Commission paid to Non resident Agents. Need to deduct tax at source

The Central Board of Direct Taxes has recently by its circular 7 of 2009 dt: 22nd October,2009 withdrawn its earlier circular No:23 dt: 23.7.2009, No:163 dated: 29th May,1975 and No:786 of 7.2.2000. The impact of such withdrawal is that in respect of entities who engage Non-resident agents for canvassing of overseas contacts, for export of their products and such agents who render service overseas are paid commission would become taxable.

The earlier circulars have clearly furnished illustrations to explain that such commissions can be paid wirhout deduction of tax. The main thrust in such situations is whether the commission payments made to overseas agents (who are non resident entities) and who render services only at such particular place. Is assessable to tax. In this connection it is pertinent to point out that section 195 very clearly speaks that unless the income is liable to tax in India, there is no obligation to deduct tax.

Now in order to determine, whether an income could be deemed to accrue or arise in India, section 9 is the basis. However, his section does not provide scope for taxing such payments, as the basic criteria provided about genesis or accruing or arising in India, by virtue of connection with a property in India, conrol and management vesed in India are not satisfied in such cases. In such circumstances, it would be most unfair on the part of the Central Board of Diect Taxes to with draw the circular. This will certainly arm the assessisng Officers, who invariably refuse to listen to arguments or examine facts, to disallow commission payment made to non resident agents under section 40(1a). This will again open new avenue for spate of appeals before the Appellate Authorities and substantial hardship to honest tax payers. The reasoning advanced for withdrawal of such circulars is ridiculous and does not make proper understanding of realities obtaining in the field.

The three circulars withdrawn are appended to this report, which will bear ample proof to establish the incoherent approach of he Central Board of Direct Taxes, more so, in its functions invoking the provisions of section 119 of the Act, which instead of remaining ameliorative is more baneful, as is evidenced by the present action of withdrawing the circulars under discussion.

RELEVANT CBDT CIRCULARS & COMMENTS PASTED BELOW

SECTION 9: INCOME DEEMED TO ACCRUE OR ARISE IN INDIA [CORRESPONDING TO SECTION 42 OF THE 1922 ACT]
Circular : No. 23 [F. No. 7A/38/69-IT(A-II)], dated 23-7-1969.

39. Income accruing or arising through or from business connection in India - Non-residents - Liability to tax under clause (i) of sub-section (1)
CLARIFICATION 1
1. Section 9 provides, inter alia, that income accruing or arising, directly or indirectly, through or from any business connection in India, shall be deemed to be income accruing or arising in India and, hence, where the person entitled to such income is a non-resident, it will be includible in his total income.

Clarifications (These clarifications are contained in Circular No. 17(XXXVII- 1) [F. No. 26(26)-IT/53], dated 17-7-1953 and Circular No. 4(XLIII-8), dated 24-2-1958, which have been retained in the compendium and appear at Sl. Nos. 40 and 41, pp. 1.95, respectively, for the sake of academic interest.) issued in the past by the Board on the scope of the provisions of section 42 of the 1922 Act and their applicability in certain types of cases are hereby consolidated and restated for the information and convenience of the public.

2. What constitutes business connection - The expression business connection admits of no precise definition. The import and connotation of this expression has been explained by the Supreme Court in their judgment in CIT v. R.D. Aggarwal & Co. [1965] 56 ITR 20. The question whether a non-resident has a business connection in India from or through which income, profits or gains can be said to accrue or arise to him within the meaning of section 9 has to be determined on the facts of each case. However, some illustrative instances of a non-resident having business connection in India, are given below :

• Maintaining a branch office in India for the purchase or sale of goods or transacting other business.
• Appointing an agent in India for the systematic and regular purchase of raw materials or other commodities, or for sale of the non-residents goods, or for other business purposes.
• Erecting a factory in India, where the raw produce purchased locally is worked into a form suitable for export abroad.
• Forming a local subsidiary company to sell the products of the non-resident parent company.
• Having financial association between a resident and a non-resident company.

3. The following clarifications would be found useful in deciding questions regarding the applicability of the provisions of section 9 in certain specific situations :

(1) NON-RESIDENT EXPORTER SELLING GOODS FROM ABROAD TO INDIAN IMPORTER (Old clarification on this issue, see Circular No. 17, dated 17-7-1953, at Sl. No. 40, p. 1.95.) No liability will arise on accrual basis to the non-resident on the profits made by him where the transactions of sale between the two parties are on a principal-to-principal basis. In all cases, the real relationship between the parties has to be looked into on the basis of agreement existing between them, but where
(a) the purchases made by the resident are outright on his own account,
(b) the transactions between the resident and the non-resident are made at arms length and at prices which would be normally chargeable to other customers,
(c) the non-resident exercises no control over the business of the resident and sales are made by the latter on his own account, or
(d) the payment to the non-resident is made on delivery of documents and is not dependent in any way on the sales to be effected by the resident,
it can be inferred that the transactions are on the basis of principal-to-principal.

(2) A question may arise in the above type of cases whether there is any liability of the non-resident under section 5(1)(a) on the basis of receipt of sale proceeds including the profit in India. If the non-resident makes over the shipping documents to a bank in his own country which discounts the documents and sends them for collection to the bankers in India, who present the sight or usance draft to the resident importer and deliver the documents to him against payment or acceptance by the latter, the non-resident will not be liable to tax on the profit arising out of the sales on receipt basis. Even if the shipping documents are not discounted in the foreign country, but are handed over in India against payment or acceptance, no portion of the profits will be chargeable to tax under the Income-tax Act, if this is the only operation carried on in India on behalf of the non-resident.

(3) NON-RESIDENT COMPANY SELLING GOODS FROM ABROAD TO ITS INDIAN SUBSIDIARY -

(i) A question may arise whether the dealings between a non-resident parent company and its Indian subsidiary can at all be regarded as on a principal-to-principal basis since the former would be in a position to exercise control over the affairs of the latter. In such a case, if the transactions are actually on a principal-to-principal basis and are at arms length and the subsidiary company functions and carries on business on its own, instead of functioning as an agent of the parent company, the mere fact that the Indian company is a subsidiary of the non-resident company will not be considered a valid ground for invoking section 9 for assessing the non-resident.
(ii) (Applied in CIT v. Gulf Oil (Great Britain) Ltd. [1977] 108 ITR 874 (Bom.)) Where a non-resident parent company sells goods to its Indian subsidiary, the income from the transaction will not be deemed to accrue or arise in India under section 9, provided that (a) the contracts to sell are made outside India, (b) the sales are made on a principal-to-principal basis and at arms length, and (c) the subsidiary does not act as an agent of the parent company. The mere existence of a business connection arising out of the parent-subsidiary relationship will not give rise to an assessment, nor will the fact that the parent company might exercise control over the affairs of the subsidiary.

(4) SALE OF PLANT AND MACHINERY TO AN INDIAN IMPORTER ON INSTALMENT BASIS - Where the transaction of sale and purchase is on a principal-to-principal basis and the exporter and the importer have no other business connection, the fact that the exporter allows the importer to pay for the plant and machinery instalments will not, by itself, render the exporter liable to tax on the ground that the income is deemed to arise to him in India. The Indian importer will not, in such a case, be treated as an agent of the exporter for the purposes of assessment.

(5) FOREIGN AGENTS OF INDIAN EXPORTERS - A foreign agent of Indian exporter operates in his own country and no part of his income arises in India. His commission is usually remitted directly to him and is, therefore, not received by him or on his behalf in India. Such an agent is not liable to income-tax in India on the commission
(The Supreme Court has held to the same effect in CIT v. Toshoku Ltd. [1980] 125 ITR 525)

(6) (For the old clarification on these issues, see Circular No. 4 (XLIII-8), dated 24-2-1958, printed at Sl. No. 41 on p. 1.95.) NON-RESIDENT PERSON PURCHASING GOODS IN INDIA - A non-resident will not be liable to tax in India on any income attributable to operations confined to purchase of goods in India for export, even though the non-resident has an office or an agency in India for this purpose. Where a resident person acts in the ordinary course of his business in making purchases for a non-resident party, he would not normally be regarded as an agent of the non-resident under section 163. But, where the resident person is closely connected with the non-resident purchaser and the course of business between them is so arranged that the resident person gets no profits or less than the ordinary profits which might be expected to arise in that business, the Income-tax Officer is empowered to determine the amount of profits which may reasonably be deemed to have been derived by the resident person from that business and include such amount in the total income of the resident person.

(7) SALES BY A NON-RESIDENT TO INDIAN CUSTOMERS EITHER DIRECTLY OR THROUGH AGENTS -

(a) Where a non-resident allows an Indian customer facilities of extended credit for payment, there would be no assessment merely for this reason provided that(i) the contracts to sell were made outside India; and (ii) the sales were made on a principal-to-principal basis.
(b) Where a non-resident has an agent in India and makes sales directly to Indian customers, section 9 of the Act will not be invoked, even if the resident pays his agent an overriding commission on all sales to India, provided that (i) the agent neither performs nor undertakes to perform any service directly or indirectly in respect of these direct sales and the making of these sales can, in no way, be attributed to the existence of the agency or to any trading advantage or benefit accruing to the principal from the agency; (ii) the contracts to sell are made outside India; and (iii) the sales are made on a principal-to-principal basis.
(c) Where a non-residents sales to Indian customers are secured through the services of an agent in India, the assessment in India of the income arising out of the transaction will be limited to the amount of profit which is attributable to the agents services, provided that (i) the non-resident principals business activities in India are wholly channeled through his agent, (ii) the contracts to sell are made outside India, and (iii) the sales are made on a principal-to-principal basis. In the assessment of the amount of profits, allowance will be made for the expenses incurred, including the agents commission, in making the sales. If the agents commission fully represents the value of the profit attributable to his service; it should prima facie extinguish the assessment.
(d) Where a non-resident principal’s business activities in India are not wholly channeled through his agent in India, the assessment in India will be on the sum total of the amount of profit attributable to his agents activities in India and the amount of profit attributable to his own activities in India, less the expenses incurred in making the sales.

(8) EXTENT OF THE PROFIT ASSESSABLE UNDER SECTION 9 - Section 9 does not seek to bring into the tax net the profits of a non-resident which cannot reasonably be attributed to operations carried out in India. Even if there be a business connection in India, the whole of the profit accruing or arising from the business connection is not deemed to accrue or arise in India. It is only that portion of the profit which can reasonably be attributed to the operations of the business carried out in India, which is liable to income-tax.
To constitute a business connection, some continuity of relationship, between the person in India who helps to make the profits and the person outside India who receives or realises the profits, is necessary. Where all what has happened is that a few transactions of purchases of raw materials have taken place in India and the manufacture and sale of goods have taken place outside India, the profits arising from such sales cannot be considered to have arisen out of a business connection in India. Where, however, there is a regular agency established in India for the purchase of the entire raw materials required for the purpose of manufacture and sale abroad and the agent is chosen by reason of his skill, reputation and experience in the line of trade, it can be said that there is a business connection in India so that a portion of the profits attributable to the purchase of raw materials in India can be apportioned under Explanation (a) to section 9(1)(i). (Added by Circular No. 163, dated 29-5-1975, printed as Clarification 2. ) [The taxability of such portion of the profits will, however, be subject to the exemption provided in clause (b) of the Explanation to section 9(1)(j).]

JUDICIAL ANALYSIS
Circular: No. 163 [F. No. 488/23/73-FTD], dated 29-5-1975.

Distinguished in - The above circular was distinguished on facts in Performing Rights Society Ltd. v. CIT [1977] 106 ITR 11 (SC), with the following observations :
Mr. Dutt relied upon a circular of the Central Board of Direct Taxes being Circular No. 23/F, 1969, dated 23rd July, 1969, regarding liability to tax on income accruing or arising to a non-resident under section 9 of the Act. Mr. Dutt contended that this circular has statutory force under section 119 of the Act. For our present purpose, however, we are not required to consider whether the circular has any statutory force or not because the circular relates to income accruing or arising through or from business connection in India. Paragraph 7 of the said circular is as follows :

This circular, therefore, contemplates a situation quite different from that in the present case. (pp. 17-18)

Applied in - The above circular was referred to and applied in CIT v. Gulf Oil (Great Britain) Ltd. [1977] 108 ITR 874 (Bom.), with the following observations :
. . . . However, Mr. Joshi was fair enough to invite our attention to a circular bearing No. 23 of 1969, dated July 23, 1969, issued by the Central Board of Direct Taxes, where certain clarifications have been issued by the Board on the scope of provisions of section 42 (section 9 of the Income-tax Act, 1961), and their applicability in certain types of cases and he fairly conceded that the question raised in the instant reference may have to be considered having regard to the guidelines or clarifications that have been issued by the Board in the said circular. Paragraph 2 of the circular runs thus:
Having regard to this illustrative instance, which has been given in paragraph 2 of the aforesaid circular, it is quite clear that in the instant case the business connection could be said to have been established, inasmuch as the Indian subsidiary company which is a hundred per cent subsidiary owned by the non-resident company has been formed to effect sales of the products of non-resident company . . . .
In this view of the matter, it seems to us clear that in view of the illustrative instances and guidelines furnished by the Board under its aforesaid circular, there is no scope for applying the provisions of section 42(3) of the Act . . . . CLARIFICATION 2

1. Attention is invited to para 3(7) of Boards Public Circular No. 23, dated 23-7-1969 [Clarification 1] , wherein it has been stated as follows :
. . . where, however, there is a regular agency established in India for the purchase of the entire raw materials required for the purpose of manufacture and sale abroad and the agent is chosen by reason of his skill, reputation and experience in the line of trade, it can be said that there is a business connection in India so that a portion of the profits attributable to the purchase of raw materials in India can be apportioned under Explanation (a) to section 9(1)(i).
2. The above sentence may convey the impression that a non-resident is liable to be taxed on a portion of the profits attributable to the purchase of raw materials required for the purposes of manufacture and sale abroad, if the purchases are made in India through a regular agency established in India for this purpose. By virtue of clause (b) of the Explanation to section 9(1)(i), the correct legal position is that in the case of a non-resident, no income shall be deemed to accrue or arise in India through or from operations which are confined to purchase of goods in India for the purpose of export. Accordingly, the mere existence of an agency established by a non-resident in India will not be sufficient to make the non-resident liable to tax, if the sole function of the agency is to purchase goods for export. This legal position has also been explained in para 3(5) of the Boards Public Circular cited above.
3. To remove any possible misunderstanding of the legal position, the following sentence may be added at the end of para 3(7) of the said circular:
The taxability of such portion of the profits will, however, be subject to the exemption provided in clause (b) of the Explanation to section 9(1)(i).

1168. Clarification regarding taxability of export commission payable to non-resident agents rendering services abroad
Circular : No. 786, dated 7-2-2000.
1. In their Audit Report for 1997-98 [D.P. No. 79(I.T.)] the Comptroller & Auditor General (C & A G) Raised an objection that the Assessing Officer in computing the profits and gains of business or profession, in a case in Mumbai charge, had wrongly allowed a deduction in respect of a payment to a non-resident where tax had not been deducted at source. The nature of the payment in this case was export commission and charges payable for services rendered outside India. In the view of C & A.G. the expenditure should have been disallowed in accordance with the provisions of section 40(a)(i) of the I.T. Act, 1961. It has come to the notice of the Board that a similar view, on the same set of facts has been taken by some Assessing Officers in other charges.
2. The deduction of tax at source under section 195 would arise if the payment of commission to the non-resident agent is chargeable to tax in India. In this regard attention to CBDT Circular No. 23 dated 23rd July, 1969 is drawn where the taxability of Foreign Agents of Indian Exporters was considered along with certain other specific situations. It had been clarified then that where the non-resident agent operates outside the country, no part of his income arises in India. Further, since the payment is usually remitted directly abroad it cannot be held to have been received by or on behalf of the agent in India. Such payments were therefore held to be not taxable in India. The relevant sections, namely section 5(2) and section 9 of the Income-tax Act, 1961 not having undergone any change in this regard, the clarification in Circular No. 23 still prevails. No tax is therefore deductible under section 195 and consequently, the expenditure on export commission and other related charges payable to a non-resident for services rendered outside India becomes allowable expenditure. On being apprised of this position, the Comptroller and Auditor General have agreed to drop the objection referred to above.

Section 9 of the Income-tax Act, 1961 - Income - Deemed to accrue or arise in India - Withdrawal of Circulars No. 23 dated 23rd July, 1969, No. 163 dated 29th May, 1975 and No. 786 dated 7th February, 2000

Circular No. 7/2009 [F. No. 500/135/2007-FTD-I], dated 22-10-2009

The Central Board of Direct Taxes had issued Circular No. 23 (hereinafter called "the Circular") on 23rd July 1969 regarding taxability of income accruing or arising through, or from, business connection in India to a non-resident, under section 9 of the Income-tax Act, 1961.
2. It is noticed that interpretation of the Circular by some of the taxpayers to claim relief is not in accordance with the provisions of section 9 of the Income-tax Act, 1961 or the intention behind the issuance of the Circular.
3. Accordingly, the Central Board of Direct Taxes withdraws Circular No 23 dated 23rd July, 1969 with immediate effect.
4. Even when the Circular was in force, the Income-tax Department has argued in appeals, references and petitions that-
(i) the Circular does not actually apply to a particular case, or
(ii) that the Circular can not be interpreted to allow relief to the taxpayer which is not in accordance with the provisions of section 9 of the Income-tax Act or with the intention behind the issue of the Circular.
It is clarified that {he withdrawal of the Circular will in no way prejudice the aforesaid arguments which the Income-tax Department has taken, or may take, in any appeal, reference or petition.
5. The Central Board of Direct Taxes also withdraws Circulars No. 163 dated 29th May, 1975 and No. 786 dated 7th February, 2000 which provided clarification in respect of certain provisions of Circular No 23 dated 23rd July, 1969.

1. These clarifications are contained in Circular No. 17(XXXVII- 1) [F. No. 26(26)-IT/53], dated 17-7-1953 and Circular No. 4(XLIII-8), dated 24-2-1958, which have been retained in the compendium and appear at Sl. Nos. 40 and 41, pp. 1.95, respectively, for the sake of academic interest.
2. Old clarification on this issue, see Circular No. 17, dated 17-7-1953, at Sl. No. 40, p. 1.95.
3. Applied in CIT v. Gulf Oil (Great Britain) Ltd. [1977] 108 ITR 874 (Bom.).
4. The Supreme Court has held to the same effect in CIT v. Toshoku Ltd. [1980] 125 ITR 525.
5. Added by Circular No. 163, dated 29-5-1975, printed as Clarification 2.

Penalty under section 271(1)(C)

1. I am a surgeon by profession and I am under the employment of a multi specialty Hospital at Hyderabad. I am regularly in receipt of my professional payments from the institution. Recently, it is understood that the Income-tax department had found that the Hospital had been collecting certain sums in cash in my name of my department, which was substantially used for creation of infrastructural facility and partly intended for payment to the doctors. It is ascertained that the Hospital has disclosed before the department the extent of such collections made from the public in respect of my department and the sum ear marked for me. Upon receiving such information and the money appropriated to my account, I volunteered to file revised returns and also pay tax, including interest thereon up to the date of filing of the return.


2. It is true that the returns were filed immediately after the department issued me notice re-opening my assessments.

While the returns filed were accepted, the assessing Officer has levied penalty under section 271(1)© for all the years. I have filed appeals against the penalty orders before the Appellate Authorities. Frankly speaking that but for the mis information from the hospital authorities, I would have filed the return including the additional sum even during the normal process.Since I find a number of interesting issues being discussed in your forum, I feel it appropriate to make a reference to you and enlist your valuable view on this.

Dr.Ramesh Reddy, Hyderabad.

The issues high lighted by the reader clearly goes to establish that he has been maintaining a very high profile in honest compliance with his tax obligations. Such a state is normally more pronounced if one is to maintain the same degree of respect and dignity in the moral fabric of one’s public life. Coming to the issue on hand, the point high lighted by the doctor is almost identical to the decision of the Supreme Court in the case of T.Ashok Pai Vs. Commissioner of Income-tax reported in 292 ITR page 11.

In this decision, the Hon’ble Court has ruled that the word “Inaccurate”, in the context of levying penalty under section 271(1)© signifies a deliberate omission on the part of the assessee. Such deliberate act must be for the purpose of concealment of income or furnishing inaccurate oarticularas. The assessing Officer is required to arrive at a finding that the explanation offered by the assessee, in the event he offers one, was false. He must be found to have failed to prove that such explanation was no only not bona fide but all the facts relating to the same which are material to he income were not disclosed by him. Thus apart from the explanation being not bona fide, it should be found as a fact hat he has not disclosed all the facts that were material for the computation of income. Holding this view, the Hon’ble Court held that in the said case, since the assessee was dependent upon hios attorney for accounting all his income and had rendered his return only on the basis of such advice, which later turned out to be in correct, he cannot be identified as one having either furnished inaccurate particulars or concealed his income.

Applying the ratio of the said decision, in the case in question, as per facts furnished by the doctor reader, he did not have information about cash collection by the Hospital which was reportedly done for provision of infrastructural facility in the hospital and partly for the benefit of the doctor. This information basically having been with held by the hospital which was not within his knowledge, his filing a revised return and paying taxes including interest threon, cannot be dubbed as concalment and more so, visited with a penalty. The reader is advised to cite this decision which is almost akin to the facts obtaining in his case.

Comments on India's Union Budget 2009

The High Lights of the Union Budget presented by the Hon’ble Finance Minister (FM) in Parliament is substantially growth oriented. The FM has analyzed in depth the needs of the Rural poor and has accentuated the Am Admi jargon of the Ruling party. He has provided a sizable stimulus package for the growth of the economy to the tune of more than 1,86,000 crores.

On the social security sector, a provision of 71,000 crores is earmarked for meeting the promise made to the poor of supply of 25 Kgs of Rice/wheat @ Rs.3 per KG and provision of employment on a guaranteed basis for 100 days to the rural Poor. The vision to provide 1.2 million jobs in various sectors is another ambitious programme launched in the Budget.

Under indirect taxes, no substantial change has been made, barring roping in the persons engaged in legal profession also within the net of Service tax. This completes the circuit of all professionals brought within the ambit of service tax.

The thrust on the states to adhere to the plans envisaged under the Jawaharlal Nehru Urban Rural (JNNURM) is another bold step to accentuate uniform distribution of resources throughout the country, without any political agenda.

The allocations for irrigation, debt relief, fertilizer subsidy are another landmark, including the programme to cover almost the entire rural women folk under the Self Help scheme.

Under direct taxes, the notable change is the enhancement of the taxable minimum for senior citizens by Rs.15,000 bringing it to 2,40,000, for women by another Rs.10,000, enhancing the existing limit to Rs.1,95,000 and for others to Rs.1,60,000, with a marginal increase of Rs.10.000. Another laudable feature in the budget is the abolition of the surcharge on individuals whose total income exceeds 10 lakhs.

The Happy News under the Direct taxes is the total abolition of Fringe Benefits Taxes. This would considerably ease the pinch of the Corporate sector, who had viewed with circumspection provision of any incentive to employees; more so, skilled personnel. This is greatly welcomed with a huge sigh of relief.

The Corporate sector has, however got a beating with increase in the Minimum Alternate tax of 15% on the Book profits. This could have been avoided, given the fact, that it is the corporate sector, who are the dominant contributories to the economy and better encouragement to them, could mop up better compliance. Under education though an interest free loan of 5 lakhs is made available for students, there is no significant forecast. Similarly for health also there is no perceptible allocation made. The enhancement for the Defence sector is understandable, in the back drop of the neighboring countries arming to the teeth.

Over all the Budget which has crossed for the first time in our history more than 10 lakh crores, of expenditure is commendable. It is growth oriented with excellent stimulus package for sustained industrial growth. Our congrats to the FM.

Highlights of Union Budget 2009-10 (as reported by PTI)
6 Jul 2009
NEW DELHI:

Following are the highlights of Budget 2009-10.
* Govt plans to bring back economy to high growth of 9%
* GDP growth dipped to 6.7% in FY'09
* FM to make pre-budget talks with state FMs annual affair
* Fiscal deficit up from 2.7% to 6.8% of GDP
* Return to fiscal prudence at the earliest
* 'Aam admi' is focus of all programmes and schemes ( Watch )
* IT exemption limit raised; Rs 15,000 for Sr.citizens ( Watch )
* Limit raised by Rs 10,000 for tax payers, including women
* 10% surcharge on personal income tax scrapped
* Fringe Benefit Tax abolished
* No change in corporate tax ( Watch )
* Defence gets Rs 1,41,703 cr, up 34%
* Total fiscal stimulus in 2008-09 amounts to Rs 1,86,000 cr
* IIFCL to evolve mechanism for increased funding of infra
* IIFCL to re-finance commercial bank loans up to 60 per cent in critical projects through PPP to tune of Rs 1,00,000 cr
* Allocations for highways being stepped up by 23 per cent
* Funds for housing, amenities for urban poor up Rs 3,973 cr
* Funds for JN Urban Renewal Mission up 87% to Rs 12,887 cr
* Assistance for storm-water drainage project up by Rs 300 cr
* Farm credit target up at Rs 3,25,000 cr from Rs 2,87,000 cr
* Interest rates incentive to farmers to repay loans on time
* Additional Rs 1,000 crore for accelerated irrigation scheme
* Export Credit Guarantee scheme extended till March 2010 * 2% interest subvention (IS) scheme extended till March 2010
* IS scheme to cover 7 job-oriented sectors, including textile, handicrafts and handlooms.
* Commodity Transaction Tax abolished
* New pension system trust exempted from STT; DDT
* Minimum Alternate Tax hiked to 15% from 10%
* Tax holiday on petro sector extended to natural gas
* 100% tax deduction on political donation * Stimulus for print media for another six months * Fertiliser subsidy to be nutrient-based, not price
* Expert Grp to form viable pricing for imported petro goods
* Banks and insurance firms to remain in public sector
* Rs 100 cr one-time grant to expand banks in unbanked areas
* Govt committed to provide Rs 100 a day as wages under NREGA
* Allocation of Rs 39,100 cr to be made for NREGA
* NREGA coverage increased to 4.74 crore households in FY'09
* Work National Food Security scheme has begun
* Allocation for Bharat Nirman being raised by 45 per cent
* Rs 2,000 cr rural housing fund under National Housing Bank
* Mission for female literacy with focus on minorities, SC/ST * 50% of all rural women to be brought into SHG programmes
* Full interest subsidy for students in select institutions
* Five lakh students to benefit
* Modernisation of national exployment exchanges
* Action for social security to unorganised sector workers
* New pension benefits for 12 lakh jawans and JCOs from July
* One lakh dwelling units for paramilitary forces personnel
* Unique Identification Card to citizens in 12-18 months
* Provision of Rs 120 crore for UIC project
* Rs 2,113 crore allocated for IITs and new IITs
* Rs 3472 cr for Commonwealth Games from Rs 2112 cr
* Customs, excise and service tax base rates unchanged
* For Indira Awas Yojana, allocation increased 63%
* IT returns to be made simpler
* 8 missions being launched under Plan on climate change
* Allocation for market development assistance scheme up 148%
* Allocation for Rural Health Mission raised by Rs 257 cr above interim budget
* Rs 500 cr for rehabilitation of Sri Lankan Tamils
* Rs 1,000 cr for infrastructure in cyclone-hit area in WB
* Total expenditure crosses Rs 10 lakh cr for first time
* Share of direct taxes in revenue increased to 56% in FY'09
* Fringe Benefit Tax abolished

QUESTION AND ANSWER FORUM: JUNE 2009

QUESTION: We are a Charitable Institution. We would like to seek your
valued Opinion whether a Charitable Organization registered under the Societies
Registration Act and registered with the Income-tax Department under section 80G
& 12A and has also received the Home Ministry's approval for
receipt of foreign grant be:

• permitted to buy shares in companies?
• Allowed to Buy shares of companies and give it to the workers who hail from our
  targeted communities?
• Allowed to receive foreign grant within specific purpose to register a public
  limited company having share holders from general public (with their own fund) and
  workers (share amount being provided with foreign grant)?

LAKSHMIAH CHANDRIAH (TRUSTEE)
Badrachalam Ramachandraswamy shikshana Trust,
Badrachalam.

ANSWER: Section 2 (15) which identifies charitable has been amended by the Finance Act
2008, which has streamlined the definition of “charitable
purpose. An extract of the amended definition is appended below.

5. Streamlining the definition of charitable purpose

5.1 Sub-section (15) of section 2 of the Act defines charitable purpose
to include relief of the poor, education, medical relief, and the advancement of any
other object of general public utility. It has been noticed that a number of entities
operating on commercial lines are claiming exemption on their income either under
sub-section (23C) of section 10 or section 11 of the Act on the ground that they are
charitable institutions. This is based on the argument that they are engaged in the
advancement of an object of general public utility as is included in the fourth limb
of the current definition of charitable purpose. Such a claim, when made in respect
of an activity carried out on commercial lines, is contrary to the intention of the
provision.

5.2 With a view to limiting the scope of the phrase advancement of any
other object of general public utility, sub-section (15) of section 2 has been
amended to provide that the advancement of any other object of general public utility
shall not be a charitable purpose, if it involves the carrying on of any activity in
the nature of trade, commerce or business, or any activity of rendering any service
in relation to any trade, commerce or business, for a cess or fee or any other
consideration, irrespective of the nature of use or application, or retention, of the
income from such activity. Scope of this amendment has further been explained by the
CBDT vide its Circular No. 11/2008, dated 19th December, 2008.

5.3 Applicability - This amendment has been made applicable with
effect from 1st April, 2009 and shall accordingly apply for assessment year 2009-10
and subsequent assessment years.

It can be seen from the extract that the activities now intended by the
organization seeking opinion, that they are hit by the amended provisions of section
2(15) and would accordingly fall outside the scope of exemption, throwing open the
doors for the authorities to tax such gains and making all such inquiries be it
roving or normal. A very detailed circular has also been issued on 19.12.2008 by the
Central Board of Direct Taxes, which very clearly establishes that the activities of
the kind proposed would implied be hit by the amendment.

In view of this, the first two limbs of reference are directly hit. As regards the
3^rd limb, it is basically very much outside the scope of charitable
purpose, as creation of a company for commercial activity cannot be regarded as an
extended activity of the already identified charitable organization, as the very
purpose envisaged clearly identifies its activity to be commercial in nature,
expressly within the clutches built by the new amendment.Â

Lastly view is also sought whether letting out of property would have any
prohibition from exemption.

It is conveyed that so long as the income derived by the charitable institution
recognized as such, is applied for the avowed purpose, it cannot forfeit exemption.
The stigma cast by virtue of the amendment is only to discourage involvement of such
charitable institutions in commercial activity, thereby circumventing their liability
to tax, which but for the exemption, is very much their burden.

The only contrast is that earning income from involvement in trade or any other
commercial activity, irrespective of their ultimate application, would forfeit
exemption. In the given case, mere letting out of space surplus or normally available
would not render such activity as commercial to forfeit exemption.

Circular No. 11/2008, dated 19-12-2008 - Definition of Charitable purpose under section 2(15) of the Income-tax Act, 1961:

Section 2(15) of the Income Tax Act, 1961 (Act) defines charitable purpose to
include the following:-

(i) Relief of the poor
(ii) Education
(iii) Medical relief, and
(iv) the advancement of any other object of general public utility.

An entity with a charitable object of the above nature was eligible for exemption
from tax under section 11 or alternatively under section 10(23C) of the Act. However,
it was seen that a number of entities who were engaged in commercial activities were
also claiming exemption on the ground that such activities were for the advancement
of objects of general public utility in terms of the fourth limb of the definition of
charitable purpose. Therefore, section 2(15) was amended vide Finance Act, 2008 by
adding a proviso which states that the advancement of any other object of general
public utility shall not be a charitable purpose if it involves the carrying on of

(a) any activity in the nature of trade, commerce or business; or
(b) any activity of rendering any service in relation to any trade, commerce or
business;

for a cess or fee or any other consideration, irrespective of the nature of use or
application, or retention of the income from such activity.

2. The following implications arise from this amendment

2.1 The newly inserted proviso to section 2(15) will not apply in respect of the
first three limbs of section 2(15), i.e., relief of the poor, education or medical
relief. Consequently, where the purpose of a trust or institution is relief of the
poor, education or medical relief, it will constitute charitable purpose even if it
incidentally involves the carrying on of commercial activities.

2.2. Relief of the poor encompasses a wide range of objects for the welfare of the
economically and socially disadvantaged or needy. It will, therefore, include within
its ambit purposes such as relief to destitute, orphans or the handicapped,
disadvantaged women or children, small and marginal farmers, indigent artisans or
senior citizens in need of aid. Entities who have these objects will continue to be
eligible for exemption even if they incidentally carry on a commercial activity,
subject, however, to the conditions stipulated under section 11(4A) or the seventh
proviso to section 10(23C) which are that

(i) the business should be incidental to the attainment of the objectives of the
entity,and
(ii) separate books of account should be maintained in respect of such
business.

Similarly, entities whose object is education or medical relief would also
continue to be eligible for exemption as charitable institutions even if they
incidentally carry on a commercial activity subject to the conditions mentioned
above.

3. The newly inserted proviso to section 2(15) will apply only to entities whose
purpose is advancement of any other object of general public utility i.e. the fourth
limb of the definition of charitable purpose contained in section 2(15). Hence, such
entities will not be eligible for exemption under section 11 or under section 10(23C)
of the Act if they carry on commercial activities. Whether such an entity is carrying
on an activity in the nature of trade, commerce or business is a question of fact
which will be decided based on the nature, scope, extent and frequency of the
activity.

3.1. There are industry and trade associations who claim exemption from tax u/s 11
on the ground that their objects are for charitable purpose as these are covered
under any other object of general public utility. Under the principle of mutuality,
if trading takes place between persons who are associated together and contribute to
a common fund for the financing of some venture or object and in this respect have no
dealings or relations with any outside body, then any surplus returned to the persons
forming such association is not chargeable to tax. In such cases, there must be
complete identity between the contributors and the participants.

Therefore, where industry or trade associations claim both to be charitable
institutions as well as mutual organizations and their activities are restricted to
contributions from and participation of only their members, these would not fall
under the purview of the proviso to section 2(15) owing to the principle of
mutuality. However, if such organizations have dealings with non-members, their claim
to be charitable organizations would now be governed by the additional conditions
stipulated in the proviso to section 2 (15).

3.2. In the final analysis, however, whether the assessee has for its object the
advancement of any other object of general public utility is a question of fact. If
such assessee is engaged in any activity in the nature of trade, commerce or business
or renders any service in relation to trade, commerce or business, it would not be
entitled to claim that its object is charitable purpose. In such a case, the object
of general public utility will be only a mask or a device to hide the true purpose
which is trade, commerce or business or the rendering of any service in relation to
trade, commerce or business. Each case would, therefore, be decided on its own facts
and no generalization is possible. Assessees, who claim that their object
is for charitable purpose within the meaning of Section 2(15), would be
well advised to eschew any activity which is in the nature of trade, commerce or
business or the rendering of any service in relation to any trade, commerce or
business.

QUESTION: We own extensive vacant lands around the far outskirts of
Vijayawada. The lands are being owned by us as a joint hereditary property over a
period of decades. They are within the local Municipal limits, though we are not
paying any land tax thereon. We had not done any cultivation, as there is limited
scope for irrigation. Most of our children got employed at different far off places
and visit our place only during their vacation or for any family function. We are
three brothers and I am he eldest. The extent of land we own is about 12 acres, all
barren.

Our children suggest that we can develop he land, for industrial purpose partly
and of the remaining, sell out housing layouts after obtaining the approval of the
concerned authorities.

Now, we understand that notices are being issued to similar holders of land by the
Income-tax department, suggesting that they are urban land and all vacant lands are
liable to Wealth-tax. However, on consulting with consultants, we are
advised that once we undertake the development of land for industrial purpose and
convert them into lay outs for housing plots, the department cannot tax them as urban
land. We are told that we would become liable to wealth-tax for a number of years and
valued at the market rate, we would be liable to pay sizable amount as wealth-tax. In
this situation, we solicit your learned counsel to advise us on

• What is an urban land, as defined for wealth-tax purposes and
• what are the circumstances, it cannot be subjected to tax.

GEDDHA RAMASUBBU, VIJAYAWADA.

ANSWER: The reader has brought out a very lengthy question. However as it
emerges, the issue is simple. The lands which though remain barren are vacant lands
which can be classified as urban lands. Urban lands have been defined under the
Wealth-tax as under:

• Any area which is comprised within the jurisdiction of a Municipality (whether
  known as municipality, Municipal Corporation, notified area committee, town area
  committee, or any other name, or a cantonment board and which has a population of
  not less than 10,000 according to the last preceding census of which relevant
  figures have been published before the valuation date or
• In any area within such distance (no being more than 8 kilometers) from the
  local limits of Municipality or cantonment board referred to earlier, as the
  Central Government may having regard to the extent and scope for urbanization of
  that area and other relevant considerations specify.(Notification So 87(E) dt:
  November 9,1993).

It can be deduced from the above definition that all lands which remain vacant and
which are situated in municipal limits or other limits where the population exceeds
10,000 or that area is specifically notified by the government, will be regarded as
“Urban landâ€. Given this under standing, the lands
owned by the family of the reader which is within the Municipal limits can be
identified as urban land liable to Wealth-tax and the reader can be charged to
wealth-tax on the market value of the said lands atr the appropriate rates.

However, under the following circumstances, the lands would fall outside the tax
net:

• If it is a land on which construction is not permissible under any law for the
  time being in force, governing the area in which the land is situated.
• Land occupied by any building which has been constructed with the approval of
  the appropriate authority
• Un-used land held for industrial purposes. And
• Any land held by any assessee as stock in trade for a period of 10 years from
  the date of acquisition.

It can be seen from the exceptional situations discussed above, that the lands of
the querist family do not subscribe to any of the conditions. However, if they
convert the land for any industrial purpose and treat it as a business asset and for
this purpose developing the lands as industrial site or house site and hold it as a
stock in trade or business asset, which is actually commenced or run, then they could
be covered by the exceptional clauses. If the asset is held as a stock in
trade then it would get the benefit of exemption. At the same time, I is cautioned,
the reader is liable to Capital gains tax on the conversion of personal asset into
stock in trade by virtue of the definition of transfer under section 2(47) of the
Act. On the date of transfer into business books, the value of the lands would be
regarded as transferred at market value and once they are sold, the liability to
capital gains would arise.


QUESTION: I am one of the directors of a medium scale Iron and Steel
Industry based at Vizagapatnam. We have been having lucrative business,
though there have been ups and downs in between. Our Income-tax assessments are
almost up to date. It is under stood that in one of the major
customers’ case there was a search from the Income-tax department
and they had reportedly laid their hands on certain documents, they regard as
incriminating. As a consequence, the assessing officer of our company has issued a
notice, suggesting re-opening of our assessments for the last 6 years. When asked for
the basis for the re-opening of the assessments, it is merely stated that certain
particulars of income have been understated besides commission paid to certain
constituents exaggerated. We have consciously furnished all the particulars of income
correctly and have neither overstated our commission payments nor understated our
income in any manner. We are accountable to the Excise department where everything is
put to strict proof and only when they are cleared, that the stock can be lifted. All
our sales are accounted for and tallied, systematically. Under the circumstances, we
are not agreeable to the department’s stand and strongly resist
the move to re-open the assessment. We would be thankful, if we are enlightened on
this issue.

GOPALARATHNAM NAIDU, VIZAGAPATNAM

ANSWER: Under the Income-tax Act, an assessment can be re-opened upto a
maximum period of 6 years, where the income is considered to have escaped assessment.
There are specific parameters laid down. The deeming fiction are:

• Where no return of income has been furnished although the total income in which
  he is assessable exceeded the taxable minimum.
• Where a return has been filed, but the assessee has understated the income or
  claimed excessive loss, deduction, allowance or relief in the return
• Where an assessment has been made but
1. the income chargeable to tax has been under assessed or
2. such income has been assessed at too low a rate or
3. such income has been subjected to excessive relief or
4. excessive loss or depreciation allowance or any other allowance under the Act
   is computed.

Again the re-opening of assessment beyond 4 years in a case where the original
assessment was completed under section 143(3) is permissible, if only the probable
tax that is considered to have escaped assessment is to the tune of Rs.1 lakh or
more.

It is thus seen from the facts furnished by the reader, that they are being
assessed over a period of time. He has not, however stated whether the assessments
have been completed under section 143(3) or 143(1). However, from the facts
furnished, it is reasonably presumed, that being a large entrepreneur, the assessment
could have been put to scrutiny and completed applying the norms laid down therefore.
However coming to the issue of re-opening, the assessing Officer has to specifically
state as to the manner the income is understated. In his connection, it is relevant
to extract the observation of their lordship of the Delhi High Court in the case of
JSRS UdyogLtd., Vs. CIT 313 ITR 328

"In the reasons supplied to the petitioner, there is no
whisper, what to speak of any allegation, that the petitioner had failed to disclose
fully and truly all material facts necessary for assessment and that because of his
failure there has been escapement of income chargeable to tax. Merely having reason
to believe that income had escaped assessment, is not sufficient to re-open
assessment beyond the four years period indicated in the section. The escapement of
income must also be occasioned by the failure on the part of the assessee to disclose
material facts, fully and truly. This is a necessary condition for overcoming the bar
set up by the proviso to section 147. If this condition is not satisfied, the bar
would operation and no action under section 147 can be
taken"

Relying on its own earlier decision, in the case of Wel Intertrade Private Ltd.,
Vs. ITO (2000) 308 ITR 22(DEL), the Hon’ble court has quashed the
notice issued under section 148.

In the light of the decision discussed supra, it is for the department to prove
that the income in question has escaped assessment by virtue of failure on the part
of the assessee to disclose truly all particulars of income. If the
reader's company conforms to this requisite, they can resist the
issue of notice on the above lines.

Special Provisions for Civil Construction and Retail

SPECIAL PROVISIONS FOR COMPUTING PROFITS AND GAINS FROM BUSINESS OF CIVIL CONSTRUCTION, PLYING, HIRING OR LEASING OF GOOD CARRIAGES AND RETAIL BUSINESS ACIVITIES.

Exceptional provisions that prescribe certain simple methods to compute income for the purpose of Income-tax assessment, are discussed in this article. The application of these provisions are where an assessee does not/could not maintain proper books of accounts.

Section 44AD: This section provides that the income of a person engaged in civil construction or supply of labour, a sum equal to 8% of the gross receipts received or payable to him or any higher sum if so admitted by an assessee, shall be deemed to be the income of the person from this business.

This provision will not, however apply to cases, where the gross receipts exceed Rs.40 lakhs as in such cases, the accounts are to be mandatorily audited and a report rendered by a Chartered Accountant.

Similarly, if an assessee admits income below 8% and which is not covered by statutory audit under section 44AB, (where the receipts are below Rs.40 lakhs), the assessing Officer is entitled to complete the assessment under section 143(3), invoking necessary scrutiny powers,, duly examining the relevant books of accounts and other documents which he may direct to be produced to substantiate the claim of income admitted being below the 8% limit prescribed under this section.

The other conditions are that all expenses incidental to the business as recognized, in sections 30 to 38 shall be deemed to have been allowed.

Similarly in respect of depreciable assets, depreciation shall be deemed to have been allowed and the value of the assets shall be taken at the depleted value, notionally construing that depreciation has been allowed.

At the same time if the assessee is a firm, expenses on salary of partners and interest on capital of partners would be allowed in the manner provided under section 40(b) of the Act, which are:

• On the 1st 75,000 of the book profits Rs.50,000 or 90% which ever is more
• On the next Rs.75,000 of the book profit 60%
• On the balance of the book profit @ 40 percent.

Similarly interest payment on capital shall not be more than 12 percent per annum.

This is a special provision by which persons who could not maintain proper accounts and whose gross receipts do not exceed Rs.40 lakhs are covered. Civil Construction has been defined for the purpose of application of this section to be:

1. The construction or repair of any building, bridge, dam or other structure or of any canal or road
2. The execution of any works contract.

Section 44AE: This section provides for adhoc estimate of profit in respect of persons who are engaged in the business of Plying, Hiring and Leasing of Goods Carriages. The extent of adhoc profit as envisaged is:

1. where heavy goods vehicle are operated, the profit shall be estimated @ 3,500 per month per vehicle
2. Other than goods vehicle, the estimate shall be Rs.3,150 per month per vehicle.

This simple estimate would be applicable only if the person operating goods carriage has 10 or less vehicles in operation. This provision would not apply for cases where the gross receipts exceeds Rs.40 lakhs. At he same time, if a person who has 10 or less vehicles admits income below the limit as above, will have to substantiate by production of proper books of accounts and other documents, to prove that his income is in reality below the prescribed limit. For this purpose the assessment would be taken up under scrutiny under section 143(3) of the Income-tax Act, by the assessing Officer. The other conditions are that all expenses incidental to the business as recognized, in sections 30 to 38 shall be deemed to have been allowed.

Similarly in respect of depreciable assets, depreciation shall be deemed to have been allowed and the value of the assets shall be taken at the depleted value, notionally construing that depreciation has been allowed.

At the same time if the assessee is a firm, expenses on salary of partners and interest on capital of partners would be allowed in the manner provided under section 40(b) of the Act, which are:

• On the 1st 75,000 of the book profits Rs.50,000 or 90% which ever is more
• On the next Rs.75,000 of the book profit 60%
• On the balance of the book profit @ 40 percent.

Similarly interest payment on capital shall not be more than 12 percent per annum.

This is a special provision by which persons who could not maintain proper accounts and whose gross receipts do not exceed Rs.40 lakhs are covered.

This apart if an assessee has his over all receipts exceeding Rs.40 lakhs, which includes receipts from carriage of goods, contracts etc., then for the purpose of section 44AB, the receipts from these sources where adhoc estimates are made, shall be eliminated and if only the balance exceeds Rs.40 lakhs, then the assessee would be required to obtain and furnish an audit as provided under section 44AB of the ACT.

Section 44 AF: If any person is engaged in retail trade and his turn over is below Rs.40 lakhs, by virtue of this provision, his income shall be estimated @ 5% of the turn over. The other conditions such as deemed depreciation, deemed deduction of expenses from sections 30 to 38 would also suo motu apply to these cases. Similarly if a person claims lesser profits, he would be subjected to scrutiny of his books of accounts by the assessing Officer, in an assessment proceedings under section 143(3) of the Act. This apart, if the over all turn over of an assessee including retain turn over exceeds 40 lakhs and if the person opts to adopt this provision in respect of retail trade viz. estimation of his profit @ 5% of the turn over attributable to retail trade, then such turn over would be eliminated from the over all turn over and if only the residue exceeds Rs.40lakhs, then he would be required to obtain and furnish an audit report as laid down under section 44AB of the Income-ax Act.

These are all unique provisions which are exceptional to the normal ones, with a view to avoid hardship and also to quicken the pace of faster finalisation of Income-tax cases by the assessing Officers.

Specified Security and Sweat Equity shares

SPECIFIED SECURITY AND SWEAT EQUITY SHARES

The law makers at the Center has brought out a legislation by which certain specific and specialized benefits conferred to certain selective persons within the scope of he Fringe Benefits Tax. Discussion has already been made in this form as to the manner Fringe Benefits Tax is sought to be imposed such as items covered the extent of tax as also the entities who are to suffer this tax.

In this brief, two specific items are sought to be analyzed:
Section 115WB(1)(d) brings within its scope specified security or sweat equity shares allotted or transferred directly or indirectly, by the employer free of cost or at concessional rate to his employees (including former employee or employees)

The two specific items assuming importance from the point of view of Fringe Benefits tax is

1. Specified Security and
2. Sweat Equity Shares

Specified security has been defined under the Securities Contracts (Regulation) Act 1956, asunder:

"Securities" include-

1. shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or other body corporate;
1. derivative;
2. units or any other instrument issued by any collective investment scheme to the investors in such schemes;5
2. Government securities;
   
   1. such other instruments as may be declared by the Central Government to be securities; and 6
3. rights or interests

It can be seen from the definition that all forms of securities, including debentures, debenture stock as also derivatives such as rights, Bonus issues are also brought within the scope. The allotment of these instruments are invariably borne out of extra ordinary considerations, more so with a view to appease the employees in general, with a view to motivate them into better contribution and to create a situation that they also participate in the growth of the organization and themselves growing along side.

While the assignment of securities would attract a class as a whole, in an industry, there are certain noted and distinct institutions that require extra ordinary skill and acumen to create a globally challenging task. Such industries specifically in their race to mobilize supporting working force and talents, attract intellectuals whose Intellectual Property Rights could be shared, distinct Know How on any project or operations are provided or any other value additions, such as mobilizing resources, assistance in the matter of establishing infrastructural facilities, can be extended to the institution by such persons.. These persons endowed with unparalleled skill and expertise are offered a participation in the management and owner ship of the enterprise. The offer is in recognition of their sweat and toil put forth for the growth of the entity. Such offer is other wise styled as “Sweat Equity Shares”. Unlike specified securities discussed earlier “Sweat Equity Shares” carry with it numerous procedures, some of them are briefly discussed below:

SWEAT EQUITY SHARES:
Section 79A of the Companies Act stipulates that

1. The issue of sweat equity shares should be authorized by a special resolution of the General Meeting
2. The number of shares to be issued, its current market rate, consideration, if any and the class of persons to whom it is proposed to be issued
3. At the time of issue, the company ought to have completed at least one year of is commencement of business
4. The shares issued of a company whose shares are listed in the stock exchange should adhere to the norms of the SEBI.

Further the definition rendered for Sweat Equity shares under the Companies Act is “ equity shares issued by the company to its employees or directors at a discount or for consideration other than cash for providing know how or making available rights in the nature of intellectual property rights or value additions, by what ever name called”

The other conditions are that the sweat equity shares issued should not be more than 15% of the total paid up capital or Rs.5 crores which ever is greater and if the ceiling is exceeded, prior approval of the Central Government should be obtained..

The price of the sweat equity share shall be at a price decided by an independent valuer and the lock in period is 3 years from the date of allotment.(i.e. the allottees are restrained in alienating such shares within the lock in period)

The company which proposes to issue sweat equity shares should clearly furnish along with the notice for the General meeting information comprising of

1. date of the meeting and the date on which the directors approved the issue of sweat equity shares
2. reasons/justification for the issue
3. Number of shares, consideration for shares and class of persons to whom the shares are to be issued
4. value of sweat equity shares along with a report of the valuer
5. names of persons for whom sweat equity shares are to be issued and the persons’ relationship with the company
6. ceiling on the Managerial remuneration if any, which will be affected by the issue of such shares
7. a clear statement conveying that the company shall stick to the accounting policies of the Central Government &
8. diluted earning per share pursuant to the issue of securities to be calculated in accordance with the Accounting Standards specified by he Institute of Chartered Accountants of India.

In cases where shares are proposed to be issued for consideration other than cash, the valuation of the Intellectual Property or know how shall be critically examined by an independent valuer who shall consult experts, considering the nature of industry and the nature of property as also the value additions. He would submit an appraisal report, which would be placed at the General meeting. The value of shares allotted to Directors or Managers shall be treated as their remuneration, as they are issued for non cash consideration which does not take the form of asset that can be carried to the balance sheet.

According to SEBI’s notification the price of sweat equity share should not be less than the higher of

1. the average of the weekly high and low of the closing prices of the related equity shares during the last six months preceding he relevant date (date of issue)
2. the average of the weekly high and low of the closing prices of the related equity shares during the two weeks preceding the date of issue.

The company shall within 7 days of allotment of such shares furnish a detailed statement to the Stock Exchange, furnishing the name and address of persons, the number of shares issued, the total amount invested in sweat equity shares and the consequent change in the share capital structure.

It can be seen from the information discussed earlier that the issue of Sweat Equity shares has assumed tremendous importance, as each industry has to out with the other in excellence of business, profit earning and more than anything else retain in perpetuity the think tank of the intellectuals who are the engineers of brain orchestrating any industry.

It is in keeping with such spirit of dynamism in achieving greater goals, Mukesh Ambani reportedly had renounced 12% of his Sweat equity shares, numbering 50 crores, valued at Rs.5000 crores. This way the best of the employees are retained, they are highly motivated to perform better and enhance the reputation of the company viz-a-viz their meritorious status. Even though Employees’ stock option does not involve so much rigour as the Sweaty Equity shares, yet considering the potential in the Industrial growth, the netting in of highly talented workforce, who can contribute to spectacular views, the scheme of Sweat Equity shares is very much worth the name, that is more relevant today with high targets projected for industrial growth.

Income from Agriculture including Plantations

INCOME FROM AGRICULTURE INCLUDING PLANTATIONS

Our country is predominantly one with agricultural back ground. At the time we attained independence nearly 87% of the people were involved in the field of agriculture. With advancement of industrialization, gradually industrial development has eroded into this sector, which has to a sizable extent decimated the availability of agricultural land. Further our rural folks had the conventional implements such as yoke and other equipments, which could not generate better yield. Our irrigation potential, seed processing, type of crops, (seasonal/cash crop) were not well known to our people as our agriculturists were not well trained in the field, but had been carrying on the routine pattern of crop. In order to provide at least some bit of land to the massive landless workforce, late Vinobahaji launched the Bhoodan Movement at Ponchampalle in Andhra Pradesh. The use of organic and in organic manure has brought out some trend of promotion in agriculture. In order to harness all these effects and to make it more productive a number of schemes have been developed in our country to educate the agricultural folks on the manner of preparation of land for agriculture, sowing of seeds, applying fertilizer, irrigation operations. Since geographically it would not be convenient, from the point of view of diverse culture both linguistic and conventional barriers, it was decided to keep agriculture under Entry 82 of the Union List and entry 46 of the state list of Schedule VII of the Constitution.( to work concurrently on the field)

The object behind is to advise the states concerned of the need for promoting agriculture according to the type of soil, provide infrastructure to the rural folks akin to their capacity. While the states would be provided necessary subsidy in supply of fertilizer, seeds and other connected stuff for agriculture. While this is the general perception, which is taken care of by the concerned state governments, in co-ordination with the Central Government, let us analyze the roll the Income-tax Act also plays in encouraging this sector.

Section 2(1A) of the Income-tax Act, 1961 ( which presently governs the taxing statutes) provides an exhaustive definition for agricultural income:

1. Any rent or revenue derived from land which is situated in India and is used for agricultural purposes. This is further clarified to state that i) any income derived from such land by agriculture or ii) the performance by a cultivator or receiver of rent in kind of any process ordinarily employed by a cultivator or receiver of rent in kind to render the produce raised or received by him fit to be taken to market or
2. The sale by a cultivator or receiver of rent in kind of the produce raised or received by him, in respect of which no process has been performed other than making it fit to be carried to the market
3. Any income derived from any building owned and occupied by the receiver of the rent or revenue of any such land, or occupied by the cultivator or the receiver of rent in kind, of any land with respect to which , or the produce of which, any process discussed earlier is carried on

The import of this definition is that any land which is classified as agricultural land should be one in which normal agricultural operations ordinarily done should be done. The produce reaped as a result of such operations, by way of sale in the market, realizing the monetary worth thereof shall be regarded as agricultural income. In this process, the cultivator or the lessor of the land who receives either money or rent in kind for leasing of the land, as a result of agricultural operations shall be deemed to have obtained such income from agriculture. Similarly any building which is in the vicinity of the agricultural land, if it is occupied either by the cultivator or the lessor and derives any income from such building would also be deemed to have obtained the income from agricultural operations. The other conditions are that the building or land should be subjected to a local rate or tax. In other words the cultivator or the lessor ought to have subjected the property to local tax and such tax should have been collected by the Officers intended for the purpose. The agricultural income so derived from the said source enjoys blanket exemption from tax irrespective of the volume and quantum.

However, there are certain restrictions are imposed before extending the benefit of exemption - They are:

1. not situated in any area which is comprised in the jurisdiction of a Municipality or a notified area or a cantonment or a placed where the population according to the last census exceeds 10000 people living in that area
2. the land should not be within 8 kilometer radius of any Municipal limits, Cantonment or Board or any notified area.

The import of this provision is to restrict the benefit of exemption only to such agricultural lands which are only in rural areas and not in urban area or other positions as discussed. The Supreme Court in the leading case of Raja Bhenoy Kumar Sahas Roy 32 ITR 466 has laid down certain parameters to identify what is an agricultural operation; according to which:

1. efforts taken to prune the land i.e. ploughing/tilling
2. sowing seeds
3. transplantation of such seedlings
4. growing such seedlings by providing irrigation facilities including providing manure
5. threshing to segregate the corns.

This can be done either directly by the cultivator or by the owner through some workmen. In all such events, the sale proceeds realized on sale of the produce brought out by the agricultural operations shall be regarded as agricultural income.

It can be seen that as a measure of encouraging agricultural activities in our country income derived from agriculture has been extended blanket exemption. It is further clarified that income from agriculture is the one which remains as gain from agricultural operations after deducting all expenses which are exclusively laid out for agricultural operations. It is immaterial as to the nature of crop cultivated, Be it sugar cane, wheat, paddy, Bajra, millet or any other seed, including cash crops like vegetables, fruits.

It should also be noted in this connection that by virtue of the recent amendment, the Income-tax Act also provides for blanket exemption on income derived from running of nurseries where the flower or other decorative plants are grown in pots and sold. This benefit is also applicable to income derived on sale of saplings (to encourage provision of flora and fawna in the arena) Such incomes are also included within the scope of agricultural income from the assessment year 2009-2010 onwards.

Yet another point to be noted is that only income generated from specific agricultural operations would enjoy the benefit of exemption. Proceeds derived from sale of trees of spontaneous growth, such as silver oak trees, Rose wood (unless they are actually planted and nurtured in the manner provided for agricultural operations) would not get the benefit of exemption. However growing Casuarina tree or shade trees in certain plantations, to provide shade to coffee plantations which are actually planted and brought up with proper watering and treatment would get the benefit of exemption. The same treatment would be extended for orchards where fruits trees are grown and fruits marketed.

I would also like to clarify in this connection that when agricultural produce is reaped from the land on harvesting, the barest minimum operation needed can alone be done to retain the character of agricultural produce. To illustrate, in a given case, if paddy or wheat is cultivated and harvested, it should be sold as paddy or wheat. The minimum operation intended here is to segregate them from the hay or tem and make them as actual paddy. Similarly ground nut, if decorticated and actual kernels are sold, they are agricultural produce. On the other hand if paddy is hulled and rice is brought out, it gets converted into a new product which will not be regarded as agricultural income. Similarly sugar cane sold in the raw form is agricultural income; while the products brought out from it by way of jaggery or sugar/candy would be business income.

Another intriguing point I would like to bring out is that agricultural income irrespective of the volume is tax free. At the same time, if the recipient of agricultural income also earns income which exceeds the taxable minimum, then the agricultural income would be aggregated with the other income and taxed at the rate as applicable to such aggregated income. Then pro rata rebate on the agricultural income by adding the agricultural income along with the limit laid down for taxable minimum and the tax on such figure would be allowed as a rebate. This is illustrated by a simple example. In case a person derives agricultural income of Rs. 2 lakhs and other income Rs.3 lakhs. Tax would be worked out at the rate applicable to the aggregated income viz. 2 plus 3. From this tax on Rs.2 lakhs plus the taxable minimum viz. Rs.1,50,000 (which is the rate in currency for the current financial year) would be reduced. The tax after deducting the rebate would be payable by him. This provision is to collect some element of tax in tune with the benefit derived by an entity from sources other than agriculture. This is because predominantly agriculture as an industry has to be encouraged. At the same time persons who are affluent should also contribute in proportion to their income from other sources, as lawful citizens of the country.