to comply with adirection issued under section 142(2A). If the taxpayer fails to comply with notice issued to him under section 142(1) or section 143(2) or fails to comply with direction issued under section 142(2A), then as per section 272A he shall be liable for a penalty of Rs. 10,000 for each failure. Penalty for underreporting and misreporting of income Many times a taxpayer may try to reduce his tax liability by underreporting of income. In such a case, by virtue of Section 270A, the taxpayer will be held liable for penalty. 230 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

241 Penalty for failure to keep, maintain, or retain books of account, documents, etc., as required under section 44AA. If the taxpayer fails to maintain books of account as per the provisions of section 44AA, then he shall be liable to pay penalty under section 271A. Penalty under section 271A is `25,000. Penalty for failure to keep and maintain information and document etc.in respect of international transaction or specified domestic transaction. Section 92D provides that every person entering into an international transaction or specified domestic transaction shall keep and maintain such information and documents as may be prescribed in this regard under rule 10D. Provided that the person, being a constituent entity of an international group, shall also keep and maintain such information and documents in respect of an international group as may be prescribed. Penalty in case of search If a search has been initiated and any undisclosed income is unearthed in the search, then penalty can be levied under section 271AAB. Failure to get accounts audited or furnish a report of audit as required under section 44AB Penalty under section 271B will be levied for failure to get the accounts audited or failure to furnish a report of audit as required under section 44AB. Penalty shall be one-half per cent of total sales, turnover or gross receipts, etc., or `1,50,000, whichever is less. Penalty for failure to deduct tax at source, wholly or partly or failure to pay wholly or partly tax under section 115- O(2) If a person who is required to deduct tax at source as required by or under the provisions of chapter XVII-B fails to deduct the tax, then he can be held liable to pay penalty under section 271C. Penalty for failure to pay tax in respect of winning from lottery or crossword puzzle If any person fails to pay whole or part of the tax as required under second proviso to section 194B than, such person shall be liable to pay penalty of an amount equal to tax not paid as per section 271C. Penalty for failure to collect tax at source If the person required to collect tax at source fails to collect the tax, then he shall be liable to pay penalty under section 271CA. Penalty shall be levied of an amount equal to tax not collected. Repaying loans or deposits or specified advance in contravention of provisions of section 269T. Contravention of the provisions of section 269T will attract penalty under section 271E. Penalty under section 271E shall be a sum equal to loan or deposit or specified advance so repaid. Failure to furnish statement of financial transaction or reportable account (previously called as Annual Information Return (AIR) ) as required under section 285BA(1) Non-furnishing of statement of financial transaction or reportable account will attract penalty under section 271FA. Penalty shall be levied of Rs. 100 per day of default. Penalty for failure to furnish statement or information or document by an eligible investment fund. A new section 9A has been inserted by Finance Act, Failure to comply with this condition shall result in penalty of `5,00,000 Penalty Section 271GB for failure to furnish report or for furnishing inaccurate report under Section 286. If any reporting entity fails to furnish report [as referred to in Section 286(2)] in respect of international group, then it would be liable to penalty of (a) `5,000 for every day for which failure continues, if the period of failure does not exceed one month; or (b) `15,000 for every day for which the failure continues beyond the period of one month. Penalty for failure to furnish information or document under section 285A. A new section 285A has been inserted DIRECT TAX LAWS AND INTERNATIONAL TAXATION 231

242 by Finance Act, 2015 to provide for a reporting obligation on Indian concern through or in which the Indian assets are held by the foreign company or the entity. Penalty for failure to file the TDS/TCS return As per section 271H, where a person fails to file the statement of tax deducted/collected at source i.e. TDS/TCS return on or before the due dates prescribed in this regard, then he shall be liable to pay penalty under section 271H. Minimum penalty shall be levied of `10,000 which can go upto `1,00,000. Penalty under section 271H will be in addition to late filing fee prescribed under section 234E. Penalty for failure to comply with provisions of section 133B Section 133B empowers the tax authorities to enter the place of business of the taxpayer to collect information required by the authorities which will be useful under the Act. If the taxpayer fails to comply with the provisions of section 133B, then penalty shall be levied under section 272AA(1) upto `1,000. Power of Principal Commissioner or Commissioner to reduce or waive Penalty Apart from enacting penalty provisions, the Income-tax Act also designed provisions empowering the Principal Commissioner of Income-tax or Commissioner of Income-tax to grant relief from penalty to taxpayers in genuine cases. Such power is granted under section 273A and section 273AA. Power of Principal Commissioner or Commissioner to reduce or waive penalty under sections 273A(1), 273A(4) and 273AA Waiver or reduction of penalty under section 273A(1) Section 273A(1) empowers the Principal Commissioner or Commissioner to grant waiver or reduction from penalty imposed or imposable under section 270A (i.e., penalty for under-reporting and misreporting of income) or under section 271(1)(c) (i.e., penalty for concealment of particulars of income or furnishing inaccurate particulars of income). Initiation to be taken by Principal Commissioner or Commissioner or the taxpayer The waiver or reduction under section 273A(1) can be granted by the Principal Commissioner or Commissioner either on his own motion or otherwise, i.e., on an application made by the taxpayer. Previous approval of Principal Chief Commissioner orchief Commissioner or Principal Director General or Director General. If the amount of income in respect of which the penalty is imposed or imposable for the relevant year or, where such disclosure relates to more than one year, the aggregate amount of such income for those years exceeds a sum of `5,00,000, no order reducing or waiving the penalty under section 273A(1) shall be made by the Principal Commissioner or Commissioner, except with the previous approval of the Principal Chief Commissioner or Chief Commissioner or Principal Director General or Director General, as the case may be. Finality of the order Every order made under section 273A shall be final and shall not be called into question by any Court or any other authority. No relief if waiver claimed earlier As per section 273A(3), where an order has been made under section 273A(1) in favour of any person, whether such order relates to one or more years, he shall not be entitled to any relief under section 273A in relation to any other year at any time after the making of such order. Thus, if a person has claimed relief under section 273A(1) at any time, then he cannot claim relief under section 273A [i.e., 273A(1) as well as section 273A(4)] thereafter. Waiver or reduction of penalty under section 273A(4) Section 273A(4) empowers the Principal Commissioner or Commissioner to waive or reduce any penalty imposable under the Income-tax Act as well as to stay or compound any proceeding for the recovery of penalty. 232 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

243 Initiation to be taken by the taxpayer For obtaining waiver or reduction or stay or compound any proceeding for the recovery of penalty, the taxpayer has to make an application to the Principal Commissioner or Commissioner. Time-limit for passing order under section 273A(4) The Principal Commissioner or Commissioner, as the case may be, shall pass order, either accepting or rejecting assessee s application to reduce or waive penalty, within a period of 12 months from the end of the month in which application is received. However, order shall be passed on or before May 31, 2017 in case of application pending as on June 1, 2016 Other provisions applicable to the case of waiver under section 273AA The application to the Commissioner for waiver shall not be made after the imposition of penalty after abatement. The Commissioner may, subject to such conditions as he may think fit to impose, grant to the person immunity from the imposition of any penalty under the Income-tax Act. Before granting the waiver, the Commissioner should be satisfied that the taxpayer has, after the abatement, co-operated with the Income-tax authority in the proceedings before him and made a full and true disclosure of his income and the manner in which such income has been derived. Appeal to CIT ( Appeals) At times it may happen that the taxpayer is aggrieved by an order of the Assessing Officer. In such a case he can file an appeal against the order of the Assessing Officer before the Commissioner of Income-tax (Appeals). Appealable Orders Section 246A specifies the orders against which an appeal can be filed before the Commissioner of Income-tax (Appeals). The list of major orders against which an appeal can be preferred before the Commissioner of Incometax (Appeals) is : Order passed against the taxpayer in a case where the taxpayer denies the liability to be assessed under Income Tax Act. Intimation issued under section 143(1)/ (1B)where adjustments have been made In income offered to tax in the return of income. Intimation issued under section 200A(1) where adjustments are made inthe filed statement. Assessment order passed under section 143(3) except in case of an order passed in pursuance of directions of the Dispute Resolution Panel An assessment order passed under section 144. Order of Assessment, Re-assessment or Re-computation passed after reopening the assessment under section 147except an order passed in pursuance of directions of the Dispute Resolution Panel An order referred to in section 150. An order of assessment or reassessment passed under section 153A or under section 158BC in case of search/ seizure. Assessment or reassessment order passed under section 92CD(3). Rectification order passed under section 154 or under section 155. Order passed under section 163 treating the taxpayer as agent of non-resident. Order passed under section 170(2)/(3) assessing the successor of the business in respect of income earned by the predecessor. DIRECT TAX LAWS AND INTERNATIONAL TAXATION 233

244 Order passed under section 171 recording the finding about partition of a Hindu Undivided Family. Order passed by Joint Commissioner under section 115VP(3) refusing approval to opt for tonnage-tax scheme to qualifying shipping companies Order determining refund passed under section 237. Order imposing penalty under section(s) 221/271/271A/271AAA/271F/271FB/272A/272AA/272B/272BB/275(1A) /158B FA(2)/271B/271BB/271C/271CA/271D/271E/271AAB. Order imposing a penalty under Chapter XXI. Time-limit for presenting an appeal As per Section 249(2), appeal should be presented within 30 days of the following date: (a) Where the appeal relates to any assessment or penalty, the date of service of notice of demand relating to the assessment or penalty. (b) Where appeal is under section 248, i.e., appeal by a person denying liability to deduct tax under section 195, the date of payment of tax. (c) In any other case, the date on which intimation of the order sought to be appealed against is served. Documents to be submitted for appeal Form No. 35 (including statement of facts and grounds of Appeal) in duplicate. However, e-filing has been made mandatory for persons for whom e-filing of return of income is mandatory w.e.f 1/3/2016. One certified copy of order, appealed against. Notice of demand in original. Copy of challans of fees the details of the challan (i.e., BSR code, date of payment of fee, serial number and amount of fee) are required to be furnished in case of e-filing of form of appeal. Procedure of the appeal After the receipt of Form no. 35, the Commissioner of Income-tax (Appeals) will fix the date and place for hearing the appeal. The date and place will be communicated to the taxpayer and to the Assessing Officer against whose order appeal is preferred. The communication will be made by issuing a notice to both the parties. In the appeal proceedings the taxpayer or the Assessing Officer can either appear personally or can appear through an authorized representative. The Commissioner of Income-tax (Appeals) would hear the appeal and may adjourn the appeal from time-totime. Before passing the order, the Commissioner of Income-tax (Appeal) may make such further inquiries as he thinks fit, or may direct the Assessing Officer to make further inquiry and report the result to him. Disposal of appeal Where it is possible, the Commissioner of Income-tax (Appeal) shall dispose off the appeal within a period of one year from the end of the financial year in which appeal is filed. The order should be issued within 15 days of last hearing. Appeal to ITAT The Commissioner of Income-Tax (Appeals) is the first appellate authority and the Income Tax Appellate Tribunal (ITAT) is the second appellate authority. Appeal to the ITAT can be filed by any of the aggrieved party either by the taxpayer or by the Assessing Officer. Appealable orders in case of appeal by the taxpayer 234 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

245 An appeal to the ITAT can be filed in respect of following orders: Rectification order passed by the Commissioner of Income-Tax (Appeals) under section 154; or Order passed by the Commissioner of Income-Tax (Appeals) under section 250, section 270A, section 271, section 271A or section 272A; or An order passed by a Principal Commissioner of Income-Tax or Commissioner of Income-Tax under section 12AA (it relates to registration application made by a charitable or religious trust). An order passed by a Principal Commissioner of Income-Tax or Commissioner of Income-Tax under section 80G(5)(vi) (it relates to approval of a charitable trust for donations made to it which would be eligible for deductions in the hands of the donor). An order passed by a Principal Commissioner of Income-Tax or Commissioner of Income-Tax under section 263 (it relates to revision of the order of Assessing Officer which is considered as prejudicial to the interest of revenue). An order passed by a Principal Commissioner of Income-Tax or Commissioner of Income-Tax under section 154 for rectification of order passed under section 263. An order of penalty passed by a Principal Commissioner of Income-Tax or Commissioner of Income-Tax under section 270A, under section 271 or under section 272A An order of penalty passed by a Principal Chief Commissioner or Chief Commissioner or a Principal Director General a Director General or a Principal Director or Director under section 272A. An order passed by the Assessing Officer under section 115VZC(1) (i.e., order of excluding the taxpayer from tonnage tax scheme). An order passed by the Assessing Officer under section 143(3) or under section 147 or under section 153A or under section 153C with the approval of the Principal Commissioner of Income-Tax or Commissioner of Income-Tax as referred to in section 144BA(12) (i.e., assessment after invocation of General Anti-avoidance Rules) or an order passed under section 154 or under section 155 in respect of such order (applicable from ). An order passed by the Commissioner of Income-tax (Exemption) under section 10(23C)(vi) or Section 10(23C) (via) [it relates to filing of application by educational institute or hospital (other than those which are wholly or substantially financed by the Government or whose aggregate annual receipt do not exceed `1 Cr.) for the purpose of grant of exemption under section 10(23C)(vi) or section 10(23C)(via), respectively.] Time- limit for presenting appeal Appeal to ITAT is to be filed within a period of 60 days from the date on which order sought to be appealed against is communicated to the taxpayer or to the Principal Commissioner of Income-Tax or Commissioner of Income-Tax (as the case may be). The ITAT may admit an appeal even after the period of 60 days if it is satisfied that there was sufficient cause for not presenting the appeal within the prescribed time. Memorandum of cross objection On filing of the appeal to the ITAT by the taxpayer or by the Assessing Officer (as the case may be) the opposite party will be intimated about the appeal and the opposite party has to file a memorandum of cross objection with the ITAT. The memorandum of cross objection is to be filed within a period of 30 days of receipt of notice. The memorandum of cross objection is to be filed in Form No. 36A. There is no fee for filing the memorandum of cross objection. The ITAT may accept a memorandum of cross objection even after the period of 30 days if it is satisfied that there was sufficient cause for not submitting the same within the prescribed time. Documents to be submitted with appeal Form No in triplicate. Order appealed against - 2 copies (including one certified copy). DIRECT TAX LAWS AND INTERNATIONAL TAXATION 235

246 Order of Assessing Officer - 2 copies Grounds of appeal before first appellate authority [i.e., Commissioner of Income-Tax (Appeals)] - 2 copies. Statement of facts filed before first appellate authority [i.e., Commissioner of Income-Tax (Appeals)] - 2 copies. In case of appeal against penalty order 2 copies of relevant assessment order. In case of appeal against order under section 143(3), read with section 144A - 2 copies of the directions of the Joint Commissioner under section 144A. In case of appeal against order under section 143, read with section copies of original assessment order, if any. Copy of challan for payment of fee. Order of the ITAT The member of bench of the ITAT hears the appeal. After hearing the appeal the ITAT will pronounce its order and will communicate the order to the taxpayer as well as the Assessing Officer. Appeals are heard by a Bench comprising one judicial member and one accountant member. Appeals where total income computed by the Assessing Officer does not exceed Rs. 50 lakh may be disposed of by single member Bench. Disposal of appeal Where it is possible, the ITAT shall dispose off the appeal within a period of four years from the end of the financial year in which appeal is filed. Stay application The ITAT may, on an application made by the taxpayer and after considering the merits of the application, pass an order of stay in any proceedings relating to an appeal filed under section 253(1). The stay order will be in operation for a period not exceeding 180 days from the date of such order. The ITAT shall dispose of the appeal within the said period of stay specified in that order. MULTIPLE CHOICE QUESTIONS Contravening an order passed by the tax authorities in respect of dealing with seized assets may attract prosecution and can result in imprisonment and fine. (a) True (b) False Correct answer : (a) Justification of correct answer : Section 132 empowers the tax authorities to initiate search proceedings at the premises of the taxpayer. During the course of search the tax authorities are also empowered to seize money, bullion, jewellery or other valuable article or thing found from the taxpayer. Generally, the seized money, bullion etc. is taken by the tax authorities in their custody (i.e., in the custody of the Government) but if it is not possible or practicable for the tax authorities to take physical possession of the same or to remove it to a safe place due to its volume, weight or other physical characteristics or due to its being of a dangerous nature. In such a case, second proviso to section 132(1) empowers the tax authorities to seize the asset by keeping the asset at the place of the taxpayer only. In such case, the asset will be seized by the tax authorities without physically taking the assets with them. For this purpose, the authorised officer would serve an order on the owner or the person who is in immediate possession or control of the asset that he shall not remove, part with or otherwise deal with the asset, except with the previous permission of such authorised officer. This action of the authorised officer shall be deemed to be a seizure of such valuable article or thing under the Income-tax Act. Many times, during the course of search it may not be practicable to seize any books of account, other documents, money, bullion, jewellery or other valuable article or thing, for reasons other than those mentioned in the second proviso to section 132(1) (as discussed above). In such cases, as per 236 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

247 section 132(3), the tax authorities may serve an order on the owner or the person who is in immediate possession or control thereof that he shall not remove, part with or otherwise deal with it, except with the previous permission of such officer. Such officer may take such steps as may be necessary for ensuring compliance with the provisions of section 132(3). Contravening above discussed provision shall attract prosecution under section 275A. 2. No prosecution proceeding will be launched against taxpayer if he has not provided necessary facility to inspect books of account or other documents to tax authorities conducting search. (a) True (b) (b) False Correct answer : (b) Justification of correct answer : In a case where a search is conducted by the tax authorities, the tax authorities as per Section 132(1)(iib) may require any person who is found to be in possession or control of any books of account or other documents maintained in the form of electronic record as defined in clause (t) of sub-section (1) of section 2 of the Information Technology Act, 2000 (21 of 2000), to afford the authorised officer the necessary facility to inspect such books of account or other documents. Person who fails to provide such facility shall be punishable with rigorous imprisonment and fine under section 275B. 3. If the taxpayer, fraudulently removes, conceals, transfers or delivers to any person, any property or any interest therein (which can be attached, to recover his tax dues), intending thereby to prevent that property or interest therein from being attached for recovery of tax, then prosecution proceedings shall be initiated against such person under section. (a) Section 275A (b) Section 276B (c) Section 276 (d) Section 277 Correct answer : (c) Justification of correct answer : If a taxpayer fails to discharge his tax liability, then the tax authority can recover the tax dues from him by attaching his movable and immovable property. If the taxpayer fraudulently removes, conceals, transfers or delivers to any person, any property or any interest therein, intending thereby to prevent that property or interest therein from being attached for recovery of tax, then prosecution proceedings shall be initiated under section As per section 178(3), the of a company has to intimate the tax authority before he parts with any of the assets of the company or the properties in his hands and has to set aside the amount if any intimated to him by the tax authorities. (a) Managing Director (b) Manager (c) Chartered Accountant (d) Liquidator Correct answer : (d) Justification of correct answer : As per section 178(3), the liquidator of a company has to intimate the tax authority before he parts with any of the assets of the company or the properties in his hands and has to set aside the amount if any intimated to him by DIRECT TAX LAWS AND INTERNATIONAL TAXATION 237

248 the tax authorities. 5. There are no prosecution proceedings under the Income-tax Act for failure to pay to the credit of Central Government a dividend distribution tax (DDT) as per section 115-O(2). (a) True (b) False Correct answer : (b) Justification of correct answer : If a person fails to pay to the credit of the Central Government: (i) the tax deducted by him (i.e., TDS) or (ii) the dividend distribution tax (DDT) as per section 115-O(2) or (iii) tax in respect of winning from lottery or crossword puzzle as per section 194B, then such person shall be prosecuted under section 276B. 6. Prosecution can be launched and the taxpayer can be punished for wilful failure to furnish return of income under section 139(1). (a) True (b) False Correct answer : (a) Justification of correct answer : If a person makes wilful default in furnishing of return of income under section 139(1) or in response to notice under section 142(1)(i) or section 148 or section 153A then he shall be prosecuted under section 276CC. However, the taxpayer shall not be prosecuted under this section for failure to furnish in due time the return of income under section 139(1), if: (a) the return is furnished by him before the expiry of the assessment year; or (b) the tax payable by him on the total income determined on regular assessment, as reduced by advance tax and TDS, if any, does not exceed `3,000. Thus, the statement given in the question is true and hence, option (a) is the correct option. 7. Prosecution can be launched and the taxpayer can be punished if he commits wilful failure to produce before the tax authorities the accounts and documents as demanded under section. (a) 154 (b) 147 (c) 143(1) (d) 142(1) (a) Correct answer : (d) Justification of correct answer : Section 142(1) deals with the general provisions relating to an inquiry before assessment. Under section 142(1), the Assessing Officer can issue notice asking the taxpayer to file the return of income, if he has not filed the return of income or to produce or cause to be produced such accounts or documents as he may require and to furnish in writing and verified in the prescribed manner information in such form and on such points or matters (including a statement of all assets and liabilities of the taxpayer, whether included in the accounts or not) as he may require. Section 276D provides for prosecution in the case of wilful failure by the taxpayer to produce accounts and documents under section 142(1) 8. As per section, the tax authorities can direct the taxpayer to get his accounts audited from a 238 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

249 Chartered Accountant nominated by the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner. (a) 153A (b) 148 (c) 142(2A) (d) 139 Correct answer : (c) Justification of correct answer : As per section 142(2A), the Assessing Officer may direct the taxpayer to get his accounts audited or re-audited from a chartered accountant as nominated by the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner and to furnish a report of such audit in the prescribed form. 9. No prosecution proceedings can be launched against a person who abates or induces in any manner another person to make and deliver an account or a statement or declaration relating to any income which is false and which he either knows to be false or does not believe to be true or to commit an offence under section 276C(1). (a) True (b) False Correct answer : (b) Justification of correct answer : If a person abets or induces in any manner another person to make and deliver an account or a statement or declaration relating to any income chargeable to tax which is false and which he either knows to be false or does not believe it to be true or to commit an offence under section 276C(1), he shall be prosecuted under section Prosecution against a public servant is to be instituted with previous sanction of under section 280(2). (a) Central Government (b) State Government (c) Chief Commissioner (d) Assistant Commissioner Correct answer : (a) Justification of correct answer : Prosecution can be launched against a public servant for disclosure of particulars by him in contravention of section 138(2) which can result in imprisonment and fine [prosecution to be instituted with previous sanction of Central Government under section 280(2)]. Rectification of Mistake MCQ 1. Any mistake which is apparent from the record in any order passed by the Assessing Officer can be rectified under section. (a) 143 (b) 147 (c) 154 DIRECT TAX LAWS AND INTERNATIONAL TAXATION 239

250 (d) 156 Correct answer : (c) Justification of correct answer : Any mistake which is apparent from the record in an order passed by the Assessing Officer can be rectified under section Any mistake apparent from the record in any intimation passed under section 200A(1) can be rectified by the Income Tax Authorities under section 154. (a) True (b) False Correct answer : (a) 3. If an order is the subject-matter of any appeal or revision, then any matter which is decided in such an appeal or revision cannot be rectified. (a) True (b)false Correct answer : (a) 4. The income-tax authority cannot rectify the mistake on his own. (a) True (b) False Correct answer : (b) Justification of correct answer : The income-tax authority can rectify the mistake on his own. The taxpayer can also intimate the mistake to the income-tax authority by making an application to rectify the mistake. If the order is passed by the Commissioner (Appeals), then the Commissioner (Appeals) can rectify mistake which has been brought to notice by the Assessing Officer or by the taxpayer. 5. No order of rectification can be passed after the expiry of from the end of the financial year in which order sought to be rectified was passed (a) 2 (b) 3 (c) 4 (d) 5 Correct answer : (c) Justification of correct answer : No order of rectification can be passed after the expiry of 4 years from the end of the financial year in which order sought to be rectified was passed. The period of 4 years is from the date of order sought to be rectified and not 4 years from the date of original order. Hence, if an order is revised, set aside, etc., then the period of 4 years will be counted from the date of such fresh order and not from the original order. 6. In case of an application made by the taxpayer, the authority shall amend the order/refuse the amendment within from the end of the month in which the application is received by the authority. (a) 4 years 240 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

251 (b) 2 years (c) 1 year (d) 6 months Correct answer : (d) Justification of correct answer : In case of an application made by the taxpayer, the authority shall amend the order/refuse to do so within 6 months from the end of the month in which the application is received by the authority. 7. The taxpayer cannot file an online application for rectification of mistake under section 154. (a) True (b) False Correct answer : (b) 8. An amendment or rectification which has the effect of enhancing the assessment or reducing a refund or otherwise increasing the liability of the taxpayer (or deductor) shall be made after giving the taxpayer (or the deductor) a reasonable opportunity of being heard. (a) True (b) False Correct answer : (a) Justification of correct answer : An amendment or rectification which has the effect of enhancing the assessment or reducing a refund or otherwise increasing the liability of the taxpayer (or deductor) shall not be made unless the authority concerned has given notice to the taxpayer or the deductor of its intention to do so and allowed the taxpayer (or the deductor) a reasonable opportunity of being heard. MCQ 2 1. As per section 276B,if a person fails to pay to the credit of the Central Government: (i) the tax deducted by him (i.e., TDS) or (ii) the dividend distribution tax (DDT) as per section 115-O(2)or (iii) tax in respect of winning from lottery or crossword puzzle as per section 194B, then such person shall be punishable with rigorous imprisonment for a period of not less than 3 months which may extend to 1 year and with fine (a) True (b) False Correct answer : (b) 2. As per section 206C, if a person fails to pay the tax collected by him to the credit of the Government, then as per section 276BB he shall be punished with rigorous imprisonment for a period of which shall not be less than 3 months but which may extend to 7 years and with fine. (a) True (b) False Correct answer : (a) 3. Section provides for punishment in the case of wilful attempt to evade tax, penalty or interest or underreporting of income. DIRECT TAX LAWS AND INTERNATIONAL TAXATION 241

252 (a)276b (b) 276C (c)276d (d) 276E Correct answer : (b) 4. Section provides for imprisonment in case of failure to file the return of income. (a) 276AA (b) 276BB (c) 276CC (d) 276DD Correct answer : (c) 5. Section 276D provides for prosecution in the case of wilful failure by the taxpayer to produce accounts and documents under section 142(1). (a) True (b) False Correct answer : (b) 6. Section 277 provides for prosecution in the case of falsification of books of account or document etc. (a) True (b) False Correct answer : (b) 7. If a person abets or induces in any manner another person to make and deliver an account or a statement or declaration relating to any income chargeable to tax which is false and which he either knows to be false or does not believe it to be true or to commit an offence under section 276C(1), then he shall be punished under section 278 (a) True (b) False Correct answer : (a) 8. Section 278A provides for prosecution in the case of second or subsequent offence under sections 276B, 276C(1), 276CC, 277 or 278. (a) True (b) False Correct answer : (a) 9. As per section 278B, where an offence under the Income-tax Act has been committed by a company, then the directors shall be deemed to be guilty of the offence and shall be liable to be proceeded against and punished accordingly. (a) True (b) False Correct answer : (b) 242 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

253 10. No prosecution can be initiated against public servant for improper discloser of the information. (a) True (b) False Correct answer : (b) 11. As per section 140A(1) any tax due (after allowing credit for TDS, advance tax, etc.) along with interest under section 234A, 234B and 234C (if any) should be paid before filing the return of income. Tax paid as per section 140A(1) is called.. (a) Advance tax (b) Self assessment tax (c) Tax paid at source (d) Corporate tax Correct answer : (b) 12. Section 234E provides for levy of late filing fees for the delay in filing of (a) Return of income (b) TDS return (c) TCS return (d) TDS/TCS return Correct answer : (d) 13. If the taxpayer fails to maintain books of account as per the provisions of section 44AA, then he shall be liable to pay penalty under section of `25,000. (a) 271B (b) 271A (c) 271AA (d) 271AB Correct answer : (b) 14. If a taxpayer, in spite of the requirement of section 44AB, fails to get his accounts audited, then he shall be liable for penalty under section 271B ofone-half per cent of total sales, turnover or gross receipts, etc., or, whichever is less. (a) `2,00,000 (b) `1,50,000 (c) `1,00,000 (d) `50,000 Correct answer : (b) 15. Section 269SS provides that no person shall take or accept loan or deposit or specified sum exceeding `50,000 by any mode other than account payee cheque or account payee demand draftor by use of electricity clearing system through a bank account. Contravention of the provisions of section 269SS will attract penalty under section 271D of an amount equal to loan or deposit taken or accepted or specified sum. (a) True DIRECT TAX LAWS AND INTERNATIONAL TAXATION 243

254 (b) False Correct answer : (b) 16. Penalty under section 271FA shall be levied for failure to file statement of financial transaction or reportable account (previously called as Annual Information Return). Penalty under section 271FA is ` for every day during which the failure continues. (a) 500 (b) 250 (c) 100 (d) 50 Correct answer : (c) 17. What is the rate of penalty for underreporting of income under Section 270A? (a) 100% (b) 200% (c) 300% (d) 50% Correct answer : (d) 18. As per section 271H, where a person fails to file the statement of tax deducted/collected at source i.e. TDS/ TCS return on or before the due dates prescribed in this regard, then he shall be liable to pay penalty under section 271H. Minimum penalty can be levied of `10,000 which can go upto `. (a) 1,00,000 (b) 2,00,000 (c) 3,00,000 (d) 3,00,000 Correct answer : (a) B provides penalty in case of default by the taxpayer in complying with the provisions of section 139A or knowingly quoting incorrect PAN in any document referred to in section 139A(5)(c) or intimates incorrect PAN for the purpose of section 139A(5A)/(5C). Penalty under section 272B is Rs.. (a) 1,00,000 (b) 50,000 (c) 50,000 (d) 10,000 Correct answer : (d) 20. Section 272BB(1A) provides for penalty for quoting incorrect Tax Deduction Account Number or Tax Collection Account Number (as the case may be). Penalty under section 272BB is `. (a) 75,000 (b) 50,000 (c) 10,000 (d) 5, DIRECT TAX LAWS AND INTERNATIONAL TAXATION

255 Correct answer : (c) 21. Principal Commissioner or Commissioner of Income-tax is empowered to grant relief from penalty to taxpayers in genuine cases. Such power is granted under section 273A and section. (a) 274 (b) 273AA (c) 273B (d) 273AB Correct answer : (b) 22. Section 273A(1) empowers the Principal Commissioner or Commissioner to grant waiver or reduction from penalty imposed or imposable under section 271F i.e. penalty for failure to file the return of income. (a) True (b) False Correct answer : (b) 23. Section 273A(4) empowers the Principal Commissioner or Commissioner to waive or reduce any penalty levied under the Income-tax Act as well as to stay or compound any proceeding for the recovery of penalty. (a) True (b) False Correct answer : (a) 24. Section 273AA empowers the Principal Commissioner or Commissioner to waive off penalty in a case where the taxpayer has made an application for settlement under section 245C and the proceedings for settlement have been completed and penalty proceedings are initiated under the Income-tax Act. (a) True (b) False Correct answer : (b) 25. The waiver or reduction under section 273A(1) can be granted by the Principal Commissioner or Commissioner on his own motion but not on an application made by the taxpayer. (a) True (b) False Correct answer : (b) 26. If the amount of income in respect of which the penalty is imposed or imposable for the relevant year(s) exceeds `, then no order reducing or waiving the penalty under section 273A(1) shall be made by the Principal Commissioner or Commissioner, except with the previous approval of the Principal Chief Commissioner or Chief Commissioner or Principal Director General or Director General, as the case may be. (a) 1,00,000 (b) 5,00,000 (c) 10,00,000 (d) 20,00,000 Correct answer : (b) 27. Every order made under section 273A shall be final and shall not be called into question by any Court or any DIRECT TAX LAWS AND INTERNATIONAL TAXATION 245

256 other authority. (a) True (b) False Correct answer : (a) 28. As per section 273A(3), where an order has been made under section 273A(1) in favour of any person, whether such order relates to one or more years, he shall not be entitled to any relief under section 273A in relation to any other year at any time after the making of such order. (a) True (b) False Correct answer : (a) 29. Relief under section 273A(4) is granted if levy of penalty will cause genuine hardship on the taxpayer. (a) True (b) False Correct answer : (b) 30. The immunity granted under section 273AA may, at any time, be withdrawn by the Principal Commissioner or Commissioner, if he is satisfied that such person had, in the course of any proceedings, after abatement, concealed any particulars material to the assessment from the income-tax authority or had given false evidence (a) True (b) False Correct answer : (a) 31. The Commissioner of Income-tax (Appeals) is the appellate authority. (a) First (b) Second (c) Third (d) Fourth Correct answer : (a) 32. Section specifies the orders against which an appeal can be filed before the Commissioner of Income-tax (Appeals). (a) 261 (b) 260A (c) 253 (d) 246A Correct answer : (d) Q3. Where the appeal relates to any assessment or penalty, the same should be presented within 30 days from the date of service of notice of demand relating to the assessment or penalty. (a) True (b) False 246 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

257 Correct answer : (a) 34. Application for condonation of delay in filing the appeal, giving the reasons for the delay along with necessary evidences should be filed in Form No. 34C. (a) True (b) False Correct answer : (b) 35. An appeal to the Commissioner of Income-tax (Appeals)shall be filed in Form No.. (a) 34B (b) 35 (c) 34C (d) 28 Correct answer : (b) 36. In case of a Hindu Undivided Family, the form of appeal, the grounds of appeal and the form of verification are to be signed and verifiedby the Karta of the family. (a) True (b) False Correct answer : (a) 37. Copy of challans of fees paid is not required to be submitted along with the Form No. 35 (i.e.,a Form of appeal). (a) True (b) False Correct answer : (b) 38. Where assessed income (i.e. total income as determined in the assessment) ismore than `1,00,000 but less than `2,00,000, the fees for filing the appeal before the Commissioner of Income-tax (Appeals) are. (a) `250 (b) `500 (c) `1,000 (d) `10,000 Correct answer : (b) 39. During the course of appeal, the Commissioner of Income-tax (Appeals) cannot allow the taxpayer to go into additional grounds of appeal. (a) True (b) False Correct answer : (b) 40. The Commissioner of Income-tax (Appeal) shall dispose off the appeal within a period of from the end of the financial year in which appeal is filed. (a) 3 months (b) 6 months DIRECT TAX LAWS AND INTERNATIONAL TAXATION 247

258 (c) 1 year (d) 2 years Correct answer : (c) 41. The Income Tax Appellate Tribunal (ITAT) is the second appellate authority. (a) True (b) False Correct answer : (a) 42. Appeal to the ITAT cannot be filed by an Assessing Officer. (a) True (b) False Correct answer : (b) 43. Rectification order passed by the Commissioner of Income-Tax (Appeals) under section 154 is the final order and the taxpayer cannot file an appeal to the ITAT against such order of the Commissioner of Income-Tax (Appeals). (a) True (b) False Correct answer : (b) 44. Departmental appeal means. (a) Appeal filed by the taxpayer against the order of CIT (Appeals) to the ITAT (b) Appeal filed by the Income-tax department against the order of CIT (Appeals) passed under section 154 or 250 to the ITAT (c) Appeal filed by the taxpayer against the order of ITAT to the High Court (d) Appeal filed by the taxpayer against the order of ITAT to the Supreme Court Correct answer : (b) 45. The departmental appeal is allowed to be proceeded only in cases where the tax effect Involved in the appeal exceeds. (a) `1,00,000 (b) `2,00,000 (c) `10,00,000 (d) `5,00,000 Correct answer : (c) 46. Appeal to ITAT is to be filed within a period of 60 days from the date on which order sought to be appealed against is communicated to the taxpayer or the Commissioner of Income-Tax (as the case may be). (a) True (b) False Correct answer : (a) 47. The appeal to ITAT shall be filed in Form No. (a) DIRECT TAX LAWS AND INTERNATIONAL TAXATION

259 (b) 35 (c) 36 (d) 34E Correct answer : (c) 48. On filing of the appeal to the ITAT by the taxpayer or by the Assessing Officer (as the case may be) the opposite party will be intimated about the appeal and the opposite party has to file a memorandum of cross objection with the ITAT. (a) True (b) False Correct answer : (a) 49. Where assessed income is more than `2,00,000 then fess for filing an appeal with the ITAT is. (a) ` 500 (b) `1,000 (c) `1,500 (d) 1% of assessed income subject to a maximum of `10,000 Correct answer : (d) 50. The ITAT shall dispose off the appeal within a period of four years from the end of the financial year in which appeal is filed. (a) True (b) False Correct answer : (a) DIRECT TAX LAWS AND INTERNATIONAL TAXATION 249

260

261 Study Note - 8 GRIEVANCES REDRESSAL PROCEDURE This Study Note includes 8.1 Introduction 8.2 Appeal and Appellate Hierarchy 8.3 Rectification 8.4 Revision 8.1 INTRODUCTION Under Income Tax Act, an assessment is normally the first stage for determining the taxable income, tax liability, interest and any other sum payable by an Assessee. The Act provides for various remedies available to an assessee on completion of the assessment. The primary remedies available to an assessee on completion of the assessment are Appeals, Revision, and Rectification. All these remedies work in different areas. However, strictly speaking the remedies are not alternative to each other but at times more than one remedial proceeding may be used as complimentary to each other so as to achieve the best result by applying optimum resources. The right of appeal arises where the taxpayer is aggrieved by the order passed by the income-tax authority. Where the Assessing Officer accepts the return filed by the tax payer and passes an order making no modification, an appeal does not lie against that order as the taxpayer cannot be said to be aggrieved of that order. As per Mozley and Whiteley s Law Dictionary Appeal is a complaint to a superior court of an injustice done by an inferior one. The party complaining is styled as the Appellant and the other party is known as Respondent. Under the scheme of the Income Tax Act, an assessment is normally the first Stage determining the Taxable Income and The Tax, Interest or Sum Payable by an Assessee. The Income Tax Act provides for various remedies available to an assessee on completion of the assessment. These remedies work in different areas. However, the remedies are not alternative to each other but at times more than one remedial proceeding may be used as complimentary to each other so as to achieve the best result. The primary remedies available to an assessee on completion of the assessment are: : APPEALS : REVISION : RECTIFICATION 8.2 APPEAL AND APPELLATE HIERARCHY The Appellate hierarchy in Inco9me Tax is described as under - NATURE OF ACTION First Appeal Second Appeal TO WHOM IT SHOULD BE FIELD Commissioner(appeals) [CIT (A)] The Income Tax Appellate Tribunal Against whose order it can be preferred Against the order of Assessing officer Against the order of the CIT(A) Appeal to high court High Court Substantial question of law arising out of ITAT order Taxpayer Who can prefer Taxpayer or commissioner of Income Tax Taxpayer or commissioner of Income Tax Appeal to supreme court Supreme Court Judgment of High Court Taxpayer or commissioner of Income Tax DIRECT TAX LAWS AND INTERNATIONAL TAXATION 251

262 Grievance Redressal Procedure Appeal before Commissioner ( Appeals) An appeal before the Commissioner of income tax (Appeals) is extremely useful grievance redressal procedure available to an assessee. The commissioner of Income Tax (Appeals) is the first appellate authority under the scheme of the Act. This forum helps in redressing the grievances that the assessee might have against the assessment order passed in his case. However, the right of appeal is not an inherent right but it is a statutory right created due to the provisions of the statute [CIT vs. Garware Nylons Ltd.(212-ITR-242) (Bom). ] The proceedings of appeal work strictly as per the statutory provisions made in this regard. Therefore,, it is essential to understand these provisions in detail and know what are the powers, rights and duties of the CIT (A) as well as the assessee while dealing with the appeals. Appealable Orders-Section 246A Section 246A of the Act lists down the category of orders, which can be appealed against. The List is an exhaustive list and not an inclusive list. Accordingly, if any order does not find place in any of the clauses of section 246A, the same becomes a non appealable order and the assessee has to exercise certain other options to protect himself against such order. Appeal against the order under section 154 wherein interest under section 244A is reduced is maintainable (Progressive Construction Seenaiah & Co. vs. (IT (2003)851TD27) (HYD) APPEALABLE ORDERS (Illustrative list) Orders giving effect to an appellate order Section wise detail of such orders are given under various Subsections of Sec. 246A Order denying the rectification of mistakes apparent from the records. A protective assessment order [Lalludas Children Trust vs. CIT (251-ITR-50)) Guj.)] However, normally Protective assessment orders are dealt as Non-Appealable. Order passed in reassessment proceedings. NON-APPEALABLE ORDERS (Illustrative list) Order levying interest u/s 234A, 234B, or 234C in a case where there is no other grievances arising from the order.- alternate remedy- waiver petition before the CIT Order imposing interest u/s. 220(2)- alternate remedywavier petition before the CIT. Order of revision u/s alternate remedy-writ petition before the High Court. Order of the commissioner passed u/s. 273A rejecting the application for waiver of Penalty- alternate remedy- writ petition before the High Court. APPEAL IN CASE OF AN AGREED ASSESSMENT The issue whether an appeal can be preferred in the case of an agreed assessment is not free from doubt. The Bombay High Court in the case of Rameshchandra & Co. vs. CIT (169-ITR-375) (Bom.) has held that when the additions are made on the basis of the assessee s own admissions, the assessment can not be subjected to appeal. A similar view has been expressed by the Allahabad High Court in the case of sterling Machine Tools Vs CIT (123-ITR-181)(All.). As against this, the Punjab and Haryana High Court in the case of Chhatmull Agarawal vs. CIT (115-ITR-694) (Punj) has held that an agreed assessment can be subjected to appeal. The statutory right of appeal cannot be taken away from the assessee since he has consented to the additions/disallowances at the time of the assessment. Under the Act, there is no provision for withdrawal of the statutory right to appeal. In view of the conflicting decisions, the maintainability or otherwise of an appeal in such a situation will largely depend on the facts of each case. It seems that it is difficult to contend that the appeal can be preferred in a case of admission made by the assessee due to the decision of the Bom, HC in the case of Rameshchandra & Co. However keeping in mind the statutory right of appeal, it seems that the appeal cannot be denied in a case where the addition/ disallowance are agreed by an assessee during assessment proceedings with a view to settle the matter. Section Appeal by person denying liability to deduct tax u/s. 195 Section 248 of the act deals with appeal in a case where under an agreement or arrangement, tax deductible on any income, other than interest u/s. 195 is to be borne by the payer and such payer claims that no tax was required to be deducted on such income. In such a situation, the section provides that the payer shall first pay the tax deductible on such income. If the CIT (A) issues a declaration as aforesaid, then the tax deposited by him will 252 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

263 be refunded to him. Section 249(1) An appeal to the CIT (A) shall be in Form No. 35. Appeal shall be accompanied by appeal fees prescribed. Documents to be filed with the Appeal form include - Form No. 35 along with statement of facts and grounds of appeal in duplicate. Receipted challans for the payment of Appeal Fees in original. Copy of the order appealed against (In case of appeal against the penalty order, also enclose a copy of the relevant assessment order). Original Notice of Demand Section 249(2)-Time Limit for filing appeal As per section 249(2), an appeal shall be preferred within 30 days of the date of service of notice of demand in the case of an appeal against an assessment or penalty or of the intimation or any oeder sought to be appealed against. In the case of an appeal u/s. 248, the same shall be preferred within 30days of the payment of tax. In a case where the appeal is sent by post, then the date of filling will be the date on which the appeal is delivered to the office of the CIT (A) and not the date on which it is handed over to the postal authorities. This is because under the general law, the post office acts as an agent of the sender and not that of addressee. Where the assessment order was served on a person who was not an authorized agent of the assessee and later on the assessee applied for and obtained a copy of the assessment, it was held that time limit for filing the appeal should be reckoned from the date on which the assessee obtained the copy of assessment order and notice of demand and not from the earlier date of the service of the assessment order. -CIT VS. PREM KUMAR RASTOGI (1980) 124 ITR 381 (AII) Section 249 (3)- Condonation of delay in filing appeal Section 249(3) enables the CIT (A) to admit an appeal after the examination of the time limit of 30 days if he is satisfied that the appellant had sufficient cause for not presenting it within the time limit prescribed. In case of an appeal filed beyond the period of 30 days, it is recommended that the same shall be accompanied by a petition for condonation of delay explaining the reasons for the delay. In appropriate cases, it is also advisable to file an affidavit confirming the reasons for the delay. As far as possible an attempt shall be to explain the reasons for each and every day s delay in filing the appeal. The words sufficient cause shall be interpreted liberally with a view to advance the cause of justice. The provision conferring right of appeal should be construed in a reasonable, practical and liberal manner [Mela Ram and Sons vs. CIT (29-ITR-607) (SC); CIT vs. Grafik India (194-ITR-645) (SC)]. If the appellant has acted diligently then normally the delay gets condoned. However if the delay is caused due to negligence on the part of the appellant, it become difficult to get the delay condoned. Where the reason for delay in filing first appeal is attributed to negligence or inaction on the part of tax consultant and there is no malafide imputable to the assessee the delay can be condoned. -Shakti Clearing Agency (P) Ltd. vs. ITO (2003) 127TaxMAN Judicial pronouncement - The delay in filing the revision was caused mainly due to fault of the lawyer who did not inform the assessee. The delay caused due to negligence of assessee s counsel. In these circumstances it would be hard to penalize the assessee for fault of the lawyer Delay for five years in filing revision condoned. -Padam Sen Agarwal vs. CST (1983) UPTC-1135 (SC) Section-249 (4)-payment of tax on Returned Income before the appeal Section 249 (4) provides that no appeal shall be admitted unless the appellant has paid the tax due on the returned income before filing of the appeal. This is a very important part of appeal proceedings and one has to be extra careful on this front. If the tax on the returned income is not paid before the filing of the appeal, the appeal is not likely to be admitted. Section 249(4) is mandatory and there is no remedy available against the operation of the said section. If the Tax is not paid before the filing of the appeal, then legally the CIT (A) is empowered to dismiss the appeal. However, if the tax is paid before the final date of hearing of the appeal, then normally the CIT (A) allows the appeal to be heard and decides the same on merit. In a case where no return is filed the assessee should pay tax of an amount equivalent to the amount of advance tax payable by him before filing an appeal. DIRECT TAX LAWS AND INTERNATIONAL TAXATION 253

264 Grievance Redressal Procedure There is no condition that interest if any u/s. 234 A/B/C should also be paid before the appeal could be admitted. Section 249(4) applies to appeals against assessment as well as appeal against penalty. The provision of Section 249(4) however applies to appeal before CIT(A) only and do not apply for filing appeal before the ITAT. Section-250-Procedure of Appeal Section 250 of the act deals with the procedures in an appeal proceeding. As per the section, the CIT (A) shall give a notice in writing fixing a date of hearing to both the appellant and also the assessing officer. The assessee or his authorized representative is having a right to be heard at the time of the hearing of the appeal. Similarly right is made available to the assessing officer or his authorized representative to be heard however, normally in practice, only the appellant appears in the hearing. No right is available to the assessing officer to be heard in the appeals under the wealth tax Act. The CIT (A) is having power to grant adjournments either suo motto or on an application made by the assessee for adjournments. Normally the adjournments are granted provided the reasons are genuine. Further Inquiries And Remand Reports, appeal order etc The CIT (A) may make further inquires or ask the AO to make the necessary inquires and give the report of the same. The powers of the CIT (A) are quasi judicial and they have to be exercised judicially. If the CIT (A) arbitrarily refuses to make inquiries in a deserving case, his action is open for correction by the higher authorities. [Smt. Prabhavati S. Shah vs. CIT (213-ITR-1) (Bom.)]. If the CIT (A) calls for a remand report from the assessing officer, then a copy of the remand report shall be forwarded to the appellant before acting on the remand report. The assessee shall have a right to controvert any findings of the remand report. Normally it is seen where the appellant puts a ground of appeal that the AO had not provided an opportunity in a particular matter, it becomes necessary for the CIT (A) to call for Remand Report. Sub-section(6) of section 250 provides that the order of the CIT (A) has to be in writing and the same has to be a speaking order giving reasons for the decision on all the issues raised in the appeal. For any of the issues resulted from the appellate order an application for rectification u/s. 154 can be made to CIT(A). Time Limit for disposal of the appeal As per sub-section (6A), it is recommended that the appeal filed may be heard and decided within one year from the end of the financial year in which the appeal is filed. However, this is an advisory limit and not strictly mandatory. Further the appellate order shall be issued within 15 days of last hearing. The CIT (A) is required to communicate the order passed by him to the assessee A.O. and to the chief Commissioner or Commissioner on disposal of the appeal. Section-251-powers of the CIT (A) Section 251 of the acts deals with the powers of the CIT (A) while disposing off an appeal before him. The powers of the CIT (A) are co-terminus with that of the assessing officer and accordingly he can do everything which an assessing officer can do while making an assessment. Similarly he cannot do something which an assessing officer cannot do. As per section 25(1), while deciding an appeal against an order of assessment, the CIT (A) may either- - confirm - reduce - enhance or - annual the assessment Similarly while deciding an appeal against the levy of penalty, the CIT (A) may either- - confirm such order or - cancel such order - Vary it so as to either enhance or reduce the penalty. Power of Enhancement of CIT (A) As can be seen from the section 251, the CIT (A) has powers to enhance the income or the penalty in an appeal 254 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

265 before him. These powers of the CIT (A) cannot be however exercised without giving appropriate opportunity to the assessee of being heard against such enhancement. The principal of natural justice will have to be followed if the CIT (A) wishes to make the enhancement. This include the procedures like proper notice, proper opportunity of being heard, filling of additional evidences, rebutting of the evidences relied on by the CIT (A) for such enhancement, cross examination of witnesses if any etc. CIT (A) is not bound by the scope of the appeal before him and may go into all the matters covered by the assessment in the particular case. His powers are not confined to matters considered by the assessing officer but it covers the entire assessment proceedings within its ambit [CIT vs. Nirbheram Daluram (224-ITR-610) (SC); Cit vs. Ahmedabad Crucible co. (206-ITR-574) (Guj.)]. However at the same time, it is held by the supreme court in the case of CIT vs. Shapoorji Pallonji Mistry (44-ITR-891) (SC) that the CIT (A) can not discover a new source of income which is not considered by the assessing officer. This decision has been subsequently followed in the case of CIT vs. Union Tyres (240-ITR-556) (Del.) and many other decisions. Both the above sets of decision work in different areas altogether. On analysis of both the sets of the decisions it can be said that the CIT (A) does not have power to make assessment at all. The CIT (A) has powers to make enhancement in respect of such items where the concerned item was under consideration either expressly or impliedly in the assessment proceedings. If the original assessment is itself invalid for whatever reasons, then the CIT (A) can not make enhancement in such case since he can not validate an originally invalid assessment. CIT(A) has some residuary powers conferred upon him u/s. 251(1) wherein he is competent to recall his order passed ex-parte on an application made to him by the appellant. APPEAL BEFORE THE INCOME TAX APPELLATE TRIBUNAL The Income-Tax Appellate Tribunal (ITAT) is the second appellate authority to whom appeals can be filed against the order of the CIT (A). It is the final fact finding authority in the entire proceedings. The facts recorded in the order of the ITAT cannot be challenged before the High Court or Supreme Court where only a substantial question of law can be contested by an assessee. The ITAT is a very important forum in the appellate proceedings because it is the first independent body. The ITAT is a Qusai-Judicial authority governed by the Ministry of law and not the Ministry of Finance. Due to this independence of the ITAT, normally the decisions of the ITAT are non-biased. There are different branches of ITAT like (a) Division Bench (b) SMC Bench (c) Third Member Bench and (d) Special Bench. An appeal to ITAT can be filed against the order of the CIT (A) by either of the aggrieved party i.e. the assessee or the assessing officer under the directions of the commissioner. Appealable orders before the ITAT 1) Any order passé by the CIT (A) u/s. 154, 250, 271A or 272A of the Income Tax Act 2) Order passed by an assessing officer u/s. 115VZC (1) (Tonnage Tax in case of shipping companies) 3) Order passed by a commissioner u/s. 12AA or section 80G(5)(vi) or section 263 or section 271 or section 272A or order u/s. 154 amending the order u/s ) Order passed by a chief commissioner or a Director General or a Director under section 272A Time Limit for filing an appeal The appeal shall be filed before ITAT within 60days of the date of communication of the order appealed against. Condonation of Delay in Filing Sub-section (5) of section 253 grants a power to the appellate tribunal to admit an appeal or permit the filing of a cross objection after the expiry of the time prescribed if it is satisfied that there was a sufficient cause for not presenting it within the prescribed time. In a case where the appeal is filed after the expiry of the time limit, it is desirable that an application for condonation of the delay is filed along with the appeal itself. Further an affidavit explaining the reason for the delay shall also be filed along with the appeal papers. Grounds of appeal before the ITAT Rule -8 of the income tax Appellate Tribunal Rules, 1963 reads as under: Every memorandum of appeal shall be written in English and shall set forth, concisely and under distinct heads, the grounds of appeal with no argument or narrative, and such grounds shall be numbered consecutively. DIRECT TAX LAWS AND INTERNATIONAL TAXATION 255

266 Grievance Redressal Procedure Thus assessee has to take care that the grounds filed before the ITAT are- - concise (brief) - with appropriate headings - Non argumentative - Duly numbered Rule-11 of the Income-Tax Appellate Tribunal Rules, 1963 deals with the procedure for grounds which may by heard during the course of the hearing of the appeal. On an analysis of the rule and also few of the judicial pronouncements, the following broad principles get emerged: additional ground is generally not permitted except by the leave of the bench. The bench is competent to allow the appellant to raise additional grounds of appeal. Leave of the bench may be sought either in writing or by oral prayer( It is preferable if it is in writing and file well in advance ) The scope of inquiry before the Tribunal can be wider than the points which are raised before the Tribunal. The Tribunal has the powers to allow additional points to be raised before it so long as they arise from the subject matter of the appeal. [Ahmedabad Electricity Co. vs. CIT (199-ITR-351) (Bom.) As long as the additional grounds are in respect of the subject matter of the entire proceedings, they shall be allowed to be admitted by the bench. Where the tribunal is only required to consider a question of law arising from the facts which are on records, there is no reason for not allowing such additional grounds. [National Thermal Power Company Ltd. Vs. CIT (229-ITR-383) (SC)] 8.3 RECTIFICATION Order can be passed u/s 154 of Act to rectify any mistake apparent from the record. The rectification can be made for the following orders: any order passed by it under the provisions of this Act ; intimation u/s 143(1) intimation u/s 200A(1) Matters which cannot be rectified Issues which are decided by way of appellate order or revision order. Procedure - The authority passing the order on its own motion or - Or on application by the assessee or deductor Any rectification pre judicial to the assessee or deductor shall be made only after a reasonable opportunity of being heard is given to the assessee. For returns filed online the rectification shall be filed online. Time limit for rectification Four years from the date of passing the order sought to be rectified. Order The order shall be passed in writing and shall be accompanied by demand notice u/s 156 in case of demand or shall make the refund due after rectification. 256 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

267 Order shall be passed within six months of application allowing the claim of the assessee or refusing the claim. Every application u/s 154 of the act shall be dealt with as under: - All applications must be duly entered into system and acknowledgement number shall be given - Physical application shall be made to the AO along with the acknowledgement number - Every application shall be disposed of within six months from the end of the end month in which application is made. - If online rectification is filed then CPC has to identify immediately whether it can process the same or to be transferred to jurisdictional AO. CPC also has to strictly adhere to the time limit for disposing the application. - On transfer the jurisdictional AO shall follow the procedures mentioned above and shall dispose off the within the time frame. - As per citizens charter the application shall be disposed off with two months and the authorities has been instructed to abide by this time limit as far as possible. Who can rectify Powers given to all officers who constitute "Income-tax authority" Power conferred to amend intimation sent under Section 143(1) Power to rectify intimation after issuance of notice under s. 143(2) CIT vs. Udaipur Distillery Co. Ltd. (2003) 182 CTR (Raj) 284 CIT vs. Gujarat Electricity Board (2003) 181 CTR (SC) 28 : (2003) 260 ITR 84 (SC) The High Court held that once the proceedings for regular assessment had already been initiated by issuing notice under s. 143(2), intimation under s. 143(1)(a) could not be rectified for making a disallowance under s. 43B, moreso when the question of allowability of deduction raises a debatable issue. Powers of Tribunal to rectify mistake in its order Section 254(2) empowers the Tribunal to rectify its orders. The proviso to Section 254(2) provides that an amendment which has the effect of enhancing an assessment or reducing a refund or otherwise increasing the liability of the assessee, shall not be made unless the Tribunal has given notice to the assessee of its intention to do so and has allowed the assessee a reasonable opportunity of being heard. Powers of Settlement Commission to rectify its orders Section 245F(1) lays down that in addition to powers conferred on the Settlement Commission under Chapter XIX-A it shall have all the powers which are vested in an IT authority under the Act. Power to rectify a mistake apparent from the record has been vested in an IT authority under s. 154 of the Act. Hence although Settlement Commission is not an IT authority referred to in Section 116, powers of rectification conferred under s. 154 on an IT authority referred to in Section 116 are exercisable by the Settlement Commission. Powers of competent authority to rectify its orders Section 269N lays down that with a view to rectify any mistake apparent from the record, the competent authority may amend any order made by him under Chapter XX-A at any time before the time for presenting an appeal against such order has expired, either on his own motion or on the mistake being brought to his notice by any person affected by the order. The proviso to said section lays down that if any such amendment is likely to affect any person prejudicially, it shall not be made without giving to such person a reasonable opportunity of being heard. Powers of Appropriate Authority to rectify its orders Sec. 269UJ lays down that with a view to rectifying any mistake apparent from the record, the Appropriate Authority may amend any order made by it under Chapter XX-C, either on its own motion or on the mistake being brought to its notice by any person affected by the order. The first proviso to Section 269UJ lays down that if any such amendment is likely to affect any person prejudicially, it shall not be made without giving to such person a DIRECT TAX LAWS AND INTERNATIONAL TAXATION 257

268 Grievance Redressal Procedure reasonable opportunity of being heard while the second proviso to said section provides that no amendment shall be made under said section after the expiry of six months from the end of the month in which the order sought to be amended was made. Power of Authority for Advance Rulings to rectify mistakeit is evident that the Authority is empowered to amend any order subject to the following two conditions : (1) there must be a mistake apparent from the record in the order sought to be rectified; and (2) rectification of such a mistake can be made before the ruling pronounced by it is given effect to. Powers of rectification conferred on Settlement Commission, competent authority and Appropriate Authority are analogous to powers conferred by s. 154 on an IT authority Power of rectification of the CIT(A) The Commissioner (Appeals) can rectify an order under section 154. This does not however confer the power on the CIT(A) to recall his order in its totality. Om Prakash Bhola vs. CIT (2004) 192 CTR (Del) 544. Power of rectification cannot be invoked when no order has been passed by the concerned authority Powers of rectification can be invoked by successor in office but not by altogether different IT authority Power to rectify a particular order not specifically conferred on an IT authority-that order cannot be rectified Power under s. 154 is not discretionary Successive applications not maintainable Powers under s. 154 of the Act are similar to powers of High Court under Art. 226 of the Constitution MEANING AND SCOPE OF "MISTAKE" Mistake-Not confined to mere clerical or arithmetical mistake Mistake need not be one of law only-it could be one of either fact or law Reasons to be adduced - Motor Industries Co. Ltd. vs. CIT & Anr. (2009) 314 ITR 29 (Kar) Mistakes which are and which are not covered by section 154 Incorrect computation of allowable deduction under particular section of the IT Act can be corrected in exercise of powers under s. 154 of the Act. Birla Bombay (P) Ltd. vs. CIT (1979) 12 CTR (Bom) 4 : (1980) 121 ITR 142 (Bom) Where it was obligatory on AO to consider provisions of section. 6(1)(a) and section. 6(1)(c) but he considered provisions only s. 6(1)(a), there was apparent mistake which was rectifiable under section [Vijay Mallya vs. Asstt. CIT (2003) 185 CTR (Cal) 233]. while determining amount payable by assessee, having not adhered to method provided in Explanation to s. 140A, same constituted mistake apparent and was rightly rectified by recourse to s In CIT vs. Industrial Cables (India) Ltd. (2009) 310 ITR 351 (P&H) Sec. 154 does not cover any mistake which may be discovered by a complicated process of investigation, argument or proof Ved Prakash Madanlal vs. CIT 1978 CTR (Bom) 309 The mistake should be a mistake apparent on record and not a mistake which could be discovered by a process of elucidation, argument or debate. The expression mistake apparent from record should not be equated in some aspects with mistake on the face of the record [Arvind N. Mafatlal vs. ITO (1957) 32 ITR 350 (Bom) : TC53R.143]. Although the mistake may be a mistake of fact as well as a mistake of law yet it is necessary that it should be a glaring, obvious or self-evident mistake and should not be one which could be discovered by a long drawn process of reasoning or examining arguments on points where there may conceivably be two opinions [National Rayon Corporation Ltd. vs. G.R. Bhamani, ITO (1965) 56 ITR 114 (Bom). 258 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

269 The mistake which can be rectified is one created or made by the concerned authority or one in creation of which the concerned authority had some contribution. Hence if the alleged mistake in the order is attributed to an impression formed by the counsel who had appeared before the authority towards which the authority had done nothing, the alleged mistake would not be one apparent from the record [Joseph Thomas vs. Agrl. ITO (1979) 13 CTR (Ker) 362 Grant of relief under a provision of law which does not obviously apply to the facts of the case would attract powers of rectification [CIT vs. Sundaram Textiles Ltd. (1984) 43 CTR (Mad) 30. Mere fact that an appeal had not been filed against the original order which was correct and valid when passed would not be a ground for the ITO to refuse to rectify that order when in view of subsequent decisions of jurisdictional High Court on the point involved the original order is shown to suffer from a mistake apparent from the record Parshuram Pottery Works Co. Ltd. vs. D.R. Trivedi, WTO (1975) 100 ITR 651 (Guj)]. Meaning of expression "mistake" or "obvious or patent mistake"-not involving a debatable point Difference between the expressions "mistake apparent from the record" and "error apparent on the face of the record" Line of demarcation neither firm nor fixed In CIT vs. E.I.D. Parry Ltd. (1995) 216 ITR 489 (Mad) : TC53R.342 Invalid order cannot be made valid by resort to s. 154 Illustrations of mistakes rectifiable Arithmetical or clerical mistake An arithmetical or clerical mistake in the orders passed by the IT authority. Mistakes in calculation of tax, rebate relief, etc. Miscalculation of tax on misreading of a section of which only one interpretation was possible. Refund of tax paid as per provisional assessment as a consequence of setting aside of regular assessment. [R.A. Boga vs. AAC (1977) 110 ITR 1 (P&H) (FB) Omission to apply formula for calculation of double tax relief in computing corporation tax. [Sutlej Cotton Mills Ltd. vs. CIT (1979) 120 ITR 399 (Cal) Excess rebate granted in respect of premium on life insurance policy.[i.n. Sundresh (HUF) vs. Agrl. ITO (1983) 34 CTR (Kar) 337 Grant of credit to the assessee bank for tax deducted at source in respect of Electricity Board Bonds when admittedly those bonds, though purchased in the name of the assessee bank belonged to its constituents who had kept them as security for loans advanced to them and interest income from the bonds was not offered by the assessee bank for taxation.[cit vs. Tanjore Permanent Bank Ltd. (1986) 55 CTR (Mad) 391 : (1986) 149 ITR 788 (Mad) Grant of rebate to a person by treating him as "a non-resident", while in fact he was a person who was "not ordinarily resident". [Chimanbhai K. Patel vs. CWT (1985) 49 CTR (Guj) 104 : (1985) 156 ITR 373 (Guj)] Allowability of relief under Section 80J when private company is converted into public limited company Order granting deductions under Section 80L and Section 80M before set off of losses Other deductions under Chapter VI-A -Issue regarding deduction of unabsorbed depreciation and unabsorbed losses from the profits and gains of business or profession while computing deduction under s. 80HHC was a debatable issue and therefore, Dy. CIT had no jurisdiction to pass the impugned order under s. 154 holding that the assesseecompany is entitled to deduction under s. 80HHC at nil as there is no positive income after setting off the unabsorbed depreciation and unabsorbed business losses of the earlier years. [Royal Cushion Vinyal vs. CIT (2009) 227 CTR (Bom) 663]. Value of closing or opening stock DIRECT TAX LAWS AND INTERNATIONAL TAXATION 259

270 Grievance Redressal Procedure Penalty Carry forward of loss Wrong deduction of tax liability Double taxation relief and other rebate -Allowance of excessive double taxation relief when facts on the basis of which such relief is to be Rectification, Revision & Appeals by CA Haridas Bhat calculated are undisputed. [CIT vs. United Commercial Bank (1994) 206 ITR 641 (Cal) : TC53R.468] Capital gains Computation of book profit under s. 115JA Interest Excess interest paid to assessee by the Government on advance tax paid by the assessee Simplex Mills Ltd. vs. P.S. Subramanyam, ITO (1958) 34 ITR 711 (Bom) Mistaken calculation of disallowance of interest under Section 40(b).[Sugar Dealers vs. CIT (1993) 115 CTR (Guj) 284 Calculation of interest after giving erroneously credit for advance tax paid after the end of the financial year. [ Life Bond Fabric (P) Ltd. vs. CIT (1995) 128 CTR (Guj) 19 : (1995) Failure to charge interest under when levy of such interest was mandatory. [Mulchand Patti Mfg. Co. vs. CIT (1995) 127 CTR (Raj) 438 : (1995) 215 ITR 746 (Raj) Written down value-depreciation, extra-shift allowance, etc. Obvious mistake in determining written down value of the assets. [Maharana Mills (P) Ltd. vs. ITO (1959) 36 ITR 350 (SC) grant of depreciation at incorrect rate. [Addl. CIT vs. P.V.S.K. Palaniappa Nadar & Sons (1980) 17 CTR (Mad) 347 Omission to allow depreciation on certain assets although income from such assets was charged to tax under the head "Income from other sources.[addl. CIT vs. Kanta Behan (1982) 27 CTR (Del) 40 Omission to allow extra-shift allowance in relation to plant and machineries of a sugar factory working on seasonal basis when there was a High Court decision stating that extra shift allowance was allowable.[cit vs. Purtabpore Co. Ltd. (1986) 54 CTR (Cal) 169 RECTIFICATION VIS-A-VIS REASSESSMENT Provisions of s. 154 and Section 147 may overlap in some cases while in others only Section 147 and not s. 154 may be applicable Difference between rectification proceedings and reassessment proceedings as far as initiation was concerned - The main difference between rectification proceeding and reassessment proceeding, as far as initiation was concerned was that whereas there was no statutory provision for issue of notice for initiation of rectification proceeding while as far as reassessment proceeding was concerned a statutory notice after recording reasons was necessary for initiation and initiation without such statutory notice was without jurisdiction as far as reassessment proceeding was concerned Girdharilal Jhajharia vs. CIT (1970) 78 ITR 133 (Cal) Reassessment notice invalid-reassessment order passed on the basis of such notice can be cancelled by exercise of powers under s REVISIONS (263 & 264) REVISION OF ORDERS PREJUDITIAL TO THE REVENUE 263 POWER WITH COMMISSIONER The Commissioner may call for and examine the record of any proceeding under this Act, ORDERS WHICH ARE PREJUDICIAL TO THE REVENUE - if he considers that any order passed therein by the Assessing Officer is erroneous in so far as it is prejudicial to 260 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

271 the interests of the revenue, OPPORTUNITY TO THE ASSESSEE - he may, after giving the assessee an opportunity of being heard ENQUIRY AS NECESSARY - and after making or causing to be made such inquiry as he deems necessary, ORDER pass such order thereon as the circumstances of the case justify, including an order enhancing or modifying the assessment, or cancelling the assessment and directing a fresh assessment. No order shall be made after the expiry of two years from the end of the financial year in which the order sought to be revised was passed. REVISION OF OTHER ORDERS POWER WITH THE COMMISSIONER The Commissioner may, either of his own motion or on an application by the assessee for revision, call for the record of any proceeding under this Act in which any such order has been passed and may make such inquiry or cause such inquiry to be made and, subject to the provisions of this Act, may pass such order thereon, not being an order prejudicial to the assessee, as he thinks fit. TIME LIMIT The Commissioner shall not of his own motion revise any order under this section if the order has been made more than one year previously. TIME LIMIT FOR APPLICATION BY THE ASSESSEE In the case of an application for revision under this section by the assessee, the application must be made within one year from the date on which the order in question was communicated to him or the date on which he otherwise came to know of it, whichever is earlier: POWER OF COMMISSIONER TO ADMIT The Commissioner may, if he is satisfied that the assessee was prevented by sufficient cause from making the application within that period, admit an application made after the expiry of that period. Tax to be paid notwithstanding reference, etc. [Section 265] Notwithstanding that a reference has been made to the High Court or the Supreme Court or an appeal has been preferred to the Supreme Court, tax shall be payable in accordance with the assessment made in the case. Execution for costs awarded by Supreme Court [Section 266] The High Court may, on petition made for the execution of the order of the Supreme Court in respect of any costs awarded thereby, transmit the order for execution to any court subordinate to the High Court. Amendment of assessment on appeal [Section 267] Where as a result of an appeal under section 246 or section 246A or section 253, any change is made in the assessment of a body of individuals or an association of persons or a new assessment of a body of individuals or an association of persons is ordered to be made, the Commissioner (Appeals) or the Appellate Tribunal, as the case may be, shall pass an order authorising the Assessing Officer either to amend the assessment made on any member of the body or association or make a fresh assessment on any member of the body or association. Exclusion of time taken for copy [Section 268] In computing the period of limitation prescribed for an appeal or an application under this Act, the day on which the order complained of was served and, if the assessee was not furnished with a copy of the order when the notice of the order was served upon him, the time requisite for obtaining a copy of such order, shall be excluded. Filing of appeal or application for reference by Income Tax Authority [Section 268A] DIRECT TAX LAWS AND INTERNATIONAL TAXATION 261

272 Grievance Redressal Procedure (1) The Board may, from time to time, issue orders, instructions or directions to other Income-tax Authorities, fixing such monetary limits as it may deem fit, for the purpose of regulating filing of appeal or application for reference by any Income-tax Authority under the provisions of this Chapter. (2) Where, in pursuance of the orders, instructions or directions issued under sub-section (1), an Incometax Authority has not filed any appeal or application for reference on any issue in the case of an assessee for any Assessment Year, it shall not preclude such authority from filing an appeal or application for reference on the same issue in the case of- (a) The same assessee for any other Assessment Year; or (b) any other assessee for the same or any other Assessment Year. (3) Notwithstanding that no appeal or application for reference has been filed by an income-tax authority pursuant to the orders or instructions or directions issued under sub-section (1), it shall not be lawful for an assessee, being a party in any appeal or reference, to contend that the income-tax authority has acquiesced in the decision on the disputed issue by not filing an appeal or application for reference in any case. (4) The Appellate Tribunal or Court, hearing such appeal or reference, shall have regard to the orders, instructions or directions issued under sub-section (1) and the circumstances under which such appeal or application for reference was filed or not filed in respect of any case. (5) Every order, instruction or direction which has been issued by the Board fixing monetary limits for filing an appeal or application for reference shall be deemed to have been issued under sub-section (1) and the provisions of sub-sections (2)(3) and (4) shall apply accordingly. Case Laws: (1) Demand notice need not be enclosed to memo of appeal - Neither section 249 nor rule 45 makes it incumbent on the assessee-appellant to enclose the demand notice along with the memo of appeal - Addl. CIT vs. Prem Kumar Rastogi 115 ITR 503 (2) Appellate authority is statutorily bound to consider condonation of delay - Where an application for condonation of delay in filing an appeal is preferred, it is the statutory obligation of the appellate authority to consider whether sufficient cause for not presenting the appeal in time was shown by the appellant - Shrimant Govindrao Narayanrao Ghorpade vs. CIT 48 ITR 54 (3) Where an assessee was served a notice of demand which did not include interest and subsequently another notice of demand was served including the interest, it was held that the period of limitation would begin from the date of service of second notice of demand [CIT vs. Karnani Industrial Bank Ltd. (1978) 113 ITR 380 (Cal)]. (4) Where a notice of demand was served on assessee s partner who subsequently handed over the notice to the assessee, it was held that period of limitation would begin when assessee receivedthe notice [Fatechand Agarwal vs. CIT (1974) 97 ITR 701 (Ori)]. (5) When only the notice of demand is served without a copy of the order, the period of 30 days would be counted from the day assessee receives a copy of the order [Karamchand Thapar (1976) 38 STC 593 (SC)]. (6) When an appeal is sent by an assessee by post, the date of filing of appeal would be the date on which the same is received by the Appellate Authority and not the date of posting the same [Titaghar Paper Mills Co. Ltd. (1980) Tax LR (NOC) 110 (Cal)]. (7) The Appellate Authority may condone the delay even where there is no such application made by the assessee. Appellate Authority is not competent to straightway dismiss an appeal filed belatedly [Markland Pvt. Ltd. vs. State of Gujarat AIR 1989 Guj 44; Naran Annappa vs. Jayanti Lal Chunilal Shah AIR 1987 Guj 205]. (8) The statutory right of appeal must be construed in furtherance of justice and the liberal meaning given to the expression sufficient cause. The Appellate Authority must examine whether there is a good reason for delay and that the appellant did act with reasonable diligence [Sandhya Rani Sarkar vs. Sudha Rani Debi AIR 1978 SC 537]. 262 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

273 (9) The quantum of stakes involved and the importance of the issues raised are relevant considerations, while deciding on the condonation of delay [Gupta Rice Mills (1993) 91 STC 208 (All)]. (10) A subsequent decision of the Supreme Court or a High Court resulting in change of legal position may be a sufficient cause for condonation of delay [CIT vs. Sothia Mining & Mfg. Corp. (1990) 186 ITR 182(Cal)]. (11) Time taken in pursuing other remedies may be a valid cause for delay [CIT vs. K.S.P. Shanmugavel Nadar & Ors (1985) 153 ITR 596 (Mad)]. (12) The pendency of a writ before the High Court, and Special Leave Petition before the Supreme Court, has been held as sufficient cause for condoning the delay [Madura Coats Ltd. vs. Collector of Central Excise (1994)119 CTR 63 (SC)]. (1) Non-allowing of interest in rectification order is appealable: When the ITO rectifies an assessment under section 154/155 and grants refund but fails to grant interest on the refund, such rectificatory order has the effect of reducing the amount payable to the assessee and hence appealable under section 246(1)(b) - CIT vs. Perfect Pottery Co. Ltd.173 ITR 545 (13) Denial of liability to tax under particular circumstances is also covered - The expression denial of liability is comprehensive enough to take in not only the total denial of liability but also the liability to tax under particular circumstances. Thus, an assessee has a right of appeal against the order of the ITO assessing the AOP instead of the members thereof individually - CIT vs. Kanpur Coal Syndicate 53 ITR 225 (14) Objection as to place of assessment cannot be raised - No appeal can lie against an order determining the place of assessment - Rai Bahadur Seth Teomal vs. CIT 36 ITR 9. In case of adverse order passed in the matter of deceased person, his legal heirs can file appeal. In case of HUF, Karta can file appeal. However, after the partition, if any adverse order is passed in respect of pre-partition HUF, erstwhile coparceners can prefer an appeal. The right of appeal is not confined merely to the assessee on whom order of assessment has been made but to any assessee aggrieved by the said order e.g. beneficiary may be aggrieved for an order made on the trust [CGT vs. A.C. Mahesh (2001) 252 ITR 440 (Mad)]. As per section 248 where under an agreement or other arrangement, the tax deductible on any income, other than interest, under section 195 is to be borne by the person by whom the income is payable, and such person having paid such tax to the credit of the Central Government, claims that no tax was required to be deducted on such income, he may appeal to the Commissioner (Appeals) for a declaration that no tax was deductible on such income. Dispute relating to the chargeability of income of the non-resident recipient can alone be the subject matter of an appeal under section 248 and not the possibility of assessing of the income of the non-resident in the hands of the resident payer as no procedure of assessment of the income of the non-resident in the hands of the resident payer is contemplated in sub-section 1 of section 195 [CIT vs. Sonata Information Technology Ltd (2010) 38 DTR 350 (Kar)]. Chapter Summary & Exam Preparation Notes The right to appeal must be given by express enactment in the Act. Therefore, in case there is no provision in the Act for filing an appeal regarding a particular matter, no appeal shall lie. The right to appeal arises where the taxpayer is aggrieved by the order passed by the income-tax authority. The assessee may prefer an appeal against the orders of the Assessing Officer to the Commissioner (Appeals), in accordance with the relevant provisions under Section 246 and appeal against the order of the Commissioner (Appeals) can be preferred by the Assessee or the Commissioner of Income Tax and such appeal lies with the Appellate Tribunal. The Central Government shall constitute an Appellate Tribunal consisting of as many judicial and accountant members as it thinks fit to exercise the powers and discharge the functions conferred on the Appellate Tribunal by this Act. Section 260A provides that an appeal shall lie to the High Court from every order passed in appeal by the Appellate Tribunal if the High Court is satisfied that the case involves a substantial question of law. The aggrieved party is entitled to appeal to the Supreme Court against the judgment delivered by the High Court. DIRECT TAX LAWS AND INTERNATIONAL TAXATION 263

274 Grievance Redressal Procedure Chapter XIXA provides for settlement of the cases which may be pending before an Income-tax authority. Further an appeal to the Appellate Tribunal by the assessee, and which is pending before it, may be withdrawn by the assessee with the permission of the tribunal, to have his case settled under Sections 245A to 245L. Case means any proceeding for assessment under this Act, of any person in respect of any assessment year or assessment years, which may be pending before an Assessing Officer on the date on which an application under Section 245C(1) is made. An assessee may, at any stage of a case relating to him, make an application in the prescribed Form (Form No. 34B) along with the prescribed fee to the Settlement Commission to settle the case. Chapters XVII and XXI of Income-tax Act, 1961, contain various provisions empowering an Incometax Authority to levy penalty in case of certain defaults. 264 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

275 Study Note - 9 SETTLEMENT OF CASES AND ADVANCE RULINGS This Study Note includes 9.1 Introduction 9.2 Settlement of Cases (Related Section - 245A - 245L) 9.3 Advance Ruling 9.1 INTRODUCTION A resident taxpayer may have some taxation issues in respect of a transaction which has been undertaken or proposed to be undertaken with a non-resident. Similarly, a non-resident may have some taxation issues in respect of transaction which has been undertaken or proposed to be undertaken by him in India. In order to get clarification on taxation of those transactions, a person can make an application to the Authority for Advance Rulings ( AAR ). Provisions relating to advance ruling are provided in sections 245N to 245V. Settlement Commission Where under any of the provisions of this Act, a refund is found to be due to any person, the Assessing] Officer, Deputy Commissioner (Appeals), Commissioner (Appeals)] or Chief Commissioner or Commissioner, as the case may be, may, in lieu of payment of the refund, set off the amount to be refunded or any part of that amount, against the sum, if any, remaining payable under this Act by the person to whom the refund is due, after giving an intimation in writing to such person of the action proposed to be taken under this section. Chapter XIXA provides for settlement of the cases which may be pending before an Income-tax authority. Further an appeal to the Appellate Tribunal by the assessee, and which is pending before it, may be withdrawn by the assessee with the permission of the tribunal, to have his case settled under Sections 245A to 245L. Accordingly the Central Government constituted an Income-tax Settlement Commission consisting of a chairman and as many Vice- Chairman and other members as considered appropriate by the Central Government from amongst persons of integrity and outstanding ability, having special knowledge of, and, experience in problems relating to direct taxes and business accounts. However, in the event of a member of the CBDT having been appointed as the Chairman, Vice-Chairman or member of the Commission, he shall cease to be a member of the Board. 9.2 RELATED SECTIONS FROM THE ACT Section 245A: Definitions Section 245B: Income-tax Settlement Commission Section 245BA: Jurisdiction and powers of Settlement Commission Section 245BB: Vice-Chairman to act as Chairman or to discharge his functions in certain circumstances Section 245BC: Power of Chairman to transfer cases from one Bench to another Section 245BD: Decision to be by majority Section 245C: Application for settlement of cases Meaning of Case [Section 245A(b)] DIRECT TAX LAWS AND INTERNATIONAL TAXATION 265

276 Settlement of Cases and Advance Rulings Case means any proceeding for assessment under this Act, of any person in respect of any assessment year or assessment years which may be pending before an Assessing Officer on the date on which an application under sub-section (1) of section 245C is made. Explanation. For the purposes of this clause (i) a proceeding for assessment or reassessment or recomputation under section 147 shall be deemed to have commenced (a) from the date on which a notice under section 148 is issued for any assessment year; (b) from the date of issuance of the notice referred to in sub-clause (a), for any other assessment year or assessment years for which a notice under section 148 has not been issued, but such notice could have been issued on such date, if the return of income for the other assessment year or assessment years has been furnished under section 139 or in response to a notice under section 142; (ii) a proceeding for making fresh assessment in pursuance of an order under section 254 or section263 or section 264, setting aside or cancelling an assessment shall be deemed to have commenced from the date on which such order, setting aside or cancelling an assessment was passed; (iii) a proceeding for assessment or reassessment for any of the assessment years, referred to in clause (b) of subsection (1) of section 153A in case of a person referred to in section 153A or section 153C, shall be deemed to have commenced on the date of issue of notice initiating such proceeding and concluded on the date on which the assessment is made; (iv) a proceeding for assessment for any assessment year, other than the proceedings of assessment or reassessment referred to in clause (i) or clause (iii) or clause (iiia), shall be deemed to have commenced from the date on which the return of income for that assessment year is furnished under section 139 or in response to a notice served under section 142 and concluded on the date on which the assessment is made; or on the expiry of two years from the end of relevant assessment year, in case where no assessment is made. Income-tax Settlement Commission [Section 245B] (1) The Central Government shall constitute a Commission to be called the Income-tax Settlement Commission for the settlement of cases under this Chapter. (2) The Settlement Commission shall consist of a Chairman and as many Vice-Chairmen and other members as the Central Government thinks fit and shall function within the Department of the Central Government dealing with direct taxes. (3) The Chairman Vice-Chairman and other members of the Settlement Commission shall be appointed by the Central Government from amongst persons of integrity and outstanding ability, having special knowledge of, and, experience in, problems relating to direct taxes and business accounts. Provided that, where a member of the Board is appointed as the Chairman Vice-Chairman or as a member of the Settlement Commission, he shall cease to be a member of the Board. Jurisdiction and Powers of Settlement Commission [Section 245BA] (1) Subject to the other provisions of this Chapter, the jurisdiction, powers and authority of the Settlement Commission may be exercised by Benches thereof. (2) Subject to the other provisions of this section, a Bench shall be presided over by the Chairman or a Vice- Chairman and shall consist of two other Members. (3) The Bench for which the Chairman is the Presiding Officer shall be the principal Bench and the other Benches shall be known as additional Benches. (4) Notwithstanding anything contained in sub-sections (1) and (2), the Chairman may authorize the Vice- Chairman or other Member appointed to one Bench to discharge also the functions of the Vice-Chairman or, as the case may be, other Member of another Bench. (5) Notwithstanding anything contained in the foregoing provisions of this section, and subject to any rules that 266 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

277 may be made in this behalf, when one of the persons constituting a Bench (whether such person be the Presiding Officer or other Member of the Bench) is unable to discharge his functions owing to absence, illness or any other cause or in the event of the occurrence of any vacancy either in the office of the Presiding Officer or in the office of one or the other Members of the Bench, the remaining two persons may function as the Bench and if the Presiding Officer of the Bench is not one of the remaining two persons, the senior among the remaining persons shall act as the Presiding Officer of the Bench. Provided that if at any stage of the hearing of any such case or matter, it appears to the Presiding Officer that the case or matter is of such a nature that it ought to be heard of by a Bench consisting of three Members, the case or matter may be referred by the Presiding Officer of such Bench to the Chairman for transfer to such Bench as the Chairman may deem fit. (5A)Notwithstanding anything contained in the foregoing provisions of this section, the Chairman may, for the disposal of any particular case, constitute a Special Bench consisting of more than three Members. (6) Subject to the other provisions of this Chapter, the places at which the principal Bench and the additional Benches shall ordinarily sit shall be such as the Central Government may, by notification in the Official Gazette, specify and the Special Bench shall sit at a place to be fixed by the Chairman. Power of Chairman to transfer cases from one Bench to another [Section 245BC] On the application of the assessee or the Chief Commissioner or Commissioner and after notice to them, and after hearing such of them as he may desire to be heard, or on his own motion without such notice, the Chairman may transfer any case pending before one Bench, for disposal, to another Bench. Decision to be taken by majority [Section 245BD] If the Members of a Bench differ in opinion on any point, the point shall be decided according to the opinion of the majority, if there is a majority, but if the Members are equally divided, they shall state the point or points on which they differ, and make a reference to the Chairman who shall either hear the point or points himself or refer the case for hearing on such point or points by one or more of the other Members of the Settlement Commission and such point or points shall be decided according to the opinion of the majority of the Members of the Settlement Commission who have heard the case, including those who first heard it. Who can file a settlement application? Any assessee, at any stage of a case relating to him, can make an application to the Settlement Commission to have the case settled by the Settlement Commission. When can an application to Settlement Commission be made? An application u/s. 245C can be made to Settlement Commission only if the following conditions are fulfilled. i. On the date of application the applicant s case, as defined in Sec. 245A(b), is pending before an Income-tax authority. ii. The applicant has furnished return(s) of income for the assessment year(s) in respect of which the application is sought to be made. iii. The additional amount of Income-tax payable on the income disclosed in the application exceeds `1,00,000/-. iv. If the applicant has made an application in the past, his case is not covered by the circumstances specified in sec. 245K. Contents of the application The application to the Settlement Commission should be made in the prescribed form (Form No. 34B) and containing i. a full and true disclosure of the income which has not been disclosed before the Assessing Officer; ii. the manner in which such income has been derived; DIRECT TAX LAWS AND INTERNATIONAL TAXATION 267

278 Settlement of Cases and Advance Rulings iii. the additional amount of income-tax payable on such income; and such other particulars as may be prescribed. Papers to be filed along with the settlement petition in Form No. 34B The application in the prescribed form (Form No. 34B) to the Settlement Commission should be accompanied by the following statements etc. v. Statement(s) containing computation of total income of the applicant for the assessment year or year(s) to which the application relates. vi. Copies of manufacturing and/or trading account, profit and loss account/income and expenditure account/ any other similar account and balance sheet in respect of the relevant year(s). vii. In the case of proprietary business or profession copies of personal account of proprietor in respect of the relevant year(s). viii. In the case of a firm/aop/boi, copies of the personal accounts of the partners/members in respect of the relevant year(s). ix. In the case of a partner of a firm/member of an AOP/BOI copies of the personal accounts of such partner/ member in the firm/aop/boi in respect of the relevant year(s). x. Proof of payment of Settlement Application fee of `500/-. Notes: 1. Seven copies of the application along with the accompaniments as mentioned above have to be filed in the office of Settlement Commission. 2. The application in Form No. 34B, the verification appended thereto, the Annexure and statements and documents enclosed therewith must be signed by the person authorised under section 140 to sign the return of income. Can a settlement application made u/s. 245C(1) be withdrawn? An application for settlement of case cannot be withdrawn by the applicant. Payment of additional tax on income disclosed on admission of case u/sec. 245(1) The assessee must pay the additional tax on the income disclosed in the application within 35 days of the receipt of the order of Settlement Commission admitting the application u/s. 245D(1). However, the assessee can apply to the Settlement Commission for extension of time for payment of additional tax and the Settlement Commission can extend the time or allow the applicant to pay additional tax in instalments. Simple interest at 15% per annum is payable on the amount remaining unpaid from the date of expiry of the period of 35 days allowed for paying additional tax. Settlement of the Case After examination of the records, the reports of the Commissioner, the evidence as may be placed before the Settlement Commission, the Settlement Commission finally disposes of the settlement petition by its order u/s. 245D(4). Every order u/s. 245D(4) has to provide for the terms of settlement including any demand by way of tax, penalty or interest, the manner in which any sum due under the settlement shall be paid and all other matters to make settlement effective. Procedure for Receipt of Application [Section 245D] (1) On receipt of an application under section 245C, the Settlement Commission shall, within seven days from the date of receipt of the application, issue a notice to the applicant requiring him to explain as to why the application made by him be allowed to be proceeded with, and on hearing the applicant, the Settlement Commission shall, within a period of fourteen days from the date of the application, by an order in writing, reject the application or allow the application to be proceeded with. 268 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

279 Provided that where no order has been passed within the aforesaid period by the Settlement Commission, the application shall be deemed to have been allowed to be proceeded with. (2) A copy of every order under sub-section (1) shall be sent to the applicant and to the Commissioner. (2A)Where an application was made under section 245C before the 1st day of June, 2007, but an order under the provisions of sub-section (1) of this section, as they stood immediately before their amendment by the Finance Act, 2007, has not been made before the 1st day of June, 2007, such application shall be deemed to have been allowed to be proceeded with if the additional tax on the income disclosed in such application and the interest thereon is paid on or before the 31st day of July, Explanation In respect of the applications referred to in this sub-section, the 31st day of July, 2007 shall be deemed to be the date of the order of rejection or allowing the application to be proceeded with under subsection (1). (2B) The Settlement Commission shall, (i) in respect of an application which is allowed to be proceeded with under sub-section (1), within thirty days from the date on which the application was made; or (ii) in respect of an application referred to in sub-section (2A) which is deemed to have been allowed to be proceeded with under that sub-section, on or before the 7th day of August, 2007, call for a report from the Commissioner, and the Commissioner shall furnish the report within a period of thirty days of the receipt of communication from the Settlement Commission. (2C)Where a report of the Commissioner called for under sub-section (2B) has been furnished within the period specified therein, the Settlement Commission may, on the basis of the report and within a period of fifteen days of the receipt of the report, by an order in writing, declare the application in question, after giving opportunity of being heard to the applicant, as invalid, and shall send the copy of such order to the applicant and the Commissioner; (2D)Where an application was made under sub-section (1) of section 245C before the 1st day of June, 2007 and an order under the provisions of sub-section (1) of this section, as they stood immediately before their amendment by the Finance Act, 2007, allowing the application to have been proceeded with, has been passed before the 1st day of June, 2007, but an order under the provisions of sub-section (4), as they stood immediately before their amendment by the Finance Act, 2007, was not passed before the 1st day of June, 2007, such application shall not be allowed to be further proceeded with unless the additional tax on the income disclosed in such application and the interest thereon, is, notwithstanding any extension of time already granted by the Settlement Commission, paid on or before the 31st day of July, (3) The Settlement Commission, in respect of (i) an application which has not been declared invalid under sub-section (2C); or (ii) an application referred to in sub-section (2D) which has been allowed to be further proceeded with under that sub-section, may call for the records from the Commissioner and after examination of such records, if the Settlement Commission is of the opinion that any further enquiry or investigation in the matter is necessary, it may direct the Commissioner to make or cause to be made such further enquiry or investigation and furnish a report on the matters covered by the application and any other matter relating to the case, and the Commissioner shall furnish the report within a period of ninety days of the receipt of communication from the Settlement Commission; (4) After examination of the records and the report of the Commissioner, if any, received under (i) sub-section (2B) or sub-section (3), or (ii) the provisions of sub-section (1) as they stood immediately before their amendment by the Finance Act, 2007, and after giving an opportunity to the applicant and to the Commissioner to be heard, either in person or through a representative duly authorized in this behalf, and after examining such further evidence as may be placed before it or obtained by it, the Settlement Commission may, in accordance DIRECT TAX LAWS AND INTERNATIONAL TAXATION 269

280 Settlement of Cases and Advance Rulings with the provisions of this Act, pass such order as it thinks fit on the matters covered by the application and any other matter relating to the case not covered by the application, but referred to in the report of the Commissioner. (4A)The Settlement Commission shall pass an order under sub-section (4), (i) in respect of an application referred to in sub-section (2A) or sub-section (2D), on or before the 31st day of March, 2008; (ii) in respect of an application made on or after the 1st day of June, 2007, but before the 1st day of June, 2010, within twelve months from the end of the month in which the application was made; (iii) in respect of an application made on or after June 1, 2010, within eighteen months from the end of the month in which application was made; (5) Subject to the provisions of section 245BA, the materials brought on record before the Settlement Commission shall be considered by the Members of the concerned Bench before passing any order under sub-section (4) and, in relation to the passing of such order, the provisions of section 245BD shall apply. (6) Every order passed under sub-section (4) shall provide for the terms of settlement including any demand by way of tax, penalty or interest, the manner in which any sum due under the settlement shall be paid and all other matters to make the settlement effective and shall also provide that the settlement shall be void if it is subsequently found by the Settlement Commission that it has been obtained by fraud or misrepresentation of facts. (6A)Where any tax payable in pursuance of an order under sub-section (4) is not paid by the assessee within thirty-five days of the receipt of a copy of the order by him, then, whether or not the Settlement Commission has extended the time for payment of such tax or has allowed payment thereof by instalments, the assessee shall be liable to pay simple interest at one & one-fourth percent per month (or part of month)on the amount remaining unpaid from the date of expiry of the period of thirty-five days aforesaid. Interest is payable even if the Settlement Commission has extended the time of payment. (6B)The Settlement Commission may, with a view to rectifying any mistake apparent from the record, amend any order passed by it under sub-section (4) (a) at any time within a period of six months from the end of the month in which the order was passed; or (b) at any time within the period of six months from the end of the month in which an application for rectification has been made by the Principal Commissioner or the Commissioner or the applicant, as the case may be. Provided that no application for rectification shall be made by the Principal Commissioner or the Commissioner or the applicant after the expiry of six months from the end of the month in which an order under sub-section (4) is passed by the Settlement Commission. Provided further that an amendment which has the effect of modifying the liability of the applicant shall not be made under this sub-section unless the Settlement Commission has given notice to the applicant and the Principal Commissioner or Commissioner of its intention to do so and has allowed the applicant and the Principal Commissioner or Commissioner an opportunity of being heard. (7) Where a settlement becomes void as provided under sub-section (6), the proceedings with respect to the matters covered by the settlement shall be deemed to have been revived from the stage at which the application was allowed to be proceeded with by the Settlement Commission and the Income-tax Authority concerned, may, notwithstanding anything contained in any other provision of this Act, complete such proceedings at any time before the expiry of two years from the end of the financial year in which the settlement became void. (8) For the removal of doubts, it is hereby declared that nothing contained in section 153 shall apply to any order passed under sub-section (4) or to any order of assessment, reassessment or re-computation required to be made by the Assessing Officer in pursuance of any directions contained in such order passed by the Settlement Commission and nothing contained in the proviso to sub-section (1) of section 186 shall apply 270 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

281 to the cancellation of the registration of a firm required to be made in pursuance of any such directions as aforesaid. Case laws: (1) Effect of omission of sub-section (1A) of section 245D: Where the applications of the respondents were not proceeded with only because of the objection raised by the Commissioner under subsection (1A), having regard to the fact that the said sub-section (1A) was removed from the statute book subsequent to 1991, there was no reason why the Settlement Commission could not have entertained fresh applications under section 245C and this would not be a case of review at all - CIT vs. Bhaskar Picture Palace 113 Taxman 109. (2) Power to over-rule objections is procedural: Amendment of section 245D with effect from empowering Settlement Commission to overrule objections of Commissioner was procedural and an order passed by Commissioner under section 245D prior to aforesaid amendment without giving applicant an opportunity of hearing was a nullity being passed in violation of principles of natural justice and after amendment of section 245D with effect from assessee was entitled to be heard on objections of Commissioner R.B. Shreeram Durga Prasad and Fatechand Nursing Das vs. Settlement Commission (IT & WT) 176 ITR 169/43 Taxman 34. Provisional Attachment to protect Revenue [Section 245DD] If during the pendency of any proceedings the Commission is of the opinion that for the purpose of protecting the interests of the revenue, it is necessary to do so, it may attach provisionally for six months any property belonging to the applicant in the manner provided in the Second Schedule to the Act. Such attachment shall not extend in any case more than two years. Power of Settlement Commission to reopen completed proceedings. section 245E If the Settlement Commission is of the opinion that, for the proper disposal of the case pending before it, it is necessary or expending to reopen any proceeding connected with the case but which has been completed by any income-tax authority before the application u/s. 245C was made, it may with the concurrence of the assessee, reopen such proceeding and pass such order thereon as it thinks fit. Case Law: Others/matters relating to jurisdiction of Settlement Commission: Failure on the part of the petitioner to deduct tax at source does not come within purview of section 245C(1). Section 245E contemplates reopening of completed proceedings not for benefit of assessee but in the interest of the revenue CIT vs. Paharpur Cooling Towers (P.) Ltd. 85 Taxman 357. Inspection, etc. Reports [Section 245G] No persons shall be entitled to inspect or obtain copies of any reports made by any Income-tax Authority to the Settlement Commission but the Settlement Commission may in its discretion, furnish copies thereof to any such person or an application made to in this behalf. However, for the purposes of enabling any person whose case is under consideration to rebut any evidence on record against him in any such report, the Commission shall furnish him a certified copy of any such report if the applicant makes an application in this behalf. The copies will be supplied to the applicant on payment of the prescribed fee. Power of Settlement Commission to grant immunity from prosecution and penalty - Section 245 H(1) The Settlement Commission may, if it is satisfied that the applicant has co-operated with it in the proceedings before it and has made a full and true disclosure of his income and the manner in which such income has been derived, grant to such person immunity from prosecution under any Central Act or from imposition of penalty under the Income-tax Act [See. 245H (1)]. The Settlement Commission, however cannot grant immunity in cases where proceedings for prosecution for an offence have been instituted before the filing of settlement petition u/s. 245C(1). Is the order u/sec. 245D(4) final and conclusive? (i) Every order u/sec. 245(4) is conclusive as to the matters stated therein. However, it is possible to file a SLP under DIRECT TAX LAWS AND INTERNATIONAL TAXATION 271

282 Settlement of Cases and Advance Rulings Article 136 before the Supreme Court or a writ petition before the High Court against any of the orders of the Settlement Commission. (ii) The order u/s. 245D(4) becomes void if it is subsequently found by the Settlement Commission that it has been obtained by fraud or misrepresentation of facts. (iii) Any immunity granted u/s. 245H(1) stands withdrawn if the applicant fails to pay any sum specified in the order u/s. 245D(4) within the time specified in such order. Jurisdiction and Powers of Settlement Commission ( section 245 BA) Subject to the other provisions of this Chapter, the jurisdiction, powers and authority of the Settlement Commission may be exercised by Benches thereof. Subject to the other provisions of this section, a Bench shall be presided over by the Chairman or a Vice-Chairman and shall consist of two other Members. The Bench for which the Chairman is the Presiding Officer shall be the principal Bench and the other Benches shall be known as additional Benches. When one of the persons constituting a Bench (whether such person be the Presiding Officer or other Member of the Bench) is unable to discharge his functions owing to absence, illness or any other cause or in the event of the occurrence of any vacancy either in the office of the Presiding Officer or in the office of one or the other Appeals, Revisions, Settlement of Cases and Penalties & Offences. Members of the Bench, the remaining two persons may function as the Bench and if the Presiding Officer of the Bench is not one of the remaining two persons, the senior among the remaining persons shall act as the Presiding Officer of the Bench: The Chairman may, for the disposal of any particular case, constitute a Special Bench consisting of more than three Members.] The places at which the principal Bench and the additional Benches shall ordinarily sit shall be such as the Central Government may, by notification in the Official Gazette, specify and the Special Bench shall sit at a place to be fixed by the Chairman. Power of Settlement Commission to Order Provisional Attachment to Protect Revenue (Section 245DD) (1) During the pendency of any proceeding before the settlement commission, it (the settlement commission) can attach provisionally any property belonging to the applicant in the manner provided in the second schedule if it is of the opinion that it is necessary to do so for protecting the interests of the revenue. Provided that where, a provisional attachment made under Section 281B is pending immediately before an application is made under Section 245C, an order under this sub-section shall continue such provisional attachment upto the period upto which an order made under Section 281B would have continued if such application had not been made. Further provided that where the Settlement Commission passes an order under this sub-section after the expiry of the period referred to in the preceding proviso, the provisions of Sub-section (2) shall apply to such order as if the said order had originally been passed by the Settlement Commission. (2) Every provisional attachment made by the Settlement Commission under Sub-section (1) shall cease to have effect after the expiry of a period of six months from the date of the order made under Sub-section (1): Appeals, Revisions, Settlement of Cases and Penalties & Offences Provided that the Settlement Commission may, for reasons to be recorded in writing extend the aforesaid period by such further period or periods as it thinks fit, so, however, that the total period of extension shall not in any case exceed two years. Power of Settlement Commission to Re-Open Completed Proceedings (Section 245E) If the Settlement Commission is of the opinion (the reasons for such opinion to be recorded by it in writing) that for the proper disposal of the case pending before it, it is necessary or expedient to re-open any proceeding connected with the case but which has been completed under this Act by any income-tax authority before the application under Section 245C was made, it may, with the concurrence of the applicant, re-open such proceeding and pass such order thereon as it thinks fit as if the case in relation to which the application for settlement had been made by the applicant under that section covered such proceeding also. But no proceeding shall be re-opened 272 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

283 by the Settlement Commission under this section if the period between the end of the assessment year to which such a proceeding relates and the date of application for settlement under Section 245C exceeds nine years. No proceeding shall be reopened by the Settlement Commission under this section in a case where an application is made on or after 1st day of June Powers and Procedure of Settlement Commission (Section 245F) (1) In addition to the powers conferred on the Settlement Commission under this Chapter, it shall have all the powers which are vested in an income-tax authority under this Act. (2) Where an application made under Section 245C has been allowed to be proceeded with under Section 245D, the Settlement Commission shall, until an order is passed under Sub-section (4) of Section 245D, have subject to the provisions of Sub-section (3) of that section, exclusive jurisdiction to exercise the powers and perform the functions of an income-tax authority under this Act in relation to the case. (3) Notwithstanding anything contained in Sub-section (2) and in the absence of any express direction to the contrary by the Settlement Commission, nothing contained in this section shall affect the operation of any other provision of this Act requiring the applicant to pay tax on the basis of self-assessment in relation to the matters before the Settlement Commission. (4) For the removal of doubts, it is declared that, in the absence of any express direction by the Settlement Commission to the contrary, nothing in chapter XIX-A shall affect the operation of the provisions of this Act in so far as they relate to any matters other than those before the Settlement Commission. (5) The Settlement Commission shall, subject to the provisions of Chapter XIX-A have power to regulate its own procedure and the procedure of Benches thereof in all matters arising out of the exercise of its powers or of the discharge of its functions, including the places at which the Benches shall hold their sittings. Inspection, etc., of Reports (Section 245G) No person shall be entitled to inspect, or obtain copies of, any reports made by any income-tax authority to the Settlement Commission; but the Settlement Commission may, in its discretion, furnish copies thereof to any such person on an application made to it in this behalf and on payment of the prescribed fee which is 80 paise for the first two hundred words or less and 40 paise for every additional hundred words or less. Provided that, for the purpose of enabling any person whose case is under consideration to rebut any evidence brought on record against him in any such report, the Settlement Commission shall, on an application made in this behalf, and on payment of the prescribed fee by such person, furnish him with a certified copy of any such report or part thereof relevant for the purpose. Power of Settlement Commission to send a Case Back to the Assessing Officer if the Assessee does not Co-Operate (Section 245HA) (1) The Settlement Commission may, if it is of the opinion that any person who made an application for settlement under Section 245C has not co-operated with the Settlement Commission in the proceedings before it, send the case back to the Assessing Officer who shall thereupon dispose of the case in accordance with the provisions of this Act as if no application under Section 245C had been made. (2) For the purposes of Sub-section (1), the Assessing Officer shall be entitled to use all the materials and other information produced by the Assessee before the Settlement Commission or the results of the inquiry held or evidence recorded by the Settlement Commission in the course of the proceedings before it as if such materials, information, inquiry and evidence had been produced before the Assessing Officer or held or recorded by him in the course of the proceedings before him. (3) For the purposes of the time-limit under Sections 149, 153, 154, 155 and 231 and for the purpose of payment of interest under Sections 243 and 244, in a case referred to in Sub-section (1), the period commencing on and from the date of the application to the Settlement Commission under Section 245C and ending with the date of receipt by the Assessing Officer of the order of the Settlement Commission sending the case back to the Assessing Officer shall be excluded; and where the assessee is a firm, for the purposes of the time limit for DIRECT TAX LAWS AND INTERNATIONAL TAXATION 273

284 Settlement of Cases and Advance Rulings cancellation of registration of the firm under Sub-section (1) of Section 186, the period aforesaid shall, likewise, be excluded. Credit of Tax paid in case of abatement of proceedings [Section 245HAA] Where an application made u/s 245C on or after 1st day of June, 2007, is rejected u/s 245D(1) or any other application made u/s 245C is not allowed to be proceeded or is declared invalid or an order has not been passed within the time period, the Assessing Officer shall allow the credit for the tax and interest paid on or before the date of making the application or during the pendency of the case before Settlement Commission. Order of Settlement to be Conclusive (Section 245-I) Every order of settlement passed under Sub-section (4) of Section 245D shall be conclusive as to the matters stated therein and no matter covered by such order shall, save as otherwise provided in this chapter, be reopened in any proceeding under this Act or under any other law for the time being in force. Recovery of Sums Due Under Order of Settlement (Section 245-J) Any sum specified in an order of settlement under Sub-section (4) of Section 245D may, subject to such conditions, if any, as may be specified therein, be recovered, and any penalty for default in making payment of such sum may be imposed and recovered in accordance with the provisions of Chapter XVII, by the Assessing Officer having jurisdiction over the person who made the application for Settlement under Section 245C. Bar on Subsequent Application for Settlement in Certain Cases (Section 245-K) Where, (i) an order of settlement passed under Sub-section (4) of Section 245D provides for the imposition of a penalty on the person who made the application under Section 245C for settlement, on the ground of concealment of particulars of his income; or (ii) after the passing of an order of settlement under the said Sub-section (4) in relation to a case, such person is convicted of any offence under Chapter XXII in relation to that case; or (iii) the case of such person is sent back to the Assessing Officer by the Settlement Commission under Section 245HA, then, he shall not be entitled to apply for settlement under Section 245C in relation to any other matter. Proceedings before Settlement Commission to be Judicial Proceedings (Section 245-L) Any proceeding under this Chapter before the Settlement Commission shall be deemed to be a judicial proceeding within the meaning of Sections 193 and 228, and for the purposes of Section 196 of the Indian Penal Code. 9.3 ADVANCE RULING Finance Act, 1993 inserted a Chapter XIX-B in the Income-tax Act, 1961 to provide provisions of Advance Rulings to avoid dispute in respect of assessment of Income-tax liability in the case of nonresident. W.e.f , the scheme has been extended to cover notified resident applicants also. The Chapter XIX-B contains sections 245N to 245V. Advance Ruling means a determination by the Authority for Advance Rulings, in relation to (i) a transaction which has been undertaken or is proposed to be undertaken by a non-resident or by a resident with a non-resident, including a determination of a question of law or of fact, and (ii) issues relating to computation of income pending before the Income-tax authority or the tribunal including a determination of a question of a law or of fact. [Sec. 245N(a)] An application may be made by (i) non-resident, (ii) a resident entering into transaction with a nonresident, or (iii) a resident of the notified class or category i.e. a public sector company or a person indulging in a transaction with a non-resident. [Sec. 245N(b)] The Authority for Advance Rulings ( AAR ) is an independent quasi-judicial body, which is set up to consider international tax issues arising from proposed or existing transactions. The body was envisaged as a mechanism to provide, certainty on an expeditious basis to non-residents, with respect to their Indian tax obligations by 274 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

285 pronouncing rulings in a time bound manner. AAR rulings are binding only on the parties involved. However, since its inception, the AAR has contributed significantly to the Indian international tax jurisprudence by its expert consideration of evolving issues of international tax. It provides significantly faster dispute resolution process as compared to the normal litigation process. Advance ruling take approx months, as compared to substantial time involved even at the second-level appellate tribunal level. Composition of Bench The AAR comprises of three members: Chairman, who is a retired judge of the Supreme Court; Member from the Indian Revenue Service, who is qualified to be a member of the CBDT; and Member from the Indian Legal Service who is, or is qualified to be, an Additional Secretary to the Government of India An application can be made before the AAR by - Non-Residents - Tax liability arising from a transaction which has been undertaken / proposed to be undertaken by the non-resident Residents- Tax liability of a non- resident arising from a transaction undertaken / proposed to be undertaken with the resident Public Sector Companies - Determination in respect of an issue relating to the computation of income which is pending before any income tax authority or the Appellate Tribunal Non-resident/ resident - Determination/decision whether an arrangement which is proposed to be undertaken by any person is an impermissible avoidance arrangement as referred to in Chapter X-A or not. GAAR to be effective from Procedure Checklist Application for Advance Ruling should be made in Form No. 34C in case of non-resident applicant Form No. 34D in case of resident applicant Form No. 34E in case of resident applicant (notified by Central Government)No. of copies of the application copies if the taxpayer has a jurisdictional commissioner copies if the taxpayer doest not have a jurisdictional commissioner Filing Fees A Filing fees of INR 10,000/- is payable (by means of an account payee demand draft in favuor of Authority for Advance Rulings payable at New Delhi Signing of the Application The application and annexure, in case of a company should be signed by the Managing Director or Director. In case if Managing Director / Director is not able to sign, the application/annexure should be signed by an person duly authorised in that behalf. The Power of Attorney authorising the signatories is to be attached along with the application. If the Power of Attorney is executed by a non-resident, the same should be duly apostilled. The documents attached along with the Application need to be duly certified as appropriately required Procedure on filing steps Step -1 Application Application to be filed in prescribed form along with filing fees DIRECT TAX LAWS AND INTERNATIONAL TAXATION 275

286 Settlement of Cases and Advance Rulings Details of questions proposed and applicant s analysis to be provided Applicant permitted to withdraw application within 30 days Step -2 Commissioner (CIT) Application forwarded to the jurisdictional CIT Where applicant is not assessed to tax, CBDT to designate a CIT within two weeks CIT to provide comments on the application * AAR can call for tax records from the CIT, where required Step-3 Examination AAR examines the allowability of the application AAR may admit or reject the application Applicant to be given a reasonable opportunity to be heard before rejection Step- 4 Hearing AAR can call for additional information, where necessary Additional facts/ questions can be admitted at the AAR s discretion AAR to hear applicant as well as the CIT Default in appearance by the CIT/applicant could result in an ex-parte order Step- 5 Ruling AAR to endeavor to pronounce a ruling within six months (recommendatory) Ruling can be modified where there is a change in law or facts Rectification of order possible in the event of a mistake apparent on record Step- 6 Appeal Writ petition filed before the High Court Special Leave Petition (SLP) filed before the Supreme Court* Writ / SLP can be filed either by the applicant or the tax authorities Scope of Advance Ruling Residential Status Non-resident, when can apply? Previous year i.e. the financial year immediately preceding the financial year in which the application is made that has to be considered for purposes of determining the maintainability of an application for advance ruling. Generally, applicants may raise any question which relates to tax liability - Both questions of law as well as questions of fact can be raised before the AAR Questions can pertain to both, concluded transactions as well as anticipated transactions 276 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

287 Hypothetical questions cannot be raised before AAR Questions on which advance rulings can be sought? The advance ruling is to be given on questions specified in relation to a transaction by the applicant. The question must relate to the applicant itself and not to any other person. Maintainability of application for Advance Ruling - Section 245R(2) Authority shall not allow the application where question raised in the application Is already pending before any income tax authority, Tribunal or any Court; except resident notified by CG PSU Involves determination of fair market value of any property; or relates to a transaction, which is designed prima facie for avoidance of income tax Restrictions on Appellate Authorities sec 245 RR Where a resident applicant has made an application to AAR, then any Income Tax Authority or Tribunal should not take any decision in respect of such issues. Thus, a resident assessee cannot pursue both remedies appeal / revision before Income Tax Authority as well as application for Advance Ruling to AAR. Advance Ruling hearing and pronouncement of the ruling Once the application is admitted, an order under section 245R(2) is issued i.e. admission order. A notice for final hearing is issued for giving an opportunity of being heard to the applicant. Final hearing takes place Pronouncement of ruling within 6 months. However, it is made clear that the time limit of six months for pronouncing advance ruling is recommendatory and not mandatory and an advance ruling given after the expiry of six months is not invalid as being beyond the said period. Publishing* the ruling on the website. Binding nature of Advance Ruling The ruling pronounced by the authority is binding on both parties before it. 245S: Applicability of Advance Ruling: (1) The advance ruling pronounced by the Authority under section 245R shall be binding only: (a) on the applicant who had sought it; (b) in respect of the transaction in relation to which the ruling had been sought; and (c) on the Commissioner, and the income-tax authorities subordinate to him, in respect of the applicant and the said transaction. The advance ruling so pronounced continues to be binding unless there is a change in law or facts on the basis of which the advance ruling was pronounced. Advance Ruling Withdrawal and Revocation of the ruling Withdrawal of application - Section 245Q(3) Within 30 days from the date of filing of a valid application complete in all respects according to the Act and Rules in the office of the Authority. The limit of 30 days is not to be construed in a strict sense, as one may ask for withdrawal after the expiry of 30 days or before the final hearing is concluded. However, in such cases withdrawal of the application is at the discretion of the Authority and depends on the DIRECT TAX LAWS AND INTERNATIONAL TAXATION 277

288 Settlement of Cases and Advance Rulings facts of each case. Advance ruling to be void in certain circumstances Section 245T Where the Authority finds, on a representation made to it by the Commissioner of Income-tax or otherwise, that an advance ruling pronounced by it has been obtained by the applicant by fraud or misrepresentation of facts. In such a situation all the provisions of the Income-tax Act shall apply as if such advance ruling had never been made. The applicants are advised to ensure that there is full and true disclosure of all material facts while seeking ruling from the Authority. Advance Ruling Appeal against the ruling No provision under the Act for appealing against the ruling of AAR. In order to ensure the degree of certainty, it was specified that the rulings would be non-appealable in nature. However, parties may opt to exercise their constitutional rights of reconsideration by approaching the Supreme Court under the SLP route under Article 136 of the Constitution of India, and by approaching a High Court by filing a writ petition in terms of Article 226 and 227 of the Constitution. Advance Ruling Important decisions Issue 1 : Taxability of direct or Indirect transfer of shares of an Indian Company by a non resident company Favourable M/S.Sanofi Pasteur Holding SA, [Andhra Pradesh High Court] 257 CTR 401 Armstrong World Mauritius Multiconsult Ltd [252 CTR 260] Smithkline Beecham Port Louis Ltd. [24 taxmann.com 153] Castleton Inv.Ltd. [(No.999 of 2010) dt 14 August 2012] Moody s Analytics Inc. (AAR Nos to 1189 of 2011) Ardex Investments Mauritius [ 63 DTR 257] Deere & Company [337 ITR 277] D.B. Zwirn Mauritius [333 ITR 32] VNU International [334 ITR 56] Adverse Orient Green Power Pte Ltd [ AAR 973 of 2010 dt 14 August 2012] Issue -2 : Taxability of payments received from use or sale of/ access to software Favourable Dassault Systems K.K. [ 322 ITR 125] Factset Research Systems Inc., [317 ITR 169] Bharati AXA General Insurance Co. Ltd [326 ITR 477] Adverse Acclerys KK, [68 DTR (AAR) 206] Citrix Systems Asia Pacific Pty Limited [68 DTR (AAR) 185] Millennium IT Software Ltd [338 ITR 391] Issue -3 : Taxability of payments made to group companies under a secondment agreement - Deputation of expatriates 278 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

289 Favourable Cholamandalam Ms General Insurance Co. Ltd.[309 ITR 356] Adverse Centrica India Offshore Private Ltd [249 CTR 11] Target Corporation India Ltd [24 taxman.com 152] Issue -4 : Taxability of payments made/received for availing or providing general business support services, IT Services, Inspection verification services. Favourable Shell Technology India Pvt Ltd [246 CTR 158] R.R. Donnelley India Outsource (P) Ltd [335 ITR 122] Bharati Axa General Insurance Co. Ltd[326 ITR 477] Ernst & Young (P) Ltd [323 ITR 184] Against Mersen India Pvt Ltd [A.A.R. No.1074 of 2010] dt: 16 April 2012 Shell India Markets (P) Ltd. [67 DTR (AAR) 1] Issue -5 : Applicability of section 115JB to foreign companies Favourable Timken Company [326 ITR 193] Praxair Pacific Ltd [326 ITR 276 ] Against Castleton Inv.Ltd. [(No.999 of 2010) dt 14 August 2012] Smithkline Beecham Port Louis Ltd. [24 taxmann.com 153] Liability for Special Cases Tax liability after the death of an individual Where an individual assessee dies, the following situations can arise vis-a-vis the tax payable by him: (a) The income earned by the assessee during his life time has been received by him. It only remains to be assessed or the taxes on the income, already assessed, is still to be recovered. This situation is covered by section 159. (b) Items of income of the deceased are received after his death by his legal heirs, executors or administrators. In this situation, the income of the deceased is normally part of the estate and hence capital in the hands of the legal representatives may be assessable in their hands by virtue of special provisions such as section 176(3) or (4) i.e. liability in case of discontinued business. (c) On the death, the assets of the estate vest, by testate or intestate succession on the heirs or legatees in specie or in specified shares and the income from the time of death accrues or arises to and is received by them. In this situation, the assessment has to be made in normal course in the hands of the heirs or legatees. (d) On death, the estate vests in the executors or administrators for the purposes of administration and, pending such administration, the executors or administrators are in receipt of the income of the estate. This situation is provided for in section 168 i.e. liability in case of executors Liability of Legal Representatives [Section 159] Where a person dies, his legal representatives shall be liable to pay any sum which the deceased would have DIRECT TAX LAWS AND INTERNATIONAL TAXATION 279

290 Settlement of Cases and Advance Rulings been liable to pay if he had not died, in the like manner and to the same extent as the deceased. Legal representative means a person who in law represents the estate of a deceased person, and includes any person who intermeddles with the estate of the deceased and where a party sues or issued in a representative character, the person on whom the estate devolves on the death of the party so suing or sued [Section 2(29)]. The legal representatives have been made liable to pay out of the estate, any sum which the deceased would have been liable to pay. Thus, the liability is not confined only to the amount of tax but it also extends to liability in respect of penalties, interest or any other sum that would have been payable by the deceased. However the liability of the legal representative is limited to the extent to which the estate is capable of meeting the liability. Consequences if the legal representative is taxable [Section 159(2) and 159(3)]: For the purpose of making an assessment (including reassessment u/s 147) of the income of the deceased and for the purpose of levying any sum in the hands of the legal representatives, the following procedure shall apply: (a) any proceeding taken against the deceased before his death shall be deemed to have been taken against the legal representative and may be continued against the legal representative from that stage; (b) any proceedings, which could have been taken against the deceased if he had survived, may be taken against the legal representative; (c) all the provisions of the Act shall apply accordingly; (d) the legal representative of the deceased shall be deemed to be an assessee; However, the liability of the legal representative shall be limited to the extent to which the estate of the deceased is capable of meeting the liability. Where the deceased has furnished a return and he died before the completion of assessment, fresh notice under section 143(2) and 142(1) have to be issued to the legal representative and all the provisions of the Act would apply accordingly. Personal liability of legal representative in some cases [Section 159(4)]: If the legal representative of a deceased person creates a charge on or disposes of or parts with any asset of the estate of the deceased, while the liability for tax on the income of the deceased remains undischarged, the legal representative shall be personally liable for any tax payable by him in his capacity as legal representative. However, such liability shall be limited to the value of the asset charged, sold or parted with and the personal liability mentioned above is restricted only to the tax payable and does not extend to interest/penalty or any other sum. Case Laws (1) Although income arising after the date of death is treated as income of the estate and is taxable in the hands of the executors u/s 168 but it will be assessed in the hands of the legal representatives u/s 159. [CIT vs. Hukumchand Mohanlal (1971) 82 ITR 624 (SC)]. (2) Where the death occurs in the middle of an accounting year, it may be necessary to apportion the accrued income on a time basis except where the income accrues, not de in diem, but on a specific day which may fall after the date of death. [Palmer vs. Cattlemore (1937) 21 TC 191 & Arvind Bhogilal vs. CIT (1976) 105 ITR 764 (Bom)]. (3) Where an assessee dies, pending any assessment proceedings, it is the duty of the Assessing Officer to ensure compliance of section 159(2) (i.e. bring the legal representative on record) before passing any orders. Hence, the assessment order passed by the Assessing Officer without bringing the legal representative on record was not justified. [CIT vs. Dalumal Shyamumal (2005) 276 ITR 62 (MP)]. (4) In case of death of assessee before proceedings for assessment are completed, legal representatives must be brought on record otherwise the assessment is void ab initio. [CIT vs. Prabhawati Gupta (1998) 231 ITR 188 (MP) and R.C. Jain (Decd.) through his legal heir R.K. Jain vs. CIT (2005) 273 ITR 384 (Del)]. (5) Where the assessee s appeal had been received by the Appellate Tribunal, the Department appeal against the order could be proceeded with after bringing on record the legal representative if the assessee has since 280 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

291 died. [Prakash vs. ITO (2009) 312 ITR 40 (Bom)]. (6) When proceedings are taken against an individual in his representative capacity, the name of that individual should first be specified. This should be followed by words describing his capacity or characters to whether he is legal representative, or an executor or administrator. Otherwise the assessment proceedings would be illegal and of no value. The principle that should be borne in mind is that it is not the deceased or the estate of the deceased that is the assessee; he is the individual who represents the estate and it is he that is taxed in his own name and, hence, his name and identity should be clearly specified in the order of assessment. [CIT vs. Amarchand N. Shroff (1963) 48 ITR 59 (SC)]. Some exceptions have however been recognised to the operation of the rule that the assessment on a dead person is a nullity. These are as follows: (a) Where the proceedings had come to a conclusion during the lifetime of the deceased but the assessment order was passed in the name of the deceased though by that time the officer had come to know of the death, the assessment order has been upheld as valid. [Joseph Joseph vs. ITO (Ag.) (1973) 92 ITR 114 (Ker)]. (b) Where the legal representatives have in fact appeared voluntarily or in response to notices and have allowed the proceedings to continue against the deceased without objection, the assessment may be only set aside for being done afresh, not annulled. [CIT vs. Roshan Lal (1982) 134 ITR 145 (Del)]. (c) Where one of the legal representatives filed a return in response to a notice on the deceased and did not point out to the officer that there were also other representatives, the assessments cannot be annulled. [Sajjan Kumar Saraf vs. CIT (1978) 114 ITR 155 (Cal)]. (d) The Supreme Court in the case of CIT vs. Jai Parkash Singh (1996) 85 Taxman 407 (SC) held that where after the death of an individual, one of his ten legal representatives filed returns and notice was issued to another legal representative under sections 142(1) and 143(2) and he complied with it and the assessment was duly computed, omission to service notice to all legal representative of the deceased was only an irregularity and not a nullity. Similarly, in another case where an assessment order was made without notice to all the legal representatives, it was held that such assessment order suffered from procedural irregularity which was liable to be corrected. Such assessment order was neither void nor liable to be annulled. [CIT vs. Pushpa Devi (2003) 132 Taxman 506 (Raj)]. As per section 159(1), legal representative shall be liable to pay any sum which the deceased would have been liable to pay if he had not died, in the like manner and to the same extent as the deceased. These words imply not only that there should be a separate assessment in respect of the deceased estate (separate from the personal assessment of the legal representative) but also that the computation of the income of the deceased estate shall have to be made in the status applicable to the deceased, granting all reliefs, which the deceased may be entitled to in respect of that status, and calculating the deductions and allowances and rebates that the deceased may be entitled to, and finally levying the tax at the average rate applicable to the deceased. Section 159 applies only in respect of income of the deceased only upto the date of death and not upto the end of the accounting year in which the death occurs. If there is a will of the deceased and the executor is appointed, the income of the estate for the period from the date of death upto the end of the accounting year in which the death occurs and thereafter till the estate is distributed shall be separately assessed in the hands of the executors. Thus, in respect of the year of death two separate and distinct assessment would have to be made, the prior one on legal representatives and the later one on the executors under section 168. It will not make any difference even if the legal representative and the executor are one and the same person. Penalty proceeding for a default committed by the deceased can be started or continued against the legal representative under this section which applies not only in respect of tax but also any other sum i.e. penalty, fine or interest. [Smt. Tapati Pal vs. CIT (2000) 241 ITR 468 (Cal)]. Further, under this Act, the legal representative, being an assessee for the purposes of Act, is liable to a penalty for him own default e.g. penalty under section 221 for his own default in paying the tax assessed on him or on the deceased or penalty under section 271(1) for having himself submitted an incorrect return of the income of the deceased or having failed to file the return on time. A penalty already imposed on the deceased prior to his death may be demanded from the legal representative and collected out of the estate. However, a legal representative is not liable to prosecution and offences under this Act. Under wealth tax, no penalty can be levied on legal representative for default of the deceased assessee DIRECT TAX LAWS AND INTERNATIONAL TAXATION 281

292 Settlement of Cases and Advance Rulings as provisions of section 18 of Wealth tax Act, 1957, relating to penalty, are outside the ambit of section 19 dealing with liability to assessment in special cases. [CIT vs. H.S. Chauhan (2000) 245 ITR 704 (Del)]. Executors [Section 168] Section 168 applies to a case where succession is a testamentary succession i.e. by will. However, in the case of intestate succession, i.e. where there is no will, section 168 will have no application. As per Explanation to section 168 executor includes an administrator or other person administering the estate of a deceased person. An executor is a person who is appointed by the testator to carry out and execute his wishes and for that purpose, to administer his estate after his death. An administrator is a person who is not appointed by the testator, but who is granted letters of administration by a court to the administrator the estate. The capacity of the executors to represent the estate is derived under the will from the date of death and does not depend on whether he has obtained probate or not. Executors and administrators are charged under this section, not as representative assessees, but in their own right as persons in whom the estate of the deceased vests until it is completely administered. Where the administration of the estate is not complete, the assessment has to be made on the executors. The income chargeable in the hands of the executor or administrator is the income of the period commencing from the date of the death of the deceased. Any income in respect of any period prior to that date should be assessed in the hands of the legal representatives under section 159. So, there would be two assessments in respect of the accounting year of death: (i) one for the period commencing from the first day of the accounting year and ending with the date of death (in the hands of the legal representative), and (ii) the other commencing from the date of death, and ending with the last day of the accounting year (in the hands of the executor or administrator). Whereas against the legal representative, there would be an assessment qua legal representative only for one year, namely, the assessment year corresponding to the accounting year of death, against the executor or administrator, there would be yearly assessments commencing from the assessment year corresponding to the accounting year of death, and lasting upto the year till the administration of the estate is completed. Thus, if the accounting year of the deceased is the financial year and the deceased died, say, on , the first assessment year applicable to the executor or administrator would be assessment year In that assessment, all income that accrued or arose or was received by the executor or administrator commencing from and ending with would be included in the total income. In respect of income which accrued or arose or received by the executor or administrator during the accounting year to , assessment would have to be made on the executor or administrator in the assessment year , and so on. This procedure would have to be observed till the date of complete distribution to the beneficiaries of the estate according to their several interests. The words according to their several qualify the immediately preceding words complete distribution to the beneficiaries; they should not be understood as requiring separate assessments on the executors in respect of the respective shares of the several beneficiaries. According to Section 168(1), the income of the estate of a deceased person shall be chargeable to tax in the hands of the executor: (i) If there is only one executor as if the executor were an individual (ii) If there are more executors than one as if the executors were an Association of Persons The executor shall be deemed to be resident or nonresident according as the deceased person was a resident/ non-resident during the previous year in which the death took place. The assessment of a person qua legal representative or qua executor or administrator is different from the assessment of these individuals in their personal or private capacity. Sub-section (2) of section 168 provides that their personal or private incomes shall have to be assessed separately and ought not to be included in their representative assessments, as made clear by this sub-section. Sub-section (4) of section 168 provides that in calculating the total income of any accounting year, the executor is entitled to deduct any specific legacy distributed to or applied to the benefit of a specific legatee. This legacy 282 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

293 shall be included in the total income of the specific legatee in the year of receipt. In computing the income from the estate, the executor is not entitled to deduct probate duty or any other expenses directed to be incurred under the will of deceased. All payments are made out of the income of the estate coming into the hands of the executor and such payments, though directed to be made by the testator, cannot be said to have been diverted away from the hands of the executor by any overriding title. The executor stands in the shoes of the testator and the entire income belongs to the estate; and he would not be entitled to any deductions which the deceased himself would not have been entitled to claim, had he been alive. Also he cannot an executor seek to deduct any sums that he might have paid by way of death duties on the ground that the same had to be paid in order to enable him to carry on the testators business in those countries. Section 169 provides the right of executor to recover tax paid. The provisions of section 162 shall, so far as may be, apply in the case of an executor in respect of tax paid or payable by him as they apply in the case of a representative assessee i.e. the executor will be able to recover such tax from the estate or from the persons on whose behalf it is paid. Case Laws: (1) Where a person leaves a will, the estate of the deceased would rest in the executor, who would be assessable under section 168, so that there is no scope for application of the clubbing provision under section 64(1) (iii) [Now substituted by section 64(1A) for aggregation of the minor s income]. [CIT vs. Abdulgafur A. Mistry (2007)292 ITR 515(Guj)]. (2) The Supreme Court in the case of ITO (First Addl) vs. Suseela Sadanandan & Another (1965) 57 ITR 168 (SC) held that if a person dies executing a will appointing more than one executor or dies intestate leaving behind him more than one heir, the ITO shall proceed to assess the total income of deceased against all the executors or the legal representatives, as the case may be. (3) A single assessment is to be made under section 168 in respect of the income of the entire estate of the deceased even if he has made separate wills appointing different executors in respect of different properties. [H.H. Maharani Vijaya Kunverba Saheb vs. CIT (1983) 136 ITR 18(Guj)]. (4) The Bombay High Court in CIT vs. Usha D Shah (1981) 127 ITR 850 (Bom) held that the effect of section 168 is that it is made obligatory that the estate of a deceased person is charged to tax in the hands of an executor. The provision does not seem to leave any discretion to the Income-tax Authorities in this matter. Liabilities of a representative assessee as regards the income in respect of which he is a representative assessee of another person [Section 160 to 167] Assessment on the legal representative or other person administering the estate of a deceased person is dealt with sections 159 and 168. However, legal representative is not a representative assessee within the meaning of this Act. Where on behalf of or for benefit of another, income is legally receivable by a person, the assessment and collection of tax thereon may present some problems. For ensuring the smooth furnishing of machinery for assessment and collection of tax in such cases, specific provisions have been made in Income-tax Act for assessment and collection of tax from person (i.e. representative assessee) receiving such income. Income of an assessee is taxable in the hands of a representative assessee either because the assessee is (a) not competent to contract (say a minor or lunatic); or (b) not present in India (say a non-resident); (c) an artificial person and thus has to be represented by some human being. A Representative Assessee means (i) In respect of the income of a non-resident specified in section 9(1) (i.e. income deemed to accrue or arise in India) the agent of the non-resident, including a person who is treated as an agent under section 163. (ii) In respect of the income of a minor, lunatic or idiot the guardian or manager who is entitled to receive or is in receipt of such income on behalf of such minor, lunatic or idiot. DIRECT TAX LAWS AND INTERNATIONAL TAXATION 283

294 Settlement of Cases and Advance Rulings (iii) If the Court of Wards/Administrator General/Official Trustee/receiver or manager etc., is appointed by or under any order of a court to receive any income on behalf of some other person the representative assessee shall be such Court of Wards/Administrator General/ Official Trustee/receiver or manager, etc. (iv) In respect of any income under a trust declared by a duly executed instrument in writing, whether testamentary or otherwise (including Wakf deed) for the benefit of any person the trustee or trustees so appointed who receive or are entitled to receive any income on behalf of the beneficiary. (v) in respect of income which a trustee appointed under an oral trust receives or is entitled to receive for the benefit of any person the trustee or trustees so appointed. A representative assessee shall be deemed to be an assessee for the purpose of this Act. Besides the legal representatives mentioned above, there are certain cases, where the income received by one person can be assessed in the hands of another. The person who is liable to be assessed on behalf of other because of their association with the real recipient of the income is known as representative assessee. Every representative assessee, as regards the income in respect of which he is a representative assessee, shall be subject to the same duties, responsibilities and liabilities as if the income were income received by him, or accruing to him, or in favour of him beneficially, and shall be liable to assessment in his own name in respect of that income; but any such assessment shall be deemed to be made upon him in his representative capacity only, and the tax shall, subject to the other provisions, be levied upon and recovered from him in like manner and to the same extent as it would be leviable upon and recoverable from the person represented by him. Analysis of the above reveals that (i) The income of the representative assessee as such should be kept distinct from such income as he may have in his individual capacity except where he is also a beneficiary. These cannot be clubbed together merely because the person being assessed is the same. (ii) Status to be assigned to representative assessee is the same as that of beneficiary or beneficiaries. (iii) If there is only one representative assessee, the income will be computed in the same manner as it would have been computed in the hands of the beneficiary and the deduction/exemption and all other relief that the person represented may be entitled to claim shall be allowed to the representative assessee. On the other hand, if there are more than one representative assessee, each has to be assessed in respect of the income he is entitled to receive. These representative assessees would also be entitled to claim deduction, exemption and all other reliefs that the person represented would be entitled to. (iv) Where there are more than one beneficiary of a private trust and the share falling to each of the beneficiary are determinate, the assessments are to be made on the trustee(s) as a representative assessee u/s 161. Such assessment will have to be made at the rate applicable to the total income of each beneficiary. Accordingly, separate assessment for each of the beneficiary on whose behalf the income is received by the trustee will have to be made. However as per section 166, the Income-tax Department has an option to make direct assessment in the hands of each beneficiary entitled to the income. (v) Tax liability of representative assessee cannot exceed the sum total of the tax liabilities of each beneficiary separately computed. (vi) If the several persons represented have each a trustee, each such trustee shall have to be assessed separately as a representative assessee in respect of individual interest of the respective person represented. (vii) Though a representative assessee may be taxed only in respect of a part of the beneficiary income, the tax has to be charged at the rate applicable to the total income. The problems are occurred where there are more than one representative assessee. For the representative assessees, they may not be aware of the other income of the beneficiary and may be able to return only that part of the income which he is entitled to receive. So also, the officer will have to get an idea of the total income of the beneficiary on the basis of all the returns filed by the representative assessees or the beneficiary, if any, before he can complete any of the assessments and if the representative assessees and sources of income are scattered in several places, the difficulty created may be quite considerable. Exceptions to the rule that the representative assessee is 284 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

295 assessable only in like manner and to the same extent as the beneficiary. Where Trust income includes business income [Section 161(1A)]: If the trust income consists of or includes profits and gains of business, the tax shall be charged on the whole of the income in the hands of the representative assessee at the maximum marginal rate and not at the rate applicable to the beneficiary. However such maximum marginal rate will not be applicable where such profits and gains are receivable under a trust declared by any person under a will, exclusively for the benefit of any relative dependent upon him for support and maintenance and such trust is the only trust declared by him. Where share of the beneficiaries are indeterminate or unknown [Section 164(1)]: In the case of a private discretionary trust, declared by a duly executed instrument in writing where the shares of the beneficiaries are unknown, trustee(s) is liable to tax as a representative assessee at the maximum marginal rate. However, the maximum marginal rate of income tax will not apply in the following cases: (i) Where none of the beneficiaries has any other income exceeding the exemption limit as applicable to an association of persons nor is he a beneficiary under any other private trust; or (ii) Where the relevant income or part of the relevant income is receivable under a trust declared by any person by will and such trust is the only trust so declared by him; or (iii) Where the trust, yielding the relevant income or part thereof was created by a non-testamentary instrument (before March 1970) bonaftde exclusively for the benefit of the relatives of the settlor, or where the settlor is Hindu Undivided Family, exclusively for the benefit of members of such family in circumstances where such relatives or members were mainly dependent on the settler for their support and maintenance; or (iv) Where the relevant income is receivable by the trustees on behalf of a provident fund, superannuation fund, gratuity fund, pension fund or any other fund created bona fide by a person carrying on a business or profession exclusively for the benefit of his employees. If the case falls within any of the above four exceptions, the relevant income or part thereof is to be taxed at the rate applicable to an association of person. From the assessment year and subsequent years, the exemption from maximum marginal rate of tax in the aforesaid cases will not apply in case where the income of a private discretionary trust [assessable in the hands of a trustee as representative assessee under section 160(1) (iv)] consists of, or includes profits and gains of business. In such cases the entire income of the trust would be charged at the maximum marginal rate of tax except in cases where the profits and gains are receivable under a trust declared by any person by will exclusively for the benefit of any relative dependent on him for support and maintenance and such trust is the only trust declared by him. In that case, the income of the discretionary trust would be charged to tax at normal rates applicable to an association of persons. Where any person is, in respect of any income, assessable in the capacity of a representative assessee, he shall not, in respect of that income, be assessed under any other provision of this Act. Case Laws: It was held that even if the trust in question had to be regarded as a discretionary trust in as much as the profits had, during the relevant assessment years, been credited to the respective accounts of the beneficiaries, the income was to be assessed in the hands of the beneficiaries. [Moti Trust vs. CIT (1999) 236 ITR (SC)]. Taxability of income of the charitable or religious trust [Section 164(2)]: Such income of the charitable or religious trust which is not exempt under section 11 shall be assessable as income of an association of persons. However, if the whole or any part of the relevant income is not exempt under section 11 or 12 due to the following it shall be charged at the maximum marginal rate: (i) if any part of the income of the charitable trust created or established after enures directly or indirectly for the benefit of any person referred to in section 13(3), or (ii) if any part of such income or any property of the trust, which during the previous year is used or applied for any persons referred to in section 13(3), or (iii) if funds of the trust are not invested in the mode specified under section 11(5). DIRECT TAX LAWS AND INTERNATIONAL TAXATION 285

296 Settlement of Cases and Advance Rulings Charge of tax in case of oral trust [Section 164A]: Where a trustee receives or is entitled to receive any income on behalf or for the benefit of any person under an oral trust, then, notwithstanding anything contained in any other provision of this Act, tax shall be charged on such income at the maximum marginal rate. Where option to tax beneficiary instead of trustees is exercised [Section 166]: Although in the case of discretionary trust, trustees are the representative assessee, but according to Section 166 there can be a direct assessment of the person on whose behalf or for whose benefit the income is received by representative assessee. The general principle is to charge all income only once. The Assessing Officer should keep this point in view at the time of making the initial assessment either of the trust or the beneficiary and adopt a course beneficial to the Revenue. Having exercised his option once it will not be open to the Assessing Officer to assess the same income for that assessment year in the hands of the other person. [Circular No. 157, dated ]. Further section 166 provides that even in a case where the assessment has been made on the representative assessee, the tax may be recovered from the person beneficially entitled to the income. [CIT vs. Trustees of Miss Gargiben Trust (No. 1) and Others (1981) 130 ITR 479 (Bom)]. Right of representative assessee to recover tax paid [Section 162]: Every representative assessee who, as such, pays any sum under this Act, shall be entitled to recover the sum so paid from the person on whose behalf it is paid, or to retain out of any moneys that may be in his possession or may come to him in his representative capacity, an amount equal to the sum so paid. Any representative assessee or any person who apprehends that he may be assessed as a representative assessee, may retain out of any money repayable by him to the person on whose behalf he is liable to pay tax (hereinafter referred to as the principal) a sum equal to his estimated liability under this Chapter and in the event of disagreement between the principal and such respective assessee such representative person may secure from the Assessing Officer a certificate stating the amount to be so retained pending final settlement of liability. The certificate shall be his warrant for retaining that amount. The amount recoverable from such representative assessee or person at the time of final settlement shall not exceed the amount specified in such certificate, except to the extent to which such representative assessee or person may, at such time, have in his hands additional assets of the principal. Cases where part of trust income is chargeable [Section 165]: Where part only of the income of a trust is chargeable under this Act, that proportion only of the income receivable by a beneficiary from the trust which the part so chargeable bears to the whole income of the trust shall be deemed to have been derived from that part. Remedies against property in cases of representative assessees [Section 167]: The Assessing Officer shall have the same remedies against all property of any kind vested in or under the control or management of any representative assessee as he would have against the property of any person liable to pay any tax, and in as full and ample a manner, whether the demand is raised against the representative assessee or against the beneficiary direct. Agent in relation to a non-resident [Section 163] The person who may be regarded as an agent of non-resident in India may belong to one of the following five categories: (i) One who is employed by or on behalf of the non-resident; or (ii) One who has any business connection with the non-resident; or (iii) One, from or through whom the non-resident is in receipt of any income, whether directly or indirectly; or (iv) One who is the trustee of the non-resident; or (v) One, whether a resident or non-resident, who has acquired by means of a transfer, a capital asset in India. In the first four cases, it is further necessary that the person sought to be assessed as an agent should be in India. It is the Assessing Officer who has jurisdiction to decide the question whether a particular person should be treated as an agent of the non-resident or not. Amongst these five categories of persons, the Assessing Officer should select the particular person who is connected with the particular income to be assessed as enumerated in section 286 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

297 9(1) and treat him as the agent of the non-resident for that particular income. The principle is that the person who helps the non-resident to make income in India should be saddled with the responsibility of payment of tax due by the non-resident in respect of that income. There is, of course, the added facility of easier assessment and collection of tax from the agent so treated, who is a person in India. Succession to business otherwise than on death [Section 170] Section 170 applies to cases of succession to a business profession or vocation and not cases of succession to any other income producing source. Succession involves change of ownership; i.e. the transferor goes out and the transferee comes in. It connotes that the whole business is transferred; it also implies that substantially the identity and the continuity of the business are preserved. The expression succession has acquired a somewhat artificial meaning. The Supreme Court, in CIT vs. Chambers (KH) (1965) 55 ITR 674 (SC), held that the tests of change of ownership, integrity, identity and continuity of business have to be satisfied before it can be said that a person succeeded to the business of another. Succession and discontinuance: Where a person is carrying on a business or profession, such business or profession may come to an end so far as he is concerned in one of the following ways: (i) It may come to end by the business changing hands by way of sale, gift or any other kind of transfer so that the business, considered an integral whole, continues to be carried on, though by a different person. That situation is called succession dealt with by the present section. (ii) It may come to end in the manner that there is no succession but the business or profession as such ceases to be carried on by the assessee or anyone else. This is called discontinuance. In this case, a charge would arise on the person concerned at the Assessing Officers discretion under the provisions of, and in accordance with the procedure laid down in section 176. Should the Assessing Officer choose not to take action under section 176, the charge would be levied in the assessment year following the previous year of discontinuance. The consequence of a finding of discontinuance would also involve that any business which is found to be carried on by the successor after the discontinuance would be a fresh and new business. Point no. (ii) eventuality is not provided for in section 170. Assessment on predecessor & successor [Section 170(1)]: Where a person carrying on any business or profession (such person hereinafter referred to as the predecessor) has been succeeded therein by any other person (hereinafter to as the successor) who continues to carry on that business or profession, (a) the predecessor shall be assessed in respect of the income of the previous year in which the succession took place up to the date of succession (including any gain accruing from the transfer of business as a result of succession); (b) the successor shall be assessed in respect of the income of the previous year after the date of succession. The effect of this section is that the predecessor in business is assessable in respect of the income of the year of succession upto the date of succession, while the successor is assessable in respect of the income of that year after the date of succession. The predecessor and the successor would each be liable to tax at the rate applicable to each. The income of the predecessor and the successor must be computed separately and each must be granted the deduction and allowances appropriate to his case. The assessment on each must be separate and distinct. The successor is not allowed to carry forward and set off the losses incurred by his predecessor. He has also no right to carry forward the unabsorbed depreciation allowance of the years prior to his succession to the business. Assessment when predecessor cannot be found [Section 170(2)]: Notwithstanding anything contained in sub-section (1), when the predecessor cannot be found, the assessment of (a) the income of the previous year in which the succession took place up to the date of succession, and (b) the previous year preceding the year of succession shall be made on the successor in like manner and to the same extent as it would have been made on the predecessor, and all the provisions of this Act shall, so far as may be, apply accordingly. DIRECT TAX LAWS AND INTERNATIONAL TAXATION 287

298 Settlement of Cases and Advance Rulings Tax of predecessor can be recovered from successor [Section 170(3)]: When any sum payable under this section in respect of the income of such business or profession for the previous year, in which the succession took place, up to the date of succession or for the previous year preceding that year, assessed on the predecessor, cannot be recovered from him, the Assessing Officer shall record a finding to that effect and the sum payable by the predecessor shall thereafter be payable by and recoverable from the successor, and the successor shall be entitled to recover from the predecessor any sum so paid by him. T Ltd. is succeeded by H Ltd. on and the tax cannot be recovered from T Ltd.. In this case the tax relating to previous year to and the preceding previous year i.e can only be recovered from the successor provided the Assessing Officer records a finding to that effect. However H Ltd. shall be entitled to recover such income-tax from T Ltd. Recovery of tax of a HUF on succession thereto [Section 170(4)]: Where business of a Hindu Undivided Family is succeeded, and there is a partition in the family either simultaneously with the succession or sometime later, the tax due by the HUF in respect of its income from the business or profession succeeded to, up to the date of the succession, shall be recoverable from the members of the divided family in accordance with the proportions of the property allotted to them on partition. The liability of such members is joint and several. In respect of such taxes owing by the divided members, the liability of the successor under sub-section (2) and (3) of section 170 would continue. Consequently, if any of the divided members cannot be found or the tax levied upon any of the divided members cannot be recovered from them, the same can be recovered from the successor, subject to the restrictions and qualifications discussed above. Income of Predecessor includes capital gains by virtue of succession: The explanation to section 170, states that any capital gain accruing to the transferor from the transfer which has resulted in thesuccession is treated as a category of the predecessors income to which this provision is applicable. One consequence is that, if the predecessor cannot be found, the successor would be liable to pay the tax on the sum of the capital gains. Charge of tax in case of AOP/BOI [Section 167B] The tax liability of AOP/BOI shall be determined on the basis of the following: (1) Charge of tax where share of members in AOP/BOI are unknown; (2) Charge of tax where share of members are known. (1) Charge of tax where share of members in AOP/BOI are unknown [Section 167B(1)]: Where the individual share of members of AOP/BOI are indeterminate or unknown, tax shall be charged on the Total Income of the AOP/BOI at the maximum marginal rate i.e. 30%. However, if the total income of any member of AOP/BOI is chargeable at a rate higher than 30%, the tax will be charged on the Total Income of the AOP/BOI also at such higher rale. Liability of partners of Limited Liability Partnership in liquidation [Section 167C) [Inserted by the Finance (No. 2) Act, w.e.f. Assessment Year ] Notwithstanding anything contained in the Limited Liability Partnership Act, 2008, where any tax due from a Limited Liability Partnership in respect of any income of any previous year or from any other person in respect of any income of any previous year during which such other person was a Limited Liability Partnership cannot be recovered, in such case, every person who was a partner of the Limited Liability Partnership at any time during the relevant previous year, shall be jointly and severally liable for the payment of such tax unless he proves that the non-recovery cannot be attributed to any gross neglect, misfeasance or breach of duty on his part in relation to the affairs of the Limited Liability Partnership. Liability of members after partition of Hindu Undivided Family [Section 171] In case total partition took place during the previous year the total income of the joint family in respect of the period upto the date of partition shall be assessed as if so far no partition had taken place; and each member or group of members shall, in addition to any tax for which he or it may be separately liable and notwithstanding anything contained in Clause (2) of section 10, be jointly and severally liable for the tax on the income so assessed and in case total partition took place after the expiry of the previous year, the total income of the previous year of 288 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

299 the joint family shall be assessed as if no partition had taken place; and each member or the group of members shall be jointly and severally liable for the tax on the income so assessed. In case of partial partition taken place after the 31st December, 1978, the HUF shall continue to be liable to be assessed under this Act as if no such partial partition had taken place and each member or group of members of such HUF immediately before such partial partition and the HUF shall be jointly and severally liable for any tax, penalty, interest, fine or other sum payable under this Act by the HUF in respect of any period, whether before or after such partial partition. The several liability of any member or group of members aforesaid shall be computed according to the portion of the HUF property allotted to him or it at such partial partition. Discontinued Business [Section 176] The cessation of the business of the assessee may occur in 2 ways (a) Where the business is no longer in existence i.e. there is complete closing down of the business or profession and a cessor of all the operations immediately. This would amount to discontinuance used in that context under this section. (b) Where the business is in existence but has been transferred by the assessee as a going concern to another entity. In this case, there is a mere change in the ownership or change in the constitution of firm. A change in ownership may amount to succession and this does not mean the discontinuance of the business. Similarly, there is no discontinuance when a partner of a firm ceases to be a partner. As succession and discontinuance are two mutually exclusive concepts there cannot be a discontinuance in cases where there is a succession. Further, if a part of the business of an assessee is dropped owing to nonprofitable nature, either permanently or temporarily it will not imply that the business has been discontinued. In the case of dissolutions of a firm or the liquidation of a company, sometimes the trade may be carried on even after such dissolution or liquidation. Other cases of discontinuance of business are as follows: (a) Amalgamation of two separate and independent businesses belonging to distinct owners may result in the discontinuance of those businesses. (b) Partition of a joint family business and the business is divided amongst the members. In this case, there will be a discontinuance of the old business even if some or all the members carry on their business in the same premises and take the advantage of the old business connections. (c) In case a firm is split up into two different firms and the old business is also divided amongst the different firms, the original firm shall be deemed to have discontinued. [Sait Nagjiu Purushotam and Co. vs. CIT (1969) 51 ITR 849 (SC)]. Liability of an Association dissolved or business discontinued [Section 177] This section covers discontinuance of the business of AOP as well as dissolution of AOP. Where any business or profession carried on by an association of persons has been discontinued or is dissolved, the Assessing Officer shall make an assessment of the total income of the association of persons as if no such discontinuance or dissolution had taken place, and all the provisions of this Act, including the provisions relating to the levy of a penalty or any other sum chargeable under any provision of this Act shall apply, so far as may be, to such assessment. Without prejudice to the generality of the above provisions, if the Assessing Officer or the Commissioner (Appeals) in the course of any proceedings under this Act in respect of such association of persons is satisfied that the AOP was guilty of any acts specified in Chapter XXI (relating to penalty), he may impose or direct the imposition of a penalty in accordance to provisions of that Chapter. Every person who was at the time of such discontinuance or dissolution a member of the association of persons, and the legal representative of any such person who is deceased, shall be jointly and severally liable for the amount of tax, penalty or other sum payable, and all the provisions of this Act, so far as may be, shall apply to any such assessment or imposition of penalty or other sum. DIRECT TAX LAWS AND INTERNATIONAL TAXATION 289

300 Settlement of Cases and Advance Rulings Liability of liquidator/receiver of a company in liquidation [Section 178] A company in liquidation is still a Company within the meaning of the charging provisions of the Act and the liquidator/receiver is merely an agent of the Company to administer the property of the company for purpose prescribed by the statute. Thus the liquidator/receiver (hereinafter called as liquidator) would have to act in regard to the submission of the return, etc. after the company goes into liquidation, whether under the orders of a court or otherwise. According to Section 178(1) of the Income-tax Act 1961 provides that it is a duty of the liquidator/ receiver to give notice of his appointment to the Assessing Officer who is entitled to assess the income of the company within 30 days of his appointment. According to section 178(2) the Assessing Officer shall, after making such enquiries or calling for such information as he may deem fit, notify to the liquidator within three months from the date on which he receives notice of the appointment of the liquidator the amount which, in the opinion of the Assessing Officer, would be sufficient to provide for any tax which is then, or is likely thereafter to become, payable by the company. Case Law The scope of section 327 of the Companies Act, 2013, is different from that of section 178 of the Income tax Act. Under section 327 of the Companies Act, all taxes which have become due and payable alone are entitled to preferential payment. The amount should have crystallised into a liability. Under section 178(2) read with section 178(3) of the Income-tax Act, provision should be made for any tax which is then or is likely thereafter to become payable. Even the amounts which have not crystallised into a liability, but which are likely to become due thereafter should be taken note of. Moreover, there is a non-obstante clause in section 178(6). On a total view of the relevant statutory provisions, the Income-tax Department is treated as a secured creditor [Imperial Chit Funds (P) Lid. vs. ITO (1996) 219 ITR 498 (SC)]. Liability of directors of private company in liquidation [Section 179] Notwithstanding anything contained in the Companies Act, 2013 where any tax due from a private company in respect of any income of any previous year or from any other company in respect of any income of any previous year during which such other company was a private company cannot be recovered, then, every person who was a director of the private company at any time during the relevant previous year shall be jointly and severally liable for the payment of such tax unless he proves that the non-recovery cannot be attributed to any gross neglect, misfeasance or breach of duty on his part in relation to the affairs of the company. As per section 179 of the Income-tax Act, 1961, every person who was a director of the private company during the relevant year can be made jointly and severally liable to pay the arrears of tax provided the Income-tax Department is unable to realise the arrears from the company. In the absence of any reasons recorded by the Assessing Officer to the effect that the arrears could not be recovered from the company, recovery cannot be made from the directors. [Dipak Dutta vs. Union of India (2004) 268 ITR 302 (Cal). Also see Indu Bhai T. Vasa (HUF) vs. ITO (2006) 282 ITR 120 (Guj)]. Section 179 allows recovery of tax due from a company from the director only when revenue is able to establish that it had taken appropriate step for recovery from the company as the expression used in section 179 is that tax cannot be recovered from the company. Where the revenue has failed to establish the same, the proceedings u/s 179 would not be valid. [Amit Suresh Bhatnagar vs. ITO (2009) 308 ITR 113 (Guj)]. For invoking section 179 it is not necessary that all three ingredients, viz, gross neglect, misfeasance and breach of duty are satisfied; it is sufficient if it is held that there is a gross neglect or misfeasance or breach of duty on part of directors in relation to affairs of company. Thus where a company did not file its return of income for more than 10 year and was not in a position to pay tax demanded, it could be said that there was a gross neglect on part of directors of company and, hence, all ingredients of section 179 were satisfied. [H. Ebrahim vs. DCIT (2009) 185 Taxman 11 (Kar)]. The phrase tax as contemplated under section 179 does not include penalty and interest in so far as directors of company are concerned. [H. Ebrahim vs. DCIT (2009) 185 Taxman 185 (Kar)]. For the purposes of section 179 Tax does not include penalty, therefore, directors of the company cannot be called upon to pay penalty of the company under section 179. Order passed by the Assessing Officer under section 179 without examining 290 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

301 the question as to whether the non recovery of tax from the assessee company was or not a result of gross neglect, misfeasance or breach of duty on the part of the assessee in relation to affairs of the company, Assessing Officer was directed to pass fresh order after giving a reasonable opportunity to the assessee. [Dineslt T. Tailor vs. Tax Recovery Officer (2010) 326 ITR 85/41 DTR 6/192 Taxman 152 (Bom)] While deciding, if the nomenclature tax would include other components such as penalty as well as interest, the High Court placed reliance on the judgment in the case of Soma Sundarams Ltd. vs. CIT 116 ITR 620, which had held that the Court has decidedly stated that the component income tax does not include payment of penalty as well as interest. [H. Ebrahim and Others vs. DCIT (2011) 332 ITR 122 (Karn)]. Exam Notes: A resident taxpayer may have some taxation issues in respect of a transaction which has been undertaken or proposed to be undertaken with a non-resident. Similarly, a non-resident may have some taxation issues in respect of transaction which has been undertaken or proposed to be undertaken by him in India. In order to get clarification on taxation of those transactions, a person can make an application to the Authority for Advance Rulings ( AAR ). Provisions relating to advance ruling are provided in sections 245N to 245V. Meaning of advance ruling Section 245N(a) gives the definition of advance ruling. As per section 245N(a) Advance Ruling means : A determination by the AAR in relation to a transaction which has been undertaken or is proposed to be undertaken by a non-resident applicant. A determination by the AAR in relation to the tax liability of a non-resident arising out of a transaction which has been undertaken or is proposed to be undertaken by a resident applicant with such non-resident. A determination by the AAR in relation to the tax liability of a resident applicant, arising out of one or more transaction valuing `100 crore or more [vide Notification No. 73/2014, dated ] in total which has been undertaken or is proposed to be undertaken by such applicant and such determination shall include the determination of any question of law or of fact specified in the application. A determination or decision by the AAR in respect of an issue relating to computation of total income which is pending before any income-tax authority or the Appellate Tribunal. It shall include the determination or decision of any question of law or of fact relating to such computation of total income specified in the application. A determination or decision by the AAR\ whether an arrangement, which is proposed to be undertaken by any person being a resident or a non-resident, is an impermissible avoidance arrangement as referred to in Chapter X-A. [Chapter XA contains provisions relating to General Anti-Avoidance Rule (GAAR)]. Documents to be submitted along with the application 4 copies of application in the prescribed form. Account-payee demand draft for the prescribed fees in favour of 'Authority for Advance Ruling's payable at New Delhi Applicability of advance ruling The advance ruling pronounced by the AAR shall be binding only on the applicant who had sought it and that too in respect of the transaction in relation to which the ruling had been sought. Further, it shall be binding on the Principal Commissioner or Commissioner and the Income-tax authorities subordinate to him, in respect of the applicant and the said transaction. The advance ruling pronouncement as stated above shall be binding as aforesaid, unless there is a change, in law, or facts on the basis of which the advance ruling was pronounced. Powers of the AAR The AAR shall, for the purpose of exercising its powers, have all the powers of a civil court under the Code of Civil Procedure, 1908 as are referred to in section 131 of this Act. Powers vested under section 131 are discovery and inspection, enforcing the attendance of any person, including any officer of a banking company and examining DIRECT TAX LAWS AND INTERNATIONAL TAXATION 291

302 Settlement of Cases and Advance Rulings him on oath, compelling the production of books of account and other documents, and issuing commissions. It will also have the power to regulate its own proceeding in all the matters arising out of the exercise of its powers under the Income-tax Act. The AAR shall be deemed to be a civil court for the purposes of section 195 but not for the purposes of Chapter XXVI of the Code of Criminal Procedure, 1973 and every proceeding before the Authority shall be deemed to be a judicial proceeding under certain provisions of the Indian Penal Code. MCQ, True / False 1. Provisions relating to advance ruling are provided in sections. (a) 80C to 80U (b) 245A to 245L (c) 237 to 245 (d) 245N to 245V Correct answer : (d) Justification of correct answer : Provisions relating to advance ruling are provided in sections 245N to 245V. 2. As per section 245N(a), advance ruling in case of a non-resident means a determination by the Authority in relation to a transaction which has been undertaken or is proposed to be undertaken by a non-resident applicant. Such determination shall include the determination of any question of law or of fact specified in the application. (a) True (b) False Correct answer : (a) Justification of correct answer : As the statement given in the question is true and hence, option (a) is the correct option. 3. As per section 245N, an applicant would not include resident making an application for determining whether an arrangement, is an impermissible avoidance agreement as referred to in Chapter X-A. (a) True (b) False Correct answer : (b) Justification of correct answer : The application for advance ruling can be made by an applicant as defined in section 245N(b). As per section 245N an applicant would mean any person (resident or nonresident) making an application for determination whether an arrangement, is an impermissible avoidance agreement as referred to in Chapter X-A. 4. An application for advance ruling cannot be made by the applicant who is nonresident. (a) True (b) False Correct answer : (b) Justification of correct answer : 292 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

303 The definition of applicant as given in section 245N(b) includes both resident as well as non-resident applicant. In other words, application for advance ruling can be made by resident as well as non-resident applicant. 5. A resident can seek advance ruling in relation to his tax liability arising out of one or more transactions valuing Rs.100 crore or more in total which has been undertaken or is proposed to be undertaken by him and such determination shall include the determination of any question of law or of fact specified in the application. (a) True (b) False Correct answer : (a) Justification of correct answer : As the statement given in the question is true and hence, option (a) is the correct option. 6. The authority will not allow the application when the question involves determination of fair market value of any property. (a) True (b) False Correct answer : (a) Justification of correct answer : In following circumstances the application is not allowed by the Authority: The authority will not allow the application when the question raised is already pending before any incometax authority or appellate tribunal or any Court. However, exception will apply in the case of a resident applicant falling within the notified class or category of persons. The authority will not allow the application when the question involves determination of fair market value of any property. The authority will not allow the application when the question relates to a transaction which is designed prima facie for the avoidance of income-tax. Exception to this rule is for : (i) resident taxpayer falling within notified class or category of persons notified in the official gazette by the Central Government; and (ii) whether or not an arrangement proposed to be undertaken by resident or non-resident is an impermissible avoidance arrangement under Chapter X-A. 7. An application (in quadruplicate) for advance ruling by any person (resident or non-resident) for determination whether an arrangement, is an impermissible avoidance agreement as referred to in Chapter X-Ais to be made in Form No.. (a) 34C (b) 34D (c) 34E (d) 34EA Correct answer : (d) Justification of correct answer : An application (in quadruplicate) for advance ruling by any person (resident or non-resident) for determining whether an arrangement, is an impermissible avoidance agreement as referred to in Chapter X-A is to be made in Form No.34EA. Thus, option (d) is the correct option. DIRECT TAX LAWS AND INTERNATIONAL TAXATION 293

304 Settlement of Cases and Advance Rulings 8. An application (in quadruplicate) for advance ruling by a resident applicant for determination of his tax liability arising out of one or more transactions valuing `100 crore or more in total which has been undertaken or is proposed to be undertaken by him is to be made in Form No.. (a) 34D (b) 34DA (c) 34E (d) 34EA Correct answer: (b) Justification of correct answer: An application (in quadruplicate) for advance ruling shall be made by a resident applicant, for determination of his tax liability arising out of one or more transactions valuing `100 crore or more in total which has been undertaken or is proposed to be undertaken by him, in Form No. 34DA. 9. The fee for application for advance ruling is `10,000 in all cases. (a) True (b) False Correct answer : (b) 10. An application for advance ruling once made, it cannot be withdrawn by the applicant. (a) True (b) False Correct answer : (b) Justification of correct answer : An application for advance ruling once made by the applicant can be withdrawn within a period of 30 days from the date of application. 294 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

305 Study Note - 10 BLACK MONEY AND IMPOSITION OF TAX ACT, 2015 This Study Note includes 10.1 Introduction 10.2 Highlights of Black Money Act 10.1 INTRODUCTION Summary of salient provisions Focus on undisclosed income and assets outside India. Information received from countries like France, Germany, etc. Swiss Bank disclosures on bank accounts owned by Indians and media reports Need for stringent laws to curb tax evasion Supreme Court directives and Special Investigation Team (SIT) findings Bringing tax evasion under the net of Prevention of Money Laundering Act, HIGHLIGHTS OF BLACK MONEY ACT Applicable Date and Intent of the Law The Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 is applicable from FY i.e. from A Y The Act, introduced with the object of tackling the menace of undisclosed overseas income/assets, applies to persons who are residents of India (other than not ordinarily residents). It contains stringent provisions in the form of levy of 30% tax and thrice the penalty, along with initiation of prosecution proceedings which can lead to punishment for a time frame ranging from 3-10 years. Structure of the Act Black Money act has 88 sections and 7 chapters as under: 1. Preliminary 2. Basis of charge 3. Tax Management 4. Penalties 5. Offences and Prosecution 6. Onetime disclosure window 7. General Provisions Scope of the Act 1. Black Money Act applies to all persons who are resident and ordinarily resident in India. 2. Undisclosed asset located outside India means an asset (including financial interest in any entity) located outside India: DIRECT TAX LAWS AND INTERNATIONAL TAXATION 295

306 Black Money and Imposition of Tax Act, 2015 held by the assessee in his name or where he is a beneficial owner ; AND he has no explanation about the source of investment in such asset; OR the explanation given by him is in the opinion of the assessing officer unsatisfactory. 3. Undisclosed foreign income and asset means the total amount of undisclosed income of an assessee from a source located outside India and the value of an undisclosed asset located outside India. Who is Assessee Section 2(1) defines Assessee as under: assessee means a person, being a resident other than not ordinarily resident in India within the meaning of clause (6) of section 6 of the Income-tax Act, by whom tax in respect of undisclosed foreign income and assets, or any other sum of money, is payable under this Act and includes every person who is deemed to be an assessee in default under this Act. The term person is not defined in the Black Money Act so its definition under the Income Tax Act ( ITA) must be adopted. Accordingly, assessee will include individual, HUF, company, firm, AOP, BOI, local authority and every artificial judicial person. This Act will not apply to any person who is Not Ordinary Resident and Non Resident. Important definitions identical to Income Tax Act 1961 u/s. 2(15) UFIA - all other words and expressions used herein but not defined and defined in the Income-tax Act shall have the meanings respectively assigned to them in that Act. TERM/WORDS UFIA I.T. ACT Appellate Tribunal 2(1) 2(4) Assessment 2(3) 2(8) Assessment Year 2(4) 2(9) Board 2(5) 2(12) Resident 2(10) 2(42) Consequence where a person is resident more than one Country (Dual Residence Cases) -Applicability of the Black Money Act to individuals Resident & Ordinary Resident (ROR) Resident but Not Ordinary Resident (RNOR) Non Resident Whether resident in previous year? Yes Yes No Whether satisfies conditions prescribed u/s 6 of ITA? Yes No No Whether Black Money Act is attracted? Yes No No Place of Effective Management ( POEM) Hitherto, the test of residency for taxation purposes was whether the company is incorporated in India or is wholly controlled and managed within India. The Finance Act replaced term wholly controlled and managed within India with the standard of place of effective management (POEM). POEM has been defined to mean a place where key management and commercial decisions that are necessary for the conduct of the business of an entity as a whole are, in substance made. A foreign company will be considered tax resident in India if its POEM is in India in the relevant financial year. Since POEM has become the test for corporate residence in the ITA in India, the impact of the Black Money Act will have a wider scope than intended. UNDISCLOSED ASSETS Located Outside India 296 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

307 As per section 2(11), Undisclosed Assets located Outside India (including Financial Interest in any entity) means: Assets held by the assessee in his own name or in respect of which assessee is a beneficial owner and he has no explanation about the source of investment in such assets or explanation given by him is in the opinion of the Assessing Officer is unsatisfactory. Section 2(12) defines Undisclosed Foreign Income and Assets means:- Income of an assessee from a sources located outside India and the value of an undisclosed asset located outside India, computed as per section 5 and as referred to in section 4. Financial interest would include, but would not be limited to, any of the following (1) if the resident assessee is the owner of record or holder of legal title of any financial account, irrespective of whether he is the beneficiary or not. (2) if the owner of record or holder of title is one of the following:- (i) an agent, nominee, attorney or a person acting in some other capacity on behalf of the resident assessee with respect to the entity. (ii) a corporation in which the resident owns, directly or indirectly, any share or voting power. (iii) a partnership in which the resident assessee owns, directly or indirectly, an interest in partnership profits or an interest in partnership capital. (iv) a trust of which the resident has beneficial or ownership interest. (v) any other entity in which the resident owns, directly or indirectly, any voting power or equity interest or assets or interest in profits. Section 3- BASIS OF CHARGE 1. The charge is for every assessment & hence this Act is permanent feature of our tax system and will act as a deterrence to accumulate income or assets abroad. 2. Tax on Undisclosed Income and Assets 30% & charged to tax in the previous year in which it has come to the notice of the assessing officer. 3. No Surcharge and Education Cess on Tax or Penalty. 4. Value of Assets shall be taken at Fair Market Value determined as per Rules in the previous year in which such asset comes to the notice of Assessing Officer. Scope of Total Undisclosed Foreign Income and Asset (Sec 4) The Act will apply from FY (AY ). The Scope will cover Income in respect of which no return is filed within time allowed u/s 139(1), 139(4) & 139(5) of the ITA. Value of an undisclosed asset located outside India will be key driver for assessment purposes. Any variation made in the income from a source outside India in the Assessment or Reassessment of the total income of any previous year, in accordance with section 29 to 43C (Business Income), 57 to 59 (Income from Other Sources) or 92C of the ITA shall not be considered as Undisclosed Income. (Note: Income from House Property and Capital Gains excluded from above).no clarification for adjustment made u/s 93 or 94A or Exchange Rate Differences. Section 5 - Computation Mechanism - Salient features No deduction of expenses and setoff of any losses. Indicates taxed on Gross Basis. No deduction for liability in relation to any foreign assets purchased. If assessee furnishes evidence that any income which is assessable or assessed to tax in any previous year prior DIRECT TAX LAWS AND INTERNATIONAL TAXATION 297

308 Black Money and Imposition of Tax Act, 2015 to , shall not be added Computation Sheet of total UFIA Computation of total UFIA Income from source located outside India (foreign income or FI ) which has not been disclosed in IT Return FI in respect of which no IT return has been filed FMV of UFA (no explanation or unsatisfactory explanation about the source of income has been provided) manner of valuation to be provided Less Income which has been assessed to tax for any assessment year under the ITA prior to relevant AY in which UFIA applies Income which is assessable or has been assessed to tax for any assessment year In case of immovable properties, the deduction will be: Value of UFA in the same proportion as assessed / assessable foreign income bears total cost Total value of UFIA 30% XX XX XX XX XX XX XX XX The quantum of penalty may vary between 100% to 300% of the tax amount, depending on whether voluntarily disclosures are made under one time disclosure window or UFIA is detected by Assessing officer (AO) Illustration: Computation of tax on UFIA Mr. K acquired foreign asset (immovable property) in the AY for `1.2 Crore. Out of the total investment, `80 lacs was assessed to tax in an earlier year. In AY 17-18, AO identified the value of such undisclosed asset as `4 crore for which no explanation was provided Computation of total UFIA ` (in crores) FMV of UFA (no explanation provided or explanation not satisfactory) 4.00 Less Income which has been assessed to tax for any assessment year under the ITA prior to relevant AY in which the Black Money Act [`4crore -(`4 crore X 0.80 lacs / 1.20 cr)] (1.33) Amount chargeable to tax under Black Money Act 2.67 Tax Management Assessment Procedure (Chapter III) No requirement to file a separate return under Black Money Act. The assessing officer on receipt of information from Income Tax Authority under the ITA or any other authority under any law or on coming of any information to his notice (source of information not specified) shall serve a notice requiring assessee to produce such information and document as he may require. E.g: Information may be from sources such as legal or illegal or stolen data. Issue of notice for assessment/reassessment (no timeline provided), opportunity of being heard and furnishing of evidences/documents will be given principles of natural justice to be followed Inquiry or investigation by Tax Authorities into matters of the assessee even though there are no proceedings pending before it Time limit for completion of assessment and reassessment shall be 2years from the end of the financial year in which notice was issued It is expected that two assessment orders will be passed in respect of period covered by a single return of income: under section 143(3) of ITA and 10(3) of Black Money Act 298 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

309 Remedial measures provided-appeal to CIT(A)/ITAT/High Court and Supreme Court (for substantial question of law), rectification of mistakes, revision of orders, recovery of arrears Recovery of Tax Power of AO to recover the outstanding demand from the assessee as per any mode specified AO or Tax Recovery Officer (TRO) may direct: (i) employer of the assessee to deduct tax in arrear from the assessee, from any amount payable to the assessee. (ii) debtor of the assessee to pay tax in arrear from the assessee, not exceeding the amount of debt. If debtor fails to make payment, he shall be deemed to be assessee in default and proceedings may be initiated against him for realization of amount. Section 31(6): Assessee cannot dispute the correctness of the any certificate drawn up Liability on persons other than assessee Section 35 and 36 :- Black Money Act imposes personal liability on manager (including a managing director) of a company, partners, member of AOP or BOI for any amount due, if the amount is not recoverable from the company/ firm/ AOP BOI. Only manager of the company and partner of Limited Liability Partnership (LLP) will not be held liable if he proves that non-recovery cannot be attributed to any neglect, misfeasance or breach of duty on his part in relation to the affairs of the company/ LLP. The Act is silent on the liability of partners of the firm other than LLP and members of AOP and BOI. The Black Money Act imposes liability on the person for abetting or inducing another to willfully attempt to evade tax or to make false statements/declarations in relation to foreign income and assets. Chapter IV - Penalty & Chap V Offences & Prosecutions Attempt to evade tax, interest and penalty Nature Penalty Prosecution (if any) Failure to disclose foreign asset or income in the return of income (Failure to report bank accounts with a maximum balance of upto Rs.5 lakh at any time during the year will not entail penalty or prosecution.) 300% of the Tax Payable `10 Lakh Attempt to evade payment of tax, interest and penalty Amount of Tax arrear Subsequent offences under this Act- where a person commits the second (or subsequent) offence Person makes false statement or delivers false evidences Abetment to make and deliver false return, account, statement or declaration relating to tax payable If assessee fails to answer any question, sign a statement he is legally bound to or fails to produce books and supporting evidences Section 54- Presumption as to Culpable Mental State 3 years 10 years 6 months 7 years 3 months 3 years 3 years 10 years Plus Fine `5 lac to `1 cr 6 months 7 years 6 months 7 years `50,000 to `2,00,000 Section 54 provides - (1) In any prosecution for any offence under this Act which requires a culpable mental state DIRECT TAX LAWS AND INTERNATIONAL TAXATION 299

310 Black Money and Imposition of Tax Act, 2015 on the part of the accused, the court shall presume the existence of such mental state but it shall be a defence for the accused to prove the fact that he had no such mental state with respect to the act charged as an offence in that prosecution. Explanation. In this sub-section, culpable mental state includes intention, motive or knowledge of a fact or belief in, or reason to believe, a fact. (2) For the purposes of this section, a fact is said to be proved only when the court believes it to exist beyond reasonable doubt and not merely when its existence is established by a preponderance of probability. Note - Onus to prove non-culpability beyond reasonable doubt is shifted on the accused One Time Compliance Procedure Chapter VI Features Positioned as not being an amnesty scheme there is no immunity from penalty One time compliance scheme window (with a time limit to be notified) for disclosing any UFA and acquired from income chargeable to tax under ITA for any assessment year prior to AY Any person can make declaration (format and the due date to be notified) in respect of UFAs and pay tax on 30% plus penalty (equal to tax) i.e. total 60%, an opportunity for persons to come clean and become compliant before the stringent provisions of the new Act come into force Taxes and penalty is to be paid on or before filing of declaration Tax will be on value of UFA as on the date of enactment of this new legislation. No additional interest u/s.234a, 234B and 234C of the ITA will be levied. No exemption, deduction or set-off of any carried forward losses. Amount of UFA so declared shall not be included in the total income of any assessment year in ITA. Any declaration made by misrepresentation or suppression of fact shall be deemed as void-ab-initio. No reopening of assessment due to disclosure under this scheme -Declaration will not affect finality of completed assessment Declaration shall not be considered as an evidence against the declarant for initiating penalty or prosecution proceedings under - ITA, - Wealth-tax Act, 1957, - Foreign Exchange Management Act, 1999, - Companies Act, 2013 or - Customs Act, Statement of Objects and Reason to the Act clarified that only till the time Chapter VI - One Time Compliance Window is in existence, no evidence against the declarant shall be used for initiating penalty or prosecution under ITA, Wealth Tax Act, FEMA, Companies Act or Customs Act. Provision on One time window not open for any person :- Who has been issued an order of detention under the Conservation of Foreign Exchange and Prevention of Smuggling Activities Act, 1974 (subject to certain conditions) Who is subject to prosecution for any offence punishable under Chapter IX or Chapter XVII of the Indian Penal Code, the Narcotic Drugs and Psychotropic Substances Act, 1985, the Unlawful Activities (Prevention) Act, 1967, the Prevention of Corruption Act, 1988 Notified under section 3 of the Special Court (Trial of Offences Relating to Transactions in Securities) Act, 1992 Against whom notice of assessment has been issued under Income Tax Act 1961 Against whom time limit for furnishing of notice of assessment has not expired due to search, survey under the Income Tax Act DIRECT TAX LAWS AND INTERNATIONAL TAXATION

311 Against whom information has been received in respect of UFA from competent authority under a formal pact (cases like account holders of HSBC Geneva which has not been disclosed, whether or not having any balance) Who has been issued an order of detention under the Conservation of Foreign Exchange and Prevention of Smuggling Activities Act, 1974 (subject to certain conditions) Who is subject to prosecution for any offence punishable under Chapter IX or Chapter XVII of the Indian Penal Code, the Narcotic Drugs and Psychotropic Substances Act, 1985, the Unlawful Activities (Prevention) Act, 1967, the Prevention of Corruption Act, 1988 Notified under section 3 of the Special Court (Trial of Offences Relating to Transactions in Securities) Act, 1992 Against whom notice of assessment has been issued under Income Tax Act 1961 Against whom time limit for furnishing of notice of assessment has not expired due to search, survey under the Income Tax Act 1961 Against whom information has been received in respect of UFA from competent authority under a formal pact (cases like account holders of HSBC Geneva which has not been disclosed, whether or not having any balance) Treaties - Section 73 The Central Government may enter into an agreement with the foreign countries or specified territories : For exchange of information for prevention of tax evasion or avoidance on UFI chargeable under this Act or law in the corresponding country For investigation cases involving such tax evasion or avoidance For recovery of tax under this Act No provision granting relief against double taxation of income under UFIA Act and corresponding law in foreign jurisdiction FEMA and UFIA key Issues Examples of foreign assets held legally under FEMA Any Indian resident company holding assets abroad under Overseas Direct Investments (ODI) Guidelines Any resident individual (under FEMA or ITA or both) who is holding assets abroad acquired from Liberalized Remittance Scheme (LRS ) Inheritance of foreign asset by Indian resident from non-resident relative and continues to hold the same as permitted under section 6(4) of FEMA A resident person who continues to hold assets abroad which were acquired when non-resident as permitted under section 6(4) of FEMA Onus is on the Tax Payer to prove that they are holding foreign assets legally and proper disclosures / filings were made. If so, the Income-tax Commissioner / RBI / Enforcement Director under FEMA cannot take any penal action / prosecution without any proper enquires. Finance Act 2015 proposes that the Enforcement Director under FEMA can directly seize equivalent value of Indian assets (without asking any questions) and merely on the reason to believe or suspicion similar amendments are also proposed under Prevention of Money-laundering Act, 2002 (PMLA) vide Finance Act 2015 Main considerations under the Black Money Act Tax evasion to be dealt strictly, however, it cannot be treated at par with criminal law. Benami Transaction law to tackle black money within India. The Act considers to provide basic threshold to tax payers having low value foreign assets and income. Adequate documentations and record to be maintained in relation to foreign income and assets. Misuse of information may cause harassment to Tax Payers who may want to come clean. The Act DIRECT TAX LAWS AND INTERNATIONAL TAXATION 301

312 Black Money and Imposition of Tax Act, 2015 does not appear to make a distinction between legal and illegal structures. The Act imposes its strict consequences even where the structure has been set up in a legally compliant manner, if there has been a non-disclosure. It has far reaching, impacting everyone from those returning to India after a stint abroad to those who are in India remitting funds abroad under the Liberalised Remittance Scheme; fund managers having carry structures to corporations having subsidiaries abroad. Relevant Case Laws Case Law 1 CWT vs. Estate of HMM Vikramsinhji of Gondal [2014] 225 Taxman 166 (SC) Apex Court observed that A discretionary trust is one which gives a beneficiary no right to any part of the income of the trust property, but vests in the trustees a discretionary power to pay him, or apply for his benefit, such part of the income as they think fit. The trustees must exercise their discretion as and when the income becomes available, but if they fail to distribute in due time, the power is not extinguished so that they can distribute later. They have no power to bind themselves for the future. The beneficiary thus has no more than a hope that the discretion will be exercised in his favour. Case law 2 Mohan Manoj Dhupelia vs DCIT [2014] 166 TTJ 584 (Mumbai - Trib.) Facts - Information regarding beneficial status in foreign trust having huge bank balance neither disclosed in ROI nor in return filed pursuant to notice issued u/s 148 The AO made addition on account of alleged undisclosed income in the hands of the named beneficiary(ies) The assessee contended that the alleged trust was discretionary trust and the amount was neither deposited nor received by the assessee. The Tribunal upheld the order of the AO observing that: documents received officially Trust created for benefit of beneficiaries. 302 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

313 Study Note - 11 INCOME DECLARATION SCHEME (IDS) 2016 This Study Note includes 11.1 Salient Features and Applicability of IDS 11.1 SALIENT FEATURES AND APPLICABILITY OF IDS The scheme provides for declaration by any person, his undisclosed income by paying tax, surcharge and penalty on the declared income as specified in Chapter IX. The scheme shall commence from 1st June, 2016 and will remain open till the date to be notified by the Government. Vide Press Release dated 14th May,2016, the Ministry of Finance has notified that the Scheme shall remain open upto 30th September, 2016 and tax, surcharge and the penalty must be paid latest by 30th November, Declaration can be filed online or with the jurisdictional Principal Commissioner of Income tax. Applicability The scheme shall be applicable in respect of undisclosed income of any year up to the F.Y Amount payable in respect of declared income as under- 30% of declared income, Krishi Kalyan of Tax and 25% of tax The total amount payable thus will be 45% of the income declared Declaration of Undisclosed Income- As per Section 183(1) of the scheme the following incomes can be declared- 1. Any income chargeable to tax which has not been declared by a person by filing return of income 2. Any income chargeable to tax which has not been disclosed in the return of income furnished by the person before the date of commencement of the scheme. 3. Any income chargeable to tax which has escaped assessment as such person omitted or failed to furnish a return or to disclose truly and fully all material facts necessary for assessment or otherwise (a) Declaration under the Scheme Form No. 1 (b) Jur Prin. CIT to issue acknowledgement Form No. 2 (c) Proof of payment of tax, surcharge, penalty Form No 3 (d) Certificate of acceptance of declaration to be issued within 15 days of submission of proof of payment Form No 4 Cases not eligible to declare income under this Chapter 1. Undisclosed income is chargeable for any A.Y. for which notice has been issued u/s. 142 or 143(2) or 148 or 153A or 153C and the proceedings are pending before the A.O. 2. Search or survey has been conducted on the person and the time for issuance of notice under the Act has not expired 3. Information is received under an agreement with foreign countries in respect of such undisclosed assets DIRECT TAX LAWS AND INTERNATIONAL TAXATION 303

314 Income Declaration Scheme (IDS) Cases covered under the Black Money(Undisclosed Foreign Income and Assets) and Imposition of Tax Act, Persons notified under the Special Courts Act, Cases covered under The Indian Penal Code, Narcotic Drugs and Psychotropic Substances Act, 1985, the Unlawful Activities (Prevention) Act, 1967, the Prevention of Corruption Act, 1988 Section 189 of the Chapter provides that undisclosed income declared under this scheme shall not affect the finality of completed assessments and as such completed assessments shall not be reopened under the Income tax Act or Wealth Tax Act. Valuation of Assets Section 183(2) of the Chapter provides that where the income chargeable to tax is declared in the form of investment in any assets, the FMV of such asset as on the date of commencement of this scheme shall be deemed to be the undisclosed income and the FMV as on 1st June, 2016 shall be computed in accordance with Rule 3 of the Income Declaration Scheme Rules, This means that the unrealized appreciation in value of the asset from the date of its acquisition till the date of commencement of scheme will get taxed under the scheme. No deduction in respect of any expenditure or allowance shall be granted against the income in respect of which declaration is made. Vide its Circular No 17 of 2016 dated 20th May, 2016, the CBDT has clarified that on subsequent sale of the capital asset declared under this scheme, the fair value on 1st June, 2016 shall be the Cost of Acquisition and the period of holding shall commence from the date of determination of fair market value for the purposes of the scheme. Payment of Tax, Surcharge and Penalty Payment of tax, surcharge and penalty shall be paid on or before a date to be notified by the C.G. in the O.G. The proof of such payment is required to be filed with the Principal CIT/CIT before whom the declaration is made. If the declarant fails to make payment by the date notified, the declaration shall be deemed to have never been made under this scheme. The declaration under this scheme can be filed by a person only once. Section 188 provides that the income declared under the scheme shall not be included in the income of any A.Y., if the declarant pays the tax, surcharge and penalty by the specified date. If taxes are not paid by the declarant by the notified date, the income declared under the scheme shall be included in the income of the declarant of the A.Y. in which it is declared. Further, there is no provision to revise the declaration. if there is an error in making the declaration and lesser amount of tax is paid due to error in declaration, then the declaration shall be deemed to be invalid and the entire declared amount including the error shall be treated as income of the declarant. Miscellaneous Provisions It is provided that where the declaration is made by misrepresentation or suppression of facts, such declaration shall be treated as void. No benefit, concession or immunity shall be available under the scheme to any person other than the person making the declaration. Where in respect of any income which accrued or arose or was received or any asset was acquired out of such income and no declaration under the scheme is made, such income shall be deemed to have accrued or received or asset shall be deemed to have been acquired in the year in which notice u/s. 142, 143(2)or 148 or 153A or 153C is issued by the A. O. and the provisions of the Act shall apply accordingly. Immunity Assets declared under the scheme shall be exempt from wealth tax. If the asset belongs to a firm, the share of the partner shall be exempt. Immunity from penalty and prosecution under The Income tax Act and The Wealth tax Act. 304 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

315 Immunity from the provisions of Benami Transactions (Prohibition) Act,1988, if the asset existing in the name of a benamidar is transferred to the declarant who paid the consideration for such asset or to his legal representative within the period notified by the C.G.. Clarifications on the Income Declaration Scheme, 2016 (The CBDT has vide circular No. 17/ 2016 dated 20th May, 2016 clarified certain points in the form of question and answers.) Ques. 1. Where a notice under section 142(1)/ 143(2)/ 148/ 153A/ 153C of the Income-tax Act has been issued to a person for an assessment year will he be ineligible from making a declaration under the Scheme? Ans. 1. The person will only be ineligible from declaration for those assessment years for which a notice under section 142(1)/143(2)/148/153A/153C is issued and the proceeding is pending before the Assessing Officer. He is free to declare undisclosed income for other years for which no notice under above referred sections has been issued. Ques. 2. As per the Scheme, declaration cannot be made where an undisclosed asset has been acquired during any previous year relevant to an assessment year for which a notice under section 142, 143(2), 148, 153A or 153C of the Income-tax Act has been issued. If the notice has been issued but not served on the declarant then how will he come to know whether the notice has been issued? Ans. 2. The declarant will not be eligible for declaration under the Scheme where the undisclosed income relates to the assessment year where a notice under section 142, 143(2), 148, 153A or 153C of the Income-tax Act has been issued and served on the declarant on or before 31st day of May, The declarant is required to file a declaration regarding receipt of any such notice in Form-1. Ques. 3. In a case where the undisclosed income is represented in the form of investment in asset and such asset is partly from income that has been assessed to tax earlier, then what shall be the method of computation of undisclosed income represented by such undisclosed asset for the purposes of the Scheme? Ans. 3. As per sub-rule (2) of rule 3 of the Income Declaration Scheme Rules, 2016, where investment in any asset is partly from an income which has been assessed to tax, the undisclosed income represented in form of such asset will be the fair market value of the asset determined in accordance with sub-rule (1) of rule 3 as reduced by an amount which bears to the value of the asset as on the , the same proportion as the assessed income bears to the total cost of the asset. This is illustrated by an example as under: Investment in acquisition of asset in previous year is of `500 out of which `200 relates to income assessed to tax in A.Y and `300 is from undisclosed income pertaining to previous year The fair market value of the asset as on is `1500. The undisclosed income represented by this asset under the scheme shall be: 1500 minus (1500*200/500)= `900 Ques. 4 Can a declaration be made of undisclosed income which has been assessed to tax and the case is pending before an Appellate Authority? Ans. 4 As per section 189 of the Finance Act, 2016, the declarant is not entitled to re-open any assessment or reassessment made under the Income-tax Act. Therefore, he is not entitled to avail the tax compliance in respect of such income. However, he can declare other undisclosed income for the said assessment year which has not been assessed under the Income-tax Act. Ques. 5. Can a person against whom a search/ survey operation has been initiated file declaration under the Scheme? Ans. 5. (a) The person is not eligible to make a declaration under the Scheme if a search has been initiated and the time for issuance of notice under section 153A has not expired, even if such notice for the relevant assessment year has not been issued. In this case, however, the person is eligible to file a declaration in respect of an undisclosed income in relation to an assessment year which is prior to assessment years relevant for the purpose of notice under section 153A. (b) In case of survey operation the person is barred from making a declaration under the Scheme in respect of an undisclosed income in which the survey was conducted. The person is, however, eligible to make a declaration in respect of an undisclosed income of any other previous year DIRECT TAX LAWS AND INTERNATIONAL TAXATION 305

316 Income Declaration Scheme (IDS) 2016 Ques. 6. Where a search/ survey operation was conducted and the assessment has been completed but certain income was neither disclosed nor assessed, then whether such unassessed income can be declared under the Scheme? Ans. 6. Yes, such undisclosed income can be declared under the Scheme Ques. 7. What are the consequences if no declaration under the Scheme is made in respect of undisclosed income prior to the commencement of the Scheme? Ans. 7. As per section 197(c) of the Finance Act, 2016, where any income has accrued or arisen or received or any asset has been acquired out of such income prior to the commencement of the Scheme and no declaration is made under the Scheme, then such income shall be deemed to have been accrued, arisen or received or the value of the asset acquired out of such income shall be deemed to have been acquired in the year in which a notice under section 142/143(2)/148/153A/153C is issued by the Assessing Officer and the provisions of the Incometax Act shall apply accordingly. Ques. 8. If a declaration of undisclosed income is made under the Scheme and the same was found ineligible due to the reasons listed in section 196 of the Finance Act, 2016, then will the person be liable for consequences under section 197(c) of the Finance Act, 2016? Ans. 8. In respect of such undisclosed income which has been duly declared in good faith but not found eligible, then such income shall not be hit by section 197(c) of the Finance Act, However, such undisclosed income may be assessed under the normal provisions of the Income-tax Act, Ques. 9. If a person declares only a part of his undisclosed income under the Scheme, then will he get immunity under the Scheme in respect of the part income declared? Ans. 9. It is expected that one should declare all his undisclosed income. However, in such a case the person will get immunity as per the provisions of the Scheme in respect of the undisclosed income declared under the Scheme and no immunity will be available in respect of the undisclosed income which is not declared. Ques. 10. Can a person declare under the Scheme his undisclosed income which has been acquired from money earned through corruption? Ans. 10. No. As per section 196(b) of the Finance Act, 2016, the Scheme shall not apply, inter-alia, in relation to prosecution of any offence punishable under the Prevention of Corruption Act, Therefore, declaration of such undisclosed income cannot be made under the Scheme. However, if such a declaration is made and in an event it is found that the income represented money earned through corruption it would amount to misrepresentation of facts and the declaration shall be void under section 193 of the Finance Act, If a declaration is held as void, the provisions of the Income-tax Act shall apply in respect of such income as they apply in relation to any other undisclosed income. Ques. 11. Whether at the time of declaration under the Scheme, will the Principal Commissioner/Commissioner do any enquiry in respect of the declaration made? Ans. 11. After the declaration is made the Principal Commissioner/ Commissioner will enquire whether any proceeding under section 142(1)/143(2)/148/153A/153C is pending for the assessment year for which declaration has been made. Apart from this no other enquiry will be conducted by him at the time of declaration. Ques. 12. Will the declarations made under the Scheme be kept confidential? Ans. 12. The Scheme incorporates the provisions of section 138 of the Income-tax Act relating to disclosure of information in respect of assessees. Therefore, the information in respect of declaration made is confidential as in the case of return of income filed by assesses Ques. 13. Is it necessary to file a valuation report of an undisclosed income represented in the form of investment in asset along with the declaration under the Scheme? Ans. 13. It is not mandatory to file the valuation report of the undisclosed income represented in the form of investment in asset along with the declaration. However, the declarant should have the valuation report. While e-filing the declaration on the departmental website a facility for uploading the documents will be available. 306 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

317 Ques 14. If notices under section 142, 143(2) or 148 have been issued after and assessee makes declaration under the Scheme then what shall be the fate of these notices? Ans. 14. A person shall not be eligible for the Scheme in respect of the assessment year for which a notice under section 142, 143(2) or 148 has been received by him on or before In a case where notice has been received after the said date, the assessee shall be eligible to make a declaration under the Scheme for the said assessment year. Such declaration shall be valid if it has not been made by suppression of facts or misrepresentation and the amount payable under the Scheme has been duly paid within the specified time. On furnishing by the declarant the certificate issued by the Pr. Commissioner/Commissioner in Form-4 to the Assessing Officer, the proceedings initiated vide notice under section 142, 143(2) or 148 shall be deemed to have been closed. Ques 15. As per question No.13, it is not mandatory to attach the valuation report. But Form-1 states "attach valuation report". How to interpret? Ans. 15. It is necessary for the declarant to obtain the valuation report but it is not mandatory for him to attach the same with the declaration made in Form-1. However, the jurisdictional Pr. Commissioner/ Commissioner in order to ascertain the correctness of the value of the asset quoted in Form-1 may require the declarant to file the valuation report before issuing the acknowledgment in Form-2. In such a circumstance, it will be necessary for the declarant to make the report available to the Pr. Commissioner/Commissioner. Ques. 16. If only part payment of the tax, surcharge and penalty payable on undisclosed income declared under the Scheme is made before , then whether the entire declaration fails as per section 187(3) of the Finance Act, 2016 or pro-rata declaration on which tax, surcharge and penalty has been paid remains valid? Ans. 16. In case of part payment, the entire declaration made under the Scheme shall be invalid. The declaration under the Scheme shall be valid only when the complete payment of tax, surcharge and penalty is made on or before Ques. 17. In case of amalgamation or in case of conversion of a company into LLP, if the amalgamated entity or LLP, as the case may be, wants to declare for the year prior to amalgamation/conversion, then whether a declaration is to be filed in the name of amalgamated entity/llp or in the name of the amalgamating company or company existing prior to conversion into LLP? Ans. 17. Since the amalgamating company or the company prior to conversion into LLP is no more into existence and the assets/liabilities of such erstwhile entities have been taken over by the amalgamated company/llp, the declaration is to be made in the name of the amalgamated company or the LLP, as the case may be, for the year in which the amalgamation/conversion takes place. Ques. 18. Whether the Scheme is open only to residents or to non-residents also? Ans. 18. The Scheme is available to every person, whether resident or non resident. Ques. 19. If undisclosed income relating to an assessment year prior to A.Y , say A.Y is detected after the closure of the Scheme, then what shall be the treatment of undisclosed income so detected? Ans. 19. As per the provisions of section 197(c) of the Finance Act, 2016, such income of A.Y shall be assessed in the year in which the notice under section 148 or 153A or 153C, as the case may be, of the Incometax Act is issued by the Assessing Officer. Further, if such undisclosed income is detected in the form of investment in any asset then value of such asset shall be as if the asset has been acquired or made in the year in which the notice under section 148/153A/153C is issued and the value shall be determined in accordance with rule 3 of the Rules. Ques. 20. Whether a person on whom a search has been conducted in April, 2016 but notice under section 153A is not served upto , is eligible to declare undisclosed income under the Scheme? Ans. 20. No, in such a case time for issuance of notice under section 153A has not expired. Hence the person is not eligible to avail the Scheme in respect of assessment years for which notice under section 153A can be issued. Ques. 21. Is it mandatory to furnish PAN in the Form of declaration? Ans. 21. Yes, PAN is the unique identifier for all direct tax purposes. This is also necessary in order to claim the benefits and immunities available under the Scheme. DIRECT TAX LAWS AND INTERNATIONAL TAXATION 307

318 Income Declaration Scheme (IDS) 2016 Ques. 22. If any proceeding is pending before the Settlement Commission, can a person be considered eligible for the Scheme? Ans. 22. No, a person shall not be eligible for the Scheme in respect of assessment years for which proceeding is pending with Settlement Commission. Ques. 23. Land is acquired by the assessee in year 2001 from assessed income and is regularly disclosed in return of income. Subsequently in the year 2014, a building is constructed on the said land and the construction cost is not disclosed by the assessee. What shall be the fair market value of such building for the purposes of the Scheme? Ans. 23. Fair market value of land and building in such a case shall be computed in accordance with Rule 3(2) by allowing proportionate deduction in respect of asset acquired from assessed income. Ques. 24. Whether cases where summons under section 131(1A) have been issued by the Department or letter under the Non-filer Monitoring System (NMS) or under section 133(6) are issued are eligible for the Scheme? Ans. 24. Cases where summons under section 131(1A) have been issued by the department or letters for enquiry under NMS or under section 133(6) are issued but no notice under section 142 or 143(2) or 148 or 153A or 153C [as specified in section 196(e)] of the Finance Act, 2016 has been issued are eligible for the Scheme. Importance of making declaration under the Scheme Concealment Penalty a paradigm shift The Scheme provides immunity from penalty and prosecution proceedings under the both the Act and the Wealth Tax Act, Any undisclosed income is not declared under the Scheme, then by virtue of the provisions of section 197(c) of the Finance Act, 2016, the undisclosed income may be deemed to be income of any previous year relevant to assessment year beginning on or after 1 April 2017, and taxed in that year. In such a case,the same maybe regarded as misreported income leading to levy of nondiscretionary penalty of 200% of the tax on the misreported income under the new penalty provision in section 270A of the Act. This would be significantly higher than penalties that may be levied under section 271(1) (c). Income-tax department is now gathering information, about undisclosed incomes and assets through increasing use of technology, mandatory reporting of various cash transactions, enhanced scope of reporting of transactions and assets, expanding the scope of tax deduction and tax collections at source, information exchange agreements with various countries, and jurisdictions, and information collected is used by the department for interacting with other government departments to obtain data regarding unaccounted money. Considering the forgoing and the stringent consequences of detection of undisclosed incomes and assets, such persons would be well advises to declare their undisclosed income under the Scheme. Only Timing difference in payment of tax Generally, the undisclosed income of prior years, unless spent, would be existing in the form of some assets. When such undisclosed assets are sold, the taxpayer would any case be liable to pay tax on the gains arising from the sale. Further, the Fair Market Value of the undisclosed assets declared shall be considered as the cost of acquisition of the undisclosed assets. Thus, instead of paying tax in future on sale of the asset, the declarant will be required to pay the tax today, which is only a timing difference. Immunity from Benami Transactions (Prohibition) Act, 1988 Any person entering into any benami transactions is punishable with imprisonment for a term which may extend to three years or fine or both. All properties held benami shall be subject to acquisition without any amount payable for the acquisition of benami property. However, if such benami property is declared under the Scheme then the immunity shall be available from the provisions of the Benami Transactions (Prohibition) Act, 1988 subject to the condition that the benamidar shall transfer such property, on or before 30 September, 2017, to the declarant or his legal representative. It is to be noted that the Benami Transactions (Prohibition) Amendment Bill, 2015 was introduced in the Lok Sabha on 13th May, The said Bill has more stringent prosecution and penalty proceedings as compared to the current Benami Transactions (Prohibition) Act, Hence, if the person does not take benefit of the Scheme and the Bill becomes an Act, the person would be subject to more stringent provisions of law. 308 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

319 Section B International Taxation (Syllabus )

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321 Study Note - 12 DOUBLE TAXATION AVOIDANCE AGREEMENTS (DTAA) This Study Note includes 12.1 Introduction 12.2 Types of Double Taxation 12.3 Agreement with Foreign Countries or Specified Territories [Section 90] 12.4 Adoption By Central Government of Agreements Between Specified Associations for Double Taxation Relief [Section 90A] 12.5 Countries With Which No Agreement Exists [Section 91] 12.6 Approaches for elimination of Double Taxation 12.7 Methods of Granting Tax Credit 12.8 Special Cases 12.1 INTRODUCTION Double taxation is imposition of two or more taxes on the same income (in case of IT), assets (in case of Capital Taxes) or any financial transaction (in case of sales taxes) in different countries. Double taxation occurs mainly due to overlapping tax laws & regulations of countries where an individual does business. When an Indian business entity makes a profit or some taxable gain in another country, it may be required to pay Tax on that income in India, as well as in country in which income was made. Double Taxation is also common in MNC s (or employees deputed abroad) where it is not equitable for a taxpayer to bear burden of tax in both countries on a single income. To protect Indian tax payers from this practice, Indian government had entered into tax treaties, known as Double Taxation Avoidance Agreement (DTAA) with about 79 countries. This means there are agreed rates of tax & jurisdiction on specified types of income arising in a country to a tax resident of another country. The objective is to encourage Foreign Investments in India and also make Foreign Markets available to Indian entities. One state claims to tax on the basis of Source of Income and another on the basis of Residence ; or both states claim to tax incomes based on Residence - hence need for elimination of Double taxation. Nation has sovereign right of imposing tax at its discretion, subject to territorial nexus. Territorial nexus connect may be qua the taxpayer or qua his income -India : Residence, extensive Source Rule, USA : Citizenship, Hong Kong : Territorial. Article 51 of the constitution sets out the following as one of the Directive Principles of State Policy. "The State shall endeavour to - (a) promote international peace and security; (b) maintain just and equitable relations between nations; (c) foster respect for international law and treaty obligations in the dealings of organised people with one another; (d) encourage settlement of international disputes by arbitration". Power to legislate treaties conferred on the Parliament by Entries 10 and 14 of List I of the Seventh Schedule. "10. Foreign affairs; all matters which bring the Union into relation with any foreign country. Entering into treaties and agreements with foreign countries and implementing of treaties, agreements and conventions with foreign countries. DIRECT TAX LAWS AND INTERNATIONAL TAXATION 309

322 Double Taxation Avoidance Agreements (DTAA) 12.2 TYPES OF DOUBLE TAXATION Economic double taxation Same economic stream of income taxed in two or more states but in the hands of different taxpayers [E.g. business profit and dividend in different countries]. Juridical double taxation Two or more states levy taxes on same entity on same income for identical periods Arises due to overlapping claims of tax jurisdictions Tax treaties largely prevent/mitigate juridical double taxation Under the IT Act 1961, there are 2 provisions, Sec-90 & 91, which provides specific relief to taxpayers to save them from DTAA. Sec-90 is for taxpayers who have paid tax to a country with which India has signed DTAA. Sec-91 provides relief to tax payers who have paid tax to a country with which India has not signed DTAA. Thus, India provides relief to both kind of taxpayers. Section 90 regulates a case where India has a tax treaty. Taxpayer has the option to be taxed as per tax treaty or domestic tax laws, whichever is more beneficial [S.90(2)], subject thereto, domestic law has full force. Domestic law provisions can, at times, be more beneficial. Section 91 provides relief from double taxation if India has no tax treaties. Person resident in India is allowed credit of foreign taxes paid against amount of Indian taxes. Section 90(1) authorises Central Government to enter into agreement with Government of other country. Section 90A(1) authorises entering into an agreement with any specified association in specified territory outside India. Objectives of the agreement could be : Elimination of double taxation Promotion of mutual economic relations, trade and investment Certainty on nature of income and quantum of tax payable irrespective of tax laws of overseas state Establishing the right of a country to tax any income stream Exchange of information to combat tax avoidance / tax evasion 12.3 AGREEMENT WITH FOREIGN COUNTRIES OR SPECIFIED TERRITORIES [SECTION 90] (1) The Central Government may enter into an agreement with the Government of any country outside India or specified territory outside India (a) for the granting of relief in respect of (i) income on which have been paid both income-tax under this Act and income-tax in that country or specified territory, as the case may be, or (ii) income-tax chargeable under this Act and under the corresponding law in force in that country or specified territory, as the case may be, to promote mutual economic relations, trade and investment, or (b) for the avoidance of double taxation of income under this Act and under the corresponding law in force in that country or specified territory, as the case may be, or (c) for exchange of information for the prevention of evasion or avoidance of income-tax chargeable under this Act or under the corresponding law in force in that country or specified territory, as the case may be, or investigation of cases of such evasion or avoidance, or (d) for recovery of income-tax under this Act and under the corresponding law in force in that country or specified territory, as the case may be, and may, by notification in the Official Gazette, make such provisions as may be necessary for implementing the agreement. 310 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

323 (2) Where the Central Government has entered into an agreement with the Government of any country outside India or specified territory outside India, as the case may be, under sub-section (1) for granting relief of tax, or as the case may be, avoidance of double taxation, then, in relation to the assessee to whom such agreement applies, the provisions of this Act shall apply to the extent they are more beneficial to that assessee. (2A) Notwithstanding anything contained in sub-section (2), the provisions of Chapter X-A of the Act shall apply to the assessee even if such provisions are not beneficial to him. (3) Any term used but not defined in this Act or in the agreement referred to in sub-section (1) shall, unless the context otherwise requires, and is not inconsistent with the provisions of this Act or the agreement, have the same meaning as assigned to it in the notification issued by the Central Government in the Official Gazette in this behalf. (4) An assessee, not being a resident, to whom an agreement referred to in sub-section (1) applies, shall not be entitled to claim any relief under such agreement unless a certificate of his being a resident in any country outside India or specified territory outside India, as the case may be, is obtained by him from the Government of that country or specified territory. (5) The assessee referred to in sub-section (4) shall also provide such other documents and information, as may be prescribed. Explanation 1 - For the removal of doubts, it is hereby declared that the charge of tax in respect of a foreign company at a rate higher than the rate at which a domestic company is chargeable, shall not be regarded as less favourable charge or levy of tax in respect of such foreign company. Explanation 2 - For the purposes of this section, specified territory means any area outside India which may be notified as such by the Central Government. Explanation 3 - For the removal of doubts, it is hereby declared that where any term is used in any agreement entered into under sub-section (1) and not defined under the said agreement or the Act, but is assigned a meaning to it in the notification issued under sub-section (3) and the notification issued thereunder being in force, then, the meaning assigned to such term shall be deemed to have effect from the date on which the said agreement came into force ADOPTION BY CENTRAL GOVERNMENT OF AGREEMENTS BETWEEN SPECIFIED ASSOCIATIONS FOR DOUBLE TAXATION RELIEF [SECTION 90A] (1) Any specified association in India may enter into an agreement with any specified association in the specified territory outside India and the Central Government may, by notification in the Official Gazette, make such provisions as may be necessary for adopting and implementing such agreement (a) for the granting of relief in respect of (i) income on which have been paid both income-tax under this Act and income-tax in any specified territory outside India; or (ii) income-tax chargeable under this Act and under the corresponding law in force in that specified territory outside India to promote mutual economic relations, trade and investment, or (b) for the avoidance of double taxation of income under this Act and under the corresponding law in force in that specified territory outside India, or (c) for exchange of information for the prevention of evasion or avoidance of income- tax chargeable under this Act or under the corresponding law in force in that specified territory outside India, or investigation of cases of such evasion or avoidance, or (d) for recovery of income-tax under this Act and under the corresponding law in force in that specified territory outside India. DIRECT TAX LAWS AND INTERNATIONAL TAXATION 311

324 Double Taxation Avoidance Agreements (DTAA) (2) Where a specified association in India has entered into an agreement with a specified association of any specified territory outside India under sub-section (1) and such agreement has been notified under that subsection, for granting relief of tax, or as the case may be, avoidance of double taxation, then, in relation to the assessee to whom such agreement applies, the provisions of this Act shall apply to the extent they are more beneficial to that assessee. (2A) Notwithstanding anything contained in sub-section (2), the provisions of Chapter X-A of the Act shall apply to the assessee even if such provisions are not beneficial to him. (3) Any term used but not defined in this Act or in the agreement referred to in sub-section (1) shall, unless the context otherwise requires, and is not inconsistent with the provisions of this Act or the agreement, have the same meaning as assigned to it in the notification issued by the Central Government in the Official Gazette in this behalf. (4) An assessee, not being a resident, to whom the agreement referred to in sub-section (1) applies, shall not be entitled to claim any relief under such agreement unless a certificate of his being a resident in any specified territory outside India, is obtained by him from the Government of that specified territory. (5) The assessee referred to in sub-section (4) shall also provide such other documents and information, as may be prescribed. Explanation 1- For the removal of doubts, it is hereby declared that the charge of tax in respect of a company incorporated in the specified territory outside India at a rate higher than the rate at which a domestic company is chargeable, shall not be regarded as less favourable charge or levy of tax in respect of such company. Explanation 2 -For the purposes of this section, the expressions (a) specified association means any institution, association or body, whether incorporated or not, functioning under any law for the time being in force in India or the laws of the specified territory outside India and which may be notified as such by the Central Government for the purposes of this section; (b) specified territory means any area outside India which may be notified as such by the Central Government for the purposes of this section. Explanation 3 -For the removal of doubts, it is hereby declared that where any term is used in any agreement entered into under sub-section (1) and not defined under the said agreement or the Act, but is assigned a meaning to it in the notification issued under sub-section (3) and the notification issued there-under being in force, then, the meaning assigned to such term shall be deemed to have effect from the date on which the said agreement came into force COUNTRIES WITH WHICH NO AGREEEMNT EXISTS [SECTION 91] (1) If any person who is resident in India in any previous year proves that, in respect of his income which accrued or arose during that previous year outside India (and which is not deemed to accrue or arise in India), he has paid in any country with which there is no agreement under section 90 for the relief or avoidance of double taxation, income-tax, by deduction or otherwise, under the law in force in that country, he shall be entitled to the deduction from the Indian income-tax payable by him of a sum calculated on such doubly taxed income at the Indian rate of tax or the rate of tax of the said country, whichever is the lower, or at the Indian rate of tax if both the rates are equal. (2) If any person who is resident in India in any previous year proves that in respect of his income which accrued or arose to him during that previous year in Pakistan he has paid in that country, by deduction or otherwise, tax payable to the Government under any law for the time being in force in that country relating to taxation of agricultural income, he shall be entitled to a deduction from the Indian income-tax payable by him (a) of the amount of the tax paid in Pakistan under any law aforesaid on such income which is liable to tax under this Act also; or (b) of a sum calculated on that income at the Indian rate of tax; whichever is less. 312 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

325 (3) If any non-resident person is assessed on his share in the income of a registered firm assessed as resident in India in any previous year and such share includes any income accruing or arising outside India during that previous year (and which is not deemed to accrue or arise in India) in a country with which there is no agreement under section 90 for the relief or avoidance of double taxation and he proves that he has paid income-tax by deduction or otherwise under the law in force in that country in respect of the income so included he shall be entitled to a deduction from the Indian income-tax payable by him of a sum calculated on such doubly taxed income so included at the Indian rate of tax or the rate of tax of the said country, whichever is the lower, or at the Indian rate of tax if both the rates are equal. Explanation -In this section, (i) the expression Indian income-tax means income-tax charged in accordance with the provisions of this Act; (ii) the expression Indian rate of tax means the rate determined by dividing the amount of Indian income-tax after deduction of any relief due under the provisions of this Act but before deduction of any relief due under this Chapter, by the total income; (iii) the expression rate of tax of the said country means income-tax and super-tax actually paid in the said country in accordance with the corresponding laws in force in the said country after deduction of all relief due, but before deduction of any relief due in the said country in respect of double taxation, divided by the whole amount of the income as assessed in the said country; (iv) the expression income-tax in relation to any country includes any excess profits tax or business profits tax charged on the profits by the Government of any part of that country or a local authority in that country. Article 1 Article 2 Article 3 Article 4 Article 5 Article 6 to 21 Article 7 Scope of convention Taxes Covered General Definitions, Resident Permanent establishment Taxation of various incomes-business profits, Royalties, Fees for Technical services, Interest, Dividends, etc. Business Profits If there is a country with which India does not have a Double Taxation Avoidance Agreement, and the assessee in respect of income arising outside India, pays income tax in foreign country and also in India, then he shall be entitled to deduct the lower of the of the following amount from income tax payable by him in India in respect of such doubly taxed income; (i) Tax on such doubly taxed income at the rates applicable in India which shall be computed as under: Tax on Total Income in India Such doubly taxed income Total Income in India (ii) Tax on such doubly taxed income at the rates applicable in foreign country which shall be computed as under: Tax Paid in Foreign Country Such Doubly Taxed Income Total Income Assessed in Foreign Country Double Non-Taxation: Income escapes tax in one country on account of DTAA & in other country on account of its Local Tax laws. This gives rise to the income escaping tax altogether. Examples: Mauritius, UAE. There are large no. of FII trading on Indian markets operate from Mauritius. According to treaty between these countries, Capital Gains are taxable in DIRECT TAX LAWS AND INTERNATIONAL TAXATION 313

326 Double Taxation Avoidance Agreements (DTAA) country of residence of shareholder and not in country of residence of company whose shares are sold. Therefore, a company resident in Mauritius selling shares of an Indian company will not pay tax in India and since there is no capital gains tax in Mauritius, gain will escape tax altogether. Treaty Ovrride In cross-border tax scenario: Assessee can avail benefit of bilateral agreements between contracting state; OR Assessee can choose to be governed by Indian tax laws Whichever is more beneficial to tax-payer. Structure of DTAA Article 10, 11 Article 12 Article 14 Article 15 Article 21 Article 22 Article 23A and 23B Article 24 and 29 Article 30,31 Dividends & Interests Royalties & FTS Independent Personal Services Dependant Personal Services Other Income Taxation of capital Methods of elimination of double taxation Special provisions-non discrimination Entry into force, Termination 12.6 APPROACHES FOR ELIMINATION OF DOUBLE TAXATION Bilateral Agreements between Contracting states - Section 90 provides for tax relief in accordance with treaties executed by India. Unilateral Tax credit Foreign tax credit system, Section 91 provides relief where no treaty exists. Section-90 - Under Section 90 & 91 of IT Act, relief against double taxation is provided in 2 ways: Bilateral Relief, Under Section 90 Indian government offers protection against double taxation by entering into a DTAA with another country, based on mutually acceptable terms. Such relief may be offered under two methods: Exemption method Ensures complete avoidance of tax overlapping Tax credit method Provides relief by giving taxpayer a deduction from tax payable in India Section-91 Unilateral Relief, Under Section 91 Indian government can relieve an individual from double taxation whether there is a DTAA between India & other country concerned. Unilateral relief may be offered if: The person /company has been a resident of India in previous year Same income must be accrued to & received by taxpayer outside India in previous year Income should have been taxed in India & in another country with which there is no tax treaty The person or company has paid tax under laws of foreign country in question 314 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

327 12.7 METHODS OF GRANTING TAX CREDITS (a) Exemption Method (I) Full Exemption - The Income earned in the state of source is fully exempt in the State of residence (II) Exemption with Progression - Income earned in state of source is considered in state of residence only for rate purpose (b) Credit Method (i) Full Credit - Total tax paid in state of source is allowed as a credit against any tax payable in state of residence (ii) Ordinary Credit - State of residence allows credit of tax paid in state of source Restricted to that part of income-tax which is attributable to income, taxable in state of residence Underlying Tax Credit (UTC) Provides relief from tax on same income, which has already suffered tax in form of corporate profits tax. Pre condition: Certain percentage of share held by recipient in capital of the payer company. DTAA entered into by India do provide for UTC by other state Illustratively USA, UK.DTAA with Mauritius & Singapore cover UTC in both countries. Example - Income before taxation of the Mauritius Co 100,000 40% 40,000 Income after Tax 60,000 Dividend Distributed by the Mauritius Co 30,000 Profit carried forward 30,000 50% of the equity of Mauritius Co. is held by Indian Co Dividend paid to Indian Company 15,000 UTC (15,000 X 40,000 / 60,000) 10,000 Unilateral Tax Credit Requirements Resident of India for relevant previous year Income has accrued or arisen outside India and is doubly taxed Taxes have been paid in the source country There is no DTAA with that country Items of Income not covered under DTAA eligible for credit Relief : Deduction from the Indian income-tax payable by him of a sum calculated on such doubly taxed income at the Indian rate of tax, OR the rate of tax of the said country, whichever is the lower, OR the Indian rate of tax if both the rates are equal Tax Residency Certificate ( TRC) Section 90(5) & Section 90A(5) w.e.f. 1st April 2013 For claiming relief under DTAA section 90 & 90A empowers the Central Government to enter into Double Taxation Avoidance Agreement with the foreign countries / foreign territories. With effect from 1st April 2013, to avail the DIRECT TAX LAWS AND INTERNATIONAL TAXATION 315

328 Double Taxation Avoidance Agreements (DTAA) benefit, submission of TRC would be necessary. A simple certificate of being resident of a country is required to avail the benefits of DTAA. Section 90A(4) provides that treaty benefit will not be available to any NR unless he furnishes TRC from Government of other country including therein particulars as may be prescribed. Rule 21AB notified on 17 September 2012, w.e.f 1 April Explanatory Memorandum of FB 2012 had stated that submission of TRC is necessary but not a sufficient condition for claiming benefits under DTAA. This is now proposed in S.90(5) of the Act. Amendment to apply retroactively from A.Y Tax treaty Residency Rules A person is a resident of a country if it is liable to tax in the country by virtue of : Domicile Residence Place of management Any other criterion of a similar nature Term liable to tax is not same as actual payment of tax [SC in ABA] In case a person is resident of both countries In case of an individual tie breaker rule determines residency In any other case the place of effective management Treaty: Agreement between Governments Treaties are signed by two national jurisdictions to regulate matters concerning taxes Taxpayer is not a party to a tax treaty Desire of signatories to make business environment in their jurisdictions tax friendly Treaty represents understanding as to rights and obligations of respective country to forego its right to tax, to limit scope or rate of taxation, to grant credit of tax paid directly or indirectly in other jurisdiction/s etc. etc. Understanding between Governments is to share tax revenues equitably as between themselves, while mitigating hardship for taxpayers 12.8 SPECIAL CASES Special Cases Taxation of Business process outsourcing units in India The provisions containing taxation of IT-enabled business process outsourcing units are not contained the Incometax Act, 1961 but are given in Circular No. 5/2004 dated issued by the CBDT which is as under: (1) A non-resident entity may outsource certain services to a resident Indian entity. If there is no business connection between the two, the resident entity may not be a Permanent Establishment of the non-resident entity, and the resident entity would have to be assessed to income-tax as a separate entity. In such a case, the nonresident entity will not be liable under the Income-tax Act, (2) However, it is possible that the non-resident entity may have a business connection with the resident Indian entity. In such a case, the resident Indian entity could be treated as the Permanent Establishment of the nonresident entity. The tax treatment of the Permanent Establishment in such a case is under consideration in this circular. 316 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

329 (3) During the last decade or so, India has seen a steady growth of outsourcing of business processes by nonresidents or foreign companies to IT-enabled entities in India. Such entities are either branches or associated enterprises of the foreign enterprise or an independent Indian enterprise. Their activities range from mere procurement of orders for sale of goods or provision of services and answering sales related queries to the provision of services itself like software maintenance service, debt collection service, software development service, credit card/mobile telephone related service, etc. The non-resident entity or the foreign company will be liable to tax in India only if the IT-enabled BPO unit in India constitutes its Permanent Establishment. The extent to which the profits of the non-resident enterprise are to be attributed to the activities of such Permanent Establishment in India has been under consideration of the Board. (4) A non-resident or a foreign company is treated as having a Permanent Establishment in India under Article 5 of the Double Taxation Avoidance Agreements entered into by India with different countries if the said nonresident or foreign company carries on business in India through a branch, sales office, etc. or through an agent (other than an independent agent) who habitually exercises an authority to conclude contracts or regularly delivers goods or merchandise or habitually secures orders on behalf of the non-resident principal. In such a case, the profits of the non-resident or foreign company attributable to the business activities carried out in India by the Permanent Establishment becomes taxable in India under Article 7 of the Double Taxation Avoidance Agreements. (5) Paragraph 1 of Article 7 of Double Taxation Avoidance Agreements provides that if a foreign enterprise carries on business in another country through a Permanent Establishment situated therein, the profits of the enterprise may be taxed in the other country but only so much of them as are attributable to the Permanent Establishment. Paragraph 2 of the same Article provides that subject to the provisions of Paragraph 3, there shall in each contracting state be attributed to that Permanent Establishment the profits which it might be expected to make if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing independently with the enterprise of which it is a Permanent Establishment. Paragraph 3 of the Article provides that in determining the profits of a Permanent Establishment there shall be allowed as deductions expenses which are incurred for the purposes of the Permanent Establishment including executive and general administrative expenses so incurred, whether in the State in which the Permanent Establishment is situated or elsewhere. The expenses that are deductible would have to be determined in accordance with the accepted principles of accountancy and the provisions of the Income-tax Act, (6) Paragraph 2 contains the central directive on which the allocation of profits to a Permanent Establishment is intended to be based. The paragraph incorporates the view that the profits to be attributed to a Permanent Establishment are those which the Permanent Establishment would have made if, instead of dealing with its Head Office, it had been dealing with an entirely separate enterprise under conditions and at prices prevailing in the ordinary market. This corresponds to the arm s length principle. Paragraph 3 only provides a rule applicable for the determination of the profits of the Permanent Establishment, while paragraph 2 requires that the profits so determined correspond to the profit that a separate and independent enterprise would have made. Hence, in determining the profits attributable to an IT-enabled BPO unit constituting a Permanent Establishment, it will be necessary to determine the price of the services rendered by the Permanent Establishment to the Head office or by the Head office to the Permanent Establishment on the basis of arm s length principle. (7) Arm s length price would have the same meaning as in the definition in section 92F(iii) of the Income-tax Act. The arm s length price would have to be determined in accordance with the provisions of sections 92 to 92F of the Income-tax Act. (8) The CBDT Circular No. 1/2004, dated is hereby withdrawn with immediate effect [Circular No. 5/2004, dated ]. Dividend: Dividend is taxed in the country where the company is incorporated, the other country foregoing the tax thereon even if the dividend income is to be assessed under the relevant laws of that country. Incorporation of the company itself may well depend upon the country, choice of those in control and management, so as to avail a lesser rate of tax. India taxed non-residents on dividend at 20%, before dividend distribution tax was introduced. The range of tax in most countries is 10% to 20%. DIRECT TAX LAWS AND INTERNATIONAL TAXATION 317

330 Double Taxation Avoidance Agreements (DTAA) Interest: Under the most Double Taxation Avoidance Agreement, rate of tax on interest is 10% but may range from 10% to 20% with a nominal variation for Syria which is 7.5%. Domestic rate of tax itself was 10% for foreign direct loan utilized in India now, by an amendment by the Finance Act, 2012, reduced to 5% from A.Y , so that one has not to look to Double Taxation Avoidance Agreement for relief in most cases. Royalty: Royalty for supply of technical know-how, patents or other intellectual property rights is most common occurrence in most collaboration agreements with India taxing such royalty at 30% where agreements were made before 31st day of March, 1997, at 20% where agreements were made on or after 1st day of April, 1997 up to 31st day of May, 2005 and finally reduced to 10% where agreements were made on or after 1st day of June, Definition of royalty requires attention because of amendment expanding the meaning of royalty with retrospective effect from The definition vide Explanations 4, 5 and 6 of section 9(1)(vi) as it stands after amendment made by the Finance Act, 2012, reads as follows: Explanation 4 For the removal of doubts, it is hereby clarified that the transfer of all or any rights in respect of any right/property/information includes and has always included transfer of all or any right for use or right to use a computer software (including granting of a licence) irrespective of the medium through which such right is transferred. Explanation 5 For the removal of doubts, it is hereby clarified that the royalty includes and has always included consideration in respect of any right, property or information, whether or not (a) the possession or control of such right/property/information is with the payer; (b) such right/property/information is used directly by the payer; (c) the location of such right/property/information is in India. Explanation 6 For the removal of doubts, it is hereby clarified that the expression process includes and shall be deemed to have always included transmission by satellite (including up-linking, amplification, conversion for down-linking of any signal), cable, optic fibre or by any other similar technology, whether or not such process is secret. But in most countries in respect of supplies on royalty basis the rate of tax is low at 10% so as to encourage development of technology. In respect of some countries the rate is lower, if it is in connection with supply of scientific or technical services. According to the Amendments made by Finance Act, 2013, the tax rate, in case of non-resident tax payer, in respect of income by way of royalty as provided u/s 115A, shall be 25%. Technical Fees: Explanation 2 to section 9(1)(vii) defines fee for technical services, which reads as under: Fees for Technical Services means any consideration including any lump sum consideration for the rendering of any managerial, technical or consultancy services including the provision of services of technical or other personnel but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head Salaries. Regular agreements or protocols relating to copyright, patents, designs, etc., may provide for sharing of R&D services or provide for assistance by deputation of personnel and even for undertaking training. Services may be rendered either from the home country or in the host country with the result that the identification of the income accruing in respective countries under the local laws may present a problem as it has happened in a number of cases in India. the technical fees of non-residents is taxed by Indian Laws at 20% where agreements were made up to and 10% thereafter. The Finance Act, 2013 has increased the rate to 25%. The interpretation of the Department with reference to definition of technical fees u/s 9(1)(vii) has been that any use of such technical service in India would attract tax at the domestic rate, even if the entire service is rendered abroad. Hence, the country with which Indian importer of technical know-how makes an agreement may make vital difference to the non-resident s liability which is relevant for the Indian taxpayer either because he bears such tax under the agreement or such tax forms the component of the amount which he has agreed to pay with the result that it is always the burden of the taxpayer in the market where demand overruns supply. Where tax rate under the agreement is lower than the domestic rate, the non-resident is entitled to be taxed at such lower rate under the agreement [CIT vs. Reiter Ingolsteadt Spinnereimaschinenbau AG, (2006) 285 ITR 199 (Mad)]. In case the inference of technical service fails, royalty may be sought to be inferred. Royalty in respect of technical know-how should be one, which is capable of being patented and even if not patented, it should be a matter of purveyance of not 318 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

331 mere knowledge, but of technique. If it were knowledge, it should be special knowledge, not a matter of public property. A copyrighted article may be sold without attracting the inference of royalty, but copyright itself can be transferred only subject to royalty. Salary: An employee of a non-resident company in India working for such company will become a resident, if he stays in India for 183 days, so that his salary may accrue in India. But where such salary was not borne by a permanent establishment of the non-resident in India and it was paid abroad, such salary income could not be taxable under Double Taxation Avoidance Agreement as was rendered in the context of Agreement between India and such other country. Conducting Examination in India: A non-resident non-profit organisation was conducting examination through an agent in India without itself having an office in India, besides conducting training programmes on subjects like corporate training, management, consultancy, publishing and trading in educational materials, etc. Authority for Advance Rulings ruled that the applicant for ruling was a non-resident being a tax resident of US and a nonprofit organisation was spared liability by the Double Taxation Avoidance Agreement between India and US, in Knowerx Education (India) P. Ltd., In re (2008) 301 ITR 207 (AAR). Indian company, however, could not be treated as an agent of the non-resident, since it was not concluding contracts on behalf of the non-resident. It could not also be treated as a dependent agency, since it enjoyed independent status. The acceptance of candidature of an individual for a certification in the examination was solely by the non-resident. It was further found that the nature of service was such that it could only be characterised as business, so that it falls under Article 7 of the Indo- US Agreement with liability for non-resident, if the non-resident has a permanent establishment in India, in which case, the income attributable to such PE would have become taxable. It follows that the applicant was not liable to deduct tax at source from payments made by it or routed through it. Consultancy Services: In case marketing consultancy service is involved, it may not be construed as technical service either in the definition of technical service in Explanation to section 9(1)(vii) or in the relevant Article 12 relating to royalty and technical fees under Double Taxation Avoidance Agreement. What is contemplated in such cases is purely one of marketing of service abroad, if such service is confined outside India. Payment for such service is on par with common sales not liable to tax in India, if services are rendered abroad [CIT vs. Toshoku Ltd. (1980) 125 ITR 525 (SC)]. The interpretation placed by the Tribunal in Deputy CIT vs. Boston Consulting Group P. Ltd. (2006) 280 ITR (AT)1(Mumbai) is more in keeping with the understanding that business of consultancy service is nontechnical in nature, so that it may not be treated as royalty and technical fees, but only as professional services. Merely because such services are used in India, the income, there from, does not become taxable either under the domestic law in India or as royalty and technical fees under Double Taxation Avoidance Agreement. The Delhi Bench of the Tribunal, in Sheraton International Inc. vs. Dy. Director of Income Tax(2007) 293 ITR (AT) 68, also understood the law on the subject in the same manner. Foreign Branch Losses in the case of a Resident: The assessee, who is a resident and ordinarily resident in India is assessable on his global income. It follows that loss in foreign branch has to be set-off against other income of the assessee. Where the Assessing Officer sought to apply the provisions of the Double Taxation Avoidance Agreement between India and Japan to disallow the loss of the branch located in Japan, it was held, in Dy. CIT vs. Patni Computer Systems Limited, (2008) 301 ITR (AT) 60 (Pune), that the assessee is entitled to the benefit of either domestic law or Double Taxation Avoidance Agreement, whichever is more favourable to it. On this reasoning, based on Treaty Override, it is also open to the assessee to claim protection of Double Taxation Avoidance Agreement in a later year, when there is profit. Such claim cannot be barred, merely because of different treatment of loss in an earlier year. Internet Access: Advance Ruling Authority, had ruled on information technology in cross-border transactions. The non-resident was having travel business issuing international credit cards, travellers cheques and providing other travel related services through a worldwide data network maintained in Hong Kong. The act work supplied information through telephonic and microwave devices as to the transactions in India, through a computer linked with the network for an Indian company, which was rendering service to other group companies with the Indian company by passing on the information to Hong Kong for communication and for this purpose it had leased online facilities from VSNL. The Indian company though not a direct subsidiary of the American company was a DIRECT TAX LAWS AND INTERNATIONAL TAXATION 319

332 Double Taxation Avoidance Agreements (DTAA) subsidiary of its subsidiary, so that it has been described as sub-subsidiary. It is on these facts, the issue was whether the amount paid by the Indian sub-subsidiary to the applicant for advance ruling, an American company, for use of software and equipment could be called royalty. If it were royalty, it would be taxable in India vide Explanation 2 to section 9(1)(vi) and should be liable to Indian tax even under the Double Taxation Avoidance Agreement by following the source rule. The Authority for Advance Rulings found that the transaction involved a high degree of technical content, which could be described as intellectual property, so that the payment for the use of the same would partake of the character of royalty. There is secrecy involved in respect of transactions of the customers, while analytical data processing is also inevitable. Even that part of the definition covering the right to use any industrial, commercial or scientific equipment would also cover such payment. There is liability under Article 12 of the Agreement between the U. S. and India. Monitoring Consultancy Services of a Branch in India: In the case of Worleyparsons Services Pty. Ltd. In re (2008) 301 ITR 54 (AAR), it was held that in Service of monitoring consultants for a pipeline project in India has to be treated as a business activity, so that the payment for the same cannot be treated as royalty. The income from such activity can only be treated as profit from business. There was also no parting of technology involved as required under the definition of technical services under Article 12(3)(g) of the Double Taxation Avoidance Agreement between India and Australia to constitute technical fees. The assessable income, therefore, would be the profit attributable to the permanent establishment, which the non-resident had in India for purposes of its activity. Technology along with Training: In the case of Director General of Inland Revenue vs. Phaltan Sugar Works(1983) 1 MLJ 74, it was held by a Malaysian court, that a payment in pursuance of a joint venture agreement, for supply of technology and investments besides supply of technical personnel could be treated as an agreement giving rise to receipts which could be treated as royalty. Ticketing Service: Sheraton group of companies, a non-resident U.S. company engaged in hotel related services worldwide, had entered into an agreement with Indian companies including ITC Ltd. Hotel Division and others for helping to procure business for the hotels in India at 3 per cent of the room sales for services which included publicity, advertisement and reservation facilities for overseas customers, by way of brochures, directories, room magazines, brand advertising, promotion of trade shows abroad, etc. The Tribunal in Sheraton International Inc. vs. Deputy Director of Income Tax (2007) 293 ITR (AT) 68 (Delhi), found that services rendered by the non-resident would not attract either the definition of royalty or technical fees. The services rendered were more related to marketing of Indian hotels abroad by advertisement to promote tourism and encourage visitors coming to India to be lodged in these hotels by means which can be described as mere ticketing service, since advertisement, publicity and sales promotion abroad were the main functions with the use of the trade mark or trade name and other services was merely incidental to this main service of the publicising the hotels abroad. The definition of royalty and technical fees in the Indo-US Agreement, it was decided, would also not give rise to any different inference. Transponder Hire: In Asia Satellite Communications Co. Ltd. vs. DCIT, (2003) 85 ITD 478 (Del), it was held that payment for uplifting of transponder service through earth stations and conversion of signals was held to be royalty. Illustration 1. The Income-tax Act, 1961 provides for taxation of a certain income earned by X. The Double Taxation Avoidance Agreement, which applies to X, excludes the income earned by X from the purview of tax. Is X liable to pay tax on the income earned by him? Discuss. Solution: Where any conflict arises between the provisions of the Double Taxation Avoidance Agreement and the Incometax Act, 1961, the provisions of the Double Taxation Avoidance Agreement would prevail over those of the Incometax Act. X is, therefore, not liable to pay tax on the income earned by him. Illustration 2. Explain briefly the proposition of law in case of any conflict between the provisions of the Double Taxation Avoidance Agreement (DTAA) and the Income-tax Act, DIRECT TAX LAWS AND INTERNATIONAL TAXATION

333 Solution: Where there is conflict between the provision as contained in the tax treaty and the provisions of Income Tax Act, a payer can take advantage of those provisions which are more beneficial to him. Thus, tax treaties override the provisions of Income Tax Act which can be enforced by the Appellate Authorities/ Courts. Illustration 3. A resident assessee, earned foreign exchange of Rs 78,800. The foreign income was also subjected to tax deduction of Rs 8,800 at source in the foreign country with which India had no agreement for avoidance of double taxation. The assessee claimed relief under Sec. 91 of the Income-tax Act in respect of the whole foreign income. Discuss his contention with reference to decided case laws. Solution: Where any income is taxed outside India as well as in India, a resident assessee is entitled to claim double taxation relief on such doubly taxed income provided such income is not deemed to accrue or arise in India. If any income arising outside India, is not subjected to tax in India, such foreign income does not form part of doubly taxed income for the purposes of Sec. 91. The expression doubly taxed income refers to foreign income which also suffered tax in India. Where any foreign income, taxed outside India, is also eligible to deduction in computing total income in India, double taxation relief would be allowed only on such income as forms part of total income. On the amount of doubly taxed income, Income-tax is calculated at the Indian rate of tax and rate of tax of the foreign country. The foreign tax rate has to be calculated separately for each country CIT vs. Bombay Burmah Trading Corpn. Ltd. [2003] 126 Taxman 403 (Bom.) Double taxation relief will be allowed on such doubly taxed income either at the average rate of Foreign Income Tax or Indian Income Tax, whichever is lower out of the two. Illustration 4. An Indian company pays to a foreign company for providing engineering services to be utilised in India. Part of the work is done abroad but the payment is made entirely outside India. Is the foreign company liable for Indian Income-tax? Solution: Yes. The criterion is not where it is paid but where the services are utilized [Steffen Robertson and Kirsten Consulting Engineers and Scientists vs. CIT. (1998) 230 ITR 207 (AAR)]. But liability will be limited to the proportionate profits attributable to activities in India under Explanation 1 to section 9(1) and as provided invariably in all DTA agreements. Illustration 5. A resident pays for electronic purchase of business information reports. Is the payment to be taxed as royalty? Solution: No. The transactions are on principal to principal basis, where there is no P.E. of the non-resident. Information is available to anyone. It is not royalty [ABC Ltd., In re, (2006) 284 ITR 1 (AAR)]. Illustration 6 A Ltd. registered in UK filed a certificate of residence in UK from Indian Revenue Authorities in UK and claimed that its entire income from shipping was exempted under Article 9(1) of the Indo-UK Convention. Can the Assessing Officer deny exemption on the ground that assessee has not established its residence in the UK so as to attract the benefit of Indo-UK Agreement? Solution: Where a company is incorporated in the UK filed a certificate of residence as well, the Assessing Officer has no material to question the claim of the assessee [Arabian Express Line Ltd. of UK vs. UOI (1995) 2012 ITR 31 (Guj) Illustration 7 S&L Ltd., a foreign company has no share in an Indian company, but the holding company of S&L Ltd. has. Indian DIRECT TAX LAWS AND INTERNATIONAL TAXATION 321

334 Double Taxation Avoidance Agreements (DTAA) company advances loan to the foreign company. Does it attract tax as dividend under section 2(22)(e)? Solution: No. As S&L Ltd. is not a shareholder in the Indian company, section 2(22)(e) does not apply [Madura Coats P. Ltd., In re (2005) 274 ITR 609 (AAR)]. Illustration 8 What are the conditions for taxation of a non-resident on his salary income in India? Solution: There are three conditions all of which are to be satisfied, namely, residence for 183 days or more, payments from a permanent establishment of the country to which the salary is charged etc. for deduction of the same. Primarily the taxability will arise in the country where the service is rendered, unless the residence is less than 183 days in which case, there is liability [CIT vs. Elitos S.P.A. (2006) 280 ITR 495 (All.) Where stay is more than 183 days, the liability is at the place of residence though payment is made elsewhere [Hindustan Powerplus Ltd., In re (2004) 271 ITR 433 (AAR)]. Normally, tax is to be paid where service is rendered but the exceptions are to be considered [Emmerich Jaegar vs. CIT (2005) 274 ITR 125 (Guj.). Illustration 9 If a taxpayer is entitled to double tax relief in India, though assessable under Indian Law, could such relief be denied merely because such income is exempt from tax in the other country? Solution: No. There can be double non-taxation. It was so pointed out in CIT vs. Laxmi Textile Exporters Ltd. (2000) 245 ITR 521 (Mad.), in the similar situation, where income was eligible for exemption under Srilankan Law, though not taxable in India under the DTAA, it was held that relief cannot be denied. The High Court found that the DTAA is binding on the Government even [CIT vs. Visakhapatnam Port Trust (1983) 144 ITR 146 (AP)]. Illustration 10 Vikram aged 70 years resident in India received a dividend of Rs. 2,00,000 from shares held in a company situated in Malaysia. The other incomes of the assessee in India was Rs. 12,00,000. The company in Malaysia deducted tax at source and no furhter tax is payable in respect of dividend income in Malaysia. The AO wants to tax the dividend income of Vikram in India since he is a resident in India. Decide the issue. Solution: If there is a Double Taxation Avoidance Agreement (DTAA) between India and Malaysia, then the dividend taxability shall be governed by such DTAA. As per the DTAA: (i) Income is taxed in one of the countries (ii) If income is taxed in both the countries, then the tax paid is one country is allowed as credit fromt he tax payable in other courty. Therefore, as per DTAA between India and Malaysia dividend will be taxed in either India or Malaysia. since it has been taxed in Malaysia it shall not be taxable in India. If DTAA provides that dividend is taxable in India as well as Malaysia, then the tax deducted at source in Malaysia will be allowed credit from tax payable in India. If there is no DTAA between India and Malaysia, then relief for double taxation can be claimed under section 91. Illustration 11 An assessee on fulfillment of certain conditions can claim relief in respect of the income arising in those countries with which India does not have nay double taxation agreement. Do you agree? Solution: 322 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

335 As per Section 91 of the Income Tax Act, if there is a country with which India does not have a Double Taxation Avoidance Agreement, and the assessee in respect of income arising outside India, pays income tax in foreign country and also in India, then he shall be entitied to deduct the lower of the following amount from Income Tax payable by him in India in respect of such doubly taxed income; (i) Tax on such doubly taxed income at the rates applicable in India which shall be computed as under: Tax on Total Income in India Such doubly taxed income Total Income in India (ii) Tax on such doubly taxed income at the rates applicable in foreign country which shall be computed as under: Tax Paid in Foreign Country Such Doubly Taxed Income Total Income Assessed in Foreign Country Illustration 12 Kalpesh Kumar is musician deriving income of `75,000 from concerts performed outside of India. Tax of `10,000 was deducted at source in the country where the concerts were performed. India does not have any double tax avoidance agreement with that country. His income in India amounted to `8,25,000. Computed tax liabilities of Kalpesh Kumar for the assessment year assuming he has deposited `1,00,000 in Public Provident Fund, `50,000 in LIC and Medical Insurance premium in respect of his father `20,000. Solution: Computation of Tax Liability of Mr. Kalpesh Kumar Assessment Year Particulars Amount (`) Income from concerts performed outside India 75,000 Income earned in India 8,25,000 Gross Total Income 9,00,000 Less: Deductions under Chapter VI-A Section 80C 1,50,000 Section 80D 20,000 Total Taxable Income 7,30,000 Tax on Total Income 71,000 Add: Education 3% 2,130 Total Tax 73,130 Less: Relief under Section 91 7,513 Tax Payable 65,617 Note: The relief under section 91 shall be as under: (a) (b) 73,130 7,30,000 10,000 75,000 75,000 = 7,513 75,00 = 10,000 DIRECT TAX LAWS AND INTERNATIONAL TAXATION 323

336 Double Taxation Avoidance Agreements (DTAA) Therefore, relief under section 91 is `7,513. Illustration 13 A resident assessee, earned foreign exchange of `78,800. The foreign income was also subjected to tax deduction of `8,800 at source in the foreign country with which India had no agreement for avoidance of double taxation. The assessee claimed relief under Sec. 91 of the Income-tax Act in respect of the whole foreign income. Discuss his contention with reference to decided case laws. Solution: Where any income is taxed outside India as well as in India, a resident assessee is entitled to claim double taxation relief on such doubly taxed income provided such income is not deemed to accrue or arise in India. If any income arising outside India, is not subjected to tax in India, such foreign income does not form part of doubly taxed income for the purposes of Sec. 91. The expression "doubly taxed income" refers to foreign income which also suffered tax in India. Where any foreign income, taxed outside India, is also eligible to deduction in computing total income in India, double taxation relief would be allowed only on such income as forms part of total income. On the amount of doubly taxed income, Income-tax is calculated at the Indian rate of tax and rate of tax of the foreign country. The foreign tax rate has to be calculated separately for each country-cit vs. Bombay Burmah Trading Corpn. Ltd. [2003] 126 Taxman 403 (Bom.) Illustration 14 A resident pays for electronic purchase of business information reports. Is the payment to be taxed as royalty? Solution: No. The transactions are on principal to principal basis, where there is no P.E. of the non-resident. Information is available to anyone. It is not royalty [ABC Ltd., In re, (2006) 284 ITR 1 (AAR)]. Illustration 15 S&L Ltd., a foreign company has no share in an Indian company, but the holding company of S&L Ltd. has Indian company advances loan to the foreign company. Does it attract tax as dividend under section 2(22)(e)? Solution: No. As S&L Ltd. is not a shareholder in the Indian company, section 2(22) (e) does not apply [Madura Coats P. Ltd., In re (2005) 274 ITR 609 (AAR)]. 324 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

337 Study Note - 13 TRANSFER PRICING This Study Note includes 13.1 Meaning of Tranfer Pricing 13.2 Arm's Length Principle 13.3 Relevance of Cost Accounting Principles in Arm's Length Pricing 13.4 Advance Pricing Agreements (APA) 13.5 Base Erosion & Profit Shifting (BEPS) and General Anti Avoidance Rules (GAAR) 13.1 MEANING OF TRANSFER PRICING (TP) The source rule/statutory provision relating to levy and collection of tax liability on international transactions or specified domestic transactions is empowered through Sec.92 to 92F of the Income Tax Act, These provisions were inserted by the Finance Act, With the opening up of global economy, apart from goods, there has been transfer or transaction relating to rendering of services cross-border. There is a magnanimous increase in the volume of cross-border transactions, which calls for attracting the provisions of Indirect Taxes in India. There arises the necessity and therefore leads to computation of reasonable, fair and equitable profit and tax in India are not being eroded of Indian tax revenue. Any income arising from an international transaction or specified domestic transactions shall have to be computed having regard to arm s length price. TP was earlier limited to International Transactions. The SC in the case of CIT vs Glaxo Smithkline Asia Pvt Ltd [ Taxman 35 (SC)] recommended introduction of domestic TP provisions. It is a Mechanism or exercise through which price for transfer or say transfer price, of, tangibles, intangibles, services, capital financing etc.is computed. Mechanism to compute an arm s length price is given in section 92C of the Income Tax Act read with Rule 10B and 10C. As per Sec. 92B of the Income Tax Act, (1) For the purposes of this section and sections 92, 92C, 92D and 92E, international transaction means a transaction between two or more associated enterprises, either or both of whom are non-residents, in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises, and shall include a mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises. (2) A transaction entered into by an enterprise with a person other than an associated enterprise shall, for the purposes of sub-section (1), be deemed to be an international transaction entered into between two associated enterprises, if there exists a prior agreement in relation to the relevant transaction between such other person and the associated enterprise, or the terms of the relevant transaction where the enterprise or the associated enterprise or both of them are non-residents irrespective of whether such other person is a nonresident or not. ASSOCIATED ENTYERPRISE The term 'associated enterprise' has been defined in a broad manner. Based on the same, the following illustrates the definition when Enterprise X ("X") would be the associated enterprise of Enterprise Y-("Y"): X participates, directly or indirectly, or through one or more intermediaries, in the management, control 4 or capital of Y and one or more of the requisites enlisted below are fulfilled; or DIRECT TAX LAWS AND INTERNATIONAL TAXATION 325

338 Transfer Pricing The same persons participate in the management, control or capital of X, as also that of Y and one or more of the requisites enlisted below are fulfilled. X and Y would be deemed to be associated enterprises if at any time during the previous year: X holds directly or indirectly shares carrying at least 26% voting power in Y or vice versa; Any person holds directly or indirectly shares carrying at least 26% voting power in both X and Y; A loan advanced by X to Y amounts to atleast 51 % of book value of the total assets of Y or vice versa; X guarantees at least 10% of the total borrowings of Y or vice versa; More than half of the directors or members of the governing board, or one or more of the executive directors or executive members of the governing board of X are appointed by Y or vice versa; More than half of the directors or members of the governing board, or one or more of the executive directors or members of the governing board of X and Y are appointed by the same person(s); The manufacture / processing of goods/articles by, or business of, X, is wholly dependent on use of intangibles or any other commercial rights of similar nature, or any data, documentation or drawing etc., owned by Y or for which Y has exclusive rights; or At least 90% of raw materials for the manufacture or processing of goods or articles required by X are supplied by Y or persons specified by Y under commercial terms influenced by Y or; Goods / articles manufactured / processed by X are sold to Y or persons specified by Y, and Y influences the commercial terms relating to the sale or; X is controlled by Mr. A and Y is controlled by Mr. A or relative of Mr. A either individually or jointly; X is controlled by a Hindu Undivided Family, and Y is controlled by a member of such Hindu Undivided Family or by a relative of a member of such Hindu Undivided Family, or jointly by such member and his relative; or X is a firm, association of persons or body of individuals, and Y holds at least 10% interest in such firm, association of persons or body of individuals; or There exists, between X and Y, any relationship of mutual interest, as may be prescribed (no such relationship has yet been prescribed) ARM'S LENGTH PRINCIPLE Section 92(2A) provides - Any allowance for an expenditure or interest or allocation of any cost or expense or any income in relation to the specified domestic transaction shall be computed having regard to the arm's length price. Underlying Principle Prices set for a transaction between related parties should for tax purposes be derived from prices which would have been applied by unrelated parties in similar transactions under similar conditions in the open market. Specified Domestic Transactions ( SDT) For the purposes of this section and sections 92, 92C, 92D and 92E, specified domestic transaction in case of an assessee means any of the following transactions, not being an international transaction, namely: (i) any expenditure in respect of which payment has been made or is to be made to a person referred to in clause (b) of sub-section (2) of section 40A; (ii) any transaction referred to in section 80A; (iii) any transfer of goods or services referred to in sub-section (8) of section 80-IA; 326 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

339 (iv) any business transacted between the assessee and other person as referred to in sub-section (10) of section 80-IA; (v) any transaction, referred to in any other section under Chapter VI-A or section 10AA, to which provisions of sub-section (8) or sub-section (10) of section 80-IA are applicable; or (vi) any other transaction as may be prescribed, and where the aggregate of such transactions entered into by the assessee in the previous year exceeds a sum of ` 5 crore upto or ` 20 crore w.e.f onwards. With the insertion of section 92BA for such specified domestic transactions, the following sections, which are applicable to international transactions, have also been made applicable to such specified domestic transaction. The Finance Act 2012 extended the scope of Transfer Pricing provision to Specified Domestic Transactions ( SDT ) The SDT would include the following: Expenditure for which payment is made or to be made to domestic related parties-40a 2(b) payment Tax Holiday/ Deductions claimed by the taxpayer, where; (i) Transfer of goods or services between various businesses of same taxpayer (ii) More than ordinary profits derived from transactions with closely connected persons SDT previously reported/certified but onus on revenue authorities, however in the changed scenario, the obligation falls on taxpayer to report/ document and substantiate the arm s length nature of such transactions. There is a shift observed from generic FMV concept to focused ALP concept Transfer Pricing provisions to apply to the Specified Domestic Transactions if the aggregate value exceeds five crores 92BA. For the purposes of this section and sections 92, 92C, 92D and 92E, "specified domestic transaction" in case of an assessee means any of the following transactions, not being an international transaction, namely: (i) any expenditure in respect of which payment has been made or is to be made to a person referred to in section 40A(2)(b) Section 40A(1) Applicability restricted to the computation of income under the head Profits and gains of business or profession Section 40A(2) Applicable on expenditure in respect of which payment has been made or it to be made Expenditure in respect of goods, services or facilities This provision is applicable only on expenditure and not on income. Provisio to section 40A(2)(a) states - Provided that no disallowance, on account of any expenditure being excessive or unreasonable having regard to the fair market value, shall be made in respect of a specified domestic transaction referred to in section 92BA, if such transaction is at arm's length price as defined in clause (ii) of section 92F. (ii) any transaction referred to in section 80A (iii) any transfer of goods or services referred to in sub-section (8) of section 80-IA (iv) any business transacted between the assessee and other person as referred to in sub-section (10) of section 80-IA (v) any transaction, referred to in any other section under Chapter VI-A or section 10AA, to which provisions of sub-section (8) or sub-section (10) of section 80-IA are applicable; DIRECT TAX LAWS AND INTERNATIONAL TAXATION 327

340 Transfer Pricing 10AA - Special provisions in respect of newly established Units in Special Economic Zones. 80IAB - Deductions in respect of profits and gains by an undertaking or enterprise engaged in development of Special Economic Zone. 80IB - Deduction in respect of profits and gains from certain industrial undertakings other than infrastructure development undertakings. 80 IC - Special provisions in respect of certain undertakings or enterprises in certain special category States 80ID - Deduction in respect of profits and gains from business of hotels and convention centers in specified area. 80IE - Special provisions in respect of certain undertakings in North-Eastern States any other transaction as may be prescribed and where the aggregate of such transactions entered into by the assessee in the previous year exceeds a sum of five crore rupees. Arms Length Pricing The arm s length principle seeks to ensure that transfer prices between members of an MNE ( controlled transactions ), which are the effect of special relationships between the enterprises, are either eliminated or reduced to a large extent. It requires that, for tax purposes, the transfer prices of controlled transactions should be similar to those of comparable transactions between independent parties in comparable circumstances ( uncontrolled transactions ). In other words, the arm s length principle is based on the concept that prices in uncontrolled transactions are determined by market forces and, therefore, these are, by definition, at arm s length. In practice, the arm s-length price is also called market price. Consequently, it provides a benchmark against which the controlled transaction can be compared. The Arm s Length Principle is currently the most widely accepted guiding principle in arriving at an acceptable transfer price. As circulated in 1995 OECD guidelines, it requires that a transaction between two related parties is priced just as it would have been if they were unrelated. The need for such a condition arises from the premise that intra-group transactions are not governed by the market forces like those between two unrelated entities. The principle simply attempts to place uncontrolled and controlled transactions on an equal footing. Why Arm s Length Pricing? The basic object of determining Arm s Length Price is to find out whether any addition to income is warranted or not, if the following situations arises: (a) Selling Price of the Goods < Arm s Length Price (b) Purchase Price > Arm s Length Price In case of transactions between Independent enterprises, the conditions of their commercial and financial relations (eg. The price of goods transferred or services provided and the conditions of the transfer or provision) are, ordinarily, determined by the market force. Whereas, In case of transactions between MNEs (Multinational Enterprises), their commercial and financial relations may not be affected by the external forces in the same way, although associated enterprises often seek to replicate the dynamics of the market forces in their dealings with each other. Difficulties in applying the arm s length principle The arm s length principle, although survives upon the international consensus, does not necessarily mean that it is perfect. There are difficulties in applying this principle in a number of situations. (a) The most serious problem is the need to find transactions between independent parties which can be said to be exact compared to the controlled transaction. (b) It is important to appreciate that in an MNE system, a group first identifies the goal and then goes on to create the associated enterprise and finally, the transactions entered into. This procedure obviously does not apply to 328 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

341 independent enterprises. Due to these facts, there may be transactions within an MNE group which may not be between independent enterprises. (c) Further, the reductionist approach of splitting an MNE group into its component parts before evaluating transfer pricing may mean that the benefits of economies of scale, or integration between the parties, is not appropriately allocated between the MNE group. (d) The application of the arm s length principle also imposes a burden on business, as it may require the MNE to do things that it would otherwise not do (i.e. searching for comparable transactions, documenting transactions in detail, etc). (e) Arm s length principle involves a lot of cost to the group Illustrations on the Type of transactions covered (examples covered indicate payments made by a Company) Case 1 Case 2 Case 3 Case 4 Case 5 Case 6 Case 7 Director or any relative of the Director of the taxpayer Section 40A(2)(b)(ii) To an individual who has substantial interest in the business or profession of the taxpayer or relative of such individual Section 40A(2)(b)(iii) To a company having substantial interest in the business of the taxpayer or any director of such company or relative of the director Section 40A(2)(b)(iv) Any other company carrying on business in which the first mentioned company has substantial interest Section 40A(2)(b)(iv) To a company of which a director has a substantial interest in the business of the taxpayer or any director of such company or relative of the director Section 40A(2)(b)(v) To a company in which the taxpayer has substantial interest in the business of the company Section 40A(2)(b)(vi)(B) Any director or relative of the director of taxpayer having substantial interest in that person Section 40A(2)(b)(vi)(B) Concept - Provisions of Section 92BA DIRECT TAX LAWS AND INTERNATIONAL TAXATION 329

342 Transfer Pricing Section 92BA Analysis Section Relevance with provisions of Sec 92BA 92 : Computation of income having regard to ALP ü 92A : Meaning of AE 92B : Meaning of International transaction 92C : Methods of computation of ALP ü 92CA: Reference to TPO ü 92CB : Safe harbour rules 92CC : Advance Pricing agreement 92CD : Effect of TP agreement 92D : Maintenance of information and documents ü 92E : CA s Report ü 92F : Definitions: Accountant, ALP, Enterprise, PE, Specified date, Transaction* Illustration: 1 During FY , X Ltd. entered into following transactions with its related parties: (a) Salary paid to Directors : ` 8 million (b) Purchases from related party : ` 28 million (c) Sales to related party : ` 36 million (d) Loan taken from related party : ` 100 million (e) Provision for interest on loan taken: ` 10 million (f) Purchase of capital asset : ` 18 million Also X Ltd. as two units and one of the unit is a Chapter VI-A unit claiming tax deduction, following transactions in relation to same: (g) inter-unit transfers : ` 20 million (h) Allocation of common expenses : ` 10 million Value of Specified Domestic Transaction (a) Salary paid to Directors : (b) Purchases from related party : (e) Provision for interest on loan taken: (g) inter-unit transfers : Total : ` 8 million ` 28 million ` 10 million ` 20 million ` 66 million As value of specified domestic transaction is 6.6 crore i.e. more than threshold limit of 5 crore, transfer pricing provision would be applicable on these transactions As per section 92(3), transfer pricing provision are not applicable if: The provisions of this section shall not apply in a case where the computation of income under sub-section (1) or sub-section (2A) or the determination of the allowance for any expense or interest under sub-section (1) or sub-section (2A), or the determination of any cost or expense allocated or apportioned, or, as the 330 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

343 case may be, contributed under sub-section (2) or sub-section (2A), has the effect of reducing the income chargeable to tax or increasing the loss, as the case may be, computed on the basis of entries made in the books of account in respect of the previous year in which the international transaction or specified domestic transaction was entered into. Compliance Transfer pricing provision on specified domestic transactions are applicable from FY / AY Taxpayer must compute an arm s length price of specified domestic transaction as per the methods prescribed under section 92C. Burden of proof is on the taxpayer to establish the arm s length price and to maintain related documents. Must obtain a report under Form 3CEB (till now no separate Form as been prescribed for specified domestic transaction) from a Chartered Accountant and file it before tax authorities within due date of filing of return of income. Due date for filing tax return would be 30 November for a taxpayer on whom transfer pricing provisions are applicable. Tax payer must submit the transfer pricing document to the tax authorities, within 30 days of the receipt of notice from the department. Penalties Non maintenance of documents, fail to report transaction, maintain or furnishes an incorrect information or document 2% of the value of controlled transaction Section 271AA Non filing of Form 3CEB `100,000/ - Section 271BA Failure to furnish information or document to tax authorities 2% of the value of controlled transaction Section 271G Transfer Pricing Documentation Relevant provisions relating to transfer pricing documentation is given under Section 92D of the Act read with Rule 10D of the Rules. Section 92 D of the Act read with Rule 10E of the Rules Should be prepared on contemporaneous basis Should be kept and maintained for 8 years from the end of the relevant assessment year No fresh documentation required for continuing transactions unless there is some significant change which can have impact on pricing Types of Documentation Enterprise - wise - Ownership structure of the taxpayer - Profile of the Group - Name of Associated Enterprises, address, legal status, country of tax residence, ownership linkage and business - Business of the taxpayer, description of industry Transaction specific - Description of transaction - Functional Asset & Risk Analysis - Industry / market condition, forecasts/ budget, financial estimates DIRECT TAX LAWS AND INTERNATIONAL TAXATION 331

344 Transfer Pricing - Uncontrolled transactions and comparability analysis Computation related - Most appropriate method - Computation of arm s length price - Assumptions, policies and price negotiation - Transfer pricing adjustment Penalty Provisions Transfer Pricing Sr. No. Type of penalty Section Penalty quantified 1 a) Failure to maintain prescribed information/documents 271AA 2% of transaction value (b) Failure to report any such transaction or (c) Furnish incorrect information 2 Failure to furnish information/documents during assessment u/s 92D 271G 2% of transaction value 3 Adjustment to taxpayer s income during assessment 271(1)(c) 100% to 300% of tax on adjustment amount 4 Failure to furnish accountant s report u/s 92E 271BA INR 100,000 Transfer Pricing Methods In order to ensure that a transfer price meets the arm s length standard, the OECD (Organization for Economic Co-operation and Development) guidelines have indicated five transfer pricing methods that can be used. These methods fall in two categories: (1) Traditional Transaction Methods; (2) Transactional Profit Methods. As per Sec.92C of the Income Tax Act, 1961, the methods for determining Arm s Length Price may be represented as under: (1) Comparable Uncontrolled Price Method, (2) Resale Price Method, (3) Cost plus Method, (4) Profit Split Method, (5) Transactional Net Margin Method, (6) Such other method as may be prescribed by the Board Amendment made by the Finance (No. 2) Act, 2014 [Section 92C] [W.e.f. A.Y ] Section 92C(2) provides that the most appropriate method referred to in section 92C(1) shall be applied for determination of arm s length price in the manner as may be prescribed. However, where more than one price is determined by the most appropriate method, the arm s length price shall be taken to be the arithmetical mean of such prices. [Proviso to section 92C(2)]. Further, if the variation between: (a) the arm s length price so determined, and (b) price at which international transaction has been actually undertaken, does not exceed such percentage not exceeding 3% of the latter (i.e. price at which international transaction has been actually undertaken) as may be notified by the Central Government in the Official Gazette in this behalf, then the price at which international transaction has actually been undertaken shall be deemed to be the arm s length price and no adjustment is required to be made. [Proviso 2 to section 92C(2)]. The following third proviso has been inserted in section 92C(2): Provided also that where more than one price is determined by the most appropriate method, the arm s length 332 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

345 price in relation to an international transaction or specified domestic transaction undertaken on or after , shall be computed in such manner as may be prescribed and accordingly the first and second proviso shall not apply. In other words, for any international transaction or specified domestic transaction undertaken on or after , third proviso shall be applicable instead of proviso first and second. Transfer Pricing Study (TP Study) is the prime document which is used during transfer pricing assessment. The statement of particulars to be furnished in the Annexure to Form No.3CEB for the Income Tax Act, 1961 assessment, has thirteen clauses. The following are the steps to be followed:- Step 1: Step 2: Step 3: Step 4: Step 5: Step 6: Selection of comparable companies Use of different filters Screening of comparables based on FAR Use of Power under Indirect Tax laws [ special reference to Sec.133(6) of the Income Tax Act,1961] Adjustments 5% Safe Harbour Step 1: Selection of Comparable Companies The first step for doing this study is to select comparable companies. This can be selected in the following four ways:- (a) Industry-wise selection (b) Product-wise selection (c) NIC Code-wise selection (d) Segment-wise selection The data relating to the financial year in which the international transaction or specified domestic transactions has been entered into must be used in analyzing the comparability of an uncontrolled transaction with an international transaction or specified domestic transactions. Step 2: Use of different filters Once there is a selection of comparable companies, the next step is to filter these companies with the use of quantitative and qualitative filters. The following filters are also used sometimes: (a) Companies whose data is not available for the relevant year (b) Companies for which sufficient financial data is not available to undertake analysis (c) Different financial year filter (d) Turnover filter (e) Service Income filter (f) Export filter (g) Diminishing Loss filter (h) Related party filter (i) Companies that had exceptional year/(s) of operation (j) Employee cost filter (k) Onsite and offsite filter (l) Fixed Asset filter DIRECT TAX LAWS AND INTERNATIONAL TAXATION 333

346 Transfer Pricing (m) Research & Development Expense filter (n) Income Tax filter Step 3: Screening of comparables based on FAR Comparability of an international transaction or specified domestic transactions with an uncontrolled transaction shall have to be judged with relevance to the following factors: (a) The specific characteristics of the property transferred or services provided in either transaction; (b) FAR Analysis- the (F) functions performed, taking into account (A)assets employed or to be employed or the (R) risks assumed by the respective parties to the transactions; (c) The contractual terms ( whether or not such terms are formal or in writing) of the transactions which lay down explicitly or implicitly how the responsibilities, risks and benefits are to be divided between the respective parties to the transactions; (d) Conditions prevailing in the markets in which the respective parties to the transactions operate, including the geographical location and size of the markets, overall economic development and level of competition and whether the markets are wholesale or retail. There may arise situation, where it requires further analysis of the following factors:- (i) Is there a public issue in the relevant year or previous year? (ii) Are the entity s profits exempted from tax? (iii) Is there any merger/de-merger, etc., during the relevant time? (iv) Is the depreciation policy different? (v) Is there a wide difference between various segments profitability? (vi) Is the area of operation, i.e. geography different? (vii) Is the volume of operation different? Step 4: Use of power under Indirect Tax Laws This power is usually used by the Revenue Department/Authorities, with a special reference to Sec.133(6) of the Income Tax Act,1961. The authorities may exercise such powers for getting details which are generally not available in the annual reports of the companies. This power is used more in the earlier years. Step 5: Adjustments Based on specific characteristics of the property transferred or the services rendered in either transaction and the contractual terms (whether or not such terms are formal or in writing) of the transactions which lay down explicitly or implicitly how the responsibilities, risks and benefits are to be divided between the respective parties to the transactions. The following enterprise level and transaction level adjustments are suggested: (a) Functional differences (b) Asset differences (c) Risk differences (d) Geographical location (e) Size of the market (f) Wholesale or retail market (g) The laws and governmental orders in force (h) Cost of labour (i) Cost of capital in the markets 334 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

347 (j) Overall economic development (k) Level of competition (l) Accounting practices However, in practice the following adjustments are provided: (i) Working capital adjustment (ii) Risk adjustment (iii) Volume/geographical/depreciation/idle capacity/first year operation, etc. Step 6: Safe Harbour Rules Power of Board to make Safe Harbour Rules [Section 92CB] The determination of arm s length price under section 92C or section 92CA shall be subject to safe harbor rules. Further as per section 92CB(2), the Board may, for the purposes of section 92CB(1), make rules for safe harbor. Overview Comparable Uncontrolled Price ( CUP ) Method compare prices. Resale Price Method ( RPM ) compares gross margins. Cost Plus Method ( CPM ) compares profit mark-ups on costs. Profit Split Method ( PSM ) refers to the (total) profits from transactions and splits them among the parties based on the level of contribution. Transactional Net Margin Method ( TNMM ) analyses net profit in relation to an appropriate base, such as costs, sales or assets. Other Method (Rule 10AB) takes into account the price which has been charged or paid, or would have been charged or paid, for the same or similar uncontrolled transaction. Other Method ( Rule 10AB) can be used for following transactions. Revenue split Valuation of intangible property Valuation of shares Cost allocation DIRECT TAX LAWS AND INTERNATIONAL TAXATION 335

348 Transfer Pricing Reimbursements Any method that takes in to account the price which has been charged or paid, or would have been charged or paid, for the same or similar uncontrolled transaction, with or between non-associated enterprises, under similar circumstances, considering all the relevant facts. Quotations, Commercial Negotiations, Tenders can be used to substantiate ALP under this method which was not possible under CUP Comparable Uncontrolled Price Method ( CUP ) Compares price charged for property/ service transferred in controlled transactions with price charged in comparable uncontrolled transactions Requires very high standard of comparability Most direct and reliable way to apply the arm s length principle Conditions for use of CUP none of the differences between the transactions can materially affect price in the open market reasonably accurate adjustments can be made to eliminate the material effects of such differences Types of CUPs available -Internal CUP - The price that the company has charged in a comparable uncontrolled transaction with an independent party -External CUP - The price charged in a comparable uncontrolled transaction between third parties when compared to a price of controlled transactions CUP Circumstances to apply 1. When internal comparables exist for transactions involving generic goods 2. When pricing certain type of financial transactions. Resale Price Method ( RPM ) Method used in case of purchase of goods or services from related parties for resale to unrelated parties without substantial value addition. The price is reduced by the normal gross margins earned by unrelated party for same or similar products or services. Gross margins is used as the profit level indicator. RPM calculation sheet Resale Price Less: Gross Margin Less: Associated Costs (e.g. Customs duty) Arms Length Price RPM Circumstances to apply xx xx xx xx When internal comparables exist but CUP can t be applied due to product differences When reseller does not add significant value to products sold to final consumer Cost Plus Method ( CPM ) Method using the costs incurred by the supplier of goods (or services) in a controlled transaction for goods or services provided to an related party. An appropriate cost plus mark-up is added to the above cost in light of the FAR Arm s Length Price = Direct and Indirect Cost of Production (+) mark-up (based on benchmarking analysis) done by comparables Conditions for use of CPM none of the differences between the transactions can materially affect cost plus margin in the open market 336 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

349 reasonably accurate adjustments can be made to eliminate the material effects of such differences Tolerant to product differences as compared to CUP method CPM Calculation sheet Costs incurred by supplier* Add: Mark Up** Arms Length Price xx xx xx *Costs incurred by supplier 1. Direct costs: Material, Labour etc 2. Indirect costs: Factory overheads **Mark Up based on 1. Internal Comparable Transactions 2. External Comparable Transactions Circumstances to apply CPM 1) In intercompany sale of tangible property where the related party manufacturer performs limited manufacturing functions and Incurs low risks 2) In case of say, Contract manufacturer, a low risk assembler who does not own product intangibles and incurs little risks. 3) The related customers involved in the controlled transaction are usually more complex in terms of: (a) functions (b) risks incurred (c) assets owned Profit Split Method ( PSM ) PSM is applied, where both the entities have unique intangibles, Operations of both the entities are so integrated that identifying the tested party is difficult. Circumstances to apply PSM Highly interrelated transactions Unique and valuable intangibles used by both parties Render all other methods inappropriate /inapplicable Transactional Net Margin Method ( TNMM ) This method mandates comparison at operating margin level, Comparison at transactional level, where possible. Operates in a similar manner to the CPM and RPM and is the most preferred and practical method. Circumstances to apply TNMM 1) On comparable independent enterprises 2) Results attributable to transactions between tested party and independent enterprises should be excluded when evaluating controlled transactions. 3) It should not be applied on a company wide basis if the company is involved in a number of different controlled transactions which are not adequately evaluated on an aggregate basis. Accountants Report DIRECT TAX LAWS AND INTERNATIONAL TAXATION 337

350 Transfer Pricing Section 92 E Every person who has entered into an international transaction or specified domestic transaction during a previous year shall obtain a report from an accountant and furnish such report on or before the specified date in the prescribed form duly signed and verified in the prescribed manner by such accountant and setting forth such particulars as may be prescribed (i) Applicable on all type of Assessee who has entered into specified domestic transaction (ii) Value of Specified domestic transaction should not be less than 5 cr in aggregate (iii) Accountant means Chartered Accountant in practice (iv) Specified date shall have the same meaning as assigned to due date in Explanation 2 below subsection (1) of section 139 i.e. 30th day of November of the assessment year Section 92CA - Reference To TPO The word specified domestic transaction inserted in various sub-sections. (1) AO may refer the computation of ALP to TPO (2) TPO to issue notice to Assessee to produce evidence in support of ALP (2A) Any other international transaction coming to notice of TPO* (2B) Non-furnishing of CA s report and TPO s power * (3) TPO shall pass the order determining ALP (3A) Explanation to section 153, if period of limitation available to TPO for making an order is less than sixty days, such remaining period extended to sixty days. ( W.e.f ) (4) AO to compute total income accordingly (7) TPO s power of summons (s.131), survey (s.133a) and collecting information u/s 133(6)applies even in Domestic Transaction Sec. 144C (15)(b)..Reference to DRP AO to forward draft of proposed order to eligible assessee Eligible assessee means any person in whose case order u/s 92CA is passed * 92CA (2A ) & (2B) do not cover specified domestic transactions and hence the TPO cannot suo moto upon the transaction coming to his notice apply the TP provisions RELEVANCE OF COST ACCOUNTING PRINCIPLES IN ARM'S LENGTH PRICING As a concept, the worldwide acceptability of Arm's Length Pricing (aka Transfer Price) as the price at which transactions between Associated Enterprises should take place is no more a matter of debate. It is true that some countries in South America have specific guidelines on Transfer Price which do not match with the methods recommended by the OECD but even those guidelines are generally in keeping with the concept of Arm's Length. In a business environment in which competitive forces determine revenue earnings, profits are budgeted for by keeping a close control over costs. "Cost Control" is a byword in all corporate across the world and the better one is able to control costs, the more competitive one can price one's product or services. Global corporations are increasingly centralizing essential functions like purchasing, IT infrastructure, legal service and R&D efforts with the objective of cutting costs and negotiating economies of scale with vendors. As a result, it is quite common now for the parent company to charge a "Management Fee" from its subsidiaries /associated enterprises or apportion a part of costs as a part of "Cost Contribution Arrangements". The term "Management Fees" is usually used to loosely describe any Inter-Company Transfer that is neither a transfer of tangible property nor one of intangible property. It is often difficult to find comparables for such services 338 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

351 or evaluate the benefits received. As a result, tax administrations are generally sceptical about "Management Fees" and consider them to be prone to potential abuse. There are two views on the issue of Management Fees: Developed nations have adopted rules and regulations on deductibility of Management Fees as an expense so long as it complies with the applicable domestic tax law and Arm's Length Principle. However, other nations do not permit deductibility of these expenses and do not even recognize such kinds of expenses. Such nations impose restrictions by way of exchange controls and withholding taxes thus creating a barrier for such nature of remittances. Before any structure can be defined for Management Fees, it is vital to establish the following: - The exact nature of the services to be performed (taking care to exclude "Shareholder Activities"). - Which entities are to render the services and which are to receive the services. - Actual costs involved in rendering the services. - Deductibility of the expenses in the recipient country The structure of the fees, scope of services and other aspects relating to the arrangement may be documented in the form of a written agreement (bilateral or multilateral) and would also require evidence of costs incurred and services actually rendered. Additionally, country-specific documentation should be added wherever applicable. A recent trend that has been discussed is that tax administrations are now seeking to establish that a direct benefit has resulted and the benefits are not indirect. As mentioned earlier, for such nature of services, it is not easy to establish a comparable with an independent party. When a comparable cannot be established, the usual preference is to use the CPM (Cost Plus Method). This requires establishing the costs, which may be ascertained by using an appropriate cost accounting method. Furthermore, care should also be taken to distinguish between what constitutes a reimbursement and what constitutes a service function. Subject to the limitations discussed above, it would be appropriate to add a cost markup on the actual costs of the service function. Cost sharing is based on the idea that a number of group companies/related companies may get together to fund the costs of research and development of new technologies or know-how. By sharing in the costs, each participant in the CCA obtains a right to the R&D. As soon as viable commercial opportunity arises, each participant may choose to exploit the opportunity optimally. While the concept of cost sharing is simple, there are complex accounting and regulatory issues that arise in practice from such arrangements. For example, if the costs include cost of equipments /machinery, how will this be captured in the books of accounts of the participating entities. Will this be capitalized or charged to revenue? Should there be a profit markup in sharing? There are benefits, too, that arise from cost sharing. For example, it may eliminate the need to pay royalties for transfer of intangible properties because each of the participants, by being a co-funder of the expenses, is entitled to enjoy the fruits of the intangible. Secondly, cost sharing is also a means of financing of R&D. Since related entities /group companies may be expected to benefit from R&D activity carried out by one of the entities (usually the parent company or a Research Centre), if they do not share the costs, it leads to a situation where the related entities get benefits at the cost of one entity only. Cost sharing eliminates this inequity. A valid CCA between related entities involves a written agreement, signed preferably before commencement of the R&D work, to share the costs and risks of the R&D effort under mutual direction and benefit. Each participant agrees to bear a part of the costs and risks and in turn reaps proportionate benefits. Acceptance of CCAs by all tax administrations has not happened yet but these are being recognized more and more by different administrations. The strongest theoretical basis for cost allocation is by reference to the actual benefits derived from the activity (it is respectfully suggested that a recent ruling by the ITAT in the matter of Dressner Rand may not reflect international thought in this matter). However, all R&D expenditure may not necessarily result in commercially exploitable situations and there must be a method of dealing with abortive expenditure as well as successful expenditure. It is DIRECT TAX LAWS AND INTERNATIONAL TAXATION 339

352 Transfer Pricing because of this that the preferred method of cost allocation is referenced to expected benefit. This calculation, however, is very complicated and may not be economical to perform. In practice, considerable weight is given to expected sales/revenue of each participant. An important point to be remembered in this connection is that while tax administrations, in general, prefer to follow OECD guidelines in the matter of CCAs, some tax administrations have designed and brought into force special regulations dealing with these: For example, Article 41 of the Corporate Income Tax Law of China; Guidelines on CCAs issued in March 2006 by Japan; Taxation Ruling 2004/1 issued by Australia etc. As mentioned earlier, a key issue is on the deductibility of expenses under CCAs. Should they be revenue expenditure of capital expenditure. There is no prescribed guideline on this and the accounting and tax treatment shall have to follow local tax law. A more fundamental issue is on the proportion of costs charged under a CCA and whether this is reasonable. Tax administrations may wish to examine the CCA at a group level rather than at company level to examine this matter. A considerable amount of disclosure may be required to be made by the group in this matter and consequently, the documentation required for this is of crucial importance. From a practical standpoint, it should be remembered that examination by tax authorities is with the benefit of hindsight whereas when CCAs are entered into, it is on the basis of foresight. Therefore, there may be instances of abortive expenditure which tax administrations may use to relook at the expected benefits (and consequently the proportion of sharing). In general, whether one is talking about Management Fees or Cost Contribution Arrangements, the Cost Plus Method & Transactional Net Margin Method are of increasing relevance in view of the fact that with such levels of globalization, it is difficult and complex to use CUP as the method of establishing transfer prices because comparables are more and more difficult to identify. In fact, it is expected that once India introduces Advance Pricing Arrangements, the Transactional Net Margin Method will be more commonly applied that CUP or CPM. ICAI Guidance Note Guidance Note of ICAI on Section 92E: Para 9.9 & Ensuring completeness of the listing of international transactions is the responsibility of the taxpayer. Para 9.12 CA should go through the records maintained by the taxpayer and match the same with documents prescribed however CA is not responsible for the content of the transactions and documentation maintained by the taxpayer. Para If any document is not maintained, then the accountant should suitably qualify his report or disclose the same in his report depending upon the facts and circumstances of each case. Para 9.17: The accountant must limit his scope of work and the review procedures to the extent certified in Form No.3CEB. For e.g. in the Annexure the method which has been used to determine the arm s length price needs to be stated. In this context the accountant is only required to ensure that the method stated as being used to determine the arm s length price by the assessee has actually been used and it is not the accountant s responsibility to ensure that the method so used is the most appropriate method as prescribed by the Board ADVANCE PRICING AGREEMENTS (APA) APA can be conceptualised as an agreement between tax payer (resident/non-resident) and CBDT determining ALP or manner of determination of ALP. APA provides binding contract with one or more tax authorities, covers specified intercompany transactions, pricing methods, and range of target results. Generally they are of five-year term (with rollback option) and can be renewed. Under APA, taxpayers have input in drafting critical assumptions, protects taxpayers from having to comply with an onerous deal caused by material changes affecting their business. APA is a voluntary process provides taxpayers with principled and non-adversarial alternative to resolving disputes and provides transfer pricing certainty, eliminate potential double taxation. APA can cover 340 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

353 determination of arm s length price (ALP) or specify the manner in which ALP is determined. APA regime intends to attack root cause of TP disputes to provide tax certainty Change in Tax Law Finance Act 2012 introduced section 92CC & section 92CD in IT Act to enable CBDT to enter into APAs. The key features contained in section 92CC & section 92CD of the IT Act lays out eligibility, scope, binding effect, validity period of APAs. Power has been delegated to CBDT to prescribe form, manner, and procedure for entering into APA. Types of APA Unilateral - Involves taxpayer and CBDT, with the approval of Central Government Bilateral - Involves taxpayer its associated enterprise, CBDT and foreign tax authorities, competent Authorities of India and foreign state involved Multilateral - Involves Multiple Parties: taxpayer, two or more associated enterprise and relevant tax authorities in different countries, multiple authorities including CBDT and foreign authorities (where associated enterprises are located) e.g. Internal Revenue Service (IRS) in US. Eligibility for APA [Section 92CC & Rule 10F] Covers Person who has entered into an international transaction and Person proposing to undertake international transaction. Scope of APA and binding effect APAs include determination of ALP or specifies the manner in which ALP is to be determined. ALP can be determined as per any method prescribed under section 92C for determination of ALP along with necessary adjustments and variations. [section 92CC(2)]. APA is binding on the person entering into international transaction (taxpayer) and the CIT (including income-tax authorities subordinate to him). APA is binding only in respect of transaction in relation to which the APA has been entered into, not binding if there is change in law or facts having a bearing on such APA. [section 92CC(6)]. CBDT is empowered to declare an APA as void ab initio if APA has been obtained by fraud or misrepresentation of facts. [section 92 CC(7)]. Also as provided in the law, noncompliance with terms of APA including critical assumptions may lead to cancellation of the APA..Transactions covered under APA is not subject to regular audit by Transfer Pricing Officer (i.e TP assessment proceedings). APA is valid for a period specified in APA, but not to exceed 5 consecutive financial years [Section 92CC(4)], APA can be extended/renewed for further period of upto 5 years. Application for APA can be withdrawn anytime before finalisation of terms of APA Rollback of APA [Section 92CC (9A)] Rollback of APA can be for applying APA to international transaction already undertaken 4 preceding financial years[rule 10MA and Rule 10RA]. Procedure contained in Rule 10RA - pending Appeal (to the extent, it covers APA) to be withdrawn both by applicant and tax department. The Rollback is available only - In respect of same international transaction to which APA applies If return for rollback year has been furnished by the applicant before due date If Rollback requested for all the years in which said international transaction has been undertaken by the applicant. TP Report in respect of such international transaction furnished in accordance with section 92E The Rollback not available if- Determination of ALP for said year (for which rollback is sought) has been subject matter of appeal before ITAT and such appeal has been disposed of before signing of APA; or Rollback has effect of reducing taxable income or increasing loss declared in the tax return for that year. DIRECT TAX LAWS AND INTERNATIONAL TAXATION 341

354 Transfer Pricing Key to success of APA Program APA Program may be successful by a proper functional analysis, determination of TP methodology, examination of critical assumptions and by specifying manner in which ALP is to be determined Stages of APA - Pre filing Consultation [Rule10H] Any person proposing to enter into APA to apply for pre filing consultation with Director General of Income Tax (IT) [Form 3CEC] to assess the possibility of entering into an APA. It is mandatory to have a Pre filing consultation before filing APA application. The APA team of CBDT to hold Pre-filing consultation to- Determine nature & scope of APA Identify transfer pricing issues like FAR analysis Discuss broad terms of APA International transaction to be covered Proposed TP method (CUP/TNMM etc.) The understanding reached in pre filing consultation to be reduced in writing. The Pre filing consultation can not obligate CBDT or taxpayer to enter into APA. Also it is held that pre filing consultation not to deem that taxpayer has applied for APA. Revision of APA [Rule 10Q] An APA may be revised by CBDT either suo moto or on request of assessee or competent authority or DGIT (IT).APA may be revised on account of- Change in critical assumptions Change in law that modifies matter covered by an APA (change in law governing non binding nature not covered) Request from competent authority of foreign country to revise APA in case of bilateral or multilateral APA Revision at the request of assessee may be rejected by CBDT, however the reasons to be provided in writing. Revised APA to include date till which original APA is to apply and date from which revised is to apply. Renewal of APA [Rule 10S] Request for renewal to be made as new application, the procedure for new application apply except pre filing consultation. Cancellation of APA [Rule 10R] An APA could be cancelled on account of- Failure to comply with terms of APA Failure to file annual compliance report Material errors in annual compliance report No consensus on the terms of the revised APA Effect cannot be given to rollback provision of an APA due to failure on the part of applicant. The Cancellation order should- Record reasons for cancellation Follow principles of natural justice Specify effective date of cancellation The Order of cancellation of APA to be communicated to- 342 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

355 Assessing Officer, Transfer Pricing Officer Foreign tax authorities in case of bilateral or multilateral APA Benefits of APA APA provides a go forward TPM for at least 5 years. Significantly reduce penalty risk Defers potential assessments and related cash outlays Provides certainty Entry into APA process reduces involvement of a local tax authority office Greatly reduced TP compliance and audit costs Simplifies financial reporting process Possibility of renewal at reduced cost Challenges of APA An APA may focus scrutiny on other transactions in the structure Current transfer pricing policy may be perceived as too high or too low and could be reduced in an APA; Potential requirement to provide more information upfront Transfer Pricing Issues In the content of International Transactions or specified domestic transactions and ascertainment of arm s length price, the following issues are surfaced. These needs to be further examined in the light of applicable statutory provisions of Indirect Tax laws in India. Key current and emerging TP Audit issues in India Indian transfer pricing administration over the past 10 years has witnessed several challenges in administration of transfer pricing law. In the above backdrop, this chapter highlights some of the emerging transfer pricing issues and difficulties in implementation of arm s length principle. Key Issues for consideration (a) Challenges in the comparability analysis - Increased market volatility and increased complexity in international transaction have thrown open serious challenges to comparability analysis and determination of arm s length price. (b) Issue relating to risks - A comparison of functions performed, assets employed and risks assumed is basic to any comparability analysis. India believes that the risk of a MNE is a by-product of performance of functions and ownership, exploitation or use of assets employed over a period of time. Accordingly, risk is not an independent element but is similar in nature to functions and assets. In this context, India believes that it is unfair to give undue importance to risk in determination of arm s length price in comparison to functions performed and assets employed. (c) Arm s length range - Application of most appropriate method may set up comparable data which may result in computation of more than one arm s length price. Where there may be more than one arm s length price, mean of such prices is considered. Indian transfer pricing regulations provide that in such a case the arithmetic mean of the prices should be adopted as arm s length price. If the variation between the arithmetic mean of uncontrolled prices and price of international transactions or specified domestic transactions does not exceed 3% or notified percentage of such transfer pricing, then transfer price will be considered to be at arm s length. In case transfer price crosses the tolerance limit, the adjustment is made from the central point determined on the basis of arithmetic mean. Indian transfer pricing regulation do not mandate use of inter quartile range. (d) Comparability adjustment - Like many other countries, Indian transfer pricing regulations provide for reasonably accurate comparability adjustments. The onus to prove reasonably accurate comparability adjustment is DIRECT TAX LAWS AND INTERNATIONAL TAXATION 343

356 Transfer Pricing on the taxpayer. The experience of Indian transfer pricing administration indicates that it is possible to address the issue of accounting difference and difference in capacity utilization and intensities of working capital by making comparability adjustments. However, Indian transfer pricing administration finds it extremely difficult to make risk adjustments in absence of any reliable and robust and internationally agreed methodology to provide risk adjustment. In some cases taxpayers have used Capital Asset Pricing Method (CAPM). (e) Location Savings - It is view of the Indian transfer pricing administration that the concept of location savings which refer to cost savings in a low cost jurisdiction like India should be one of the major aspects to be considered while carrying out comparability analysis during transfer pricing audits. Location savings has a much broader meaning; it goes beyond the issue of relocating a business from a high cost location to a low cost location and relates to any cost advantage. MNEs continuously search options to lower their costs in order to increase profits. India provides operational advantages to the MNEs such as labour or skill employee cost, raw material cost, transaction costs, rent, training cost, infrastructure cost, tax incentive etc. (i) Highly specialized skilled manpower and knowledge (ii) Access and proximity to growing local/regional market (iii) Large customer base with increased spending capacity (iv) Superior information network (v) Superior distribution network (vi) Incentives (vii) Market premium The incremental profit from LSAs is known as location rents. The main issue in transfer pricing is the quantification and allocation of location savings and location rents among the associated enterprises. Under arm s length pricing, allocation of location savings and rents between associated enterprises should be made by reference to what independent parties would have agreed in comparable circumstances. The Indian transfer pricing administration believes it is possible to use the profit split method to determine arm s length allocation of location savings and rents in cases where comparable uncontrolled transactions are not available. In these circumstances, it is considered that the functional analysis of the parties to the transaction (functions performed, assets owned and risks assumed), and the bargaining power of the parties (which at arm s length would be determined by the competitiveness of the market availability of substitutes, cost structure etc) should both be considered appropriate factors. (f) Intangibles - Transfer pricing of intangibles is well known as a difficult area of taxation practice. However, the pace of growth of the intangible economy has opened new challenges to the arm s length principle. Seventy five percent of all private R&D expenditure worldwide is accounted for by MNEs. The transactions involving intangible assets are difficult to evaluate because of the following reasons: (i) Intangibles are seldom traded in the external market and it is very difficult to find comparables in the public domain. (ii) Intangibles are often transferred bundled along with tangible assets. (iii) They are difficult to be detected. A number of difficulties arise while dealing with intangibles. Some of the key issues revolve around determination of arm s length price of rate of royalties, allocation of cost of development of market and brand in a new country, remuneration for development of marketing, Research and Development intangibles and their use, transfer pricing of cobranding etc. (g) R&D activities - Several global MNEs have established subsidiaries in India for research and development activities on contract basis to take advantage of the large pool of skilled manpower which are available at a lower cost. These Indian subsidiaries are generally compensated on the basis of routine and low cost plus mark up. The parent MNE of these R&D centres justify low cost plus markup on the ground that they control all the risk and their subsidiaries or related parties are risk free or limited risk bearing entities. 344 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

357 The claim of parent MNEs that they control the risk and are entitled for major part of profit from R&D activities is based on following contentions: (i) Parent MNE designs and monitors all the research programmes of the subsidiary. (ii) Parent MNE provides fund needed for R&D activities. (iii) Parent MNE controls the annual budget of the subsidiary for R&D activities. (iv) Parent MNE controls and takes all the strategic decisions with regards to core functions of R&D activities of the subsidiary. (v) Parent MNE bears the risk of unsuccessful R&D activities. The Indian transfer pricing administration always undertakes a detailed enquiry in cases of contract R&D centres. Such an enquiry seeks to ascertain correctness of the functional profile of subsidiary and parent MNE on the basis of transfer pricing report filed by the taxpayers, as well as information available in the public domain and commercial databases. After conducting detailed enquiries, the Indian tax administration often reaches the following conclusions: (i) Most parent MNEs were not able to file relevant documents to justify their claim of controlling risk of core functions of R&D activities and asset (including intangible assets) which are located in the country of subsidiary or related party. (ii) Contrary to the above, it was found that day to day strategic decisions and monitoring of R&D activities were carried out by personnel of subsidiary who were engaged in actual R&D activities and bore relevant operational risks. (h) Marketing Intangibles Marketing related intangible assets are used primarily in the marketing or promotion of products or services. This includes: Trademarks; Trade names; Service marks; Collective marks; Certification marks; Trade dress; Newspaper mastheads; Internet domain names; Non-competitive agreements (i) Customer-related intangible assets are generated through inter-action with various parties such as customers, entities in complimentary business, suppliers, etc. these can either be purchased from outside or generated internally. (i) Contractual basis: customer contracts and customer relationships; order or production backlog (ii) Non-contractual basis:- customer lists; non-contractual customer relationships; (j) Artistic-related intangible assets are rights granted by Government or other authorized bodies to the owners or creators to reproduce or sell artistic or published work. These are on a contractual basis. These includes: Plays, opera and ballets; Books, magazines, newspapers and other literary works; Musical works; Picture and photographs; Video and audio-video material. (k) Intra-group Services - Globalization and the drive to achieve efficiencies within MNE groups have encouraged sharing of resources to provides support between one or more location by way of shared services. Since these intra group services are the main component of tax efficient supply chain management within an MNE group, the Indian transfer pricing authorities attach high priority to this aspect of transfer pricing. The tax administration has noticed that some of the services are relatively straight forward in nature like marketing, advertisement, trading, management consulting etc. However, other services may be more complex and can often be provided on stand alone basis or to be provided as part of the package and is linked one way or another to supply of goods or intangible assets. An example can be agency sale technical support which obligates the licensor to assist the licensee in setting up of manufacturing facilities, including training of staff. The Indian transfer pricing administration generally considers following questions in order to identify intra group services requiring arm s length remuneration: (i) Whether Indian subsidiaries have received any related party services i.e., intra group services? (ii) Nature and detail of services including quantum of services received by the related party. DIRECT TAX LAWS AND INTERNATIONAL TAXATION 345

358 Transfer Pricing (iii) Whether services have been provided in order to meet specific need of recipient of the services? (iv) What are the economic and commercial benefits derived by the recipient of intra group services? (v) Whether in comparable circumstances an independent enterprise would be willing to pay the price for such services? (vi) Whether an independent third party would be willing and able to provide such services? The answers to above questions enable the Indian tax administration to determine if the Indian subsidiary has received or provided intra group services which requires arms length remuneration. Determination of the arm s length price of intra group services normally involve following steps: (i) Identification of the cost incurred by the group entity in providing intra group services to the related party. (ii) Understanding the basis for allocation of cost to various related parties i.e., nature of allocation keys. (iii) Whether intra group services will require reimbursement of expenditure along with markup. (iv) Identification of arm s length price of markup for rendering of services. (l) Financial Transactions Intercompany loans and guarantees are becoming common international transactions or specified domestic transactions between related parties due to management of cross border funding within group entities of a MNE group. Transfer pricing of inte company loans and guarantees are increasingly being considered some of the most complex transfer pricing issues in India. The Indian transfer pricing administration has followed a quite sophisticated methodology for pricing inter company loans which revolves around: (i) comparison of terms and conditions of loan agreement; (ii) determination of credit rating of lender and borrower; (iii) Identification of comparables third party loan agreement; (iv) suitable adjustments to enhance comparability. Transfer pricing administration is more than a decade old in India. However disputes are increasing with each transfer pricing audit cycle, due to the following factors: (i) Cross border transactions have increased exponentially in the last one decade. (ii) Lack of international consensus on taxation of certain group cross border transactions like intangible, financial transactions, intra group services etc. (iii) Difficulty in applying the arm s length principle to complex transactions like business restructuring. (iv) Taxpayers in India can postpone payment of tax liability by resorting to litigation. (v) Availability of multiple channels to resolve disputes in India. TRANSFER PRICING Case Study -1 Facts 1. Happy Inc, an US Co is having a permanent establishment (PE) in India, Mr. D, a director of US Co, is deputed to Indian PE in financial year from 1st December Salary is paid to Mr. D by US Co and the PE in India for the respective periods worked in both entities (US Co and Indian PE). 3. Mr. D is a non-resident in India for the financial year Indian PE (taxed on net basis) has claimed deduction for salary paid to Mr. D in its return of income for FY Issues 346 DIRECT TAX LAWS AND INTERNATIONAL TAXATION

359 1. Whether domestic transfer pricing provisions are applicable to Indian PE for salary paid to Mr. D? 2. Assume Indian PE is a subsidiary company of US Co and Mr. D is a non-resident and is also a Director of subsidiary company getting salary from subsidiary company. Whether payments made to director is a specified domestic transaction? Solution Where Happy Inc. (US Co) has PE in India relation flowchart Where Indian Company ( Ind Co) is Subsidiary of Happy Inc (US Co) relation flowchart Salary paid to Mr. D is not an International Transaction in terms of sec 92B read with section (r.w.s) 92A since information on shareholding of Mr D is not given in instant case. Therefore, Mr. D is not an AE of US Co as defined u/s 92A. However if Mr. D held at least 26% of shares in US Co, then the same would constitute as an international transaction and salary paid to Mr. D would be regarded as an international transaction. However, if he does not hold any shares still Mr. D is a director of US Co and hence covered as a related party u/s 40A(2)(b)(ii). Since payment is made to related party covered by s. 40A(2)(b), the transaction constitutes SDT in terms of s. 92BA(i). Since it is a SDT,, the salary payment to Mr. D will be liable to Domestic TP and PE will be required to benchmark it to ALP, maintain necessary documentation and furnish TP audit report. Salary paid to Mr. D is required to reported in TP Audit Report by Indian PE. Thus, Indian PE may also be exposed to penalty u/s 271G if it has defaulted on maintenance of required TP documentation and/or u/s 271BA if it has defaulted on furnishing of TP audit report. Case Study 2 DIRECT TAX LAWS AND INTERNATIONAL TAXATION 347