Chartered Accountant Finance: March 2013

Sunday, March 31, 2013

[aaykarbhavan] Happy New Financial Year 2013-14

Wish you all a very happy

new financial year

2013-14

May the new Financial year bring

More success & achievements

Sets new records and landmarks

With best wishes

Ashish Dubey

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[aaykarbhavan] JUdgments, Articles and Cooments and other Information.

Background

'Keyman Insurance Policy' is an insurance policy taken by a business organisation or a professional organisation on the life of an employee or a director, in order to protect the business against the financial loss, which may occur from the employee's or a director's premature death, termination of employment, etc. It is an insurance policy where the proposer as well as the premium payer is the employer, the life to be insured is that of the employee or a director and the benefit, in case of a claim, goes to the employer. A 'Keyman' is an employee or a director, whose services are perceived to have a significant effect on the profitability of the business. It is, in a way a measure for indemnification of loss that may occur in the absence of the key personnel of the organisation.

There were some doubts on the taxability of the income from such policy and also regarding the treatment of the premium paid – whether it should be allowed as a capital expenditure or as a revenue expenditure. Therefore, by the Finance (No. 2) Act, 1996, amendments were made in sections 2(24), 28, 17(3) and 56. The Finance (No. 2) Act, 1996 amended clause (10D) of section 10 of the Income-tax Act, 1961 ("the Act") to exclude any sum received under a Keyman insurance policy including the sum allocated by way of bonus of such policy for this purpose. The Finance (No. 2) Act, 1996, also lays down that the sums received by the said organisation on such policies be taxed as business profits; the surrender value of the policy, endorsed in favour of the employee (Keyman); or the sum received by him at the time of retirement be taken as 'profits in lieu of salary' for tax purposes; and in case other persons having no employer-employee relationship the surrender value of the policy or the sum received under the policy be taken as income from other sources and taxed accordingly. The sums received by organisation of Keyman policy should be taxed as business profits, the expenditure incurred by the organisation paying the premium for a Keyman insurance policy obtained by the organisation on the life of its employee or director must be regarded as expenditure incurred wholly and exclusively for business of the organisation therefore, the premium paid on the Keyman insurance policy is allowed as business expenditure.

Ref.: 1. CIT v. B.N. Exports – [(2010) 323 ITR 178 (Bom)]

2. CIT v. Gem Art – [(2012) 252 CTR (Guj.) 451]

Reason for amendment

The assessee in some cases use take Keyman insurance policies on life of its employees and directors. After paying premium for a certain period, they use to assign the policy to the concerned employee or the director after receiving surrender value from him. Thereafter, for the remaining period of the policy, the insurance premiums were paid by the assignee. Thereafter, the amount received by the assignee of the policy on maturity was claimed as exempted under section 10(10D) of the Act on the ground that once the policy is assigned, it leads to conversion and the character of the policy changes and it does not remain a keyman policy and gets converted into an ordinary policy therefore, the proceeds received on maturity was exempted from tax. Recently, the Hon'ble Delhi High Court in the case of, CIT v. Rajan Nanda [(2012) 349 ITR 8 (Del.)] held that once there is an assignment of Keyman insurance policy by employer company to employee, insurance policy gets converted into an ordinary policy and in that case maturity value received by employee would not be subjected to tax in view of section 10(10D). However, while concluding the judgment the Hon'ble High Court observed that company as well as the individual taken huge benefit of these provisions, but it cannot be treated as the case of tax evasion. It is a case of arranging the affairs in such a manner as to avail the State exemption as provided in section 10(10D) of the Act. Law is clear. Every assessee has right to plan its affairs in such a manner which may result in payment of least tax possible, in conformity with the provisions of Act. It is also permissible to the assessee to take advantage of the gaping holes in the provisions of the Act.

With a view to plug the loophole and check such practices to avoid payment of taxes it is proposed to amend the provisions of clause (10D) of section 10 to provide that a keyman insurance policy which has been assigned to any person during its term, with or without consideration, shall continue to be treated as a keyman insurance policy and taxed accordingly in the hands of the recipient. Accordingly, Clause 4 of the Finance Bill, 2013 provides that in Explanation 1, which defines 'Keyman Insurance policy' for the purpose of clause 10(10(D) of the Act following words be inserted, "and includes such policy which has been assigned to a person, at any time during the term of the policy, with or without any consideration" after the words, "business of the first-mentioned person" occurring at the end.

Effective date of amendment

The Finance Bill, 2013 further provides that the above amendment will take effect from 1st April, 2014 and will, accordingly, apply in relation to assessment year 2014-15 and subsequent assessments years.

Conclusion

The proposed amendment does not make any departure from the Circular No.762 dated 18th February, 1998 which explained the tax aspects relating to Keyman insurance policy. The effect of the present amendment would be that sum received under a Keyman insurance policy will now be taxable in the hands of the recipient, even where the policy has been assigned as a life insurance policy to the recipient during its term, with or without consideration. The other tax treatments as explained by the Circular still holds good. Thus, the payment of premium on such policies will still continue to be allowable business expenditure.

Section 10(10D) of the Act vide clause (b) provides that, the amount received on maturity of a Keyman insurance policy is not exempted under section 10(10D) of the Act. The new amendment now specifically states that amount received on maturity of keyman policy will be taxable in the hands of the recipient, even where the policy has been assigned as a ordinary life insurance policy to the recipient during its term, with or without consideration. Thus, the amendment now brings within the tax net maturity proceeds of even those policies which are assigned before 1-4-2013, if the policy matures after 31-3-2013. Accordingly, the sum received by any recipient (employer or employee/director) being maturity proceed of a Keyman insurance policy after 31-3-2013 would be taxable in their hands
and not exempt under section 10(10D) of the Act.

Finance Bill, 2013 was presented with a view to boost up investors confidence and propel growth through tax and non-tax incentives. The underlying theme of the Tax proposals was clarity in tax laws, stable regime, a non adversarial tax administration, a fair mechanism for dispute resolution and independent judiciary. However, while making the analysis of the fine print of the direct tax proposals, especially relating to the income-tax law, it is found that as many as thirteen decisions have been proposed to be over ruled. The only silver lining is the absence of any proposal to amend the law with retrospective effect. The proposals reversing the court rulings may be summed up as under:

Proposal	Relevant Section	Name of the Ruling
Keyman Insurance Policy	10(10D)	CIT v. Rajen Nanda (249 CTR (Del) 141)

No distinction between rural advances and other advances for bad debts	36(1)(viia)	CATHOLIC SYRIAN BANK LTD ( 343 ITR 124) DCIT v. Karnataka Bank Ltd. (254 CTR 103)(SC) CIT v. South Indian Bank Ltd. (233 CTR 214) (Ker)
Consideration in respect of land or building held as stock-in-trade.	43CA	CIT v. Kan Constructions and Colonizers P. Ltd. (70 DTR 169)(All.) CIT v. Thiruvengadam Investments (P) Ltd. (320 ITR 345) (Mad)
Inadequate consideration of immovable property from non-relatives	56(vii)(b)	Khubsurat Resorts P. Ltd. (211 Taxman 510) (Del.) (ITA No. 776/2011 decided on 5-11-2012 )
Weightage Deduction of Additional wages	80JJAA	ACIT v. Taxas Instrument (India) (P) Ltd. (115 TTJ 976) [Bang.]
"Existing liability" not to include advance tax of current year	132B	CIT v. Jyotindra B. Mody ITA No. 3741 of 2010 dt. 21-9-2011 181 (2011) 43B-BCAJ 53 (Nov. 52) (Bom.) (High Court) Ramjilal Jagannath v. ACIT (241 ITR 158)(MP) CIT v. Ashokkumar (334 ITR 355)(PH)
Scope of reference for Special Audit expanded	142(2A)	DLF Commercial Projects Corpn. (2012) 83 CCH 034 (Del HC)
"Tax Due" in relation to liability of Director of Private Company	179(1)	Maganbhai Hansraj Patel 211 Taxman 386 (2012) Sanjay Ghai v. ACIT (2012) 83 CCH 033 Del. HC
Addl. Tax on distributed income by Co. for buy-back of unlisted shares	New Chapter XII-DA	Armstrong World industries Mauritius Multiconsult Ltd. In re (2012) 349 ITR 303 (AAR)
Compulsory Penalty of ` 500 per day for default in furnishing AIR statement	285BA	Patan Nagrik Sahakari Bank Ltd. v. DIT(CIB) (338 ITR 167)(Guj.)

Here an attempt is made to examine each of the above said proposals as under:

2. Keyman Insurance Policy – Section 10(10D) –

2.1 While construing the existing provisions of Sec. 10(10D), it was held in this case that once there is an assignment of Keyman insurance policy by employer company to employee, insurance policy gets converted into an ordinary policy and hence, in that case, maturity value received by employee would not be subjected to tax in view of section 10(10D). Accordingly, the practice adopted by the tax payers was to take out a Keyman insurance policy on the life of Keyman connected with its business and later on assign the same to the Keyman before its maturity. The Keyman pays the remaining premium of the policy and on maturity the sum received is claimed exempt on the ground that it was no longer a Keyman policy but a life insurance policy.

2.2 Now the proposal is to plug this loophole by inserting an Explanation-1 that a Keyman insurance policy which has been assigned to any person during its term, with or without consideration, shall continue to be treated as a Keyman insurance policy.

2.3 Since this proposal is going to take effect from 1-4-2014, the issue arises as to whether even the Keyman insurance policies assigned prior to this date but it matures or surrender after this date will be hit by this amendment. The crucial words in the proposed Explanation are "at any time during the term of the policy" which may be interpreted to include even also the policy so assigned in the past. It may be noted that the new sub-clause (d) proposed to be inserted to section 10(10D) raising the limit to 15% of the eligible premium on life insurance policy of persons with disability or disease expressly provides that the same shall apply to the policies issued on or after 1-4-2012.

3. Deduction of bad debts to banks

3.1 Under the existing provisions of section 36(1) (viia), the Banks or financial institutions depending upon its category is entitled to claim deduction for provision of bad and doubtful debts made for different types of advances at the specified rates. The Bank is also entitled to claim deduction for bad debts actually written off u/s. 36(1)(vii)to the extent it is in excess of the credit balance in the provision for bad and doubtful debts a/c. made u/s. 36(1)(viia). This provision came up for consideration before the Hon'ble Apex Court in case of Catholic Syrian Bank Ltd. wherein it was held that scheduled and non-scheduled commercial banks are entitled to full benefit of write off of irrecoverable debts under s. 36(1)(vii) in addition to the benefit of deduction of provision for bad and doubtful debts under
s. 36(1)(viia). Further, in the case of rural advances which are covered by cl. (viia), there would be no such double deduction. The proviso to cl. (vii), in its terms, limits its application to the case of a bank to which cl. (viia) applies. The proviso to
s. 36(1)(vii) and ss. 36(1)(viia) and 36(2)(v) have to be read and construed together. Thus they form a complete scheme for deductions and prescribe the extent to which such deductions are available to a scheduled bank in relation to rural loans, etc. whereas s. 36(1)(vii) deals with general deductions available to a bank and even to non-banking businesses. The provisions of s. 36(1)(vii) operate in their own field and are not restricted by the limitations of s. 36(1)(viia). Therefore, bad debts written off other than those for which provision is made under cl. (viia) are covered under the main part of s. 36(1)(vii), while proviso thereto operates in cases falling under cl. (viia) to limit the deduction to the extent of difference between the debt or part thereof written off in the previous year and the credit balance in the provision for bad and doubtful debts made under cl. (viia).

3.2 It is now proposed that only one account would be made in respect of provision for bad and doubtful debts and it shall relate to all types of advances including advances made by rural branches. Therefore, in such cases, the amount of deduction in respect of bad debts actually written off u/s. 36(1)(vii) shall be limited to the amount by which such bad debts exceed the credit balance in the provision for BDR a/c. made u/s/. 36(1)(viia) without any distinction between rural advances and other advances.

4. Full value of consideration of land/building held as stock-in-trade

4.1 Presently the provision of sec. 50C requiring the sale consideration on transfer of land or building or both required to be taken at the value adopted by local stamp duty valuation authority. However, this provision was held to be applicable to the land/building held as capital asset and as such, it was not applicable to the land/building held as stock-in-trade. It was held by Hon'ble Delhi High Court that assessee was private limited company engaged in business of real estate and construction. The AO treated the sale transaction of plots as sale of capital assets and accordingly determined deemed capital gain as per provisions of s. 50C. The Tribunal held that section 50C of the Act would have no application where transfer of immovable property is on account of sale of stock-in-trade income. – Such income
is computed under the head income from business.

4.2 It is now proposed to insert a new section 43CA whereby the provision of sec. 50C will be applicable in like manner. In other words, the consideration for the transfer of an asset (other than capital asset) being land or building or both is less than the stamp duty value, the value adopted by Stamp Duty Valuation Authority shall be deemed to be the sales consideration for the purpose of computing the business income. It is also proposed to apply sub-sections (2) and (3) of sec. 50C to determine such value. It is further proposed that such value as on the date of agreement may be taken if the amount of consideration has been paid otherwise than in cash on or before the date of the agreement of transfer of the asset.

4.3 The effect of the proposed amendment will be to cover even the real estate business transactions. It is proposed to be made applicable w.e.f 1-4-2014 and accordingly applicable in relation to A.Y. 2014-15 and subsequent years. Therefore, all those transfers of real estate taking place in the succeeding Financial Year will be covered in case the amount of consideration is paid in cash on or before the agreement for sale. Therefore, even if the part of the consideration is paid otherwise than in cash after the date of execution of the agreement for sale, the same will be hit by the proposed provision.

5. Inadequate consideration of immovable property

5.1 It was held that the existing provisions of sec. 56(2)(vii)(b) provided that where the immovable property was received by an individual and HUF without consideration and its stamp duty value exceeded ` 50,000, the stamp duty value was chargeable as income from other sources in the hands of such individual or HUF. However, the said provisions did not cover a situation where the immovable property was received for inadequate consideration.

5.2 Therefore the proposal is made to substitute the said sub-clause so as to club this loophole whereby the stamp duty value of an immovable property as exceeds the apparent consideration shall be chargeable as income from other sources in the hands of individual or HUF.

5.3 It will be noticed that both new sections 43AC and sec. 50C providing for stamp duty value to be taken as sale consideration have inbuilt provision for making reference to DVO in case the stamp duty value is disputed by the assessee but no such provision has been incorporated so far as this sub-section is concerned. Therefore, in a given case, the sale consideration in the hands of the vendor may be such lesser value as determined by DVO u/s 50C(2)/(3) but in case of the purchaser of such immovable property, the stamp duty value shall prevail. It appears to be an inadvertent omission on part of draftsman. Secondly, there is likely to arise confusion on account of the existing sub clause – (c) of sec. 56(vii). The sub-clause (c) is applicable to any property other than immovable property and it covers both the situations i.e. the property received by individual or HUF without consideration or for an inadequate consideration. Now the definition of 'property' given in sub-clause (d) to Explanation to this
sub-section includes immovable property being land or building or both. In other words, the situation relating to inadequate consideration received in respect of the immovable property is already covered by this sub-clause. Therefore, it appears that the inclusion of immovable property in definition clause (d) seems to be confusing.

6. 'Existing Liability' u/s 132B

6.1 Though it was a settled position in law that the person searched may apply the cash found against the advance tax liability for the current year. It is interesting to point out that in case of Ramjilal Jagannath (241 ITR 758)(MP) it was already held as far back as on 21-4-1999 that the amount seized under section 132 cannot be dealt with unless an order is made by the ITO either under section 132(5) or the money is applied or appropriated in accordance with section 132B, so that the contention of the assessee that the amount could be adjusted towards the existing liability of the advance tax cannot be accepted. However, in case of Vishwanath Khanna v. UOI (335 ITR 548)(Del.) it was held that Department would not be justified in levying interest under ss. 234B and 234C, as the amount of advance tax payable by the petitioner assessee for relevant assessment years could be adjusted from the amount lying with the Department in the petitioner's own account consequent to search and seizure operation.

6.2 Therefore it is now proposed to amend
Sec. 132B by inserting Explanation-2 which clarifies that the existing liability does not include Advance tax payable under the Act.

6.3 This proposal is going to affect the persons searched harshly because it will seriously disturb his liquidity position, say in a given case, the cash found and seized may have been disclosed as income for the current year, but he will have to arrange for further funds so as to pay the advance tax on such disclosed income.

Moreover, the proposal may also hit hard where the search has taken place after 15th March and no advance tax has been paid on the income of the current year. It is possible to argue in such case that the liability to pay advance tax on such income had already arisen much before the date of search so that it was an existing liability on that date.

Since the proposal has been made by way of an Explanation and it is expressly stated as 'for the removal of doubts' it may be interpreted as clarificatory in nature. Therefore though the search or requisition may have taken place prior to
1-6-2013, the adjustment towards advance tax liability may be denied after this date.

7. Scope of special audit Sec. 142(2A)

7.1 The existing provisions of Sec.142(2A) empower the Assessing Officer to direct the assessee to get the accounts audited having regard to the nature and complexity of the accounts of the assessee and interest of the revenue, provided other conditions are fulfilled. The relevant principles governing the applicability of the provisions have been set out in the judgment of the Supreme Court in Sahara India v. CIT & Anr. (2008) 300 ITR 403. Recently this provision came up for consideration in case of DLF Commercial Projects Corpn. (WP(c) no.1868/2012) (dtd.
15-10-2012) before Hon'ble Delhi High Court. The proposal for special audit was forwarded by the AO just a few days before the asst. getting time barred and the approval was given by Chief Commissioner immediately. The assessing officer had also raised various quarries relating
to the applicability of Sec. 40(a)(ia) to reimbursement of income and various unsecured creditors etc.

7.2 It is now proposed to extend the scope of powers of the AO to direct for special audit in as much as it will not be restricted to the nature and complexity of accounts but even in case of volume of accounts, doubts about the correctness of accounts, multiplicity of transactions in the accounts and specialised nature of business activity of the assessee.

7.3 Therefore, very wide powers are proposed to be given to the Assessing Officer for deciding as to when the special audit may be directed by him. It appears that now the AO would be able to direct for special tax audit even when gross receipts and expenses under various heads run in to a few crores, the volume of vouchers and invoices are big and correctness of expenses could not be verified without labourious task. The amendment is in line with the judicial ruling in case of V. Vishnudas Kini v. DCIT (109 Taxman 15)(Ker.) Similarly in case of ATS Infrastructure Ltd. v. ACIT (30 Taxmann.com 361)(All), the special audit was confirm since the assessee had opted for dubious methods of accounting.

The criteria of volume of accounts and multiplicity of transactions in accounts are vague and capable of being misused. It is also surprising as to how the volume of accounts or multiplicity of transactions by itself can be a ground to direct special audit. Say in a case of a big retail trader earning net profit of a very low rate, may have thousands of accounts and transactions whereas a C&F agent or sole distributor may have a few accounts or transactions running into thousands of rupees. Similarly, the criterion of doubts about the correctness of the accounts is also vague and general in nature. It is apprehended that such wide and almost plenary powers may be exercised for extending the limit of time barring assessments. It would be useful to refer to the decision in case of Swadeshi Cotton Mills Co.Ltd. v. CIT [1988]
171 ITR 634 (All.) wherein the word 'complexity of accounts' has been dealt with as under:

Before dubbing the accounts to be complex or difficult to understand, there has to be a genuine and honest attempt on the part of the Assessing Officer to understand accounts maintained by the assessee; appreciate the entries made therein and in the event of any doubt, seek explanation from the assessee. But opinion required to be formed by the Assessing Officer for exercise of power under the said provision must be based on objective criteria and not on the basis of subjective satisfaction.

8. 'Tax due' in relation to liability of Director of Private Company : u/s 179(1)

8.1 Under the existing provisions of sec. 179, where the tax due from a Pvt. Company cannot be recovered from it, then the director(s) of such company during the previous year to which such non-recovery relates, is jointly and severally liable for such tax, unless he proves that the non-recovery of tax cannot be attributed to any gross neglect, misfeasance or breach of duty on his part. Similar provision exists for recovery of tax of LLP from its partner. However, the term "tax due" came up for consideration before Hon.Gujarat High Court in the case of Maganbhai Hansraj Patel and before Hon. Delhi High Court in the case of Sanjay Ghai (supra), wherein it was held that it does not include penalty, interest and other sum payable under the Act. To be precise, it was pointed out that the term 'penalty' has not been defined. Term 'interest' is defined in section 2(28A) of the Act but is in context of interest payable in any manner in respect of any moneys borrowed or debt incurred and has no relation to interest chargeable under various provisions of the Act on tax arrears. We may however, notice that as observed by the Apex Court in case of Harshad Mehta (supra), the Act uses the term 'tax', interest and penalties at various places having different connotations. Section 156 which pertains to notice of demand provides that where any tax, interest, penalty, fine or any other sum is payable in consequence of any order passed under the Act, the Assessing Officer shall serve upon the assessee a notice of demand in the prescribed form specifying the sum so payable.

8.2 In order to nullify the effect of aforesaid decisions, it is now proposed to insert Explanation w.e.f. 1-6-2013, clarifying that the term "tax due" shall include interest, penalty and other sum payable under the Act.

8.3 The issue therefore arises as to whether the proposed Explanation is retrospective in nature and applicable even to the order passed u/s.179(1) prior to this date. It also requires to be considered whether the AO can pass a fresh order including the aforesaid items or he can modify the earlier order to that extent. It is also possible that the earlier orders may already include the aforesaid items of recovery so that he need not pass a fresh order in case the
earlier order is not challenged by the Director/Partner.

9. Additional tax on buy-back of shares of unlisted company

9.1 Presently, every company distributing dividend is required to pay Dividend Distribution Tax u/s.115-O and such dividend is not chargeable to tax in the hands of the share holders. Therefore, the modus operandi adopted by some of the companies, especially private limited or unlisted companies to carry out buy-back of its shares in accordance with sec. 77A of the Companies Act, 1956. It was held in case of Armstrong World Industries Mauritius Multiconsult Ltd. In re (2012) 24 taxmann.com 213 (AAR – New Delhi) that the capital gains arising out of the proposed buy-back of shares was not taxable in India in view of para 4 of Article 13 of DTAC between India and Mauritus.

9.2 In order to curb such practice, it is now proposed to insert a new Chapter–XII-DA to provide that the consideration paid by the company for purchase of its own unlisted shares which is in excess of the sum received by the company at the time of issue of such shares will be charged to tax and additional income-tax at 20% shall be payable on such income. Since such tax shall be the final tax like DDT, the income arising to the share holders in respect of such buy back would be exempt.

10. Deduction of additional wages

10.1 The provisions of sec. 80JJAA provide for deduction for three years of an amount equal to 30% of the additional wages paid to new workers employed in any previous year by an Indian Company in its industrial undertaking engaged in manufacture or production of any article or thing. It was held in the case of Texas Instrument (India) (P) Ltd. (supra) by ITAT, Bengaluru Bench that the new software engineers employed by the company, not in supervisory capacity, but for development of software and worked as system-engineers, software-design engineers, etc. the assessee was entitled to deduction u/s. 80JJAA.

10.2 It is now proposed to allow this deduction only in case the Indian company is engaged in the manufacture of goods in a factory because the Legislative intention of providing this tax incentive was in respect of the employment of blue-collared in the manufacturing sector.

11. Rationalisation of penalty u/s 271FA

11.1 Under the existing provisions of Sec. 285BA, it is mandatory for specified persons to furnish AIR in respect of specified transactions within the prescribed time and failure to furnish such return within the prescribed time, the AO may impose penalty of

` 100 per day during which the failure continues. Even after issue of notice to furnish AIR, the default is made, it is punishable with a penalty of ` 500 per day during which the failure continues. In a case before Hon'ble Gujarat High Court, the Co-op. bank not only failed to file AIR within the prescribed time but it was filed only after second notice u/s 285BA(5) was issued by AO. And the penalty for the period after the date of second notice was upheld as conscious disregard of statutory obligation.

11.2 It is now proposed to levy penalty of
` 500 per day during which the failure continues beginning from the date following the expiry of time specified in such notice.

11.3 As result of the proposed amendment, the assessee will be required to explain the reasonable cause for failure to file AIR till the date of service of notice u/s 285BA(5) failing which penalty of `100 per day for delay till date of service of notice may be imposed. Thereafter in respect of delay from the date of expiry of time specified in the notice, penalty of ` 500 per day would be applicable. Thus sec. 273B will not come to the rescue of the assessee and penalty of ` 500 per day will be imposed.

Conclusion

In view of above, it will be noticed that the Direct Tax Proposals of Finance Bill, 2013 are aimed at overruling the case laws which were found adverse to the Department but it has failed to address to all those decisions which had raised the fresh controversies. It requires to be seen how far the aforesaid proposals could be said to have achieved the objective of stable tax régime. Let us hope the practice of overruling the adverse cases will be stopped in the forthcoming budgets.

he Union Budget 2013-14 presented by
Mr. Chidambaram is likely to have considerable adverse impact for those willing to purchase or sell any immovable property.
1. Purchase of flat or other immovable property

As per the existing provisions of section 56(2)(vii) if any individual or Hindu Undivided Family receives any immovable property (including agricultural land) without any consideration, the stamp duty value of which exceeds

` 50,000, the stamp duty value of such property is deemed as income of such individual or HUF. However, there are certain exceptions like, if such property is received from a relative, or received on the occasion of marriage of individual, or received under a will or by way of inheritance etc.

The FM has now proposed to cover the cases where when an individual or HUF receives the immovable property at inadequate consideration, that is, where the consideration paid is lower than the stamp duty value of the property by an amount exceeding

` 50,000. The difference between the stamp duty value and the consideration paid will become chargeable as deemed income in the hands of the individual or HUF as income from other sources and it will apply to transactions on or after 1st April, 2013. For example you have purchased a flat at ` 30 lakhs but the stamp duty value is ` 50 lakhs, then the purchaser will be required to pay tax on its difference i.e. ` 20 lakhs. The newly
proposed provision will adversely affect the purchasers of flat or land or building. The FM should exempt if the difference is up to 20 per cent.

If there is a time gap between the date of agreement and the date of registration, the stamp duty value may be taken as on the date of the agreement, instead of that on the date of registration, if consideration or any part has been paid by any mode other than cash on or before the date of agreement. Usually with the time passing by, price of property keeps on increasing so adoption of price of earlier date when the agreement was signed, is usually lesser and helps the taxpayer.

However it is advisable to register the conveyance deed on or before 31st March, 2013 as the new provisions will be effective in respect of properties acquired on or after 1st April, 2013.

2. New Obligation of tax deduction on the part of the purchaser

If the proposals made in the Finance Bill, 2013 are approved, the purchaser of an immovable property (other than agricultural land) will have to deduct tax at source of 1 per cent under new section 194-IA if the consideration for the transfer is
` 50 lakhs or more and the transfer is made on or after June 1, 2013. For this purpose the TDS will be deducted at the time of payment of such sum in cash or by cheque or bank draft or by any other mode, whichever is earlier. It is not made clear whether the limit of ` 50 lakhs will apply based on the sale consideration mentioned in the agreement (or conveyance) or on the basis of its stamp duty value. This proposal is against the concept of taxing real income.

Similar proposal was made in Budget 2012 but later withdrawn. But last year it was clear that the limit of ` 50 lakhs will be considered on the basis of stamp duty value of property. The FM also needs to clarify whether the purchaser deducting TDS will be required to obtain Tax deduction account number (TAN) and will be required to file statement of TDS. If not, how the seller will get the credit for TDS.

Last year, it was specifically provided that no registering officer should register any conveyance deed or document unless the transferee furnishes proof of TDS payment. But this time there is no such specific stipulation. However, TDS will not apply to the transfer of agriculture land.

Though the purchaser of an immovable property will have to deduct TDS @ 1 per cent if the consideration paid is ` 50 lakhs or more and the transfer is made after June 1, 2013 but remember that the rate of TDS will be 20 per cent if the seller has no PAN number.

3. Interest on purchase of First home

At present, a deduction of ` 1.5 lakh is allowed u/s 24 on the interest payment on housing loans. First-time homebuyers have been offered a tax deduction under new section 80EE that "shall not exceed ` 1 lakh" while computing total income for the financial year 2013-14. Though the FM termed it as an additional deduction but clause (4) of proposed section 80EE states "where a deduction under this section is allowed for any interest referred to in sub-section (1), deduction shall not be allowed in respect of such interest under any other provision of the Act for the same or for any other assessment year." For removal of confusion, the FM should make proper amendment and clarify that this deduction is in addition to deduction u/s 24. The conditions also need to be liberalised. The cap on amount of loan sanctioned for the acquisition of the residential house property upto ` 25 lakhs and the value of the house property not exceeding ` 40 lakhs, need not be imposed. Though there is no mention that the value for this purpose will be on the basis of stamp duty value, it should be stated that the value stated in the agreement or conveyance deed will be reckoned with for this purpose.

4. Impact on promoters and builders

The promoters and builders will also feel the brunt this time as a new section 43CA, has been proposed to deal with a situation where the consideration paid for the transfer of an immovable asset (even if its profits are assessable as profit from business) is less than the stamp duty value. Here, the stamp duty value shall be considered for assessment purposes in the hands of the seller i.e. promoters and builders. The amendment is proposed on the lines of provisions of section 50C, which applies if an immovable property is held as investment.

This proposal is in line with existing section 50C, which is applicable to taxpayers holding the asset as a capital investment. If the date of the agreement that fixed the value of the consideration for the transfer of the asset and the date of registration of the transfer of the asset are not the same, the stamp duty value will be determined on the date of the agreement for the transfer if payment or its part has been paid by cheque, draft or any mode other than cash. This option will be helpful to the sellers.

It would be relevant to mention that the Supreme Court had decided in the famous case of K.P. Varghese v. ITO 131 ITR 597 (SC), in which the decision was delivered by the Bench of Hon'ble Justice P. N. BHAGWATI and Hon'ble Justice E.S. VENKATARAMIAH, as under:

"We must, therefore, hold that sub-section (2) of section 52 can be invoked only where the consideration for the transfer has been understated by the assessee or, in other words, the consideration actually received by the assessee is more than what is declared or disclosed by him and the burden of proving such an understatement or concealment is on the revenue. This burden may be discharged by the revenue by establishing facts and circumstances from which a reasonable inference can be drawn that the assessee has not correctly declared or disclosed the consideration received by him and there is an understatement or concealment of the consideration in respect of the transfer. Sub-section (2) has no application in the case of an honest and bona fide transaction where the consideration received by the assessee has been correctly declared or disclosed by him, and there is no concealment or suppression of the consideration."

This section 52(2) was omitted from the Income tax Act w.e.f. assessment year 1988-89. However the provisions of deeming income are finding place in various sections of the Income-tax Act, which is against the concept of charging tax on real income.

5. Agricultural land and Income

The definition of capital asset has been amended. The transfer of agricultural land situated within 2 km (measured aerially i.e. shortest aerial distance) from the municipal limit having a population between 10,000 and 1 lakh or land situated within 6 kms which has a population of between 1 lakh to 10 Lakh, may be subjected to capital gains tax. The existing limit is 8 kms. So be careful if you are selling any agricultural land. The meaning of agricultural income has also been proposed to be modified and the area from municipal limit has been curtailed on the similar lines.

In case of purchase as well as sale, one should be more careful now so far as tax implications are concerned

--
Regards,

Pawan Singla

BA (Hon's), LLB

Audit Officer

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Saturday, March 30, 2013

Re: [aaykarbhavan] Fw: [aurangabad_ca] Vimal Punmiya's Book on Will and Nomination

Thanks

----- Original Message -----

From: Dipak Shah

To: aaykarbhavan@yahoogroups.com

Sent: Saturday, March 23, 2013 7:05 PM

Subject: Re: [aaykarbhavan] Fw: [aurangabad_ca] Vimal Punmiya's Book on Will and Nomination

Please find attached.

C A Shah D J

USA

From: Dhimant Shah <dhimant1962@gmail.com>
To: aaykarbhavan@yahoogroups.com
Sent: Saturday, 23 March 2013 3:48 AM
Subject: Re: [aaykarbhavan] Fw: [aurangabad_ca] Vimal Punmiya's Book on Will and Nomination

ATTACHMENT MIISING

On Fri, Mar 22, 2013 at 11:55 PM, Dipak Shah <djshah1944@yahoo.com> wrote:

----- Forwarded Message -----
From: GIRISH KULKARNI <girishkulk@joshikulkarni.co.in>
To: Aurangabad Taxation <aurangabad_ca@yahoogroups.com>
Sent: Friday, 22 March 2013 5:45 AM
Subject: [aurangabad_ca] Vimal Punmiya's Book on Will and Nomination [1 Attachment]

EnclosedÂ

--Â

--
CA GIRISH KULKARNI
JOSHI KULKARNI & CO.
LOCATION :- AURANGABAD ,Â MUMBAI, PUNE , NANDED
CONTACT 92253 06814 EMAIL girishkulk@joshikulkarni.co.inÂ

--

Regards

Dhimant Shah
09833834286

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[aaykarbhavan] Business standard news updates 31-3-2013

UBI first bank to file winding- up petition against UB Holdings

MANOJIT SAHA

Mumbai, 30 March

Kolkata- based United Bank of India ( UBI) has filed a petition to wind up Vijay Mallya- promoted United Breweries ( UB) Holdings in the Karnataka High Court, after Kingfisher Airlines ( KFA) defaulted on the loan. The lender had the corporate guarantee of UB Holdings for the loan, which was extended to the grounded airline. On failure to honour the guarantees, as KFA defaulted on loans, the petitioner has invoked the guarantees. Banks can invoke these if the principal creditor defaults.

UBI is the first lender to file awinding- up petition, though some of the lessors of aircraft had filed similar petitions.

The petition, filed on March 19, is pending for admission in the court. The governmentowned lender has an exposure of about ₹ 400 crore, including both guarantees and loans.

The move came after Finance Minister P Chidambaram, at a meeting with chiefs of publicsector banks recently, asked lenders to act tough on corporate defaulters. " We cannot have an affluent promoter and a sick company," he had said. Confirming the development, a senior UBI official said the bank would be aggressive in loan recovery.

In October last year, the Directorate General Of Civil Aviation had suspended the airlines' operating permit, which expired in December.

Banks had started classifying the KFA account as non- performing from the third quarter of 2011- 12. A large part of the loan was unsecured, so most made 100 per cent provisioning for exposure.

Transfer pricing circulars may lead to more litigation

NSUNDARESHA SUBRAMANIAN

New Delhi, 30 March

The recent circulars issued clarifying the government's position on taxation of development centres maintained by multinational companies ( MNCs) are likely to lead to an increase in disputes and litigation rather than resolving them, some tax experts have said.

Earlier this week, the Central Board of Direct taxes ( CBDT) issued two circulars on transfer pricing issues. Circular no. 2/ 2013 dealt with Application of Profit Split Method ( PSM), while Circular no. 3 dealt with the conditions relevant to identify development centres engaged in " contract R & D (research and development) services with insignificant risk." In case of the first circular, though the subject mentions the application of profit split method, the circular implicitly in some places and explicitly at other places concludes that in case of R & D activities, use of Cost Plus/ Transactional Net Margin Method ( TNMM) is not the appropriate. For example, it mentions that there is no correlation on cost incurred on R & D activities and return on an intangible developed through R &D activities.

The circular clearly states PSM has to be applied to estimate the value of intangibles.

Application of PSM requires information about the tax payer and the associated enterprises (AEs). The circular requires the taxpayer to furnish the good and sufficient reason for non- availability of such information. It means that tax payer will be required to furnish the detailed information/ documents of the AEs.

Even if transfer pricing officer (TPO) considers other methods such as TNMM as an appropriate one, he will be required to make an upward adjustment taking into account transfer of intangibles, location savings & locationspecific advantages, according to the provisions.

Samir Gandhi, tax partner, Deloitte, " Though the CBDT is of the view that the circular will help in providing certainty on transfer pricing issues relating to development centre, it seems this may not be exactly true. The circular in fact lays down that PSM is the most appropriate method for R & D centre and not the Cost Plus method. It is possible that this will increase the litigation rather than resolving/ preventing the disputes and may lead to India may not considered as a preferred location to set up development centres." Similarly, the second circular lays down five conditions to be cumulatively complied with. The important being that foreign principals perform most of the economically significant functions involved in development cycle and provides economically significant assets including intangibles. The Indian development centre will work under direct supervision of the principal through strategic decisions and monitoring of activities on regular basis. The Indian development centre will have no legal or economic ownership right on outcome of research. The satisfaction of the above conditions should be evidenced by the conduct of the parties and not merely by the contractual term, according to the circular.

Experts said though the emphasis is on the risk in the subject matter of the circular, a lot of weightage is given to the function performed by the foreign principal and the Indian development centre. The only reference to risk is that mere bearing of contractual risk will not be the final determinant.

"Further, if the foreign principal is located in widely perceived as low or no tax jurisdiction such as Mauritius or Cayman Islands, it will be presumed that foreign principal is not contracting the risk," added Gandhi of Deloitte.

EPFO- NPS turf war: Companies tread neutral ground

SREELATHA MENON, VRISHTI BENIWAL &BIBHU RANJAN MISHRA

New Delhi/ Bangalore, 30 March

The Employees' Provident Fund Organization ( EPFO) and the National Pension System ( NPS), the two pension scheme operators in the country, seem to be heading for a turf war. The NPS is wooing subscribers from the private sector, earlier a domain of the EPFO.

NPS has reported so far, 522 private companies, including Reliance Industries Limited ( RIL), Reliance Group, Colgate Palmolive, Cognizant, Capgemini, Pantaloons and Wipro, have opted for it.

However, companies have chosen to remain neutral in their stance. For instance, Wipro told Business standard its relationship with NPS didn't mean an end to its EPFO membership. " NPS is over and above the mandatory contribution towards EPF," said Samir Gadgil, general manager and global head (compensation and benefits), Wipro Technologies. He added for Wipro, NPS was introduced in July 2011, and this was voluntary.

Annual NPS funds from Wipro vary according to the contribution amounts opted for by individual subscribers. On an average, annual contribution stood at ₹ 4- 6 crore, Gadgil said.

For RIL employees, too, NPS membership is voluntary.

In Delhi, the company issued a circular to its employees, asking them to choose between NPS and the company's EPFO pension scheme. An RIL employee said no staff member was being forced to opt for NPS.

Infosys said from April 1, it would introduce the NPS option for its employees. " We are looking to facilitate a process where employees can choose to have NPS as part of their retirement benefits from 2013- 14," the Bangalorebased company said.

EPFO denies it has lost any of its subscribers to NPS. A senior EPFO official said, " We are not aware of any EPFO subscriber leaving us for NPS. You show us one person who has left us for NPS." Officials in the Pension Fund Regulatory and Development Authority (PFRDA) said their system couldn't track whether companies had entirely shifted from EPFO to NPS. They, however, said a lot of private companies were showing interest in joining NPS. "Many companies from the private sector have joined NPS. But we can't track from where the money is coming. NPS has the advantage of lower costs and higher returns," said PFRDA Chairman Yogesh Agarwal.

EPFO gives 8.5 per cent returns to subscribers. As of August- end, 2012, returns offered by NPS stood at six- 11 per cent.

Recently, Finance Minister P Chidambaram had exhorted private companies to promote NPS, a call that led to discomfort within EPFO.

Analysts say the scales tip in favour of EPFO, as it offers guaranteed returns, unlike NPS. For investors, the primary aspect was security and EPFO had the most reliable fund, said financial analyst Amit Sethi of AMVI Financial. He added the difference in rates wasn't significant. The government wouldn't want to harm EPFO, which had a bigger subscriber base than NPS, he said.

EPFO's recent announcement of investment in private bonds, as well as a more aggressive entry into the bond market in general, pointed to better returns in the future, Sethi said. In two years, EPFO returns would stand at 8.759.25 per cent, while NPS returns weren't expected to see such a rise, he said, ruling out a threat to EPFO.

While EPFO has a corpus of ₹ 4.5 lakh crore, in four years, NPS has raised only ₹ 28,493 crore. On an average, EPFO adds ₹ 50,000 crore to its corpus every year.

EPFO is pushing for an amendment to the EPF Act to raise the salary ceiling for employees from ₹ 6,500 to ₹ 10,000 or ₹ 15,000. This would ensure the scheme is attractive to those earning high salaries as well. EPFO is mandatory for those earning up to ₹ 6,500 a month; for the rest, it is voluntary.

Number of Corpus under NPS Employer / Sector subscribers ( in ₹ crore)

Central government 11,25,871 17,047 State government 15,85,349 9,780 Private sector 2,02,679 1,254 NPS- Lite 15,79,690 412

Total 44,93,589 28,493 SECURING THE FUTURE

A status check on National Pension System

NPS subscription Status of NPS implementation by states

Number of States

States joined NPS 23 States notified joining NPS but have not taken 2

any further steps ( Maharashtra, Tamil Nadu)

States not joined NPS ( West Bengal, Tripura), 3

Kerala has given in- principle approval for joining NPS from April 1, 2013

Source: Labour ministry

CS A RENGARAJAN,, B.Com ,FCS, LLB, PGDBM
Company Secretary, Chennai

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