MINISTRY OF FINANCE
(Department of Economic Affairs)
NOTIFICATION
New Delhi, the 7th December, 2010
G.S.R. 956 (E). – In exercise of the powers conferred by sub-section (4) of Section 3 of the Public Provident Fund Act, 1968 (23 of 1968), the Central Government hereby makes the following Scheme further to amend the Public Provident Fund Scheme, 1968, namely :-
1. (1) This scheme may be called the Public Provident Fund (Amendment) Scheme, 2010.
(2) It shall come into force on the date of its publication in the Official Gazette.
2. In the Public Provident Fund Scheme, 1968 in paragraph 9, in sub-paragraph (3), after the proviso, the following proviso shall be inserted, namely :-
“Provided further that an account opened on behalf of a Hindu Undivided Family prior to the 13th day of May, 2005, shall be closed after expiry of fifteen years from the end of the year in which the initial subscription was made and the entire amount standing at the credit of the subscriber shall be refunded, after making adjustments, if any, in respect of any interest due from the subscriber on loans taken by him. In the case of accounts opened on behalf of Hindu Undivided Family, where fifteen years from end of the year in which initial subscription was made, has already been completed, they shall also be closed at the end of the current year, i.e. the 31st day of March, 2011 and the entire amount standing at the credit of the subscriber shall be refunded, after making adjustments, if any, in respect of any interest due from the subscriber on loans taken by him.”
[F.No. F.7/4/2008-NS.II]
M. A. KHAN, Under Secy.
Note: The scheme was notified vide G.S.R. 1136(E), dated 15-6-1968 and amended vide G.S.R. 368(E), dated 1-8-72, G.S.R. 217(E), dated 9-3-79, G.S.R. 271(E), dated 16-3-83, G.S.R. 54(E), dated 7-2-84, G.S.R. 895(E), dated 23-6-86, G.S.R. 1013(E), dated 6-7-99, G.S.R. 908(E), dated 6-12-2000, G.S.R. 679(E), dated 4-10-2002, G.S.R. 768(E), dated 15-11-2002, G.S.R. 585(E), dated 25-7-2003, G.S.R. 690(E), dated 27-8-2003, G.S.R. 755(E), dated 19-11-2004, and G.S.R. 291(E), dated 13-5-2005.
Thursday, December 30, 2010
Wednesday, December 29, 2010
Digital Signature Class 2 and/or, Class 3 for E Tendering, DGFT, MCA, Income Tax, Brokers etc
Contact for Class II, Class II B, Class III B,Class III, DGFT at very reasonable price on same day. Tcs or E Mudhra for Class 2 and Class 3, and for DGFT safe Scrypt.
Contact
D sign Softech Private Limited
24-A, MIG DDA Flats, Rani Jhnasi Complex, Motia Khan,
Near Jhandewalan Gole Chakker, New Delhi- 110055.
Phone- 011 23522714/15, 011 43503600E Mail: dsignsoftech@gmail.com
URL: www.dsignsoftech.com
Mobile 9810135587
Contact
D sign Softech Private Limited
24-A, MIG DDA Flats, Rani Jhnasi Complex, Motia Khan,
Near Jhandewalan Gole Chakker, New Delhi- 110055.
Phone- 011 23522714/15, 011 43503600E Mail: dsignsoftech@gmail.com
URL: www.dsignsoftech.com
Mobile 9810135587
Saturday, December 25, 2010
Amendment in 40a(ia) by finanace Act , 2010 is clarrifactory
2010-TIOL-765-ITAT-AHM
IN THE INCOME TAX APPELLATE TRIBUNAL
BENCH 'B' AHMEDABAD
ITA No.3983/Ahd/2008
Assessment Year:-2005-2006
SHRI KANUBHAI RAMJIBHAI MAKWANA
RANGOLI COMPLEX, BHALEJ ROAD, ANAND
PAN NO: ACYPM8211D
Vs
INCOME TAX OFFICER
WARD-1, ANAND
Mahavir Singh, JM and D C Agrawal, AM
Dated: December 3, 2010
Appellant Rep by: Shri M G Patel, AR
Respondents Rep by: Shri K Madhusudan, SR-DR
Income tax – Section 40(a)(ia) - Whether the amendment brought out in Section 40(a)(ia) are clarificatory in nature and retrospective w.e.f 1st April 2005.
The assessee is a contractor and required to get work done through sub-contractors. During the course of assessment proceedings, AO required the assessee to produce the details of TDS deducted on sub-labour contract payments paid. The assessee intimated as regards to inadmissibility with regard to non-deduction of TDS. AO made addition for non deduction of tax. In appeal, CIT (A) partly allowed the appeal of the assessee within the amended provisions of section 40(a)(ia) which state that if tax had been deducted in the month of March and deposited with the Government before submission.
After hearing both the parties, the ITAT held: -
++ that the amendments brought out in Section 40(a)(ia) of the Act from time-to-time was clarificatory and when an amendment is declaratory and clarificatory in nature, the presumption against its retrospectivity is not applicable and amendments of this kind only declare. It is no doubt true that, ordinarily, a statute, and particularly when the same has been made applicable with effect from a particular date should be construed prospectively and not retrospectively. But this principle will not be applicable in a case where the provision construed is merely explanatory, clarificatory or declaratory it cannot be disputed that the object of the Explanation is to explain the meaning and intendment of the Act itself;
++ that the provisions of Section 40(a)(ia) as amended by the Finance Act, 2010 w.e.f 1-4-2010, which has newly been inserted by the Finance (No.2) Act, 2004, with effect from 1st April, 2005 to section 40 of the Act is remedial in nature, designed to eliminate unintended consequences which may cause undue hardship to the taxpayers and which made the provision unworkable or unjust in a specific situation, and is of clarificatory nature and, therefore, has to be treated as retrospective with effect from 1st April, 2005, the date on which section 40(a)(ia) has been inserted by the Finance (No.2) Act, 2004.
IN THE INCOME TAX APPELLATE TRIBUNAL
BENCH 'B' AHMEDABAD
ITA No.3983/Ahd/2008
Assessment Year:-2005-2006
SHRI KANUBHAI RAMJIBHAI MAKWANA
RANGOLI COMPLEX, BHALEJ ROAD, ANAND
PAN NO: ACYPM8211D
Vs
INCOME TAX OFFICER
WARD-1, ANAND
Mahavir Singh, JM and D C Agrawal, AM
Dated: December 3, 2010
Appellant Rep by: Shri M G Patel, AR
Respondents Rep by: Shri K Madhusudan, SR-DR
Income tax – Section 40(a)(ia) - Whether the amendment brought out in Section 40(a)(ia) are clarificatory in nature and retrospective w.e.f 1st April 2005.
The assessee is a contractor and required to get work done through sub-contractors. During the course of assessment proceedings, AO required the assessee to produce the details of TDS deducted on sub-labour contract payments paid. The assessee intimated as regards to inadmissibility with regard to non-deduction of TDS. AO made addition for non deduction of tax. In appeal, CIT (A) partly allowed the appeal of the assessee within the amended provisions of section 40(a)(ia) which state that if tax had been deducted in the month of March and deposited with the Government before submission.
After hearing both the parties, the ITAT held: -
++ that the amendments brought out in Section 40(a)(ia) of the Act from time-to-time was clarificatory and when an amendment is declaratory and clarificatory in nature, the presumption against its retrospectivity is not applicable and amendments of this kind only declare. It is no doubt true that, ordinarily, a statute, and particularly when the same has been made applicable with effect from a particular date should be construed prospectively and not retrospectively. But this principle will not be applicable in a case where the provision construed is merely explanatory, clarificatory or declaratory it cannot be disputed that the object of the Explanation is to explain the meaning and intendment of the Act itself;
++ that the provisions of Section 40(a)(ia) as amended by the Finance Act, 2010 w.e.f 1-4-2010, which has newly been inserted by the Finance (No.2) Act, 2004, with effect from 1st April, 2005 to section 40 of the Act is remedial in nature, designed to eliminate unintended consequences which may cause undue hardship to the taxpayers and which made the provision unworkable or unjust in a specific situation, and is of clarificatory nature and, therefore, has to be treated as retrospective with effect from 1st April, 2005, the date on which section 40(a)(ia) has been inserted by the Finance (No.2) Act, 2004.
Friday, December 24, 2010
S. 50C applies to transfer of development rights in property
The following important judgement is available for download at itatonline.org.
Arif Akhatar Hussain vs. ITO (ITAT Mumbai)
S. 50C applies to transfer of development rights in property
The assessee was co-owner of inherited property. He entered into an agreement with the developer for development of the property for a consideration of Rs. 63 lakhs and offered his share of the consideration to capital gains. The Stamp Valuing Authority valued the property at Rs.4.73 crores though the DVO valued it at Rs. 1.81 crores. The AO invoked s. 50C and adopted the DVO’s valuation as the consideration. This was confirmed by the CIT (A). Before the Tribunal, the assessee argued that there was a distinction between “rights in land & building” and the “land and building” and that s. 50C did not apply to “rights” in land & building such as development rights. It was pointed out that the fact that only development rights were transferred was borne out by the fact that the assessee was shown as owner of the property in the municipal records. It was also pointed out that the stamp duty law made a distinction between transfer of development rights and transfer of the property by imposing different rates of duty. HELD dismissing the appeal:
Arif Akhatar Hussain vs. ITO (ITAT Mumbai)
S. 50C applies to transfer of development rights in property
The assessee was co-owner of inherited property. He entered into an agreement with the developer for development of the property for a consideration of Rs. 63 lakhs and offered his share of the consideration to capital gains. The Stamp Valuing Authority valued the property at Rs.4.73 crores though the DVO valued it at Rs. 1.81 crores. The AO invoked s. 50C and adopted the DVO’s valuation as the consideration. This was confirmed by the CIT (A). Before the Tribunal, the assessee argued that there was a distinction between “rights in land & building” and the “land and building” and that s. 50C did not apply to “rights” in land & building such as development rights. It was pointed out that the fact that only development rights were transferred was borne out by the fact that the assessee was shown as owner of the property in the municipal records. It was also pointed out that the stamp duty law made a distinction between transfer of development rights and transfer of the property by imposing different rates of duty. HELD dismissing the appeal:
Wednesday, December 22, 2010
The economics of education: Govt Mints money taxing educational services
The economics of education: Govt Mints money taxing educational services
22 December, 2010 Ahmedabad :
Education is a matter between the person and the world of knowledge and experience, and has little to do with school or college. However, schools and colleges are the breeding ground for our future generations. Education should be absolutely free from taxes. The government collects huge revenues in the guise of education cess. These funds are meant to be used for the welfare of students and for providing free education to the children of this country. Ironically, the same government has imposed service tax on the coaching and training institutes and the ultimate burden of this tax is passed on to the students.
A fundamental issue emerges that whether, the service provided by a not-for-profit organisation is liable for service tax. Various courts held contrary views and pronounced contrasting decisions. Before any final conclusion can be reached the Finance Act, 2010, has added an explanation in the definition of the taxable service to clarify that the term 'commercial' appearing in the relevant definition, only means that such training or coaching is being provided for a consideration, whether or not such training or coaching is conducted with a profit motive. This change is retrospective in nature with effect from 01.07.2003.
Constitutional validity of levy of service tax treating parallel college as "commercial training or coaching centre" within the meaning of Section 65(27) was raised in Malappuram Distt. Parallel College Assn. (STO 2005 Ker 122). A parallel college is always privately-owned and in most cases, it is a small scale institution with facilities similar to colleges. Whereas colleges are affiliated to universities, parallel colleges have no such official recognition.
The Kerala high court has struck down the demand of service tax from parallel colleges under commercial coaching and training service" as arbitrary and violative of article 14 of the constitution of India. The high court observed that there is no distinction between the two classes of students namely; the students studying in the colleges affiliated to universities and private students who take coaching in parallel colleges to write the same examinations. The high court further observed that the main reason why many students can't join regular colleges affiliated to universities is economical reasons. Further, on account of limited number of seats available in the affiliated colleges, the less brilliant will have to look for coaching elsewhere and they end up in parallel colleges. In any case, there can be no distinction between students undergoing private study in the parallel colleges and those undergoing course-study in the regular colleges, so long as the curriculum, the examinations written and the degrees obtained by them are one and the same.
Based on the above findings, high court held that "Therefore, levy of service tax for services rendered by parallel colleges which indirectly falls on the students, but by simultaneously providing exemption to regular affiliated colleges allowing the students therein study free of tax is patently discriminatory and violative of Article 14 of the Constitution of India."
Even in Circular No. 59/8/2003-S.T., dated 20.06.2003, the clarification was provided that some institutes like colleges, apart from imparting education for obtaining recognised degrees/ diploma/ certificates, also impart training for competitive examinations, various entrance tests etc. It is clarified that by definition, such institutes or establishments, which issue a certificate, diploma or degree recognised by law, are outside the purview of "commercial training or coaching institute". Thus, even if such institutes or establishments provide training for competitive examinations etc., such services rendered would be outside the scope of service tax.
Recently similar issue arose before tribunal - Bangalore, in case of 'Tandem Integrated Services' (STO 2010 CESTAT 414). In this case, it was held that the colleges apart from imparting education for obtaining recognised degrees/ diploma /certificates, also impart training for competitive examinations, such institutes or establishments are outside the purview of "commercial training or coaching institute". The benefits, as accorded to the regular colleges which are affiliated to university can't be denied to the appellants. Regular colleges affiliated to university are exempted from paying service tax for imparting training for the competitive examinations and various entrance tests etc., there is no reason for not extending the benefit to of being outside the purview of the service tax under the category of "commercial training or coaching".
Finally, it is held that these educational institutes are not liable to pay service tax, thereby giving a sigh of relief to thousands of students who were ultimately bearing these taxes.
22 December, 2010 Ahmedabad :
Education is a matter between the person and the world of knowledge and experience, and has little to do with school or college. However, schools and colleges are the breeding ground for our future generations. Education should be absolutely free from taxes. The government collects huge revenues in the guise of education cess. These funds are meant to be used for the welfare of students and for providing free education to the children of this country. Ironically, the same government has imposed service tax on the coaching and training institutes and the ultimate burden of this tax is passed on to the students.
A fundamental issue emerges that whether, the service provided by a not-for-profit organisation is liable for service tax. Various courts held contrary views and pronounced contrasting decisions. Before any final conclusion can be reached the Finance Act, 2010, has added an explanation in the definition of the taxable service to clarify that the term 'commercial' appearing in the relevant definition, only means that such training or coaching is being provided for a consideration, whether or not such training or coaching is conducted with a profit motive. This change is retrospective in nature with effect from 01.07.2003.
Constitutional validity of levy of service tax treating parallel college as "commercial training or coaching centre" within the meaning of Section 65(27) was raised in Malappuram Distt. Parallel College Assn. (STO 2005 Ker 122). A parallel college is always privately-owned and in most cases, it is a small scale institution with facilities similar to colleges. Whereas colleges are affiliated to universities, parallel colleges have no such official recognition.
The Kerala high court has struck down the demand of service tax from parallel colleges under commercial coaching and training service" as arbitrary and violative of article 14 of the constitution of India. The high court observed that there is no distinction between the two classes of students namely; the students studying in the colleges affiliated to universities and private students who take coaching in parallel colleges to write the same examinations. The high court further observed that the main reason why many students can't join regular colleges affiliated to universities is economical reasons. Further, on account of limited number of seats available in the affiliated colleges, the less brilliant will have to look for coaching elsewhere and they end up in parallel colleges. In any case, there can be no distinction between students undergoing private study in the parallel colleges and those undergoing course-study in the regular colleges, so long as the curriculum, the examinations written and the degrees obtained by them are one and the same.
Based on the above findings, high court held that "Therefore, levy of service tax for services rendered by parallel colleges which indirectly falls on the students, but by simultaneously providing exemption to regular affiliated colleges allowing the students therein study free of tax is patently discriminatory and violative of Article 14 of the Constitution of India."
Even in Circular No. 59/8/2003-S.T., dated 20.06.2003, the clarification was provided that some institutes like colleges, apart from imparting education for obtaining recognised degrees/ diploma/ certificates, also impart training for competitive examinations, various entrance tests etc. It is clarified that by definition, such institutes or establishments, which issue a certificate, diploma or degree recognised by law, are outside the purview of "commercial training or coaching institute". Thus, even if such institutes or establishments provide training for competitive examinations etc., such services rendered would be outside the scope of service tax.
Recently similar issue arose before tribunal - Bangalore, in case of 'Tandem Integrated Services' (STO 2010 CESTAT 414). In this case, it was held that the colleges apart from imparting education for obtaining recognised degrees/ diploma /certificates, also impart training for competitive examinations, such institutes or establishments are outside the purview of "commercial training or coaching institute". The benefits, as accorded to the regular colleges which are affiliated to university can't be denied to the appellants. Regular colleges affiliated to university are exempted from paying service tax for imparting training for the competitive examinations and various entrance tests etc., there is no reason for not extending the benefit to of being outside the purview of the service tax under the category of "commercial training or coaching".
Finally, it is held that these educational institutes are not liable to pay service tax, thereby giving a sigh of relief to thousands of students who were ultimately bearing these taxes.
Tuesday, December 21, 2010
A non-resident Indian can remit $1 mn from property sales
A non-resident Indian can remit $1 mn from property sales
The prices of ancestral properties left in India by emigrating non-resident Indians (NRIs) have escalated beyond their belief. Little wonder they have developed a new and intense interest in claiming their share, especially with recession biting hard in the West. In the last few years, the ancestral homes in India are valued in crores.
So these amounts become very attractive for NRIs to claim and remit. In the recent past, the Reserve Bank of India (RBI) has revised the maximum amount that can be sent abroad without special permissions. However, these properties should not be agricultural land, a farm house or a plantation.
An NRI/PIO is allowed to send abroad up to $1 million from the sale of property in any one financial year. This amount should be the sale proceeds of property inherited by him out of rupee funds. This transfer is subject to production of documentary evidence in support of acquisition, inheritance or legacy of assets by the NRI, and a tax clearance or a no objection certificate from the Income Tax Authority. The $1 million remittance can also be made from the balances held in Non Resident Ordinary Rupee (NRO) Accounts.
After taking a dip following the financial crisis of 2008, property prices have bounced back and how. Despite the high price rise, more and more NRIs are keen to buy properties in India. Who can buy property in India? An NRI who is a citizen of India but residing outside, or a Person of Indian Origin (PIO). A PIO is defined as an individual (not a citizen of Pakistan, Bangladesh, Sri Lanka, Afghanistan, China, Iran, Nepal or Bhutan) who has held an Indian passport at any time or whose father or mother or grandfather or grandmother was a citizen of India.
The laws related to immovable property in India are complex and are not uniform from one state to another, said Rajan D. Gupta, a senior lawyer and a qualified accountant with SRGR Law Offices.
"A major concern is to determine the clear and marketable title of the land under question and to ensure that the land under question is free from any encumbrances such as litigation, prior mortgages, any third party interest or rights and any governmental actions such as compulsory acquisition proceedings," said Gupta.
"Again, in case of properties, especially agricultural properties, which are owned by farming families, there are a number of family law issues which again are myriad as there are a number of religions in India and most of them have their own characteristic legal frameworks."
Gupta said to ward off such issues and be almost certain about the legal status of the property to be acquired, it is advisable that a competent legal professional must be engaged to conduct a title check and due diligence of the property to be acquired.
"It is also important to engage such a professional who practises within the jurisdiction where the property is situated so that he/she is aware of the local legal compliances and issues," he added.
NRIs face many legal tangles about their properties in India. These relate to the purchase, transfer and ownership of property, power of attorney, management and eviction of tenants, remittance of the sale proceeds, illegal grabbing of their properties and other related issues.
Their legal cases have been pending in the courts for years, indeed decades. If an NRI is fighting a case with a resident Indian, he is at a disadvantage because the Indian is in no hurry while the NRI has limited time to attend to his case during his visit to India or make special trips for court appearances.
Source Economic Times
The prices of ancestral properties left in India by emigrating non-resident Indians (NRIs) have escalated beyond their belief. Little wonder they have developed a new and intense interest in claiming their share, especially with recession biting hard in the West. In the last few years, the ancestral homes in India are valued in crores.
So these amounts become very attractive for NRIs to claim and remit. In the recent past, the Reserve Bank of India (RBI) has revised the maximum amount that can be sent abroad without special permissions. However, these properties should not be agricultural land, a farm house or a plantation.
An NRI/PIO is allowed to send abroad up to $1 million from the sale of property in any one financial year. This amount should be the sale proceeds of property inherited by him out of rupee funds. This transfer is subject to production of documentary evidence in support of acquisition, inheritance or legacy of assets by the NRI, and a tax clearance or a no objection certificate from the Income Tax Authority. The $1 million remittance can also be made from the balances held in Non Resident Ordinary Rupee (NRO) Accounts.
After taking a dip following the financial crisis of 2008, property prices have bounced back and how. Despite the high price rise, more and more NRIs are keen to buy properties in India. Who can buy property in India? An NRI who is a citizen of India but residing outside, or a Person of Indian Origin (PIO). A PIO is defined as an individual (not a citizen of Pakistan, Bangladesh, Sri Lanka, Afghanistan, China, Iran, Nepal or Bhutan) who has held an Indian passport at any time or whose father or mother or grandfather or grandmother was a citizen of India.
The laws related to immovable property in India are complex and are not uniform from one state to another, said Rajan D. Gupta, a senior lawyer and a qualified accountant with SRGR Law Offices.
"A major concern is to determine the clear and marketable title of the land under question and to ensure that the land under question is free from any encumbrances such as litigation, prior mortgages, any third party interest or rights and any governmental actions such as compulsory acquisition proceedings," said Gupta.
"Again, in case of properties, especially agricultural properties, which are owned by farming families, there are a number of family law issues which again are myriad as there are a number of religions in India and most of them have their own characteristic legal frameworks."
Gupta said to ward off such issues and be almost certain about the legal status of the property to be acquired, it is advisable that a competent legal professional must be engaged to conduct a title check and due diligence of the property to be acquired.
"It is also important to engage such a professional who practises within the jurisdiction where the property is situated so that he/she is aware of the local legal compliances and issues," he added.
NRIs face many legal tangles about their properties in India. These relate to the purchase, transfer and ownership of property, power of attorney, management and eviction of tenants, remittance of the sale proceeds, illegal grabbing of their properties and other related issues.
Their legal cases have been pending in the courts for years, indeed decades. If an NRI is fighting a case with a resident Indian, he is at a disadvantage because the Indian is in no hurry while the NRI has limited time to attend to his case during his visit to India or make special trips for court appearances.
Source Economic Times
Sunday, December 19, 2010
Friday, December 3, 2010
No s. 14A disallowance of interest on borrowed funds on basis that assessee ought to have used own funds to repay loans & not invest in shares
The assessee earned dividend of Rs. 3 crores which was exempt u/s 10(34). As the assessee had borrowings of Rs. 31.98 crores out of total funds of Rs. 96.18 crores and investments in shares of Rs. 30.42 crores, the AO held that the interest on the borrowings had to be disallowed on a pro-rata basis u/s 14A. The AO held that the assessee ought to have used the surplus funds to repay the loans instead of investing in shares and that it was an indirect case of diversion of borrowed funds for investment in shares. This was upheld by the CIT(A). On appeal by the assessee, HELD allowing the appeal:
In view of Godrej Boyce Mfg Co 328 ITR 81 (Bom) Rule 8D is applicable only prospectively i.e. from AY 2008-09 and not for earlier years. The facts showed that the assessee had made the investment in shares out of its own funds and the borrowed funds were entirely utilized for the purpose of its business. The investment in shares in the current year was made from a separate bank account where the surplus funds generated in that year were deposited. The argument that the assessee could have utilized its surplus funds in repaying the borrowings instead of investing in shares and by not doing so, there was diversion of borrowed funds towards investment in shares to earn dividend income is not acceptable in view of CIT vs. Hero Cycles Ltd 323 ITR 518 where it was held, distinguishing Abhishek Industries 286 ITR 1 (P&H), that if investment in shares is made by an assessee out of own funds and not out of borrowed funds, disallowance u/s 14A is not sustainable. Accordingly, the disallowance of interest on borrowed funds was deleted.
See Also: CIT vs. Reliance Utilities 313 ITR 340 (Bom) (where it was held that a presumption could be drawn that investment for non-business purposes had come out of own funds), CIT vs. Leena Ramachandran (where it was held that s. 14A applies where shares are held as investment and the only benefit derived is dividend). See Also S. 14A & Rule 8D: A comprehensive analysis by Shri. K. C. Singhal, VP, ITAT, (Retd).
In view of Godrej Boyce Mfg Co 328 ITR 81 (Bom) Rule 8D is applicable only prospectively i.e. from AY 2008-09 and not for earlier years. The facts showed that the assessee had made the investment in shares out of its own funds and the borrowed funds were entirely utilized for the purpose of its business. The investment in shares in the current year was made from a separate bank account where the surplus funds generated in that year were deposited. The argument that the assessee could have utilized its surplus funds in repaying the borrowings instead of investing in shares and by not doing so, there was diversion of borrowed funds towards investment in shares to earn dividend income is not acceptable in view of CIT vs. Hero Cycles Ltd 323 ITR 518 where it was held, distinguishing Abhishek Industries 286 ITR 1 (P&H), that if investment in shares is made by an assessee out of own funds and not out of borrowed funds, disallowance u/s 14A is not sustainable. Accordingly, the disallowance of interest on borrowed funds was deleted.
See Also: CIT vs. Reliance Utilities 313 ITR 340 (Bom) (where it was held that a presumption could be drawn that investment for non-business purposes had come out of own funds), CIT vs. Leena Ramachandran (where it was held that s. 14A applies where shares are held as investment and the only benefit derived is dividend). See Also S. 14A & Rule 8D: A comprehensive analysis by Shri. K. C. Singhal, VP, ITAT, (Retd).
Tuesday, November 30, 2010
Large volume of purchase & sale of shares does not per se mean activity is business
vs. SMK Shares & Stock Broking (ITAT Mumbai)
Friday, November 26th, 2010
(135.1 KiB, 534 DLs)
Large volume of purchase & sale of shares does not per se mean activity is business
The assessee, a broker in the BSE, disclosed short-term capital gains and long-term capital gains on sale of shares. The AO accepted the LTCG as such though he held that the STCG was assessable as “business profits” on the ground that the assessee was a stock broker & there was large volume and frequency (more than 300) transactions. On appeal, the CIT (A) reversed the AO. On appeal by the department to the Tribunal, HELD dismissing the appeal:
(i) It is no more res integra that a person can be both “Investor” as well as “Trader” in shares. (Draft Instruction No. 2005, Instruction No. 1827 dated 31.8.1989 & Circular No. 4/2007 dated 15.6.2007 referred). The assessee has to maintain the distinction between shares held as stock and those held as investments in its records;
(ii) While volume of transactions is an important indicator of the intention of the assessee whether to deal in shares as trading asset or to hold the shares as investor, it is certainly not the sole criterion. The AO’s conclusion that since sale and purchase had been determined by the volatility in the market, the same is against the basic feature of investor is not based on sound rational reasoning. A prudent investor always keeps a watch on the market trends and, therefore, is not barred under law from liquidating his investments in shares. The law itself has recognized this fact by taxing these transactions under the head “Short Term Capital Gains”. If the AO’s reasoning is accepted, then it would be against the legislative intent itself;
(iii) The fact that the assessee did not borrow funds for investment in shares is an important aspect which cannot be lost sight off while deciding the true intention of the assessee;
(iv) The fact that the AO accepted the assessee’s claim in earlier years that it was an investor is material because though the principles of res judicata do not strictly apply to income tax proceedings it is well settled law that the principles of consistency should not be ignored. Uniformity in treatment and consistency under the same facts and circumstances is one of the fundamentals of the judicial principles which cannot be brushed aside without proper reason;
(v) The fact that the AO accepted the offering of LTCG also showed that the assessee’s status as investor was accepted by him;
(vi) Some part of the STCG had arisen out the earlier investment which had been accepted as being on investment account. As the modus operandi of the assessee remained the same in regard to other shares purchased during the year, the assessee’s claim could not be negated only on the basis of frequency of the transaction (Gopal Purohit 228 CTR 582 (Bom), Sadhana Nabera 41 DTR 393 & Jayshree Pradip Shah considered).
Friday, November 26th, 2010
(135.1 KiB, 534 DLs)
Large volume of purchase & sale of shares does not per se mean activity is business
The assessee, a broker in the BSE, disclosed short-term capital gains and long-term capital gains on sale of shares. The AO accepted the LTCG as such though he held that the STCG was assessable as “business profits” on the ground that the assessee was a stock broker & there was large volume and frequency (more than 300) transactions. On appeal, the CIT (A) reversed the AO. On appeal by the department to the Tribunal, HELD dismissing the appeal:
(i) It is no more res integra that a person can be both “Investor” as well as “Trader” in shares. (Draft Instruction No. 2005, Instruction No. 1827 dated 31.8.1989 & Circular No. 4/2007 dated 15.6.2007 referred). The assessee has to maintain the distinction between shares held as stock and those held as investments in its records;
(ii) While volume of transactions is an important indicator of the intention of the assessee whether to deal in shares as trading asset or to hold the shares as investor, it is certainly not the sole criterion. The AO’s conclusion that since sale and purchase had been determined by the volatility in the market, the same is against the basic feature of investor is not based on sound rational reasoning. A prudent investor always keeps a watch on the market trends and, therefore, is not barred under law from liquidating his investments in shares. The law itself has recognized this fact by taxing these transactions under the head “Short Term Capital Gains”. If the AO’s reasoning is accepted, then it would be against the legislative intent itself;
(iii) The fact that the assessee did not borrow funds for investment in shares is an important aspect which cannot be lost sight off while deciding the true intention of the assessee;
(iv) The fact that the AO accepted the assessee’s claim in earlier years that it was an investor is material because though the principles of res judicata do not strictly apply to income tax proceedings it is well settled law that the principles of consistency should not be ignored. Uniformity in treatment and consistency under the same facts and circumstances is one of the fundamentals of the judicial principles which cannot be brushed aside without proper reason;
(v) The fact that the AO accepted the offering of LTCG also showed that the assessee’s status as investor was accepted by him;
(vi) Some part of the STCG had arisen out the earlier investment which had been accepted as being on investment account. As the modus operandi of the assessee remained the same in regard to other shares purchased during the year, the assessee’s claim could not be negated only on the basis of frequency of the transaction (Gopal Purohit 228 CTR 582 (Bom), Sadhana Nabera 41 DTR 393 & Jayshree Pradip Shah considered).
Wednesday, November 17, 2010
Income tax - Whether profits from sale of shares held as long-term investments are to be taxed as business income or capital gains? - It is capital ga
Income tax - Whether profits from sale of shares held as long-term investments are to be taxed as business income or capital gains? - It is capital gain, rules Delhi HC
By TIOL News Service
NEW DELHI, OCT 28, 2010: THE issue before the HC is - Whether profits from sale of shares held as long-term investments by an investment and finance company are to be taxed as business income or capital gains. And the HC decision rules that it is capital gains.
Facts of the case
The assessee is a company engaged in the business of sale and purchase of shares. It filed its return declaring an income of Rs.60,05,375/- in which it included short term capital gain at Rs.38,476/- and long term capital gain at NIL after set-off of long term capital loss of previous years amounting to Rs.2,08,24,174/-. In the course of assessment proceedings, the AO observed that in computation of the income filed, the assessee had shown long term capital gain at Rs.2,08,24,174/-which had been set off against the long term capital loss of the AY 1995-96 amounting to Rs.2,02,45,035/- and of the AY 1996-97 at Rs.5,79,139/-. On a query being raised by the assessing officer as to why sale of investment be not treated as business or trading receipts as the assessee is an investment company having main business of purchase and sale of shares, it was submitted by the assessee that it was registered as an investment and finance company having its main activity of investing its funds in long term securities like shares, debt and equity mutual funds, etc for generating dividend, interest and profit and loss on sale of investments and all the investments of the company are of long term nature and had not been held as stock-in-trade since the FY 1999-2000 in which year all the investments held as stock-in-trade were transferred to the investment portfolio. It was contended on behalf of the assessee that the said practice of taking all its securities under the investment head had since then been followed and the revenue had never raised any query on that score. However, the AO held that the income from the transactions of sale and purchase of shares was business income of the assessee company and were in fact purchased not for investment purposes but for the purpose of sale at a profit are liable to be taxed under the head business income and not under the head capital gain as declared by the assessee company. On the basis of aforesaid reasoning, the AO assessed the tax at Rs.3,25,82,805/- and initiated penalty proceedings u/s 271(1)(c) and directed charge of interest under Section 234B/234D accordingly.
The CIT(A) held that the profit arising on the sale of shares has to be treated as long term capital gains and, accordingly, the addition of Rs.2,65,77,430/- was deleted. The ITAT also decided the issue in favour of the assessee.
On further appeal by the Revenue, the High Court held that,
++ in the case at hand, the assessee had purchased the shares on 27th January, 1996 and the same were held for a span of 7 years and were sold during the year under consideration. The assessee had not involved himself in the business of buying and selling shares after 1st April, 1997. The assessee had not engaged itself as a dealer in debt mutual funds. Nothing has been brought on record to show that the assessee was engaged in the selling of shares. The object incorporated in the Memorandum of Association only refers to the fact that the assessee can deal in shares but, there was no regular activity on that score. The nature of activity, intention and conduct has significance. They play a pivotal role in the entire gamut of transaction;
++ as per the circular issued by the CBDT on 15th June, 2007, a tax payer can have two portfolios, that is, an investment portfolio comprising of securities which are to be treated as capital assets and a trading portfolio comprising of stock-in-trade which are to be treated as trading assets. The assessee is entitled to have income from both heads, namely, capital gains as well as business income. On a proper scanning of the facts that have been brought on record, there can be no iota of doubt that the shares that were made by the assessee as an investment gave rise to capital gains. Therefore, the concept of business income does not arise and hence, the findings recorded by the first appellate authority as well as by the Tribunal stand on terra firma.
By TIOL News Service
NEW DELHI, OCT 28, 2010: THE issue before the HC is - Whether profits from sale of shares held as long-term investments by an investment and finance company are to be taxed as business income or capital gains. And the HC decision rules that it is capital gains.
Facts of the case
The assessee is a company engaged in the business of sale and purchase of shares. It filed its return declaring an income of Rs.60,05,375/- in which it included short term capital gain at Rs.38,476/- and long term capital gain at NIL after set-off of long term capital loss of previous years amounting to Rs.2,08,24,174/-. In the course of assessment proceedings, the AO observed that in computation of the income filed, the assessee had shown long term capital gain at Rs.2,08,24,174/-which had been set off against the long term capital loss of the AY 1995-96 amounting to Rs.2,02,45,035/- and of the AY 1996-97 at Rs.5,79,139/-. On a query being raised by the assessing officer as to why sale of investment be not treated as business or trading receipts as the assessee is an investment company having main business of purchase and sale of shares, it was submitted by the assessee that it was registered as an investment and finance company having its main activity of investing its funds in long term securities like shares, debt and equity mutual funds, etc for generating dividend, interest and profit and loss on sale of investments and all the investments of the company are of long term nature and had not been held as stock-in-trade since the FY 1999-2000 in which year all the investments held as stock-in-trade were transferred to the investment portfolio. It was contended on behalf of the assessee that the said practice of taking all its securities under the investment head had since then been followed and the revenue had never raised any query on that score. However, the AO held that the income from the transactions of sale and purchase of shares was business income of the assessee company and were in fact purchased not for investment purposes but for the purpose of sale at a profit are liable to be taxed under the head business income and not under the head capital gain as declared by the assessee company. On the basis of aforesaid reasoning, the AO assessed the tax at Rs.3,25,82,805/- and initiated penalty proceedings u/s 271(1)(c) and directed charge of interest under Section 234B/234D accordingly.
The CIT(A) held that the profit arising on the sale of shares has to be treated as long term capital gains and, accordingly, the addition of Rs.2,65,77,430/- was deleted. The ITAT also decided the issue in favour of the assessee.
On further appeal by the Revenue, the High Court held that,
++ in the case at hand, the assessee had purchased the shares on 27th January, 1996 and the same were held for a span of 7 years and were sold during the year under consideration. The assessee had not involved himself in the business of buying and selling shares after 1st April, 1997. The assessee had not engaged itself as a dealer in debt mutual funds. Nothing has been brought on record to show that the assessee was engaged in the selling of shares. The object incorporated in the Memorandum of Association only refers to the fact that the assessee can deal in shares but, there was no regular activity on that score. The nature of activity, intention and conduct has significance. They play a pivotal role in the entire gamut of transaction;
++ as per the circular issued by the CBDT on 15th June, 2007, a tax payer can have two portfolios, that is, an investment portfolio comprising of securities which are to be treated as capital assets and a trading portfolio comprising of stock-in-trade which are to be treated as trading assets. The assessee is entitled to have income from both heads, namely, capital gains as well as business income. On a proper scanning of the facts that have been brought on record, there can be no iota of doubt that the shares that were made by the assessee as an investment gave rise to capital gains. Therefore, the concept of business income does not arise and hence, the findings recorded by the first appellate authority as well as by the Tribunal stand on terra firma.
Thursday, July 8, 2010
Eight new taxable services w.e.f. 01-07-2010 under Service Tax Act
Eight new taxable services w.e.f. 01-07-2010
CBEC has notified 8 new taxable Services w.e.f. 1.7.2010 vide Notification No.24/2010-Service Tax dated 22.6.2010.
The following are the new taxable Services introduced w.e.f. from 1.7.2010.
1. Games of chance (zzzzn)
2 Health services (zzzzo)
3 Maintenance of medical records (zzzzp)
4 Promotion of a ‘brand’ of goods, services, events, business entity etc. (zzzzq)
5 Commercial use or exploitation of any event organized by a person or organization (zzzzr)
6 Electricity Exchange Service (zzzzs)
7 Copyrights on Cinematographic films and sound recording (zzzzt)
8 Providing of preferential location or external / internal development of complexes (zzzzu)
CBEC has notified 8 new taxable Services w.e.f. 1.7.2010 vide Notification No.24/2010-Service Tax dated 22.6.2010.
The following are the new taxable Services introduced w.e.f. from 1.7.2010.
1. Games of chance (zzzzn)
2 Health services (zzzzo)
3 Maintenance of medical records (zzzzp)
4 Promotion of a ‘brand’ of goods, services, events, business entity etc. (zzzzq)
5 Commercial use or exploitation of any event organized by a person or organization (zzzzr)
6 Electricity Exchange Service (zzzzs)
7 Copyrights on Cinematographic films and sound recording (zzzzt)
8 Providing of preferential location or external / internal development of complexes (zzzzu)
Digital Certificate - Class 3 Platinum e -Tendering
Digital Certificate - Class 3 Platinum
Class 3 Certificates are issued to individuals, organizations and devices and are applicable for personal and commercial use. They represent the highest degree of digital security available to individuals, devices, servers and organizations. Typically, they are used for Electronic Data Exchange (EDI), internet banking/broking, e-tendering and other web-based transactions where confidentiality and authenticity are critical.
You are required to by physically present during authentication and confirmation of applicant identity by the RA or Sub-CA, who issues the certificate provided you meet all requirements.
Individual
Class 3 Platinum Individual Certificates issued to individuals or devices and encompass primarily high end security-sensitive online activities.
Organization
These are digital certificates that are appropriate for digital signatures, encryption, electronic access control, e-commerce and online financial transactions that require a strong assertion of the customer's identity. The validation procedures for Class 3 Platinum Organization certificates includes confirmation that the subscriber organization does in fact exist, authorization from the organization for the certificate application and authorization for the person submitting the certificate application.
Refer Support Documents for the list of mandatory documents required when applying for Class 3 Platinum Certificates.
Class 3 Platinum Individual certificates are legally valid as per the Indian Information Technology Act, 2000
Support Documents
Support documents are mandatory when applying with e-Mudhra for Class 2 Gold and Class 3 Platinum Digital Signature Certificates.
For an individual
• Attested copy of any one of the following as identity proof (attestation may be by any Public Notary/Gazetted Officer/Bank Manager)
o Passport
o Driving License
o Voter's ID
o PAN card
o Company ID Number
For an Organization
• True copy of any one(from the Company Secretary/Director/Partner of the organization)
o Certificate of Incorporation
o Memorandum of Association/Articles of Association
o Partnership Deed
o Valid Business License
• True copy of any one (attested by Company Secretary/Director/Partner of the organization)
o Annual Report
o Income Tax Return
o Bank Details of the organization from the Bank
o Statement of Income issued by Chartered Accountant
• Authorization letter in favor of the certificate applicant from the organization
• Domain Name registration proof from the registrar of Domains (if applying for Server Certificate)
e-Mudhra offers three classes of Digital Signature Certificates for personal and commercial use. You can select the certificate class that best suits your requirements.
• Class 1 Silver
• Class 2 Gold
• Class 3 Platinum
Class 1 Silver is intended for personal use. It does not strongly authenticate identity and is therefore not applicable for commercial use.
Class 2 and Class 3 are managed certificates and are available for individuals, organizations and devices. They are applicable in all environments where proof of identity is an obligation. They are issued only after suitable verification processes have been completed by an RA or Sub-CA organization. Please refer Support Documents section for more details on requirements for successful identity verification.
Effective from 10th February, 2010
Class of e-Mudhra Digital Signature Certificate Validity in Years Price in INR
Class 1 Silver Individual One 99
Two 149
Class 2 Gold Individual One 899
Two 1149
Class 2 Gold Organisation One 899
Two 1149
Class 3 Platinum Individual One 1499
Two 1749
Class 3 Platinum Organisation One 1749
Two 2099
Class 3 Device one 7499
Two 11999
Terms of Pricing.
1. The prices indicated are on per DSC basis
2. No Service Tax & VAT applicable
3. The prices indicated are exclusive of token price
4. The prices are subject to change without prior notice
Guidelines to apply for certificate:
1. For Class 1 DSC, you can apply online
2. For Class 2 and 3 DSC, you are required to submit original application form accompanied by supporting credential documents and payment to the nearest RA
3. Application form may be downloaded from or obtained by contacting e-Mudhra or its nearest RA
4. You can apply only for DSC or for both DSC and token
5. Please ensure that your application is consistent and complete in all aspects to avoid delay in processing or rejection
6. e-Mudhra reserves the right to accept or reject any application for DSC
7. In case of cheque payments, DSC and/or token will be issued only after realization of the payment instrument
8. Customers can avail of support by contacting us over the telephone or through the web support facility available on www.dsignsoftech.com or call 9810135587
Link to apply
through https://www.e-mudhra.com/alliance/ag/c2gi2s/index.aspx
Class 3 Certificates are issued to individuals, organizations and devices and are applicable for personal and commercial use. They represent the highest degree of digital security available to individuals, devices, servers and organizations. Typically, they are used for Electronic Data Exchange (EDI), internet banking/broking, e-tendering and other web-based transactions where confidentiality and authenticity are critical.
You are required to by physically present during authentication and confirmation of applicant identity by the RA or Sub-CA, who issues the certificate provided you meet all requirements.
Individual
Class 3 Platinum Individual Certificates issued to individuals or devices and encompass primarily high end security-sensitive online activities.
Organization
These are digital certificates that are appropriate for digital signatures, encryption, electronic access control, e-commerce and online financial transactions that require a strong assertion of the customer's identity. The validation procedures for Class 3 Platinum Organization certificates includes confirmation that the subscriber organization does in fact exist, authorization from the organization for the certificate application and authorization for the person submitting the certificate application.
Refer Support Documents for the list of mandatory documents required when applying for Class 3 Platinum Certificates.
Class 3 Platinum Individual certificates are legally valid as per the Indian Information Technology Act, 2000
Support Documents
Support documents are mandatory when applying with e-Mudhra for Class 2 Gold and Class 3 Platinum Digital Signature Certificates.
For an individual
• Attested copy of any one of the following as identity proof (attestation may be by any Public Notary/Gazetted Officer/Bank Manager)
o Passport
o Driving License
o Voter's ID
o PAN card
o Company ID Number
For an Organization
• True copy of any one(from the Company Secretary/Director/Partner of the organization)
o Certificate of Incorporation
o Memorandum of Association/Articles of Association
o Partnership Deed
o Valid Business License
• True copy of any one (attested by Company Secretary/Director/Partner of the organization)
o Annual Report
o Income Tax Return
o Bank Details of the organization from the Bank
o Statement of Income issued by Chartered Accountant
• Authorization letter in favor of the certificate applicant from the organization
• Domain Name registration proof from the registrar of Domains (if applying for Server Certificate)
e-Mudhra offers three classes of Digital Signature Certificates for personal and commercial use. You can select the certificate class that best suits your requirements.
• Class 1 Silver
• Class 2 Gold
• Class 3 Platinum
Class 1 Silver is intended for personal use. It does not strongly authenticate identity and is therefore not applicable for commercial use.
Class 2 and Class 3 are managed certificates and are available for individuals, organizations and devices. They are applicable in all environments where proof of identity is an obligation. They are issued only after suitable verification processes have been completed by an RA or Sub-CA organization. Please refer Support Documents section for more details on requirements for successful identity verification.
Effective from 10th February, 2010
Class of e-Mudhra Digital Signature Certificate Validity in Years Price in INR
Class 1 Silver Individual One 99
Two 149
Class 2 Gold Individual One 899
Two 1149
Class 2 Gold Organisation One 899
Two 1149
Class 3 Platinum Individual One 1499
Two 1749
Class 3 Platinum Organisation One 1749
Two 2099
Class 3 Device one 7499
Two 11999
Terms of Pricing.
1. The prices indicated are on per DSC basis
2. No Service Tax & VAT applicable
3. The prices indicated are exclusive of token price
4. The prices are subject to change without prior notice
Guidelines to apply for certificate:
1. For Class 1 DSC, you can apply online
2. For Class 2 and 3 DSC, you are required to submit original application form accompanied by supporting credential documents and payment to the nearest RA
3. Application form may be downloaded from or obtained by contacting e-Mudhra or its nearest RA
4. You can apply only for DSC or for both DSC and token
5. Please ensure that your application is consistent and complete in all aspects to avoid delay in processing or rejection
6. e-Mudhra reserves the right to accept or reject any application for DSC
7. In case of cheque payments, DSC and/or token will be issued only after realization of the payment instrument
8. Customers can avail of support by contacting us over the telephone or through the web support facility available on www.dsignsoftech.com or call 9810135587
Link to apply
through https://www.e-mudhra.com/alliance/ag/c2gi2s/index.aspx
Even exempt income is taxable under MAT / s.115JB
Rain Commodities vs. DCIT (ITAT Hyderabad Special Bench)
Even exempt income is taxable under MAT / s.115JB
The assessee credited its P&L A/c with an amount of Rs. 149.77 crores being the profit on sale of assets to its wholly owned subsidiary. As the said profits were not chargeable to tax u/s 47(iv), the assessee took the view that the same had also to be reduced from the “book profits” u/s 115JB. The Special Bench had to consider whether exempt income could be excluded from the computation of “book profits” u/s 115JB. HELD deciding against the assessee:
(i) The AO can alter the “book profit” only in two circumstances (a) if the P&L A/c is not drawn up in accordance with Parts II & III of Schedule VI to the Companies Act or (b) If accounting policies & standards, method & rate of depreciation have been incorrectly adopted for preparation of the P & L A/c. Except for the said two cases, the AO has no power to alter the net profit shown in the P&L A/c. Under (a), the AO cannot disturb the Net Profit shown by the assessee where there are no allegations of fraud or misrepresentation but only a difference of opinion as to whether a particular amount should be properly shown in the P&L A/c or Balance sheet;
(ii) Parts II & III of Schedule VI to the Companies Act do not permit the exclusion of capital gain from the P & L A/c. The P & L A/c is required to disclose every material feature including credits or receipts and debits or expenses in respect of non-recurring transactions or transactions of an exceptional nature including capital profits (Veekaylal Investments 249 ITR 597 (Bom) followed). Items referred to in the Notes are a part of the P&L A/c (Sain Processing 221 CTR 493 (Del) followed;
(iii) The assessee had included the said capital gains in the P & L A/c and it was not its’ case that same was not includible. The fact that the capital gains was exempt u/s 47(iv) does not mean it can be excluded from the “book profit” because no such exclusion was permitted under the Explanation to s. 115JB. The taxability of capital gain is relevant only for the purpose of computation of income under the normal provisions and has nothing to do with the computation of “book profits”. {N.J. Jose & Co 217 CTR 479 (Ker) (capital gains exempt u/s 54E) followed};
(iv) The argument that as s. 115JB (4) provides that “save as otherwise provided in this section all other provisions of the Act shall apply” does not mean that the exemption provisions of s. 47(iv) can be read into s. 115JB. This only means that while the computation has to be as per s. 115JB, anything over and above that will be subject to other provisions of the Act. Frig Sales 4 SOT 376 (Mum) overruled);
(v) Accordingly, in the absence of any provision for exclusion of exempted capital gain in the computation of book profit u/s 115JB, the assessee is not entitled to the exclusion claimed.
Note: Though the SB observed that it was not necessary for it to dwell upon a situation where the assessee has directly credited the profit on sale of asset to a reserve Account, it referred with approval to Bombay Diamond Co 33 DTR 59 where even profits not credited to the P&L A/c were held includible in Book Profits. Growth Avenue approved. Sutlej Cotton Mills 45 ITD 22 (Cal) (SB) which held that exempt capital gains had to be reduced from book profits was held not to be good law.
Even exempt income is taxable under MAT / s.115JB
The assessee credited its P&L A/c with an amount of Rs. 149.77 crores being the profit on sale of assets to its wholly owned subsidiary. As the said profits were not chargeable to tax u/s 47(iv), the assessee took the view that the same had also to be reduced from the “book profits” u/s 115JB. The Special Bench had to consider whether exempt income could be excluded from the computation of “book profits” u/s 115JB. HELD deciding against the assessee:
(i) The AO can alter the “book profit” only in two circumstances (a) if the P&L A/c is not drawn up in accordance with Parts II & III of Schedule VI to the Companies Act or (b) If accounting policies & standards, method & rate of depreciation have been incorrectly adopted for preparation of the P & L A/c. Except for the said two cases, the AO has no power to alter the net profit shown in the P&L A/c. Under (a), the AO cannot disturb the Net Profit shown by the assessee where there are no allegations of fraud or misrepresentation but only a difference of opinion as to whether a particular amount should be properly shown in the P&L A/c or Balance sheet;
(ii) Parts II & III of Schedule VI to the Companies Act do not permit the exclusion of capital gain from the P & L A/c. The P & L A/c is required to disclose every material feature including credits or receipts and debits or expenses in respect of non-recurring transactions or transactions of an exceptional nature including capital profits (Veekaylal Investments 249 ITR 597 (Bom) followed). Items referred to in the Notes are a part of the P&L A/c (Sain Processing 221 CTR 493 (Del) followed;
(iii) The assessee had included the said capital gains in the P & L A/c and it was not its’ case that same was not includible. The fact that the capital gains was exempt u/s 47(iv) does not mean it can be excluded from the “book profit” because no such exclusion was permitted under the Explanation to s. 115JB. The taxability of capital gain is relevant only for the purpose of computation of income under the normal provisions and has nothing to do with the computation of “book profits”. {N.J. Jose & Co 217 CTR 479 (Ker) (capital gains exempt u/s 54E) followed};
(iv) The argument that as s. 115JB (4) provides that “save as otherwise provided in this section all other provisions of the Act shall apply” does not mean that the exemption provisions of s. 47(iv) can be read into s. 115JB. This only means that while the computation has to be as per s. 115JB, anything over and above that will be subject to other provisions of the Act. Frig Sales 4 SOT 376 (Mum) overruled);
(v) Accordingly, in the absence of any provision for exclusion of exempted capital gain in the computation of book profit u/s 115JB, the assessee is not entitled to the exclusion claimed.
Note: Though the SB observed that it was not necessary for it to dwell upon a situation where the assessee has directly credited the profit on sale of asset to a reserve Account, it referred with approval to Bombay Diamond Co 33 DTR 59 where even profits not credited to the P&L A/c were held includible in Book Profits. Growth Avenue approved. Sutlej Cotton Mills 45 ITD 22 (Cal) (SB) which held that exempt capital gains had to be reduced from book profits was held not to be good law.
Monday, May 17, 2010
Formation of Mutual Fund
Given below are the requirements, procedure and regulations involved during the formation of a Mutual Fund
Main requirements under SEBI (Mutual Funds) Regulations, 1996:
The following are the eligibility criteria for grant of a certificate of registration as per regulation 7 of SEBI (Mutual Funds Regulations) 1996 (Please see SEBI web site www.sebi.gov.in)
For the purpose of grant of a certificate of registration, the applicant has to fulfil the following, namely:-
(a) The sponsor should have a sound track record and general reputation of fairness and integrity in all his business transactions;
Explanation: For the purposes of this clause "sound track record" shall mean the sponsor should,-
(i) be carrying on business in financial services for a period of not less than five years; and
(ii) the net worth is positive in all the immediately preceding five years; and
(iii) the net worth in the immediately preceding year is more than the capital contribution of the sponsor in the asset management company; and
(iv) the sponsor has profits after providing for depreciation, interest and tax in three out of the immediately preceding five years, including the fifth year.
(aa) the applicant is a fit and proper person.
(b) in the case of an existing mutual fund, such fund is in the form of a trust and the trust deed has been approved by the Board;
(c) the sponsor has contributed or contributes atleast 40% to the net worth of the
asset management company;
Provided that any person who holds 40% or more of the net worth of an asset management company shall be deemed to be a sponsor and will be required to fulfil the eligibility criteria specified in these regulations;
(d) the sponsor or any of its directors or the principle officer to be employed by the
mutual fund should not have been guilty of fraud or has not been convicted of an offence involving moral turpitude or has not been found guilty of any economic offence.
(e) appointment of trustees to act as trustees for the mutual fund in accordance
with the provisions of the regulations;
(f) appointment of asset management company to manage the mutual fund and
operate the scheme of such funds in accordance with the provisions of these regulations;
(g) appointment of a custodian in order to keep custody of the securities and carry out the custodian activities as may be authorised by the trustees.
Application for Registration:
An applicant should apply for registration in form A prescribed under Schedule I of SEBI (Mutual Funds) Regulations 1996. It may be noted here that as per the proviso to Reg. 7 (c) of the Regulations, any person who holds 40% or more of the net worth of an asset management company shall be deemed to be a sponsor and will be required to apply in Form A.
While applying, please ensure that the main objects of the memorandum of the sponsor company permit it to carry on mutual fund activities. An applicant should also submit the following additional information for the sponsor as well as for the other shareholders in the proposed asset management company.
1. A complete list of your group/associate companies registered with SEBI in any capacity, also indicate the capacity in which they are registered and the SEBI Registration number. In case of foreign sponsors, details of registration of sponsor/any of its associate / group companies with any regulatory agency abroad (You may also refer to SEBI (Mutual Funds) Regulations for the definition of ‘associates’, ‘group’ and ‘control’.)
2. Whether any of the sponsor or its group/associate companies are listed in any of the recognised stock exchange(s) in India. If so, please furnish the details.
3. Whether there have been any instances of violation of or non-adherence to any securities related regulations and whether any action has been taken against you or any of your associate/group companies in this regard, by a regulatory agency in India or abroad; (please provide the following information)
(a) Top 10 monetary penalties in case of foreign entities and all monetary penalties in case of Indian entities, imposed against the sponsor or any associate of the sponsor (for irregularities/ violations in the financial services sector or for defaults in respect of shareholders / debenture holders and depositors, by by any financial regulatory body or government authority or settlement arrived with any financial regulatory body during the last five years and details thereof. Penalties awarded for economic offences may be disclosed only in case of sponsor.
(b) Details of all cases of suspensions and cancellation of certificate of registration (for irregularities/ violations in financial services sector or for defaults in respect of shareholders, debenture holders and depositors) of the sponsor or any associate of the sponsor shall be disclosed for the last 10 years.
All disclosures on penalties and action taken as per (a) and (b) above against foreign entities may be limited to the jurisdiction of the country where the principal activities (in terms of income/ revenue) of the sponsors/ associate companies are carried out or where the headquarter is situated.
4. Declaration in terms of Regulation 7(d) of the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996 that your sponsor company or any of your directors have not been found guilty of fraud or have not been convicted of an offence involving moral turpitude or have not been found guilty of any economic offence. If there are such cases, full details should be provided.
5. (a) Details of registration of your company/associate/group companies, which are registered/ required to be registered with Reserve Bank of India (RBI) as a Banking company or Non Banking Finance Company or in any other capacity.
(b) Details of disciplinary action taken by RBI against you or any of your group/associate companies. Please also inform us in case there is any default in repayment of deposits by you or any of your group / associate companies.
(c) Details of the RBI approval, if any required, for the purpose of sponsoring a mutual fund.
6. Whether any of the directors or employees of your company or your group / associate companies were ever associated with any organisation as a director or an employee against whom SEBI had initiated action of suspension or cancellation of certificate of registration or initiated any other action under the provisions of SEBI Act or launched any prosecution for acts committed during their association. If so, please furnish details.
Communication by SEBI:
SEBI will examine the application and a communication will be sent to you about your eligibility status. If you are found eligible, you will be required to undertake the following steps:
1. Incorporation of the Asset Management Company and the Trustee Company/Board of trustees:
For this purpose, you may submit two copies of the completed Memorandum and Articles of Association of the Asset Management Company and the Trustee Company for our forwarding to the Registrar of Companies.
Please ensure that these documents contain a clause that “notwithstanding anything mentioned in these documents, only those activities will be carried out which are permitted under the SEBI (Mutual Funds) Regulations. All the provisions of the SEBI (Mutual Funds) Regulations, 1996 and the Guidelines issued from time to time shall be applicable.”
Please also indicate the address of the ROC where these companies would be incorporated.
2. Auditor’s certificate:
After incorporation of the AMC and the Trustee Company, please submit a certificate from a Chartered Accountant certifying that:
(a) The sponsor has contributed at least 40% to the net worth of the AMC (Regulation 7 (c).
(b) The AMC has a net worth of not less than Rupees Ten Crore (Rupees 100 min), as required under regulation 21 (1) (f) of SEBI (Mutual Funds) Regulations, 1996 (the net worth should be furnished in the following format):
Paid-up capital _________
Plus free reserves of the company _________
less miscellaneous expenditure to the extent not written-off _________
less accumulated losses, if any _________
Less intangible assets, if any. _________
TOTAL NETWORTH _________
3. Filing of executed copies of Trust Deed and Investment Management Agreement.
Please file executed copies of trust deed and Investment Management Agreement along with a check list clearly mentioning where you have incorporated the clauses of contents of the trust deed and Investment Management agreement as per third schedule and fourth schedule of SEBI (Mutual Funds) Regulations.
4. Setting up of Infrastructure by the Applicant
After complying with the above requirements, a detailed note on the infrastructure facilities available with the Asset Management Company should be sent to SEBI, providing the following specific details:
(a) Details of the office premises and address.
(b) Organisation chart of the AMC, clearly specifying the responsibilities of various personnel.
(c) Profile of the key personnel including the fund managers and equity research personnel.
(d) Justification of adequacy of personnel in fund management, equity research and other operational areas considering the expected size of mutual fund. At what stage, the number of key personnel will be reviewed, should be indicated.
(e) Systems support in terms of hardware and software.
(f) Arrangement made for investor services.
(g) Establishing the financial viability of sponsoring a Mutual Fund giving details of expected size of mutual fund over a period of time,
(h) Internal systems and control procedures developed to check insider trading and front running.
(i) Size of funds which the AMC feels competent to manage and the expertise available with the sponsor/AMC etc.
(j) Whether the compliance manual has been prepared to ensure that all provisions of SEBI (Mutual Funds) Regulations and Guidelines are complied with. (All guidelines issued to mutual funds are available on SEBI web site).
(k) Submission of completed Form C and Form D, providing details of trustee company and AMC, as given in First Schedule of SEBI (Mutual Funds) Regulations.
(l) Bio-data of the directors of the trustee company and the AMC in the prescribed format (Please refer to SEBI circular dated December 20, 2001 available on web site).
(m) Bio data of key personnel in hard and soft copies (Please refer to SEBI circular dated May 7,1997)
(n) Any other information relevant for application for registration.
5. Grant of Certificate of Registration
Once all above requirements have been complied with and requisite fees as per Second Schedule of Regulations has been paid, SEBI will grant certification of registration as a mutual fund and will approve AMC. SEBI may also conduct infrastructure inspection of the applicant before grant of certificate of registration.
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