Taxability of intangible assets located in India

Transfer of intangible assets located in India

As per Indian Income-tax Act, all incomes accruing or arising, whether directly or indirectly, through the transfer of a capital asset situated in India is liable to Income-tax. Many a times, a controversy arises as to the situs of the asset in India. The controversy is more prominent in case of intangible assets like trademarks, brand-names, etc.
In the above context, recent case of Foster's Australia Ltd (170 Taxman 341) may be referred to. The brief facts of the case are that an Australian company is engaged in brewing, processing and selling of beer products. It owns trademarks, logos, technology and know-how, etc. On Oct, 13, 1997, the company entered into a Brand License (BL) Agreement with Foster's India, an Indian company whereby Foster's India was granted an exclusive license to brew, package, label and sell Foster's beer and an exclusive right of use of the trademarks within the territory of India. The Australian company was paying income-tax on such consideration, treating the same as royalty income.
On August, 4, 2006, the Australian company entered into a sale and purchase (S&P) agreement with SAB Miller, UK in Australia for transfer of shares of Foster India and other intangible assets in the nature of intellectual property.
In the instant case, the prime issue for consideration was as to whether the capital assets transferred through the S&P Agreement are ‘situated in India'. This issue arises since the income arising from the transfer of capital asset situated in India is deemed to be an income liable to be taxed in India as per the explicit mandate of section 9(1).
The Australian company approached the Authority for Advance Ruling for a ruling. It contended that the items of intellectual property covered by the S&P Agreement have no location in India and the situs in this case would be the place of fiscal residence of the owner. Therefore, both the asset and the place of contract being outside India, no income can be charged to tax under the Income-tax Act, 1961.
The department argued that Foster's India is held by Foster's Group, Australia, through the cobweb of its subsidiaries. Though the shares and trademarks and Foster's brand are shown to be sold by two different entities, in effect and in substance, Foster's group, Australia has transferred the ownership of its Indian company, i.e., Foster's India including its tangible as well as intangible assets.
The Authority however observed that: "The situs of these intellectual property assets, in our view, should not be traced and confined only to the place where the contract (India S&P Agreement) was entered into and acted upon by the parties. On the relevant date of transfer, they were very much present in India and the transfer of such assets took place concurrent with the transfer of controlling interest in Foster's India to SAB Miller. At best, their location in Australia is only notional or fictional. The fact that the trade-marks and names originated in Australia and initially registered there does not make material difference."
It was therefore held that the income arising to the Australian company from the transfer of its right, title and interest in the trade-marks and Foster's brand Intellectual Property is taxable in India under the Income-tax Act, 1961.
It is thus clear that intangible assets like trademarks, brand-names etc shall be taken as located in India if they are used in India. Their place of registration in this context is not material.

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Higher TDS rate if PAN not disclosed

The move is being viewed as an effort by the government to expand the taxpayer base.
Companies and individuals who do not reveal their Permanent Account Number (PAN) while receiving income from any source will be liable to pay tax deducted at source (TDS) at the maximum marginal rate of 30 per cent (plus surcharge and education cess).
Under the Income Tax Act, 1961, any income payable to the assessee is liable for TDS by the person or entity making the payment. TDS rate ranges from 1 per cent to 30 per cent depending on the nature of income.
The Central Board of Direct Taxes is considering changes to the Act to this effect.
For example, if a payment is made to a professional like an engineer or a doctor, TDS is deducted at a rate of 10 per cent. If the engineer or doctor fails to provide PAN number, tax will be deducted at the rate of 30 per cent. Similarly, if a contractor does not provide PAN, he will suffer a TDS at the higher rate of 30 per cent instead of 2 per cent now.
"In many situations, contractors or sub-contractors pay the normal TDS but still do not file return of income. By taxing at maximum marginal rate, they will be induced to disclose PAN and file tax return also," said Amitabh Singh, partner, Ernst & Young.
The move is being viewed as an effort by the government to expand the taxpayer base and ramp up revenue collections in view of the huge resource requirement to fund subsidies.
Many assessees do not reveal their PAN to evade taxes and get away with the normal TDS payment. Due to lack of PAN, taxes were often pocketed by deductors also. This creates difficulty in processing tax refunds as well.
PAN quoting has been made mandatory in the e-TDS returns being filed by firms and companies from last year. The tax deductors were facing some difficulty due to reluctant of assessees to prove PAN. The higher TDS rate will force the assessees to reveal the number. Near 100 per cent PAN quoting in TDS returns is important for moving towards dematerialisation of TDS certificates by 2010, the revised deadline set in Budget 2008.
The move is aimed at increasing the effectiveness of TDS provisions to expand the taxpayer base and improve collections. TDS collections constituted 34 per cent of the total Rs 3,14,000 crore direct tax collected in 2007-08.
TDS collections are expected to grow by 55 per cent to Rs 1,65,385 crore in 2008-09, or 45 per cent of the Budget estimate of Rs 3,65,000 crore for 2008-09.

Hiding material facts is concealment

Hiding material facts is concealment
Accepting loan in cash of Rs 20,000 or more is liable for penalty under the income-tax law.

BUSINESS LINE ,Monday, Jul 21, 2008

Taxpayers are expected to declare taxable income by computing it in accordance with the provisions of law.
If a taxpayer files a return of income which he knows is not true or furnishes inaccurate particulars of income then he could be slapped with ‘concealment penalty’.
The minimum penalty leviable is equal to the amount of tax sought to be evaded by concealing the income or furnishing inaccurate particulars thereof. However, the maximum penalty cannot exceed three times the tax sought to be evaded.
In CIT vs Videon (2008 301 ITR 260 Delhi), the assessee disclosed capital gain from sale of land in the original return. Later, a revised return was filed claiming the capital gain, as the transfer was of agricultural land which is an exempted asset.
The assessing officer (AO) did not accept the withdrawal of capital gain by means of revised return and, on appeal, when the matter was remanded by the Tribunal to the AO for reconsideration, the assessee surrendered its claim for exemption.
The AO after charging long-term capital gain (LTCG) to tax also levied concealment penalty.
The court held that the assessee did not hide any material facts and had acted on bona fide belief and on the basis of advice received from Municipal Corporation for claiming the exemption in respect of capital gain on sale of land.
The court held that there was no malicious act or ill intention on the part of the assessee and, hence, penalty is not leviable.

Time limit for rectification
The term ‘order’ refers to assessment orders relating to income and levy of penalty. It also includes orders passed by the appellate authorities. If it contains any error it is to be rectified and necessary provisions are inserted in the statute book to facilitate such rectification. In the case of orders passed by Tribunal, the time limit for rectifying the error is four years from the date of order as per Section 254(2).
In Sree Ayyanar Spinning & Weaving Mills Ltd vs CIT (2008 301 ITR 434 SC) the apex court held that Section 254(2) has two parts — (i) rectification on suo motu basis for which the time limit is four years from the date of order is applicable; and (ii) rectification on the basis of any mistake pointed out by the assessee or AO — for which the time limit of four years is applicable only for pointing out the error and not for passing the order of rectification.
Accordingly, if an application for rectification is filed with the Tribunal within four years from the date of order, the order rectifying the error could be passed by the Tribunal even after the expiry of four years from the date of its earlier order.

Possession of unregistered property
An immovable property could be taken or retained by the prospective buyer by entering into a sale agreement with the seller. If the sale agreement satisfies the requirements of Section 53A of the Transfer of Property Act, 1882 the ownership could be obtained by mere possession without any sale deed or registration thereof.
On sale of such property later, the date of acquisition of ownership must be counted from the date of possessing the property in accordance with sale agreement and not from the date of sale deed or its registration.
In Madathil Brothers vs Deputy CIT (2008 301 ITR 345 Madras), the assessee had possession of property from 1976 based on sale agreement, though the sale deed in favour of the assessee was executed in July 1986 and was registered in September 1986.
The property was sold four days after the registration of the document in the assessee’s favour. The court held that for the purpose of reckoning the ownership tenure, the date of sale agreement and consequent possession thereof was to be considered and not the date of execution of sale deed or its registration. Accordingly it held that the transfer is taxable as LTCG.
In CIT vs G. Saroja (2008 301 ITR 124 Madras) it was held that if there is no sale agreement and granting of possession to the builder or buyer, no capital gain could be charged on deemed basis without any other evidence on record to show transfer of property.

Acceptance of loan by book entries
Accepting loan in cash of Rs 20,000 or more is liable for penalty under the income-tax law. Whether a loan could be accepted by means of book entries was discussed in CIT vs Bombay Conductors & Electricals Ltd (2008 301 ITR 328 Gujarat). In this case, the assessee purchased goods from its holding company. Since it could not pay the money for the purchases made, the due was converted into a loan by means of book entries.
The court held that the objective of introducing Section 269 SS is to curb circulation of black money in the guise of loan or deposit. While introducing Section 269 SS a provision to provide relief based on reasonable cause was inserted by way of Section 273B.
The Tribunal gave a reprieve to the assessee as the book entry was made on bona fide belief that there was no embargo in the statute. The court upheld the reasoning of the Tribunal and held that for a technical or venial breach of law — no penalty is imposable.

Sale of shares
In the case of sale of shares, the date of transfer would be the date of execution of contract of sale provided it is followed by actual delivery of shares and transfer deeds.
The CBDT Circular No.704 dated April 28, 1995, says that the contract for purchase or sale of securities entered by the broker shall be taken as the date of transfer for the purpose of computing capital gain. It was so held in Max Telecom Ventures Ltd vs Assistant CIT (2008 301 ITR AT 90 Amritsar).
It may be noted that if the shares were held for more than 12 months and the sale is effected through a recognised stock exchange in India and is covered by securities transaction tax, such LTCG arising on transfer is exempt under Section 10(38).(The author is an Erode-based chartered accountant.)

Debenture issue expenses

Debenture issue expenses are fully allowable even if they are fully or partly convertible in to shares.

Summary:
On issue of debentures capital is borrowed. A conversion of debenture in to shares may take place later on, however, that will not change the factum of borrowing of capital. Therefore, expenses in connection with issue of fully or partly convertible debentures are to be considered as expenses for borrowing capital. In such a case any part of debenture issue expenses cannot be disallowed as expenses for raising share capital. In this write-up related issues are discussed in light of a recently reported judgment of Madras high Court.
Debenture or bond:
Debenture or bond is an instrument to raise loan by issuing securities. The advantage of raising loan through such instrument is that the security is marketable and the holder can sell it in the market if he wants to realize money before it is due from the issuer on redemption. By issuing debentures and bonds money can be raised from several persons on the same terms and conditions without separate agreements. This is because the terms and condition of the issue of debentures or bonds are equally applicable to all holders of such debentures or bonds. Thus, small savings can also be mobilized by issue of bonds and debentures.
Convertible debenture(PCD)
Convertible or partly convertible debentures are also instrument to raise money by issue of debenture or bond i.e. loan capital. The terms of issue prescribes that the money is obtained as a loan bearing some interest and that after some time or on certain intervals, some part or parts of debenture money will be converted into equity shares at the price decided at the time of issue or to be decided in future. The debenture may be fully convertible (FCD) or partly convertible (PCD).
Money raised is money borrowed :
When debenture or bond is issued, the issuer company does not receive share capital. Money raised by issue of FCD or PCD is in nature of capital borrowed and not in nature of share capital. Therefore, the principles relating to expenses in connection with borrowing of money, apply to the issue of bonds or debentures whether they be fully or partly convertible or non-convertible.
Partly convertible debenture
In case of issue of partly convertible debenture, the following transactions take place in due course of time.
1) Application is made for issue / allotment of debentures / bond.
2) Debenture or bonds are issued or allotted and therefore, issuing company credits the loan account which is taken by way of issue of debenture or bond.
3) On the occasion of conversion, certain part of debenture is paid up by issue of shares and therefore, at this stage, the transaction of discharge liability against debenture or bond and raising of share capital arises.
Issue of capital is a future and contingent event:
In these cases we find that issue of share capital takes place in future and not at the time of issue of debenture or bond. The expenses incurred at the time of issue of bonds or debentures cannot therefore be considered as expenses for raising of share capital.
As noted earlier generally in case of convertible debentures FCD/PCD, the terms for issue of shares are decided beforehand and sometimes they are decided later on. Sometimes, conversion is compulsory and sometimes it may optional. Even in case of compulsory conversion stipulated at the time of issue of debenture, it is in one way optional for the investor because if an investor does not want to wait till the stipulated date of allotment of shares, he can sell debentures. Therefore, the buyer will be entitled to receive share and not the original subscriber. In some situations if there is major change in circumstances the terms and conditions of issue of debentures and shares may be altered or varied by the debenture holders through proper legal course by holding debenture holders' meeting and by changing the terms and conditions etc. Therefore, it can be said that it is not necessary that the person who receives debenture as a subscriber will receive the shares also or that shares will in fact be issued. Therefore, the issue of shares is not a surety but there remain many contingencies. Longer the period of conversion larger will be contingencies.
Certain conversion at the time of allotment
In past we had seen that several issues of PCD's in which case certain part of debentures was converted into equity shares simultaneously at the time of allotment of debenture. Therefore, in such a case debenture application money remained as capital borrowed and on allotment of debenture a part of it got converted into equity shares and part into debenture or bond. But so far the debenture application money was concerned, it was a borrowed capital.
The issue expenses:
In case of issue of debentures certain expenses are incurred for complying with statutory requirements, advertisement, stamp duty, statutory fees and other issue expenses. The controversy arises as to allowability of such expenses. If the debentures are issued then capital is borrowed, and borrowing of capital is in usual course of business and it does not create an advantage of enduring nature, in capital field, and therefore all expenses incurred in connection with issue of debentures or otherwise raising loan are allowable as revenue expenses.
A recent judgment of Madras High Court
In CIT v. South India Corpn.(Agencies) Ltd.
[2007] 164 Taxman 249(Mad.) section 37(1) of the Income-tax Act, 1961relating to allowability of business expenditure in assessment years 1989-90 and 1992-93 was considered. The assessee claimed full deduction of expenses incurred on debenture issue. The Assessing Officer on consideration of partly convertible nature of debentures, treated 60 per cent of issue expenses as capital expenditure and balance as revenue expenditure. He was of the view that at time of redemption, debenture holders would be entitled to certain shares, therefore expenses were partly to raise share capital. In appeal before the Tribunal, it was held that issue of shares was a future event which may or may not happen, and as in instant case, expenditure incurred was on issue of debenture only, such expenditure was revenue expenditure.
The revenue challenged the order of Tribunal on issue whether Tribunal was justified in allowing entire expenses as revenue expenses by way of following question:
"Whether, on the facts and circumstances of the case, the Tribunal was right in holding that the 60 per cent of the expenses incurred on partly convertible debentures had to be allowed as deduction?"
The Assessing Officer as well as the Commissioner of Income-tax (Appeals) considered 60 per cent of the claim of debenture issue expenses as capital expenditure. Thus the assessee filed an appeal before the Income-tax Appellate Tribunal. On consideration of facts, the Tribunal held as follows:
"The last of the issues is with regard to expenses incurred on debenture issue being treated as capital expenditure. The authorities have treated part of the expenditure as capital expenditure on the reasoning that at the time of redemption of the debenture, the holders of the debentures were entitled to certain shares. The issue of shares is a future event which may or may not happen. At present, the expenditure incurred was on the issue of debentures only and hence the expenses incurred on obtaining a loan is revenue expenditure. We accordingly uphold the claim of the assessee."
On revenues appeal the High Court considered the facts found by the Tribunal and decided cases laws on the issue of expenses in connection with borrowing and noted as follows:
The Assessing Officer bifurcated the expenditure and allowed only 40 per cent as revenue expenditure, without any basis.
The Tribunal correctly held that the disallowance of 60 per cent is without any basis and the Assessing Officer was wrong in treating part of the expenditure as capital expenditure on the reasoning that at the time of redemption of debentures, the holders of the debentures would be entitled to certain shares.
The issue of shares is a future event which may or may not happen.
The Tribunal considered and followed the principles enunciated in the Apex Court judgment in India Cements Ltd. V. CIT [1966] 60 ITR 52, which in fact, followed by the Delhi High Court in CIT v. Thirani Chemicals Ltd. [2007] 290 ITR 196 holding that expenditure incurred on the issue of debentures is a permissible deduction under section 37 of the Act.
During course of hearing Learned counsel appearing for the Revenue has not produced any material or evidence to take a different view.
The reasoning of the Tribunal was based on relevant materials and evidence.
There is no error or infirmity in the order of the Tribunal to warrant interference.
In view of the above , the High Court held that no substantial question of law arises for consideration by the court and hence, the appeal in respect of the question on this issue (Question no. 1) was dismissed.
Conclusion:
Debenture issue expenses are normal revenue expenses incurred to raise borrowed capital. In case of an existing business, or for extension of the business borrowing is a normal activity therefore expenses incurred for borrowing of capital are allowable. However, in view of fact that tenure of loan may spread over a period beyond the year of accrual of such expenses, specific provision can be made to amortize such expenses over the period of loan raised by way of loan or by way of debentures or bonds. In absence of specific prohibition or specific method of amortization, such expenses preferably need to be claimed fully in the year of accrual. Amortization over the period of instrument or loan, if followed in accounts can be another way of claiming the expenses following matching principal of accounting. The fact that a portion of debenture amount may be converted into share capital in future, will not change the character of expenses.
Immediate conversion or conversion after short period:
Author remember that in some cases there was part conversion of debentures into equity immediately on allotment of debenture or shortly thereafter. In such cases the revenue authorities can possibly take view that the issue of shares has been made in a disguised manner. Therefore, it is always advisable that the terms and conditions should be such that bonafide cannot be questioned. An option to covert debenture into shares can be a reasonable safeguard to establish bonafide terms and conditions. A compulsory conversion immediately on allotment or after a short spell of time, may draw adverse inference.

About the Author: -
Uma Kothari

Effective Date ?

EFFECTIVE DATE FOR THE APPLICABILITY OF NEW PROVISIONS OR AMENDMENT- a new dimension vide ruling of Allahabad high Court.

Summary:
As per a recent ruling of the Allahabad High Court amendments which have been enacted after a previous year has commenced cannot be applied to the previous year which has already begun and can apply to a previous year which is yet to begun. Thus, amendment of section 64 vide the Taxation Laws (Amendment) Act,1975 which became law on 07.08.1975 when the President assented to it was held to be not applicable to the income of previous year which has already commenced on 01.04.1975 and thus could not be applied to the assessment year 1976-77. As per the court the obvious reason is that the assessee must be made aware of applicable law before the commencement of the previous year to which it is intended to apply.
Previous year and assessment year in simple terms Ss 2(9), 2 (34) and 3.
Example of previous year.
Basis of assessment.
Obligations during previous year.
General perception about effective date of commencement of a provision.
Situation when an amendment is made after 1st April.
Analysis of Krishna Mohan Agrawal v. CIT [2007] 295 ITR 190 (All).
The provisions of the annual budget.
A new dimension about effective date.
Previous year and assessment year in simple terms:
In the context of the Income-tax 1961 {The Act}, as per provisions of section 3 since assessment year 2000-01, the previous year means the financial year or a part of the financial year (in case of new business or source of income) ending on 31st of March of any calendar year. And the term assessment year means the financial year beginning thereafter from the 1st April of the same calendar year. Thus P.Y.E. on 31.03.07 will include full financial year 2006-07 as well as any period starting from or after 01.04.06 and ending on 31.03.07 in case of new assessee or new source of income. The provisions in this regard can be referred to in sections 2 (9), 2(34) and 3 of the Act.
Example of previous year:
For example for an existing old company the period 01.04.06 -31.03.07 is the previous year and for a newly incorporated company the period from the date of incorporation say 01.01.07 to 30.03.07 will be the previous year for the assessment year 2007.08. Similarly in case of a new business or source of income the previous year will be from the date of setting up of business to 31st March.
Basis of assessment:
Income earned in a previous year is assessed in the assessment year. For this purpose, net income up to the end of the previous year (12 pm of 31st March) is to be ascertained. Just for illustration we can take an example of valuation of commodities, suppose gold price at close of normal office hours on 31.03.07 was Rs.10000/- per ten gram, however, at close of commodities exchange say at 12 PM the price fell to Rs.9500/- per ten grams. In this case for valuation purposes, the market value will have to be considered @ Rs.9700/- per ten grams and not Rs.10,000/- . Now suppose cost per ten gram is Rs.9900/- then market value being lower than cost is to be taken and stock will have to be valued @Rs.9700/- per ten grams.
As another example we take a case of a professional person who maintains his books of account on cash basis. Suppose some clients in India and /or from abroad, deposit/ transfer funds in his account on account of professional fees after 5.30 Pm (IST) but before 12.00 PM IST of 31st March. In this case all payments received on 31st March till 12PM have to be considered for the purpose of income of the previous year 2006-07 and assessment year 2007-08.
Obligations during previous year:
The assessee is obliged to pay advance tax on the income of the previous year during the previous year itself, thought tax is imposable after the end of the previous year in the relevant assessment year. Therefore, the assessee must be aware about the applicable provisions, rate of tax etc. before commencement of the previous year so that he can properly plan his affairs and meet obligations.
General perception about effective date of commencement of a provision:
Generally it is considered that law as on 1st April of the assessment year is applicable to that assessment year or in connection with computation of income of the previous year which precede such assessment year. However, for meeting obligations to be discharged during the previous year, the assessee must know the relevant provisions.
In this regard it is also interesting to note that in case of change in rate of depreciation many times the effective date is given as 2nd April, meaning thereby that new rates will apply to assessment year which starts after the effective date. Therefore as per general understanding an amendment in rate of depreciation made with effect from 01.04.2005 will apply from assessment year 2005-06 and amendment made effective from 02.04.2005 will apply to assessment year 2006-07 on wards.
The reason is that the taxpayer must have prior information about the law and tax rates etc. which will apply to the computation of income of a previous year. That is the law applicable should be known to the taxpayer before the previous year commences.
Situation when an amendment is made after 1st April:
Some times an amendment is made or a new provision is framed with effect from 1st April of a year however, the enactment itself is passed or becomes a law after 1st April of a financial year for theoretical purposes let us suppose a proposals made in budget 2007 on 28th February, 2007 was to take effect from 01.04.2008 (assessment year 2008-09 relevant to PYE 31.03.08) however the provision is passed / notified after 01.04.07 that is after commencement of the previous year 2007-08. In such a case it can be said that as on commencement of the previous year the provision did not become effective law. Therefore, having been made effective after 01.04.2007 it should be applied only from previous year 2008-09 and not from PY 2007-08.
In Krishna Mohan Agrawal v. CIT [2007] 295 ITR 190 (All) amendment to section 64 which was to take effect from 1-4-1976 came for consideration. The court held that it is not applicable to assessment year 1976-77 but will apply only from assessment year 1977-78. The court considered and reasoned on the following aspects:
A. when the Finance Act determines a new rate of tax or surcharge, it normally comes into effect with effect from April 1.
B. It governs the previous year of the assessee which is to commence thereafter, i.e., with effect from April 1.
C. Unless the amending Act provides otherwise either expressly or by necessary implication, the normal presumption would be that any amendment brought about, would apply only to the previous year which is yet to come, on or after the date on which such amendment is enforced.
D. The amendment effected by the Taxation Laws (Amendment) Act, 1975 received the assent of the President of India on 07.08.1975. That is to say after the commencement of the previous year 1975-76 on 01.04.1975 relevant to assessment year 1976-77
E. The Tribunal was legally not correct in holding that the amendment to section 64(1) of the Income-tax Act, 1961, enforced with effect from April 1, 1976, was applicable to the assessment year 1976-77 which would be relatable to the previous year 1975-76 inasmuch as that previous year was already over on the date of enforcement of the amendment.
F. Before the amendment, newly added clubbing provisions were not applicable. Income of minor child by way of profit share in a firm in which he was admitted to as a partner was to be taxed in the hands of the minor as income of the minor and was not to be added or clubbed to the income of the assessee (guardian of the minor).
G. Only after the amendment such income (profit share in firm) was to be clubbed with the income of the assessee / parent of minor.
H. As per the High Court the reason is obvious that if such charge or rate of charge was to govern the previous year which has already gone by, there would be utter chaos, inasmuch as the assessee would have no idea in advance as to what would be the rate of tax or surcharge or exemption on his currently earned income and investments and he would not be able to either plan out his taxation or to discharge the various obligations of the assessee which arise under the Act throughout his "previous year", from time to time.
The court referred to several judgments. Matters relevant with the context of the article are discussed below:
Kalwa Devadattam v. Union of India [1963] 49 ITR 165 (SC)-
Income arises on accrual (or receipt in case of cash basis of accounting) and at a point of time not later than the close of the previous year.
Chief CIT v. Rama Shanker [2005] 277 ITR 69 (All) -
The notification dated July 24, 1980 providing for higher depreciation on the truck used on hire was not applicable for the assessment year 1980-81 because it is well settled that in the Income-tax Act the law as stands on the first day of the assessment year is applicable unless and until any amendment made in the Act or the notification issued therein is specifically made applicable from an anterior date.
Kesoram Industries and Cotton Mills Ltd. v. CWT [1966] 59 ITR 767 (SC)-
Dividend recommended by the Board of Directors during the previous year, however, approved by the shareholders after the end of the previous year was not deductible from wealth, because it was not a liability incurred before the end of the previous year. The recommendation of the board can be withdrawn or modified or may not be approved; therefore it was merely recommendation not resulting into a liability before the end of the previous year (valuation date for wealth tax purpose)
The provisions of the annual budget:
In every annual budget which is usually presented on 28th February there are proposals to amend law which will usually have effect from the assessment year commencing from the 1st April next following. For example let us consider the proposals in the Finance Bill 2007 (Budget 2007) which were enacted into the Finance Act, 2007 on receiving the assent of the President on 11th May, 2007. The section (2) reads as follows:
(2) Save as otherwise provided in the Act, sections 2 to 93 shall be deemed to have come into force on the 1st day of April, 2007.
According to this section the provisions shall come into force from 1st April, 2007 and thus apply from assessment year 2007-08. However, in many provisions we find that they have specifically been made applicable with retrospective effect and many from assessment year 2008-09. All other provisions shall apply to assessment year 2007-08 for which relevant previous year ended on 31.03.07 that is prior to coming into force of the Finance Act, 2007. For example in section 3 of the Finance Act 2007 which amends section 2 of the Income =-tax Act, 1961 we find provisions which have been given effect from 25.08.1976 ( meaning of India) 01.04.1994 and 01.10.1996 in relation to certain authorities and their designation etc, 01.04.2004 in relation to certain employers, 01.06.1976 , 01.04.2008 etc. Generally provisions which affect the liability of tax payer in form of computation of income are given effect from 01.04.2008 that is assessment year 2008-09 for which relevant previous year had already begun on 01.04.2007.
Thus, applying the ruling in the case of Krishna Mohan Agrawal a view can be taken that such provisions should be applied only to a previous year which has not begun before the Finance Act is enacted on 11.05.2007 in other words those provisions should be applied only to the previous year which commences after 11.05.2007 that is previous year 2008-09 relevant to the assessment year 2009-10 and no to the assessment year 2008-09, as generally understood.
A new dimension about effective date:
As discussed above the judgment of Allahabad high Court on the issue of the effective date sets a new dimension about it.
In case of companies we find that first installment of advance tax falls due on the 15th day of June and in other cases on 15th September of the previous year. Once has to plan about income and taxes for the period beginning 1st April, therefore the tax payer should in all fairness be made aware of the provisions about rate of tax, computation of income, rebates etc. before the previous year begun.
Applying the same there should also be a ban on amendments which affects the rights and privileges of tax payer and obligations as to tax rate, interest liability etc. from an earlier date and many times are prompted because the assessee avails certain benefits on interpretation of law by courts.
Unfortunately the courts rulings permitting clarificatory amendments to have a retrospective effect has been considered as a blanket permit by the Government to amend law with retrospective effect and every year we find several amendment made with retrospective effect.

About the Author: -
Uma Kothari

Important Rulings

Income Tax - 2008 - TMI - 4678 - AUTHORITY FOR ADVANCE RULINGS

Taxability of payment made to BTA (non-resident company) who provides lease circuit service to the resident company - Since BTA does not have any permanent establishment - the amount paid to BTA is not taxable and therefore no TDS is required to be deducted. Further the amount paid to BTA can not be treated as Royalty within the meaning of Article 12 of DTAA with Singapore.

Income Tax - 2008 - TMI - 4677 - AUTHORITY FOR ADVANCE RULINGS

Indian subsidiary company of applicant (a Singapore company) refers certain international clients to its parent company in connection with acquisition, sales and dealings in real estate and other services such as advisory & research facilities management, project management etc. in the field of real estate in lieu of referral fees. Held that such referral fees is not taxable in India. Therefore no TDS is liable to be deducted in India. - no business connection in India.

Income Tax - 2008 - TMI - 4676 - AUTHORITY FOR ADVANCE RULINGS

The income arising from the transfer of its right, title and interest in and to the trade-marks is taxable in India under the Income-tax Act, 1961. 'Independent valuation report' obtained by the applicant may be accepted by the department if it is found true and correct on examination.

Secured Loans

Different forms of Secured Loans and AUDIT
Funds of an entity could be either own funds or owed funds. Borrowings are categorized as loans.
Loan is a one-time receipt from the lender (which may be released in installments as in the case of factory buildings, civil works, plant and machinery, etc.). Loans are to be within the borrowing powers of the company as per the Companies Act.
Loans of a company can be:

From institutional lenders such as banks, IDBI, IFCI, etc., which are secured.
From small investors, such as fixed deposits from public which are unsecured.
Debentures, which may be either secured or unsecured
Inter-corporate deposits, which are from other companies, which may or may not be under the same management

What is a security?
A security is a tangible asset, current or fixed, which is given to the custody of the lender with a stipulation that the lender could dispose of the security and appropriate the proceeds in case of default in repayment. A loan could be fully or partly secured.

Security of a current asset

In the case of a pledge, the lender has possession of the asset charged, which would be released only on payment of the dues. In the case of hypothecation, the possession is with the borrower, with a stipulation that the lender can seize the asset upon failure to repay the loan. The lender exercises a lien over the asset.
Loan against gold, NSCs, fixed deposits of bank, shares of companies, etc., are loans on pledge. All these are given to the custody of the lender, who will release the asset only on repayment in full of the amount borrowed.
Loans against vehicles, personal loans for purchase of durables, such as televisions, air-conditioners, etc., are loans on hypothecation. The borrower has possession of these goods.
Security of immovable property
An immovable property is secured by way of a mortgage, which could be an equitable mortgage (simple deposit of title deeds with the lender) or a registered mortgage, where the mortgage deed is to be registered with the registrar of assurances.
A guarantee is an assurance given by a third party to the contract that he would pay the amount if the principal borrower fails to pay.
There is nothing tangible given to the custody of the lender. Therefore, the loan against a guarantee does not constitute a secured loan. Loans against guarantees be it even by the Government, have to be shown under the head unsecured loans and not secured loans.
When an asset is given to the custody of the lender, the asset is said to be charged to the lender. The lender gets the right on the asset upon failure of the borrower to repay the loan. The charge can be a first/second charge or a pari passu charge.

Charge on an asset
In the case of first charge, the lender gets absolute right on the security. Any surplus from the sale of the asset should be turned over to the borrower.
In the case of the second charge the lender gets the right on the asset after satisfying the first lender. Any surplus after satisfying his claim should be turned over to the borrower.
Pari passu charge gives a parallel proportionate right to the lenders. Realization of the asset should be shared in proportion to the balances outstanding to the respective lenders.
Company law requirements

Registration of charge: Law requires any such charges on assets to be registered. Creation of charge is to be registered with the Registrar of Companies (RoC) within 30 days from the date of such creation or such extended time as permitted by the RoC. Such a registration secures the position of the lender. It is in the interest of the lender to ensure that the charge is registered. If the charges are not registered, the lender cannot enforce his charge on the asset.
Disclosure: Where a loan is disclosed as a secured loan, the details and nature of security should also be disclosed. If the loan is further secured by the personal guarantee of any of the directors, the fact should also be stated.
AS 10 provides an option to disclose the amount due to the hire vendor either as a deduction from the cash price of the asset or alternately as a secured loan.

Audit requirements: Section 227(1A) casts a responsibility on the auditors regarding such secured loans as well. Where a loan is disclosed as a secured loan, the auditor should ensure that the loan is properly secured.
To ensure that the loan is properly secured, the auditor has to carry out the following procedures:
Examine the document of loan for the nature and extent of security.
Obtain a letter from the lender that to the effect that the asset is held by them as a security.
Check the certificate of registration of charge (Forms 8 and 13).
Insist upon a management representation to this effect.
Verify the register of charges that this security is registered with the RoC and entered in this register.
Check the disclosure under secured loans.
Interest on secured loans
Disclosure of interest on secured loans is tricky. When interest is due and payable, it is a current liability and shown as such. But if it becomes overdue, the lenders can extend their charge on the interest also and consequently the amount gets merged with the secured loans. Since interest is not compounded, it cannot be shown as an addition to the loan but as a separate item.
Consider a company having secured debentures on which interest is payable on the first day of July and January every year. In the balance sheet as on March 31, 2XX6, interest payable for the broken period from January 1 to March 31, 2XX6 should be disclosed under current liabilities. In case interest due on January 1, 2XX6 also remains unpaid, that amount due from July 1, 2XX5 to January 1, 2XX6 should be disclosed along side secured debentures under the head secured loans but not as an addition to secured debentures.
Audit of secured loans
The auditor should verify the minutes of the board meeting for raising a loan.
Ensure that the loan is within the borrowing powers or a specific resolution passed by the general body for raising such loans.
Vet the loan documents of secured loan to understand the terms of loan such as installment payable, rate of interest, details of security.
Vouch the disbursement of loan with reference to the entries in the books of account and account copy from the lender.
If the repayment is by way of an EMI or such other fixed amount, calculate the split out of the amount between principal and interest and account for the same accordingly.
Calculate interest on loan as per the terms of the loan both with reference to the rate and the period. If the sanction says the interest is at quarterly or half-yearly rests, calculations should be made accordingly.
Examine whether interest is disclosed as per the requirements of law.
Ensure that the loan is disclosed only at the principal outstanding and that the nature of security is also mentioned.
To comply with CARO requirement, trace the usage of loan and ensure that it is used only for the purpose for which it was intended. Verify receipts issued by the payee for all the payments out of this loan. Obtain a management representation to this effect.
Source:
Business Line, Monday, May 21, 2007

compiled by ABASH

MEMBER OF JAB WE MET CA

REDEFINING PROFESSIONALISM..............

RESULT OF ELECTION

Followings is the RESULT OF THE ELECTION OF JAB WE MET CA GROUP:-

President- CA. SATBIR

Vice President- CA. BHUVAN

Secretary- CA.SOURABH SONI (done CS also from ICSI)

Treasurer- CA. VIKAS KAPAHI.

Press Secretary- CA. HEMANT

I congratulate to all of them . Now a great deal of responsibility lies on these members as they have to WORK HARD to unit 70 members of the group and other members who are surfing the blog ,daily,all over the world . I hope each one of us will co-operate with them regardless of whom we had given our vote. Now Group is above all."UNITED WE STAND DIVIDED WE FALL"

Further in the absence of CA Bhuvan , CA Vivek sawhney will take act as Vice President.
in the absence of CA SOURABH SONI , CA AKHIL GUPTA will take act as SECRETARY and in the the absence of CA VIKAS KAPAHI , CA ABHASH will act as Treasurer.

WITH REGARDS
CA SATBIR
PRESIDENT
JAB WE MET CA
REDEFINING PROFESSIONALIM..............
Date 22/07/2008

Golden Quotes

LIFE IS PARTLY WHAT WE MAKE IT AND PARTLY WHAT IT IS MADE BY THE FRIENDS WE CHOOSE....

COUNTDOWN BEGINS.......

Political developments hold key for markets

Dalal Street is likely to get the much needed direction and stability after the vote of confidence on UPA government on June 22 this week, even as falling crude oil prices may impact positively, analysts say."Result of the vote of confidence on the UPA government on June 22 would be the main factor to impact the market sentiments this week," brokerage firm Bonanza Portfolio President, Research, P K Agarwal said."The surge in crude oil prices has softened which affected the market positively and if the political situation remains stable, a good rally can be witnessed during the week," he added.Analysts believe the market, which has been beaten down severely in the past few months, may witness a strong rally if the political situation stabilizes even as movement of crude oil prices and fears of further monetary tightening by the Reserve Bank of India may continue to haunt the sentiments."Market is likely to remain range bound and may consolidate this week. But with a higher degree of volatility due to uncertainty on the political front and the global oil prices," domestic brokerage firm SMC Global Vice-President Rajesh Jain said.After falling to a low of 12,514.20 last week, the BSE benchmark index, Sensex, closed with a gain of over 500 points at 13,635.40 on Friday, while the 50-share index Nifty settled at 4,092.25, up 145 points.Last week, the market had witnessed renewed buying as global markets surged owing to fall in crude oil prices indicating signs of abatement after hitting a record high of $147 per barrel

BY BHUVAN

MEMBER JAB WE MET CA

Market Postmortem

Market Postmortem on 21.07.08
After the extremely volatile day market managed to end on a positive note shrugging all the political drama and the last hour it rallied bravely ignoring the negative European opening.
The leaders were banking and Reality stocks again as they are covering their dues, though barring the Capital Goods index all the other major BSE Sectoral indices ended in green.
Major Gainers
The major gainer among banks were Indian Bank with 14% gain, other major stocks which gained were Nalco(10%), Max India(9.80%), LIC Housing Finance(9.05%), Sintex(7.7%) and Bajaj Auto and Union Bank (7.60%).
Other stocks which showed a good recovery were BOI, PFC, Hero Honda, Praj Industries and ICICI bank. Last half an hour the market belonged to Reliance Industries with a smart gain and now at 2152 Rs.
Major Losers
Among the major losers were Satyam computer(4.14%), Ambuja Cement(2.17%), BHEL(1.56%), Larsen and Toubro(1.26%) and Bharti(0.44%).
Finally the Sensex gained 214 points to close at 13,850 and the Nifty surged 67 points to close at 4,159.
In the overall market, 1,163 stocks advanced and 1,368 stocks declined. Whereas, 84 stocks were unchanged.
Volume Toppers
IDFC was among the most traded counter on the bourses. Others like, RNRL, RPL, JP Associates, Chambal Fertilier, Satyam, Idea, Renuka Sugar, RPower and ICICI Bank were among the stocks in demand in the liquid universe.
POST MORTEM
The up side movement was mainly due to heavy buying all around and short covering as tomorrow onwards a new picture will be visible. As it is expected that the Government will survive seeing its track record of past. Cooling crude have set a new confidence in market giving bears a serious blow.
Still worries are left and we have to wait for the credit policy meet where a hike in CRR by 25 bps is expected then we can see some more corrections.
Market Next Trading Day
As European market are trading in Red and enough up move has been seen in US and Indian market a correction is expected in both the Indian and US market after three straight session gain. Volatility will persist and Crude which is above 131 now will again play a crucial role.
Details will be at market Today but in brief hot sectors will be again Banks and Reality. Though direction may be towards negative side.
Hot stock may be 3i Infotech on agreement with Bank of India, to implement AMLOCK(TM), the company's award winning Anti Money Laundering (AML) software

STOCK MARKET ANALYSIS

On Friday the markets showed extreme volatility, the Sensex shedding 574 points. As with every cloud, this one has come with the standard issue silver lining – after six consecutive weeks in the red, the markets ended last week firmly in the green.
Traders in the market seem to be in no need for a directional change though. The markets had to deal with three big pieces of news on Friday- the 3 is, Infosys, Inflation & Industrial Output. Traders gave sold into each of these triggers.
When Infosys Technologies announced first quarter net profit at Rs. 1302 cr and Earnings per share above Rs. 100, the markets reacted with a gap up opening. The move was pure sleight of hand and Infosys Technologies and the IT pack lost between 7 and 9% at the end of the trading day. Some of this can be attributed to the long build-up we had seen in IT ahead of the results. A gap up opening gave traders the opportunity to unwind these positions, putting immense selling pressure on the technology pack. But a close look at the rest of the technology pack indicates fresh short positions towards the end of Friday so there is continuing pessimism in IT. Satyam, TCS & Wipro come out with results later this week and each of them is seeing short buildup, with traders expecting these stock prices to correct further. The pain as far as technology stocks in the futures and options side are concerned is far from over. With 7% erosion in its stock price Infosys Technologies has added 6.4 lakh shares in Open Interest. That’s roughly an 18% addition in Open Interest and it’s safe to assume most of these positions are on the short side. TCS has also seen an Open Interest addition of 8% and a majority of these positions are on the short side.
The other piece of news that the market sold into on Friday was IIP coming in at a shocking 3.8% Vs the 10.6% registered last year. The market had discounted for a slowdown to the extent of 7% which is what a Reuters’ poll put the IIP number at. A closer look at the IIP numbers showed that the Capital Goods sector was the biggest laggard and this sparked off a huge selling rally. Even as we go into trade this morning the Capital Goods space is showing tremendous weakness. Capital goods major L&T July Futures have added close the 3 lakh shares in Open Interest, that an 18% rise in Open Interest while the stock is down 6% in the cash market.
The forecast then in for the Nifty to be extremely volatile with the 3900 level acting a s a strong downside resistance. Some long build-up in the banking pack ahead of results this week and heavy short build-up in the IT pack seems to be the theme this week.

BY BHUVAN

MEMBER JAB WE MET CA

WATCH RCOM & RELIANCE THIS WEEK

With the deal between Reliance Communication and South African telecom entity MTN falling apart, amid the battle between the two Ambani siblings, the stocks of RCOM and Mukesh Ambani-led Reliance Industries will be the most watched ones when the market opens tomorrow.Analysts believe the two stocks, though most watched by investors for any big movements, are expected to remain subdued this week due to the continuing tussle between Anil and Mukesh Ambani."RCom and RIL stocks will continue to face pressure this week amid the overall bearish sentiments in the market. The shares are expected to remain under pressure till the market situation improves," SMC Global Vice President Rajesh Jain said.In another significant move, AAA Communications, a private company of Anil Ambani that holds 63.38 per cent equity in RCOM, wrote to RIL claiming it was "free to and shall deal with RCOM shares as it deems fit."The RCOM-MTN deal to create a $70 billion entity fell apart as both sides confirmed that they would not be able to conclude the transaction, a day after the Mukesh Ambani initiated the arbitration process against his younger brother.Shares of RCOM had witnessed a 20% slump since May 26, the day both companies entered into an exclusive agreement for a possible merger.RCOM shares, which were trading around Rs 543.20 on May 26, suffered the brunt of speculations to fall to Rs 435.20 on Friday last week, the day its talks with the South African telecom firm fell apart.

BY BHUVAN

MEMBER JAB WE MET CA

HIGHER TDS

*The move is being viewed as an effort by the government to expand the
taxpayer base and ramp up revenue collections**
*
New Delhi:Companies and individuals who do not reveal their Permanent
Account Number (PAN) while receiving income from any source will be liable
to pay tax deducted at source (TDS) at the maximum marginal rate of 30 per
cent (plus surcharge and education cess).

Under the Income Tax Act, 1961, any income payable to the assessee is liable
for TDS by the person or entity making the payment. TDS rate ranges from 1
per cent to 30 per cent depending on the nature of income. The Central Board
of Direct Taxes is considering changes to the Act to this effect.

For example, if a payment is made to a professional like an engineer or a
doctor, TDS is deducted at a rate of 10 per cent. If the engineer or doctor
fails to provide PAN number, tax will be deducted at the rate of 30 per
cent. Similarly, if a contractor does not provide PAN, he will suffer a TDS
at the higher rate of 30 per cent instead of 2 per cent now.

"In many situations, contractors or sub-contractors pay the normal TDS but
still do not file return of income. By taxing at maximum marginal rate, they
will be induced to disclose PAN and file tax return also," said Amitabh
Singh, partner, Ernst & Young.

The move is being viewed as an effort by the government to expand the
taxpayer base and ramp up revenue collections in view of the huge resource
requirement to fund subsidies.

Many assessees do not reveal their PAN to evade taxes and get away with the
normal TDS payment. Due to lack of PAN, taxes were often pocketed by
deductors also. This creates difficulty in processing tax refunds as well.

PAN quoting has been made mandatory in the e-TDS returns being filed by
firms and companies from last year. The tax deductors were facing some
difficulty due to reluctant of assessees to prove PAN. The higher TDS rate
will force the assessees to reveal the number. Near 100 per cent PAN quoting
in TDS returns is important for moving towards dematerialisation of TDS
certificates by 2010, the revised deadline set in Budget 2008.

The move is aimed at increasing the effectiveness of TDS provisions to
expand the taxpayer base and improve collections. TDS collections
constituted 34 per cent of the total Rs 3,14,000 crore direct tax collected
in 2007-08. TDS collections are expected to grow by 55 per cent to Rs
1,65,385 crore in 2008-09, or 45 per cent of the Budget estimate of Rs
3,65,000 crore for 2008-09.

Source: Business Standard

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Thanks & Regards
ABHASH KUMAR