Assessment of income of a person other than the person in whose case search has been initiated or books of account, other documents or assets have been requisitioned

1. Search assessment provisions are always surrounded by controversy. One can take the experience from the earlier Block Assessment scheme which had failed. Department action and zeal in expanding the scope and application of the provisions leads to this controversy.

2. Under the existing provisions where search is initiated or requisition is made after 31-5-2003 the provisions 153A to 153D are applicable. These provisions have an overriding effect over the provisions of sections 139, 147, 148, 149, 151 and 153 of the Act since these provisions are non obstante provisions. The assessment proceedings are initiated for six assessment years immediately preceding the year in which search u/s. 132 is initiated or requisition is made u/s. 132A. The provisions of section 153C are analogous to section 158BD of the Act. Therefore, decision of the Apex Court in the case of Manish Maheshwari 289 ITR 341 SC would also apply where assessment is to be made u/s. 153C. The precondition for invoking jurisdiction for issue of notice u/s. 153C is that the AO must “record satisfaction” as to the seized material belongs to the assessee.

3. Under existing provision where the Assessing Officer is satisfied that any books of account or documents seized or requisitioned belong to or belongs to any person, other than the person referred to in section 153A, then the books of account or documents or assets seized or requisitioned shall be handed over to the Assessing Officer having jurisdiction over such other person for such jurisdictional Assessing Officer to complete the assessment.

Therefore, as per the existing provision if the books of account belong to the person searched but entry in such books reflect the undisclosed income of the third party then, the AO cannot assume jurisdiction u/s. 153C to assess such undisclosed income. The only course open to him would be to invoke the provisions of section 147 of the Act. This view is supported by the decision of Bangalore Bench of the Tribunal in the case of P. Shriniwas Naik (2008) 306 ITR 411 (Bang.). In this case, search was conducted at the premises of ‘R’ in the course of which certain books were seized. One of the books showed that assessee had advanced a loan to ‘R’. On that basis, section 153C was invoked and assessment was made in the hands of assessee. It was held by the Tribunal that section 153C could not be invoked as books seized did not belong to assessee.

4. Similarly in the case of Pepsi India Holdings Private Ltd v. ACIT (Delhi High Court) it was observed that S. 153C cannot be invoked unless the AO is satisfied for cogent reasons that the seized documents do not belong to the searched person. Finding of photocopies with the searched person does not mean they “belong” to the person holding the originals. The distinction between “belongs to” and “relates to” or “refers to” must be borne in mind by the AO. The Assessing Officers should not confuse the expression “belongs to” with the expressions “relates to” or “refers to”. A registered sale deed, for example, “belongs to” the purchaser of the property although it obviously “relates to” or “refers to” the vendor. In this example if the purchaser’s premises are searched and the registered sale deed is seized, it cannot be said that it “belongs to” the vendor just because his name is mentioned in the document. In the converse case if the vendor’s premises are searched and a copy of the sale deed is seized, it cannot be said that the said copy “belongs to” the purchaser just because it refers to him and he (the purchaser) holds the original sale deed. In this light, it is obvious that none of the three sets of documents – copies of preference shares, unsigned leaves of cheque books and the copy of the supply and loan agreement – can be said to “belong to” the petitioner.

5. Similar views have been expressed in the following decisions:

a) Tanvir Collections (P.) Ltd. v. Asst. CIT [2015] 54 taxmann.com 379 (Delhi) (Trib.)

b) Pepsi Foods (P.) Ltd. v. ACIT [2014] 367 ITR 112 (Delhi)(HC)

c) CIT v. Meghmani Organics Ltd. [2013] 40 taxmann.com 31 (Guj.)(HC)

6. Similarly in Sinhgad Technical Education Society v. ACIT (2011) 140 TTJ 233 (Pune)(Trib.) search & seizure action u/s. 132 was carried out in the case of Shri M. N. Navale, the President of the assessee’s Educational Society, in the course of which certain documents pertaining to the assessee were found. Based on the documents, the AO issued a notice u/s. 153C and made an assessment on the assessee. The assessee challenged the s. 153C proceedings on the ground that the mere finding of documents in the premises of the searched person was not sufficient if the documents were not “incriminating”.

The Tribunal held that though s. 153C confers jurisdiction if the AO is “satisfied” that “documents” seized belong to a person other than the person referred to in s. 153A so as to be able to assess that other person, the document must have prima facie incriminating information. The document seized must not only be a ‘speaking one’ but also be prima facie ‘incriminating one’ for attracting s.153C. If the impugned documents merely contain the notings of entries which are already recorded in the books of account or subjected to scrutiny of the AO in the past in regular assessment u/s. 143(3) of the Act, such document cannot be said to be containing the incriminating information so as to confer jurisdiction u/s. 153C.

Disputes have arisen as to the interpretation of the words “belongs to” in respect of a document. Existing section 153C could be invoked against such other person only when books of account, etc., belonged to him and not otherwise. As disputes had arisen as to the interpretation of the words “belongs to” the legislature brought the proposed amendment vide clause 36.

Under the proposed amendment, section 153C is to be amended to give the former Assessing Officer the power to hand over the books of account or documents to the jurisdictional Assessing Officer even if these pertains or pertain to, or any information contained therein, relates to the other person. Thus after the proposed amendment the dept. can issue 153C notice even if the document seized pertains or pertain to, or any information contained therein, relates to the other person. This amendment is proposed to take effect from the 1st day of June, 2015.

However, in my view, the grey area of whether the information contained in the seized documents is incriminating or not for attracting Section 153C still remains.

Certain accountants not to give reports/certificates

The Act contains several provisions (e.g. section 44AB, section 80-IA, section 92E, section 115JB, etc.) which mandate the taxpayers to furnish audit reports and certificates issued by an ‘accountant’ for ensuring correct reporting/computation of taxable income by the taxpayers. Explanation below section 288(2) of the Act defines an ‘accountant’ as a chartered accountant within the meaning of Chartered Accountants Act, 1949 (including a person eligible to be appointed as auditor under section 226(2) of the Companies Act, 1956, of the companies registered under any State).

The Comptroller and Auditor General of India (C&AG) published its report on “Appreciation of Third Party (Chartered Accountant) Certification in Assessment Proceedings” (No. 32 of 2014). In para 3.9 of the Report, it has been stated that the Chartered Accountants Act, 1949 debars an auditor to express his opinion on the financial statement of any business or any enterprise in which he, his relative, his firm or partner in the firm, has substantial interest. However, during the course of audit, it has been noticed that an auditor has furnished his report in Form 56F in respect of a closely held company in which the auditor’s brother was the managing director.

To ensure the independence of auditor, sub-section (3) of section 141 of the Companies Act, 2013 contains a list of certain persons who are not eligible for appointment as auditor. The audit/certification function under the Income-tax Act is mainly provided for protecting the interests of revenue. An auditor who is not independent cannot meaningfully discharge his function of protecting the interests of revenue.

Therefore, Clause 77 of the Bill seeks to amend section 288 of the Act to provide that an auditor who is not eligible to be appointed as auditor of a company as per the provisions of sub-section (3) of section 141 of the Companies Act, 2013 shall not be eligible for carrying out any audit or furnishing of any report/certificate under any provisions of the Act in respect of that company. On similar lines, ineligibility for carrying out any audit or furnishing of any report/certificate under any provisions of the Act in respect of non-company is also proposed to be provided.

It is proposed to revise the definition of ‘accountant’ in Explanation below section 288(2) of the Act on the lines of definition of ‘chartered accountant’ in the Companies Act, 2013. “Accountant” means a chartered accountant as defined in clause (b) of sub-section (1) of section 2 of the Chartered Accountants Act, 1949 who holds a valid certificate of practice under sub-section (1) of section 6 of that Act. It is further proposed to provide that the accountant shall not include the following persons (except for the purposes of representing an assessee under sub-section (1))—

(a) In case of an assessee, being a company, the person who is not eligible for appointment as an auditor of the said company in accordance with the provisions of sub-section (3) of section 141 of the Companies Act, 2013; or

(b) In any other case,

(i) The assessee himself or in case of the assessee, being a firm or association of persons or Hindu Undivided Family, any partner of the firm, or member of the association or the family;

(ii) In case of the assessee, being a trust or institution, any persons referred to in clauses (a), (b), (c) and (cc) of sub-section (3) of section 13;

(iii) In case of a person other than persons referred to in sub-clauses (i) and (ii), the person who is competent to verify the return under section 139 in accordance with the provisions of section 140;

(iv) Any relative of any of the persons referred to in sub-clauses (i), (ii) and (iii);

(v) An officer or employee of the assessee;

(vi) An individual who is a partner, or who is in the employment, of an officer or employee of the assessee;

(vii) An individual who, or his relative or partner is holding any security of or interest in the assessee.

It is also provided that the relative may hold security or interest in the assessee of the face value not exceeding one hundred thousand rupees; an individual who, or his relative or partner is indebted to the assessee. It is also provided that the relative may be indebted to the assessee for an amount not exceeding one hundred thousand rupees; an individual who, or his relative or partner has given a guarantee or provided any security in connection with the indebtedness of any third person to the assessee. It is also provided that the relative may give guarantee or provide any security in connection with the indebtedness of any third person to the assessee for an amount not exceeding one hundred thousand rupees;

(viii) A person who, whether directly or indirectly, has business relationship with the assessee of such nature as may be prescribed;

(ix) A person who has been convicted by a court of an offence involving fraud and a period of ten years has not elapsed from the date of such conviction.

It is further proposed to amend sub-section (4) of the said section so as to provide that a person who has been convicted by a court of an offence involving fraud shall not be qualified to represent an assessee under sub-section (1) of the said section for a period of ten years from the date of conviction.

It is also proposed to insert an Explanation at the end of the said section so as to provide that the expression “relative” in relation to an individual means (a) spouse of the individual; (b) brother or sister of the individual; (c) brother or sister of the spouse of the individual; (d) any lineal ascendant or descendant of the individual; (e) any lineal ascendant or descendant of the spouse of the individual; (f) spouse of a person referred to in clause (b), clause (c), clause (d) or clause (e); (g) any lineal descendant of a brother or sister of either the individual or of the spouse of the individual.

However, the Bill seeks to amend section 288 of the Income-tax Act relating to appearance by authorised representative. It is proposed to provide that the ineligibility for carrying out any audit or furnishing of any report/certificate in respect of an assessee shall not make an accountant ineligible for attending income-tax proceeding referred to in sub-section (1) of section 288 of the Act as authorised representative on behalf of that assessee. It is further proposed to provide that the person convicted by a court of an offence involving fraud shall not be eligible to act as authorised representative for a period of 10 years from the date of such conviction. These amendments will take effect from 1st June, 2015.

In my view the aforesaid amendment is in public interest at large.

Ajay R. Singh,
Advocate

Charitable Trust / Institution

Definition of Charitable Purpose

In Divya Yog Mandir Trust v. Jt. CIT (2013) 60 SOT 154 (URO) (Delhi)], the Tribunal held that any form of educational activity involving imparting of systematic training in order to develop the knowledge, skill, mind and character of students is to be regarded as “education” covered under section 2(15) of the Income-tax Act, 1961. In view of above, it can be concluded that imparting of Yoga training through well structured yoga shivir/camps fall under the category of imparting education which is, one of the charitable objects defined under section 2(15).

Now, the Finance Bill, 2015 proposes to amend the definition of section 2(15) of the Act as well as conditions for exemption under the one of the objects of the bill “Ease of doing business / dispute resolution”. Therefore, it is proposed to include “yoga” as a specific category in the definition of charitable purpose on the lines of education, to avoid any controversy due to international recognition granted to it by United Nation.

Advancement of any other object of general public utility

The present definition in section 2(15) was substituted by Finance Act, 2008 and the first proviso was added to state that the advancement of any other object of general public utility will cease to be a “charitable purpose” if it involves any “trade, commerce or business” and aggregate receipts from such activities exceed rupees twenty five lakh. Thus, the proviso is very widely worded and implies that even smallest commercial activity will render the entire organisation not charitable.

Now, to mitigate the impact of the above proviso, the bill proposes that as regards the advancement of any other object of general public utility is concerned, there is a need is to ensure appropriate balance being drawn between the object of preventing business activity in the garb of charity and at the same time protecting the activities undertaken by the genuine organisation as part of actual carrying out of the primary purpose of the trust or institution.

It is, therefore, proposed to amend the definition of charitable purpose 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 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, unless –

(i) Such activity is undertaken in the course of actual carrying out of such advancement of any other object of general public utility; and

(ii) The aggregate receipt from such activities, during the previous years, do not exceed twenty per cent of the total receipts, of the trust or institution undertaking such activity or activities, for the previous year.

Accumulation of income u/s. 11(2)

Under the provisions of section 11 of the Act, the primary condition for grant of exemption to trust or institution in respect of income derived from property held under such trust is that the income derived from property held under trust should be applied for the charitable purpose of India. Where such income cannot be applied during the previous year, it has to be accumulated and applied for such purpose in accordance with various conditions provided in the section. While 15% of the income can be accumulated indefinitely by the trust or institution, 85% of income can only be accumulated for a period not exceeding 5 years subject to the conditions that such person submits the prescribed Form 10 to the Assessing Officer in this regard and the money so accumulated or set apart is invested or deposited in the specified forms or modes. If the accumulated income is not applied in accordance with these conditions, then such income is deemed to be taxable income of the trust or institution.

In CIT v. Nagpur Hotel Owners’ Association (2001) 247 ITR 201 (SC)] the Supreme Court held that, it is abundantly clear from the wording of section 11(2), that it is mandatory for the person claiming the benefit of section 11 to intimate to the assessing authority the particulars required, under rule 17 in Form No. 10 of the Income Tax Rules, 1962 i.e. for accumulation of income. Therefore, it is necessary that the assessing authority must have this information at the time he completes the assessment.

To overcome, the above judgment, it is proposed to provide that, in order to remove the ambiguity regarding the period within which the assessee is required to file Form 10, and to ensure due compliance of the above conditions within time, it is proposed to amend the Act to provide that the said Form shall be filed before the due date of filing return of income specified under section 139 of the Act for the fund or institution. In case the Form 10 is not submitted before this date, then the benefit of accumulation would not be available and such income would be taxable at the applicable rate. Further, the benefit of accumulation would also not be available if return of income is not furnished before the due date of filing return of income

These amendments would help the Yoga Institution to claim the exemption under section 11 of the Act. Further, if Form 10 is submitted, for accumulation of income by charitable trust / institution, before due date of filing return of income, it would facilitate the revenue to process the return of income without waiting to seek the copy of Form 10. Thus, complying with the vision of the Prime Minister “maximum governance minimum Government”.

Additional Depreciation and Investment in new Plant or Machinery:

Another object of the Bill, is to boost the vision of Prime Minister, “Make in India”. Therefore it is propose to amend the Income-tax Act, 1961 as under:

i) Additional Investment Allowance

Manufacturing sector plays significant role in the economic growth of any region. Therefore, in order to encourage the setting up of industrial undertakings in the backward areas of the State of Andhra Pradesh and the State of Telangana, it is proposed to provide following income tax incentives:

It is proposed to insert a new section 32AD in the Act to provide for an additional investment allowance of an amount equal to 15% of the cost of new asset acquired and installed by an assessee, if:

(a) He sets up an undertaking or enterprise for manufacture or production of any article or thing on or after April 1, 2015 in any notified backward areas in the State of Telangana; and State of Andhra Pradesh; and

(b) The new assets are acquired and installed for the purposes of the said undertaking or enterprise during the period beginning from April 1, 2015 and ending on March 31, 2020.

This deduction shall be available over and above the existing deduction available under section 32AC of the Act. Accordingly, if an undertaking is set up in the notified backward areas in the State of Andhra Pradesh or Telegana by a company, it shall be eligible to claim deduction under the existing provisions of section 32AC of the Act as well as under the proposed section 32AD if it fulfils the conditions specified in the said section 32AC and conditions specified under the proposed section 32AD.

The phrase “new asset” has been defined as plant or machinery but does not include-

(i) Any plant or machinery which before its installation by the assessee was used either within or outside India by any other person:

(ii) Any plant or machinery installed in any office premises or any residential accommodation, including accommodation in the nature of a guest house;

(iii) Any office appliance including computer or computer software;

(iv) Any vehicle;

(v) Any ship or aircraft; or

(vi) Any plant or machinery, the whole of the actual cost of which is allowed as deduction (whether by way of depreciation or otherwise) in computing the income chargeable under the head “Profits and gains of business or profession” of any previous year.

With a view to ensure that the manufacturing units which are set up availing this proposed incentive actually contribute to economic growth of these backward areas by carrying out the activity of manufacturing for a substantial period of time, it is also proposed to provide suitable safeguards for restricting the transfer of the plant or machinery for a period of 5 years. However, this restriction shall not apply to the amalgamating or demerged company or the predecessor in a case of amalgamation or demerger or business reorganisation but shall continue to apply to the amalgamated company or resulting company or successors, as the case may be

ii) Additional depreciation:

To incentivise investment in new plant or machinery, additional depreciation of 20% is allowed under the existing provisions of section 32(1)(iia) of the Act in respect of the cost of plant or machinery acquired and installed by certain assessee. This depreciation allowance is allowed over the above the deduction allowed for general depreciation under section 32(1)(ii) of the Act. In order to incentivise acquisition and installation of plant and machinery for setting up manufacturing units in the notified backward area in the State of Andhra Pradesh or the State of Telangana. It is proposed to allow higher additional depreciation at the rate of 35% (instead of 20%) in respect of the actual cost of new machinery or plant (other than a ship and aircraft) acquired and installed by a manufacturing undertaking or enterprise which is set up in the notified backward area of the State of Andhra Pradesh or the State of Telangana on or after of April 1, 2015. This higher additional depreciation shall be available in respect of acquisition and installation of any new machinery or plant for the purpose of the said undertaking or enterprise during the period beginning on April 1, 2015 and ending on March 31, 2020. The eligible machinery or plant for this purpose shall not include the machinery or plant which are currently not eligible for additional depreciation as per existing proviso to section 32(1)(iia) of the Act.

iii) Additional depreciation in succeeding year

It is also proposed to make consequential amendments in the second proviso to section 32(1) of the Act for applying the existing restriction of the allowance to the extent of 50% for assets used for the purpose of business or less than 180 days in the year of acquisition and installation. However, the balance 50% of the allowance is also proposed to be allowed in the immediately succeeding financial year.

Thus amendment would help in avoiding controversy. In DCIT v. Cosmo Films Ltd.(2012) 139 ITD 628 (Delhi) (Trib.) and ACIT v. SIL Investments Ltd. (2012) 73 DTR 233 (Delhi)(Trib.) decided in favour of the assessee and allowed to set off 50% additional depreciation in succeeding year, while in Brakers India Ltd v. DCIT(2013)96 DTR 281(Chennai)(Trib.) decided against the assessee.

Transaction not regarded as transfer

To overcome the judgment of the Supreme Court in Vodafone International Holdings B. V. v. UOI (2012)341 ITR 1(SC), Explanation 5 to section 9(1) was inserted by the Finance Act, 2012 with effect from April 1, 1962. The Explanation reads as under:

“For the removal of doubts it is hereby clarified that an asset or a capital asset being any share or interest in a company or entity registered or incorporated outside India shall be deemed to be and shall always be deemed to have been situated in India, if the share or interest derives directly or indirectly, its value substantially from the assets located in India.”

To mitigate rigour of the above Explanation, the Finance Bill, 2015, proposes to insert section 9A to the Act. Simultaneously, it is also proposed to include following two clauses to section 47 of the Act.

(i) Any transfer, in a scheme of amalgamation, of a capital asset, being a share of a foreign company, referred to in Explanation 5 to clause (i) of sub-section (1) of section 9, which derives, directly or indirectly, its value substantially from the share or shares of an Indian company, held by the amalgamating foreign company to the amalgamated foreign company, if conditions provided therein;

(A) At least 25% of the share holders of the amalgamating foreign company continue to remain share holders of the amalgamated foreign company; and

(B) Such transfer does not attract tax on capital gains in the country in which the amalgamating company is incorporated.

(ii) any transfer in a demerger, of a capital asset, being a share of a foreign company, referred to in Explanation 5 to clause (i) of section 9, which derives, directly or indirectly, its value substantially from the share or shares of an Indian company, held by the demerged foreign company to the resulting foreign company, if;

(a) The shareholders holding not less than 75% in value of the shares of demerged company continue to remain share holders of resulting foreign company; and

(b) Such transfer does not attract tax on capital gains in the country in which demerge foreign company is incorporated.

Consequential amendment is also proposed in respect of cost with reference to mode of acquisition.

Tax neutrality on merger of similar schemes of Mutual Funds

Securities and Exchange Board of India has been encouraging mutual funds to consolidate different schemes having similar features so as to have simple and fewer number of schemes. However, such mergers/consolidations are treated as transfer and capital gain are imposed on unit holders under the Income-tax Act.

In order to facilitate consolidation of such schemes of mutual funds in the interest of the investors, it is proposed to provide tax neutrality to unit holders upon consolidation or merger of mutual fund schemes provided that the consolidation is of two or more schemes of an equity oriented fund or two or more schemes of a fund other than equity oriented fund. It is further proposed that the cost of acquisition of the units of consolidated scheme shall be the cost of units in the consolidating scheme and period of holding of the units of the consolidated scheme shall include the period for which the units in consolidating schemes were held by the assessee. It is also proposed to define consolidating scheme of a mutual fund which merges under the process of consolidation of the schemes of mutual fund in accordance with the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996 and consolidated scheme as the scheme with which the consolidating scheme merges or which is formed as a result of such merger.

These amendments would help to achieve one of the objects of the bill “Ease of doing Business / Dispute resolution”.

Amendment of section 115JB

The Finance Minister Mr. Arun Jetley in his speech, while presenting the budget of 2015-16 in para 116 observed:

“In order to rationalise the MAT provisions for FIIs, profits corresponding to their income from capital gains on transactions in securities which are liable to tax at a lower rate, shall not be subject to MAT.”

Therefore, under “rationalisation measures” being one of the objects of the Bill, the provisions of section 115JB are proposed to be rationalised.

Vide Finance Act (No. 2), 2014 it was provided that any securities held by a Foreign Institutional Investor which has invested in such securities in accordance with the regulations made under the Securities and Exchange Board of India Act, 1992 would be capital asset. Consequently, the income arising to a Foreign Institutional Investor from transactions in securities would always be in the nature of capital gains.

It is, therefore, proposed to amend the provisions of section 115JB so as to provide that income from transactions in securities (other than short term capital gains arising on transactions on which securities transaction tax is not chargeable) arising to a Foreign Institutional Investor, shall be excluded from the chargeability of MAT and the profit corresponding to such income shall be reduced from book profit. The expenditure if any, debited to profit and loss account corresponding to such income (which is being proposed to be excluded from the MAT liability) are also proposed to be added back to the book profit for the purpose of computation of MAT.

In view of the above,

A new clause (iic) is also proposed to be inserted in Explanation 1 so as to provide that the amount of income from transactions in securities, (other than short term capital gains arising on transactions on which securities transaction is not chargeable) accruing or arising to an assessee being a Foreign Institutional Investor which has invested in such securities in accordance with the regulations made under the Securities and Exchange Board of India Act, 1922 if any such amount is credited to the profit and loss account, shall be reduced from the book profit for the purpose of calculation of income tax payable under the section. Further by inserting a new clause (fb) in Explanation 1, it is proposed that the book profit shall be increased by the amount or amounts of expenditure relatable to the above income

A new clause (iib) is proposed to be inserted in Explanation 1 so as ato provide that the amount of income, being the share of income of an assessee on which no income tax is payable in accordance with the provisions of section 86, if any such amount is credited to the profit and loss account, shall be reduced from the book profit for the purpose of calculation of income tax payable under the section. Further by inserting a new clause (fa) in Explanation 1 it is proposed that the book profit shall be increased by the amount or amounts of expenditure relatable to the above income.

Section 86 of the Act provides that no income tax is payable on the share of a member of an AOP, in the income of the AOP in certain circumstances. However, under the present provisions, a company which is a member of an AOP is liable to MAT on such share also since such income is not excluded from the book profit while computing the MAT liability of the member. In the case of a partner of a firm, the share in the profits of the firm is exempt in the hands of the partner as per section 10(2A) of the Act and no MAT is payable by the partner on such profits.

In view of the above, it is proposed to amend the section 115JB so as to provide that the share of a member of an AOP, in the income of the AOP, on which no income tax is payable in accordance with the provisions of section 86 of the Act, should be excluded while computing the MAT liability of the member under 115JB of the Act. The expenditures, if any, debited to the profit and loss account, corresponding to such income (which is being proposed to be excluded from the MAT liability) are also proposed to be added back to the book profit for the purpose of computation of MAT.

Thus, long term capital gains and short term capital gains on which STT is paid by FIIs, would be excluded from MAT, but short term capital gains (other than STT paid) would be taxed in MAT at 18.5%. in the hands of FIIs. Further, the share of profit AOP in the hands of member is proposed to be excluded rightly as there is no provision to exclude the share of profit of AOP in the hands of member like section 10(2A), wherein the share of profit of the firm is excluded, in the hands of partner.

Tax on income received from Venture Capital Companies and Venture Capital Fund

The provisions of section 115U were introduced by the Finance Act, 2000 with effect from April 1,2001 with a view to provide incentive to venture capital. The section 115U provides that any income accruing or arising to or received by a person out of investment made in a venture capital company or venture capital fund shall be chargeable to tax if it were the income received by such person had he made the investments directly in venture capital undertaking. Similarly the income received by the person shall also be deemed to be of the same nature and bear the same proportion as if it had received by the venture capital company or venture capital fund.

Now the Finance Bill, 2015 seeks to insert a new Chapter XII–FB consisting of new section 115UB in the Income-tax Act, relating to tax on income of investment funds and income received from such funds.

Therefore, it is proposed to provide that existing pass through scheme contained in the provisions of section 10(23 FB) and section 115U shall not apply to such fund on or after April 1, 2016, however such investment fund to which new regime provided in section 10(23FBA) and section 115UB applies.

CA. H. N. Motiwalla

Section 11 of the Income-tax Act 1961 provides for exclusion of income derived from property held under trust wholly for charitable or religious purposes, to the extent to which such income is applied to such purposes in India; and, where any such income is accumulated or set apart for application to such purposes in India, to the extent to which the income so accumulated or set apart is not in excess of [fifteen] per cent of the income from such property;

Section 2(15) of the Income-tax Act 1961 defines charitable purposes as under:-

2(15) ‘charitable purpose’ includes relief of the poor, education, medical relief, preservation of environment (including water heads, forests and wildlife) and preservations of monuments or places of or objects of artistic or historical interest and the advancement of any other object of general public utility:

Provided 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;”

Provided further that first proviso shall not apply if the aggregate value of the receipts from the activities referred to therein is twenty five lakh rupees or less in the previous year

The present definition in section 2(15) was substituted by Finance Act 2008 with effect from 1-4-2009 and first proviso was added to state that the “advancement of any other object of general public utility” will cease to be a “charitable purposes” if it involves any trade commerce or business .Preservation of environment and preservation of monuments or places of historical or artistic interest have also be added to the definition implying that these are now taken out of the category of general public utility

Second proviso to section 2(15) added by Finance Act 2010 with effect from 1-4-2009 provides an exception to the application of first proviso if the turnover from the activity of trade, commerce or business does not exceed
Rs. 10 lakh in the previous year. The limit of Rs. 10 Lakh was increased to
Rs. 25 Lakh by the Finance Act 2011 with effect from 1-4-2012.

The Finance Minister in his Budget speech of 2008 had stated that the CBDT would issue guide lines to determine whether an entity is carrying on any activity in the nature of trade commerce or business and that Chamber of commerce and similar organisations would not be affected by the amendment. However no such guide lines were issued. Department has issued notices to several organizations resulting in unwarranted litigation.

Delhi High Court in the case of Institute of Chartered Accountants of India and Another v. Director General of Income-tax (Exemptions) and Others. [2012] 347 ITR 99 (Del.) held that

The first proviso to section 2(15) introduced with effect from April 1, 2009 applies only if an institution is engaged in advancement of any other object of general public utility and postulates that such an institute is not “charitable” if it is involved in carrying on 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.

It further held that the proviso is inapplicable for the entities engaged in the activities of (i) relief of the poor; (ii) education; (iii) medical relief; (iv) preservation of environment (including watersheds, forests and wildlife); (v) preservation of monuments or places or objects of artistic or historical importance

The constitutional validly of proviso to section 2(15) of the Income-tax Act 1961 was challenged in the Delhi High in the case of India Trade Promotion Organization vs. UOI (www.itatonline.org) The High Court vide judgment Dated January 22, 2015 Held that If the definition of “charitable purpose “in section 2(15) and section 10(23C) (iv) is construed literally, it is violative of the principles of equality & unconstitutional.

In order to uphold the Constitutional validity of the proviso to section 2(15) it was held that the proviso shall have to be read down;

I quote from the judgement “The expression “charitable purpose”, as defined in Section 2(15) cannot be construed literally and in absolute terms. It has to take colour and be considered in the context of Section 10(23C)(iv) of the said Act. It is also clear that if the literal interpretation is given to the proviso to Section 2(15) of the said Act, then the proviso would be at risk of running foul of the principle of equality enshrined in Article 14 of the Constitution India. In order to save the Constitutional validity of the proviso, the same would have to be read down and interpreted in the context of Section 10(23C)(iv) because, in our view, the context requires such an interpretation. The correct interpretation of the proviso to Section 2(15) of the said Act would be that it carves out an exception from the charitable purpose of advancement of any other object of general public utility and that exception is limited to activities 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. In both the activities, in the nature of trade, commerce or business or the activity of rendering any service in relation to any trade, commerce or business, the dominant and the prime objective has to be seen. If the dominant and prime objective of the institution, which claims to have been established for charitable purposes, is profit making, whether its activities are directly in the nature of trade, commerce or business or indirectly in the rendering of any service in relation to any trade, commerce or business, then it would not be entitled to claim its object to be a ‘charitable purpose’. On the flip side, where an institution is not driven primarily by a desire or motive to earn profits, but to do charity through the advancement of an object of general public utility, it cannot but be regarded as an institution established for charitable purposes (Info Parks Kerala v. Deputy Commissioner of Income-tax (2010) 329 ITR 404 (Ker) and Andhra Pradesh State Seed Certification Agency v. Chief Commissioner of Income-tax-III, Hyderabad 256 CTR 380 (AP) dissented from) Finance Bill, 2015 proposes to amend section 2(15) as under:-

In section 2 of the Income-tax Act, with effect from the 1st day of April, 2016, —

(a)

(b) in clause (15),—

(i) after the word “education,”, the word “yoga,” shall be inserted;

(ii) for the first and the second provisos, the following proviso shall be substituted, namely:—

“Provided 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, unless —

(i) such activity is undertaken in the course of actual carrying out of such advancement of any other object of general public utility; and

(ii) the aggregate receipts from such activity or activities during the previous year, do not exceed twenty per cent. of the total receipts, of the trust or institution undertaking such activity or activities, of that previous year;”;

As is evident the Bill Proposes to include Yoga in the definition of Charitable purposes for purposes of section 11. The proposed amendment in clause (15) of section 2 of the Income-tax Act 1961 further provides 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, unless–– (i) such activity is undertaken in the course of actual carrying out of such advancement of any other object of general public utility; and (ii) the aggregate receipts from such activity or activities during the previous year, do not exceed twenty per cent of the total receipts, of the trust or institution undertaking such activity or activities, of that previous year

In my humble view the proposed amendment in the proviso to section 2(15) is likely to benefit non -profit organisations having substantial receipts but will adversely affect non-profit organisations of small magnitude

Examples – As per the proposed amendment a non-profit organisation with annual receipt of 500 Crs out of which 100 Crs may be from activities in the nature of trade, commerce or business will not lose the status of a Public charitable trust as receipts from the activities in the nature of trade commerce or business of the organisation do not exceed 20 % of the annual receipts of the previous year.

On the other hand a non-profit organisation with gross annual receipts of
Rs. 5 lakh will lose the status of the Public charitable trust if the receipts from the activities in the nature of trade commerce or business exceed 1 lakh in the previous year

Technically a non-profit organisation with petty receipt of Rs. 100 from an activity which may fall in the nature of trade commerce or business will also lose the status of public charitable trust if it does not have any other receipt in the previous year.

This, in my humble view, may not be the intention of the proposed legislation. Finance Minister may consider the consequence of the proposed amendment before pressing it for approval of the parliament

Suggestion: The limit of Rs. 25 lakh under the existing law may simply be enhanced to
Rs. 50 lakh or so Or Limit of Rs. 50 lakh (or any figure) or 20% of the receipts of the previous year whichever is higher “may be incorporated”

ITAT Bar Association/Bombay chartered Accountants Society may take up the matter with the Finance Minister.

Manzoor Ahmed Bakhshi
Advocate

NAMASTE INDIA

My beloved Members,

“India inspired creations, only for you”, said a Samsung Initiative ‘Ad’ titled –
“Namaste India”, published on the front page of Economic Times dated 16th March, 2015. It instantly attracted my attention and thought process the way they do business in our country. The Ad further continued,
“At Samsung, the world’s leading electronics company, innovation starts by listening carefully to what you need. For us there is no greater satisfaction than creating products that enhanced your life. And that is preciously why we ‘Make For India’.” This diagnosis of theirs touched my heart.

2. As we all know that Samsung Electronics, a Korean electronics major, by the end of 2016 proposes to surpass the US but behind China. Following statistics of their ‘Make For India’ initiative is quite illuminating for doing their focused business in India.

3. Who will say that the above Samsung Initiative established in India has not added growth to India’s economy and enriched the living standard of Indians using the above qualitatively excellent products? When I say so, please bear in mind that am simply bringing to your kind attention the mission of India’s growth is in their mind, of course, in the mutual interest of India and Korea. Incidentally, it may be stated that Mr. Hyunchil Hong, Samsung India President said,
“India’s Budget (2015-16) has acted as catalyst to its intention of ‘making for India’.” He further said, “we do have some specific products for online…… we are keeping a close eye the way e-commerce is growing.” Indeed, Samsung presented their views in the ‘Ad’ humbly and in a lovely manner to attract customers in India. We must therefore appreciate their business initiative and the process of their thinking.

4. To take forward our growth story Hon’ble PM will be starting a monthly conference call with State Chief Secretaries and Secretaries of Union Government starting March 25, 2015 for the speedy redressal of grievances, and monitoring and implementation of projects. The new governance programme has been named as
“Pragati” i.e. pro-active governance and timely implementation. This initiative of the PM shows how he is restless about the implementation of the growth of our motherland.

5. In the meantime, RBI report said –
“We are now looking at just 5% earnings growth in F.Y. 2015-16 compared to 15% growth estimate at the beginning of the year. While retail inflation accelerated to 5.37% in February, industrial production growth hit a three-month low in January 2015, the Government said in data released on March 12, 2015”. Simultaneously, Mr. Marc Faber, Global Investor & Publisher of the widely read – Gloom, Boom & Doom report said, “Indian markets may correct 10-20% this year (2015-16) as implementation of Government’s reforms programme
has been disappointing so far. I do not think the economy is growing
anywhere near 8%. It may be growing at 5%. But when I compare this
5% growth with 0% or 1% growth elsewhere in the world, 5% growth is
very good !.” Thus, he supported the views of the RBI.

6. Arising out of the GST Bill tabled in the Parliament, the trade and industry desires to have clarity on
“Supply Rules”, which is a barrier for GST roll out in as much as, because of the surge in e-commerce and electronic delivery of services, this aspect refers to rules that allocate the right to tax services between States. So far, it seems, importing dealer will get credit for goods and services supplied from another State. What is unclear is which State would have the right to tax different services. This is the backbone of GST, which will ensure the services are taxed at the right jurisdiction. Without supply rules, there is a possibility of certain services going out of tax net and some being taxed over again.

7. For a common man RTI is a good weapon to use for redressal of his grievances or bring the same to the notice of the Government and administration for improvement. But sadly, delays are weakening RTI. In March 2009, there were 6,917 appeals pending with the CIC and in March 2015, the number of such cases has gone upto 37,878. On top of that the Central Information Commission has been headless for 6 months now. For a common man, RTI route is treated as a mini Constitution, but, it appears that it is being neglected by the Union Government. How sad the scenario is!

8. Last but not the least, I appeal and invite our members including NEC members to participate in the National Tax Conference, Darjeeling, scheduled for 17th and 18th April, 2015. For details you may refer to AIFTP Times for March 2015 which is already in your hands.

With best wishes and regards,

J. D. Nankani
National President

Finance Bill, 2015 – Sincere attempt of the Hon’ble Finance Minister to present a growth oriented budget – Deserves appreciation – Notwithstanding, why is the Government hesitant to bring in accountability provision in tax laws?

In the NDA Government’s first full year budget, we highly appreciate the sincere attempt of the Hon’ble Finance Minister to present a budget which is both forward looking and growth oriented. We are also pleased to acknowledge that some of the recommendations of the Federation have been accepted by him. Important suggestions of ours which have been accepted are:

(1) S. 158AA – Procedure for appeal by revenue when an identical question of law is pending before Supreme Court.

(2) S. 253(1) – Orders passed by prescribed authority refusing to grant approval under sections 10(23C)(vi) and (via) being made appealable before the Tribunal.

(3) S. 253(3) – Single member of the Tribunal to dispose of cases where total income as computed by Assessing Officer does not exceed
Rs. 15 lakhs.

(4) Working towards achieving more certainty in tax law.

(5) Scrapping the proposal to enact the Direct Tax Code.

(6) Mandatory routing of advances of
Rs. 20,000/- or above through banking channels and prescribing quoting of PAN compulsory for transactions exceeding
Rs. 1 lakh.

(7) Adhering to the commitment of dispensing with retrospective amendments to the income tax law.

The Federation also welcomes the following provisions:

(a) Abolition of Wealth-tax, though late

(b) Measures to curb black money

(c) Various incentives to promote investments

(d) Postponement of General Anti–Avoidance Rule

(e) Proposal to set up exclusive commercial divisions in various courts in India.

At the same time, the Federation apprehends that the following amendments may lead to increased litigation:

(1) S. 263 – Revision of order without making enquiry or verification, in respect of order passed, allowing relief not in accordance with the Board or decision of court.

(2) S. 271(1) – Explanation 4: Tax sought to be evaded for purpose of levy of penalty for concealment of income under section 271(1)(iii), where concealment of income or furnishing inaccurate particulars of income occurs in computation of income under section 115JB, or 115JC.

In this issue, the learned authors have contributed articles on some of the important amendments proposed
vide Finance Bill, 2015, which may be useful to the readers and administration to understand the provisions.

Amendments to the fiscal laws each year is a regular feature. But, the Federation is of the opinion that whatever may be the law, unless the provision of accountability is introduced in the Act, honest tax payers will have to suffer at the sweet mercy of few adventurous tax officials, and, therefore, it is essential for the law makers as well as the Federation to focus the attention on this vital issue till such time the success is achieved in this behalf.

“The Law is good, if a
man use it lawfully” – 1 Timothy, 1:8

Recently, an assessee brought to our notice that the returned income was loss of
Rs. 2 crores, and the Assessing Officer, for reasons best known to him converted the loss into profit and assessed at
Rs. 4 crores by treating entire cost of purchase of machinery as income, sister concern’s sales added as the income of assessee.

One has to imagine the harassment meted out to the assessee by such unlawful actions of the Assessing Officer. This is mainly because albeit the entire addition is deleted by higher authorities, no question will be asked of the Assessing Officer concerned for making such illegal additions. So both gets escaped from the scrutiny on the ground that they being public servants their actions are honestly done. Therefore, it is high time, all concerned with this deeply rooted malady, must ponder over it and seek remedy in the matter. One will find a number of High Court judgments warning tax officials to follow the due process of law while rejecting stay applications, notwithstanding that the Apex Court as well as High Courts has prescribed guidelines on this issue. Sadly, some tax officials do not show any respect to the judgment of the higher courts and nothing happens to them. In such a disgusting scenario, we earnestly appeal to the Government to take drastic steps to bring accountability in tax administration and advise tax officials to follow the culture of tax service.

Dr. K. Shivaram
Editor-in-Chief