[aaykarbhavan] Business standard updates

Profits can’t be taxed in the hands of partners

VRISHTI BENIWAL New Delhi, 2 April In what could bring a major relief to partnership companies, the Income- Tax department is set to clarify that the income of a firm that has been exempted from tax cannot be taxed for its profit in the hands of its partners. Earlier, even if the income chargeable to tax for a firm was nil due to certain deductions and exemptions, some assessing officers levied tax on the profit credited to its partners. This led to disputes and some taxpayers challenged this in courts. “After looking into the issue, the Central Board of Direct Taxes ( CBDT) has decided to clarify that such income in the hands of partners will be completely exempt,” said a senior finance ministry official. The official said the partners that had already paid taxes on such income might be allowed to get refunds or adjustments against their future tax liability (but there are only a few such cases). The move came after CBDT received representations in connections with interpretation of provisions of Section 10 ( 2A) of the Income- Tax Act. According to this section, inserted by the Finance Act, 1992, a tax partner is not liable to tax again on his share in the total income of the firm. “The position is clear but the language of the section in the law created difficulty... The ambiguity will be cleared with this clarification. It will certainly provide alot of relief to promoter companies and others from the consequences of unintended taxation,” said Deloitte Partner N C Hegde. The profit of a partnership firm is divided among its partners in sync with their partnership deal. For the purpose of computation of income tax, identities of a partner and the firm are coterminus. This means assets and liabilities are not different. The profits are credited to a partner’s account and he can plough it back into the business. It is more of a book entry, as no cash is generally drawn out of the company. Therefore, the income of partners was made tax exempt in 1993 to avoid double taxation. Turn to Page 21 > TAX RELIEF FOR PARTNERSHIP FIRMS >The law A partner is not liable to be taxed again on its share in a partnership company. Since the income of the firm is already chargeable to tax, taxing again in the hands of partners could lead to double taxation >The problem Some tax authorities misinterpreted it and started taxing the profits in the hands of partners where a firm’s tax liability became nil due to certain exemptions and deductions >The solution CBDT will clarify that the entire profit credited to partners’ accounts in a firm will be exempt from tax, even if the firm’s taxable income becomes nil on account of exemptions PUTTING TAX IN ORDER

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Profits can’t be taxed...

As some assessing officers interpreted the section differently and started levying taxes on partners’ profits, clarifications were sought as to what amount would be exempt in the hands of partners in cases where a firm had claimed exemptions or deductions. The firm is taxed at 30 per cent plus surcharge and applicable tax and the partners’ profit is also taxed at the same rate. “The income of a company is to be taxed in the in the hands of the company alone. This can, under no circumstances, be taxed in the hands of its partner,” says a CBDT circular that is likely to be made public soon.

Questions remain over public- issue exit norms

SACHIN P MAMPATTA Mumbai, 2 April Companies that change the end- use of funds raised from the public are now required to offer their shareholders an exit route. However, there is still ambiguity over how this is to be handled under the existing regulations of the Securities and Exchange Board of India ( Sebi). According to experts, the operational aspects of such exits and implications such as the impact on promoter shareholding and whether this will trigger an open offer are yet to be addressed. Section 27 of the Companies Act says a firm cannot change the objects of its issue except with the express permission granted by shareholders in a general meeting. “ A company shall not, at any time, vary the terms of a contract referred to in the prospectus or objects for which the prospectus was issued, except subject to the approval of, or except subject to an authority given by the company in a general meeting by way of a special resolution,” the Act notes. Shareholders who disagree with the change should be offered an exit. “ The dissenting shareholders being those shareholders who have not agreed to the proposal to vary the terms of contracts or objects referred to in the prospectus, shall be given an exit offer by promoters or controlling shareholders at such exit price, and in such manner and conditions as may be specified by the Securities and Exchange Board by making regulations in this behalf,” says the Act. According to Yogesh Chande, consultant at Economic Laws Practice, the provision for exit requires additional clarity from Sebi, including on aspects such as the impact this will have on the takeover code, which requires entities purchasing more than a certain number of shares to come out with an open offer to other public shareholders as well. In the absence of a regulatory clarification on the same, opinion is divided on whether such an exit will even necessitate an open offer. “ Sebi has not yet come out with operational guidelines on the exit route. It will also probably have to grant an exemption from the takeover code if it is to be done through the promoter purchase route,” said Sandeep Parekh, founder, Finsec Law Advisors. According to Shriram Subramanian, managing director of InGovern Research Services, the exit involves buying back securities from the public. “ So, a further open offer may not be triggered.” While there were no consolidated figures on how many companies had changed the objects of their issue, Sebi had passed orders against seven companies on irregularities regarding use of capital raised through initial public offers in 2011. In a bid to improve disclosures with regard to changes in the objects of public issues, Sebi had recently come out with a discussion paper on the mandatory appointment of a monitoring agency for all issues. Final norms on this are expected to be out soon. It is also suggested the new exit provisions in the Companies Act have to be financed with additional capital. “They will have to take a loan or the promoter may have to bring in fresh equity,” said Subramanian. According to Parekh, granting an exit may not be in the best interests of the company. “This move is counterproductive. The company should have the flexibility to change the objects of the issue if the business climate changes. If promoters are faced with the prospect of bringing in additional capital to buy out dissenting shareholders, they may well decide to go ahead with the existing plan even if it is not in the interest of the company and its shareholders. Such decisions should be left to the company; however, now, the company law has made that a foregone conclusion.” Offering exit to dissenting shareholders may have implications under takeover code, could trigger open offer EXIT ROUTE |Companies Act says objects of public issue can only be changed after shareholders’ approval |Dissenting shareholders need to be offered an exit |Unclear how this would work under the existing Sebi regulations |May have implications for takeover code, could trigger open offer

 

EPFO account holders to get universal account numbers Four years ago, Aruna Rao applied for transfer of her Employee Provident Fund balance from her earlier job. Three years later, when she changed job again, her balance had still not been transferred. To avoid the hectic transfer process of two balances, Rao has decided to withdraw the amounts. Such situations may become passé from October, when the Employee Provident Fund Organisation ( EPFO) provides people with a Universal Account Number ( UAN). Subscribers will not have to apply for transfers. They will simply give the UAN to the company. This should come as a relief for Raja Chandran whose EPF balance hasnt been transferred even after two years. UAN will work on the lines of core banking services (CBS). The UAN would be for various schemes by the EPFO. "This will be a positive for subscribers. Often, they get frustrated waiting and withdraw money. Not only do they fail to create a decent corpus for their retirement, they end up paying tax on the withdrawn amount if they havent completed five years of service," says financial planner Malhar Majumder. Even existing subscribers will be allotted a fresh number, says EPF Commissioner K K Jalan. " Everyone will get a fresh account number. If a subscriber has five accounts, we will match the birth dates for each account, their Aadhaar numbers and other know- your- customer points will be checked. If all the data points match, the subscriber will be asked if he wants to merge the accounts," he explains. The new account number will be 14- or 15- digit. To deal with delayed balance transfers, EPFO launched the online EPF balance transfer facility in October. Though the system has been around for six months, experts say, it isnt finding favour. At the time of joining a new organisation, you are given awithdrawal form ( Form 13), which will ask for the details of your previous organisation and PF account number. Give the form in triplicate to your present employer. The new company will fill in its details and get it attested. It will then file it to the regional PF office. It should take no more than three months to transfer. Things are simpler online. You need to visit the EPFO site, click on Online Transfer Claim Portal and follow the process. But it is important the digital signatures of both new and old employers be registered with EPFO. NEHA PANDEY DEORAS This will make life easier for those shifting jobs >YOUR MONEY The new account number will be 14or 15- digit. EPFO launched the online EPF balance transfer facility in October. Though the system has been around for six months, experts say it isn’t finding favour DTC may undergo a makeover under new govt BS REPORTER New Delhi, 2 April Finance Minister P Chidambaram showed his commitment to the Direct Taxes Code ( DTC) by releasing arevised draft of the Bill ahead of the elections, but its fate is in limbo as a non- UPA government might review it afresh or make significant changes to the current draft. Experts said technically, Chidambaram has completed most of the major steps towards replacing the archaic Income Tax Act of 1961 and if the new government is on the same page, it would, at most, be required to refer the Bill to a select committee after tabling it in Parliament. However, the possibility of a new government junking this version of DTC or incorporating a Parliament standing committee recommendations on exemptions is not ruled out. “ The timing ( of inviting comments on the draft) is entirely misplaced. What do they hope to achieve? My advice to the bureaucracy is to wait for political guidance,” said senior Bharatiya Janata Party (BJP) leader Yashwant Sinha. The Standing Committee on Finance Chairman, however, added the BJP was in favour of anew direct tax law, as the current legislation had become complex after amendments over the years. Some finance ministry officials and tax experts, however, said DTC in its current form does not serve any purpose as most of the things it proposed initially, such as General AntiAvoidance Rules, Advance Pricing Agreements, have been incorporated in the Income Tax Act over the last couple of years. “No policy is cast in stone. The future of DTC will depend on new economic realities and polices of the next government,” said a finance ministry official, adding the law could be simplified by amending the I- T Act. For full report, visit www. business- standard. com Yashwant Sinha asks bureaucracy to wait for ‘ political guidance’

 

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CS A Rengarajan

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