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.

Income from Plantations

INCOME FROM TEA, COFEEE & RUBBER PLANTATIONS.

It may be recalled in the earlier article we have analyzed the generation of agricultural income, the manner it is considered as exempt under the Income-tax Act and what are the conditions tagged on to derive such benefits. While general agricultural income enjoys blanket exemption, if it is not accompanied by any other income derived by a person, the manner of treatment accorded to income from Tea, Coffee and Rubber Plantations are altogether in a different platform. While general agricultural income as it is generated enjoys, the lawmakers did not consider it necessary to dwelve at length the basis for computation of such income. However income generated from Tea,. Coffee and Rubber Plantations stand altogether in a different footing, for certain percentage of income generated from these sources are subjected to Income-tax. The idea behind taxing these incomes (though they are also derived from the same agricultural source) is that persons involved in these operations have to necessarily deploy larger inputs and such persons could tend to be men worthy of means. In a society which craves for progressive taxation as its avowed policy, the law makers have thought it fit to tax such entities on a limited scale, for they are the affordable lot, when compared to the tiny common who could generate agricultural income to a very limited extent from their land holdings. On the other hand owners of plantations have necessarily to possess larger extent of land to raise their crop, who are necessarily endowed with the necessary wherewithal to invest and reap benefits. It is such back ground, in the minds of the law makers which has instilled in imposing a certain levy on incomes generates from these sources.

COMPUTATION OF INCOME FROM TEA; Rule 8 of the Income-tax Rules provides that Income derived from the sale of tea grown and manufactured in India by any person shall be computed treating it as though it is income derived from business and forty percent of such income shall be taken to be the income liable to tax. While computing the income from tea, development allowance as laid down under section 33AB of the Income-tax Act shall be allowed. The extent of deduction to be allowed are: (admissible from the assessment year 1991-92 onwards)

1. The sum of money deposited in Tea/Coffee/Rubber Development account maintained by an assessee with any Bank, under a scheme as approved by the Tea/Coffee/Rubber Board, before the expiry of 6 months from the end of the previous year or before the due date for furnishing a return of income or
2. Deposited the money in a deposit account opened in accordance with and for the purpose framed in a scheme framed by the Tea/Coffee/Rubber Board shall be allowed a deduction as under:
1. a sum equal to the amount of the aggregate of the amount
2. a sum equal to forty percent of the profits of such business (computed in the manner laid down for computing income from profits and Gains from business or profession) before making any deduction under this section.

The other inherent condition with regard to the benefit of deduction for tea growers/manufacturers is that

1. the assessee shall at least 3 months before the commencing of operations for plantations or re-plantation, give notice of intention to the Tea Board in writing
2. the assessee shall afford the Tea Board authorities or such other agencies as may be authorized by the Tea Board to inspect the area under plantation or re-plantation
3. the assessee shall furnish to the Tea Board all such particulars, Documents or statements in relation to the planting or replanting of tea, as the Tea Board may require from time to time
4. and the assessee shall furnish to the assessing Officer along with the return of income for the previous year for which the deduction is claimed, a certificate from the Tea Board in form 5 and a statement of particulars in form 5A

This apart, the deduction shall be allowed only when the books of accounts are audited and a report is rendered by a chartered account qualified under section 288(2) of the Act. Further the amount deposited in the account shall not be withdrawn except for the purposes specified in the scheme or in the circumstances specified below:

1. closure of business
2. death of an assessee
3. partition of a Hindu Undivided family
4. dissolution of a firm
5. liquidation of a company.

The assessee shall forfeit the benefit of deduction if

1. if the funds are utilized fopr installation of any plant or machinery in any residential accommodation including a guest house
2. for acquiring any office appliances, other than a computer
3. any machinery or plant the whole cost of which is allowable as a deduction &
4. acquisition of any new plant or machinery for the purpose of construction, manufacture or production of any article or thing specified in the Eleventh schedule.

The instances of above violation shall entail in the entire amount being treated as the income of the assessee and brought to tax in the normal manner. Similarly where the assets acquired in accordance with the scheme or deposit held is transferred within a period of 8 years from the date of deposit/acquisition, then the assessee shall forfeit the benefit of exemption and the assessing Officer shall make an assessment on the extent of deposit so used for purposes other than the one laid down, as the income of the assessee in the particular year of violation and bring the same to tax in the normal manner

COMPUTATION OF INCOME FROM MANUFACTURE OF RUBBER:

Income-tax Rules 7A provides that 35% of the income derived from the sale of centrifuged latex or latex based crepes (such as latex crepe) or brown crepes remilled crepe, smoked blanket crepe or flat barke crepe or technically specified block rubbers manufactured or processed from field latex or coagulumn obtained from rubber plants grown by a seller in India, shall be adopted, treating the entire process as business income.

While computing the income from sale of rubber as above, cost of planting rubber plants in replacement of plans that have died or become permanently useless in an area already planted, if area has not already been abandoned as waste land shall be allowed as a deduction. While working out the admissible deduction, the value of subsidy, if any granted shall no be reduced from the cost of such planting or re-planting.

COMPUTATION OF INCOME FROM THE MANUFACTURE OF COFFEE:

Income-ax Rules 7B provides that 25% shall be deemed to be the income derived from coffee from the value of coffee grown and cured by the seller in India, treating the same as a business proposition.

Income derived from the sale of coffee grown, cured, roasted and grounded by the seller in India, with or without mixing chicory or other flavouring ingredients shall be computed as if it were income derived from business and 40% of such income shall be adopted as income derived from this source.

It has furher been explained that the term curing shall have the same meaning as assigned in clause (d) of section 3 of the Coffee Act, 1942 (7 of 1942)

Similarly as discussed in the case of rubber, allowance shall be made in respect of the cost of planting of coffee plants and replacements of plants that have died or become permanently useless in an area already planted if such area has not been previously abandoned. While computing the deduction, the value of subsidy, if any provided to the grower shall no be deducted.

The benefit of exemption as discussed under Tea enumerating section 33AC shall equally apply for both Coffee and Rubber incomes. I.e. deposit in specific account with NABARD. (National Bank for Rural and Agricultural Development)

The encouragement from the taxation point of view of comparison though very much differs from the normal agricultural income, yet, while considering the enormous investments and possibility of the industry gaining substantial boost/boom could be reasonably termed as commensurate with the merit and potential of the industry as a whole.

Matter of Bonus Payments

SOME PROCEDURAL DIFFICULTIES IN THE MATTER OF PAYMENT OF BONUS FOR THE YEAR 2007-08 (FINANCIAL YEAR) AND PRACTICAL SOLUTIONS ARE DISCUSSED IN THIS ARTICLE.

An issue was brought to light in the discussion table of Tax Forum that with the advent of the advanced due date viz. 30th of September for filing of returns by all entities who are subjected to Tax Audit as laid down under section 44AB, there are certain practical difficulties in the matter of charging the Payment of Bonus to employees covered under the Payment of Bonus Act. The difficulties visualized are that under normal circumstances, it has been the convention of Corporate entities to pay Bonus at or upon the exact festivity which mostly happens to be Deepavali in our country. This year, actually Deepavali festival falls on 29.10.2008. Up to last year, the due date for filing of Tax Audit Reports and returns was up to 31st October. Under normal circumstances any expenditure is charged to revenue during the financial year itself. However since Bonus payment is an issue to be decided only on arriving at the actual profits available for such consideration; besides, a decision has to be taken on the extent of Bonus payable according to situation occurring in each year, the same cannot be charged as a normal expenditure. By virtue of the provisions of section 43B of the Income-tax Act, if the payment is made before the due date for filing of the return, the expenditure in question would be admissible as a deduction, being a charge on the profits of the year.

Since during the year in currency, the festivity Deepavali falls a month beyond the due date for filing of the return, in order to claim the deduction, there is a suggestion that a provision could be made in the accounts. Or conversely, instead of making payment under the nomenclature of Bonus, certain adhoc payments in the form of ex-gratia award could be considered. In this back ground, what is the impact on the entrepreneur, is being analyzed in this article.

It has also been expressed by many entities that normally, Bonus is being paid for a specific, festival and in this case for Deepavali. The concern of the institutions is that the provisions of section 43B is so scathing that unless the payment is made within the time allowed under section 139(1), of the Income-tax Act, it shall not be allowed as a deduction. The lurking anguish is that in the current year, Deepavali falling beyond the due date, laid down for filing the return viz. during October,08, it could be that the claim for Bonus, in the form of provision would perforce be disallowed,( as the payment cannot be made before 30th September,08) entailing in huge liability, by way of tax and attendant interest levies. The suggestion of the Managers is that we can style the payment as “adhoc” or “ex-gratia”and charge to the running account, in which case the difficulty could be overcome.

Section43B, which is a "non-obstente" provision, says, interalia, that “Any sum referred to in clause (ii) of sub section (1) of section 36..” shall be allowed (irrespective of the previous year in which the liability pay such sum was incurred by the assessee according to the method of accounting regularly employed by6 him) only in computing the income referred to in section 28 of that previous year in which such payment was actually paid.”

The above position makes it clear that unless the Bonus which is the issue in question is paid within the previous year or extended time of the due date for filing of the return of income, the same shall not be allowed. But would be allowed irrespective of the previous year to which it relates, in the year in which it is actually paid, no matter whether it relates to a different year or is not a charge on the profits of the year, in which the payment was actually made..

Now coming to the Payment of Bonus Act, it only envisages payment of Bonus to employees, upon their eligibility from out of the income earned during the previous year. This provision does not postulate any condition that it ought to be paid only during any specific festivity or time. It merely provides for payment according to the capacity and eligibility from out of the profits earned during the previous year. Over a period of time, we have adopted a convention by which we have been adopting a standard method of paying Bonus during Deepavali, which is predominantly the festival largely celebrated by the citizens of our country. The Managers have voiced their concern that since the Deepavali festivity actually falls beyond the due date for filing the return, payment made subsequently would entail in sizable liability. Such anguish is true and well reasoned. However, in order to over come the dis allowance, it is suggested that the Bonus can be paid well before the festivity to time before the due date for filing the return. There is absolutely no rigid rule or principle that a change in the procedure ought not to be effected.

To illustrate a few examples, it may be recalled that the Banks were adopting earlier the calendar year as the previous year. Similarly Income-tax payers were adopting different periods as their previous year such as “Samvath Year”. Deepavali year, "Vijayadasami year" “Tamil New Year”, “Yugadhi year”.. etc., But the legislature, however, by a stroke of pen ruled that hence forth the previous year for the purpose of finalizing accounts shall only be the financial year commencing from 1st of April and ending on the 31st day of March. The principle is that Bonus has to be paid for loyalty in service which has generated to the growth of the institution and earning of income. Such recognition can be made any time after the accounts are finalized and the real profits ascertained. It does not mean that the bonus should be so timed to suit any specific festivity. In view of the anomalous situation, there is nothing improper in adopting in this method. Besides, this is the only institution where regular method of payment of Bonus is being followed as per note of the Mangers who run the institution, while other governmental agencies are merely following the adhoc method.

The suggestion to switch over to adhoc method would not be recognized, as such a proposition is not being followed, as the system of maintenance of accounts and the method of accounting f, there is a possibility of the same being disallowed, as it is not a change on the income of the year. The only exceptional provision is section 43B which provides for deduction irrespective of the year of accrual, but the material yardstick is the date of payment. We cannot all of a sudden switch on to the new procedure, (to circumvent dis allowance) as it is likely to entail in procedural wrangles, besides involving the institution in litigation, which may take years to settle.

In this view of the matter, considering the back ground as projected in the detailed note, it is opined, that there is nothing improper in paying the Bonus before the due date for filing of the return. If it is not done dis allowance under section 43B is certain with additional tax liability, which cannot be mitigated later, especially the interest component. Added to that, the change in the procedure would not upset the apple cart of the institution, as it is not a shift in the policy of the affecting or impacting all institutions since payment of bonus is being systematically followed as per working conditions of employees. If, however we attempt to change the system by adopting adhoc or ex-gratia payment, it would be in conflict with the accounting method followed. This apart, there is every possibility that the payment shall be disallowed, as any deduction be it under section 36 or 37 are aimed at the current profits only. Hence if we charge the bonus of the earlier year, under the garb of ex-gratia payment, the stigma of “not laid out for the purpose of earning the current income” shall be applied. Further, being corporate entities we cannot shift our stand in the matter of accounting principles for the sake of a simple issue. Hence the alternate route of adopting ex-gratia payment and charging to the current profits is not desirable.

In this situation, the entities may appraise their respective Board of the urgent need to pay Bonus before the 30th September and obtain sanction, which would be perfectly within the 4 corners of law in all respects, both from the point of Payment of Bonus Act, Conditions of employment governing the employees as also the provisions of the Income-tax Act. No provision can be made in the accounts towards payment of Bonus, as any provision is perforce inadmissible, other than in cases of specific financial institutions and that too in the form of reserves.

Finally, as an alternative, it can also be considered that the entire Bonus be credited to each individual employee’s account with the condition that it shall be drawn only on or after the cut off date for the festivity. By this method, the money also goes out of the pockets of the entrepreneur and at the same time, in keeping with the convention being followed over a period of time, that it would be available for a specific festivity. This could also over come any future situation in which for each year, the date of festivity may vary and every year a new method cannot be adopted. If this is once credited, I could well suit for any future contingency.

Search & Seizure - Part 2

Continued in part II.(Search and Seizure under the Income-tax Act)

It may be recalled that in the earlier part of this article the manner search under section 132 of the Act is brought out by the Income-tax department, was explained in detail. It was also discussed therein, the genesis or nucleus for the conduct of the search and what are the situations that would warrant a search etc., In this part a detailed discussion on the further stage of search is discussed:

During the course of search, where it is found that any books of accounts, other documents, money, bullion, jewellery or other valuable article or thing are found in the possession or control of any other person, it may be presumed that

1. the books of accounts, other documents, money, bullion, jewellery or other valuable articles belong to such other person
2. that the contents of such books of account and other documents are true and
3. that the signature and every other part of such books of accounts and other documents, which purport 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, and in the case of documents stamped, executed or attested by the person by whom it purports to have been so executed or attested.

The import of this provision rendered, under section 132(4A) of the Act is that a person in possession of books of accounts and other documents, which bears his hand writing or attestation (though ostensibly claimed as belonging to some one else) including other valuables as discussed supra, could possibly be identified, as relatable the person to whom those assets belong.( this process is predominantly to curb the benami deals) This identification is very necessary so that to fasten on him/them the tax attributable to such income generated, which could have possibly been concealed and suppressed from the purview of payment of tax.

As discussed in the earlier part, in case of practical difficulties arising during the course of search, heavy volume of the materials identified for seizure it is not possible to physically lift them and retain under safe custody of the department, the authorized Officer shall issue a prohibitory order, restraining the person searched forbidding him from removing or moving or tampering with the materials identified as seized but still kept under custody duly seized and sealed at the very same premises where the search was conducted.

The prohibitory order to issued shall lapse after a period of 60 days In other words, the authorized Officer shall take necessary action to assess or quantify the extent of income generated on the basis of the seized material to reconcile the income concealed and the possible tax avoided there from. The books of accounts and other documents seized shall not be retained by the authorized Officer for a period exceeding 30 days, from the date of order of the assessing Officer, who is the jurisdictional assessing Officer, passing the Post search assessment under section 153A or clause © of section 153BC.

The books can, however be retained for an extended period on the basis of the detailed reasons recorded with the approval of the jurisdictional Chief Commissioner or Commissioner or Director General or Director, for the period for which retention of the documents was found justified. Such extension and purpose of extended retention should also be communicated to the assessee. But all said and done, the orders of the Chief Commissioner or other authorities shall not go beyond 30 days from the date all the connected proceedings under the Act, relating to search assessments are completed.

In the meantime, the person searched can make copies from the books of accounts or other documents seized, in the presence of the authorized Officer or any other person empowered by him in this behalf. The extract or copying process can be done in any place as is convenient to the authorized Officer.

The auhorised Officer shall hand over all the books of accounts and other documents, to the assessing Officer, who has the territorial jurisdiction over the person searched within 60 days from the date of search, if the authorized Officer himself is not the assessing Officer. There after the assessing Officer shall take over all the functions as were exercised by the authorized Officer, including making of assessments. If a person who is legally entitled to the books of accounts or other documents seized, objects for any reason to the approval for the continued retention of books of accounts, then he may move an application before the Central Board of Direct Taxes, clearly furnishing the reasons for such objection. The Board may after providing an opportunity adjudicate on such application, in the manner it deems fit.

In this connection Rule 112 of the Income-tax Rules,1962 provides the necessary guidelines to be followed in the manner of issue of warrants of authorization, its execution, obligation of the person searched in extending co-operation with the authorized and his team, the manner of deposit of the materials seized. In cases where money is seized from any person, It shall immediately be deposited with the Reserve Bank of India or any branch of the State Bank of India, in the Personal Deposit Account of the jurisdictional Commissioner/director concerned. The person searched shall be furnished complete details of such deposits in proof of its safe transmission to government custody.

In cases where certain sealed on which prohibitory orders were passed, boxes are required to be opened in order to locate any valuable or material, then it shall be done in the presence of the person searched who shall be afforded necessary opportunity to personally supervise such operations. The manner the searched documents are analysed and the application of the seized assets are discussed in part III of this series of article.

Search & Seizure under the Income Tax Act (of India)

SEARCH AND SEIZURE UNDER THE INCOME-TAX ACT.

The Income-tax Act,1961, which governs us currently provides for Search and Seizure of properties/documents/money bullion or such other material under certain situations. In this article we are analyzing the basis for the conduct of search by the Income-tax department, the procedure to be adopted and the consequences that would follow on the persons searched.

Basis of search: In situations where the Director General, Director, Chief Commissioner of Income-tax, the Commissioner of Income-tax or any Joint Director or Joint Commissioner (the last two authorities on being empowered specifically in this behalf), as a result of information in their possession, leading to the belief that

a) Any person to whom notices have been issued under the Act to produce or cause to produce any books of accounts or other documents, has either omitted to produce or failed to produce such documents or
b) Any person to whom summons or notice has been issued to produce books of accounts or other documents will not produce such documents, which are useful or relevant for any proceedings under the Act or
c) Any person found to be in possession of any money, bullion, jewellery or other valuable article or thing and the value of such items constituting income, (hereafter referred to as undisclosed income) may no be disclosed by such person

Then, the senior level Officers of the department as identified shall authorize any Joint Director, Joint Commissioner or Deputy Director/Commissioner or an Income-tax Officer, who would henceforth be identified authorized Officer, shall

enter and search any building, place, vessel vehicle or aircraft where he has reason to suspect that such books of accounts or other documents, money bullion, jewellery or other valuable articles or things are kept.

For this purpose he has powers to break open any lock or any door, box or locker, safe almirah or other receptacle. He can also search any person who has got out or gets in or is in the place, if he has reason to suspect that such person is in possession of such books or other materials.

If the books or documents are found in the electronic mode, then he has the authority to ask such person to afford necessary facility to afford such officer to inspect such books of accounts or other documents.

He is also endowed with the authority to seize books of accounts, or other documents, money, bullion or other valuable article or thing found as a result of search. The authorized Officer has also the option not to seize, but to place marks of identification on all the properties, make out list of inventories and other materials.

If during the course of search, the authorized Officer has the need to access such places which are within the jurisdiction of a different Chief Commissioner or Director General, then the search by the authorized Officer shall not vitiate the search, as if a separate authorization is to be secured from the different Chief Commissioner or Director General there could be delay which may also hamper the search. For this purpose, the authorized Officer may, if necessary requisition the services of the Police Officials and I is incumbent on the latter to provide adequate support to the authorized Officer.

The authorized Officer shall examine on oath any person who is found to be in possession of the books of accounts, documents or other such items as listed. Any such statement rendered by the person shall be used as evidence during the course of the Post search assessment.

In case it is not possible to seize any material, the authorized Officer shall serve an order on the person searched not to remove or part with or otherwise tamper with the material identified for seizure and listed by him.

Apart from the above discussion, the usual procedure relatively adopted is to garner information from different sources. For this purpose the Central Information Branch of the department, which is headed by a Commissioner forms the nucleus. It is at this point all statutory reports from various agencies such as a) Banks in respect of cash deposits exceeding 10 lakhs b) Property registered with a value exceeding 10 lakhs c) Investment in shares exceeding 1 lakh and such other valuable information are stored. They are processed with reference to the records, if any that remain with the jurisdictional assessing Officer. Apart from his, various personal or other material complaints information will also constitute the basis for the conduct of search.
(Continued in part II)