Compounding of offences under Income tax Act, 1961

Compounding of offences under Income tax Act, 1961

Introduction: This paper aims at bringing out the intricacies of prosecution of offences contained in theIncome Tax Act, 1961 and their compounding. This paper further minutia the various guidelines issued by the CBDT in this regard. The readers are cautioned to take proper care and consultation before acting on the material contained in this article.

Index:

1.General meaning of compounding of offences.

2.General meaning of Prosecution.

3. Meaning of Cognizable and Non-cognizable offences

4. Technical and Non technical offences as per Income Tax Act, 1961

5. Offences under the Income Tax Act.

6. Compounding of offences under the Income Tax Act

7. CBDT circulars on Compounding of offences

i. Letter: F. No. 4/7/69-IT (INV.), dated 21-3-1969.

ii. CBDT Instruction: Extracts from CBDT Instruction No. 1317 of 1980, [reported in M.P. Tewari v. Y.P. Chawla, ITO [1991] 187 ITR 506 (Delhi), at pp. 510-511].

iii. F.No. 285/161/90-IT(Inv.) dated 30th September, 1994

iv. F.No. 285/26/2002-IT(Inv.) Dated 29th July, 20038. Application for compounding of offences.

1. General meaning of compounding of offences

Compoundable offences are those which can be conciliated by the parties under dispute. The permission of the court is not required in such cases. When an offence is compounded, the party, who has been distressed by the offence, is compensated for his grievance.

For e.g.: Suppose

o    Somebody’s car inadvertently strikes a person on the road and the person gets wounded. Though the car driver may be guilty of rash and negligent driving, but still he can settle the matter by paying adequate compensation to the victim.

o    One person, let’s say, is constructing his house and accidentally one of the newly constructed walls fall down and a passerby gets wounded in the process. In this situation the aggrieved person has the option of compounding the offence as the owner was guilty of negligence.

However, it must be noted here that only the aggrieved party or the victim has the right to compound an offence and nobody else, not even the public prosecutor has the power to compound an offence.

2. General meaning of Prosecution :

Definition: The institution and carrying on of a suit in a court of law or equity, to obtain some right, or to redress and punish some wrong; the carrying on of a judicial proceeding in behalf of a complaining party, as distinguished from defense.

Definition: The institution, or commencement, and continuance of a criminal suit; the process of exhibiting formal charges against an offender before a legal tribunal, and pursuing them to final judgment on behalf of the state or government, as by indictment or information.

3. Meaning of Cognizable and -Non-Cognizable offenses under the Act

o    A cognizable offence in the criminal justice system of India is one in which the police is empowered to register an FIR, investigate and arrest an accused involved in cognizable crime without a court warrant.

o    As defined in Cr.PC, a non-cognizable offence is one in which police can neither register a First Information Report (FIR) nor can investigate or effect arrest without the express permission ordirections from the court.

As per section 279A the following offences shall be deemed to be non-cognizable offences notwithstanding anything contained in the code of Criminal Procedures 1973.

276B	Failure to pay tax to the credit of the central Govt. under chapter XIID orXVII-B
276C(1)	Wilful attempt to evade tax.
276C(2)	Wilful attempt to evade payment of tax
276CC	Failure to furnish the return of income.
277	False statement in verification, etc.
278	Abatement of false returns etc.

4. Technical Vs. Non Technical offences under Income tax Act, 1961

As per the guidelines of the CBDT F.No. 285/161/90-IT (Inv.) dated 30th September, 1994 and F.No. 285/26/2002-IT(Inv.) Dated 29th July, 2003 distinction between technical and non-technical offences is detailed as under:

1. Offences u/ss. 276B (relating to TDS), 276BB (relating to TCS), and 276E (omitted w.e.f. 1-4-1989 which related to section 269T) are regarded as technical. All other offences are regarded as non-technical.

2. The technical offences can be compounded even before filing complaint.

3. A technical offence may be compounded by Chief Commissioner of Income Tax or Director General of Income Tax if the following conditions are satisfied cumulatively.(now deleted by th29 July 2003 ) guidelines

i. The offence is the first one by the assessee.

ii. The compounding charges do not exceed Rs. 10 lakhs. iii. The complaint should not have been filed.

iii. In all other cases, the offence can be compounded only with the previous approval of the Board. ( these conditions deleted by CBDT guidelines F.No. 285/26/2002-IT(Inv.)

Now, In this regard, it has now been prescribed by CBDT guidelines F.No. 285/26/2002-IT(Inv.)that :

a. All types of cases relating to technical offences are to be compounded by CCIT/DGIT.

b. Distinction between first offence and subsequent offence is removed and

c. CCIT/DGIT shall not reject an application for compounding of a technical offence, if all conditions prescribed in the guidelines are satisfied.

4. A non-technical offence can be compounded with the approval of the Board subject to satisfaction of the following conditions mentioned as under:

The following conditions should be satisfied for compounding an offence.

i. There should be a written request from the assessee.

ii. The amount of undisputed tax, interest and penalties relating to the default should have been paid.

iii. The assessee should express his willingness to pay both the prescribed compounding fees as well as establishment expenses.

Additional conditions:

i. The offence is the first one by the assessee.

ii. The Board’s prior approval is obtained. However, if the amount involved exceeds Rs. 1 lakh, approval can be granted only after seeking advice from Ministry of Law. This requirement of referring the matter to Ministry of Law has not been done away with vide amendment dated – 7-292003 referred above.

5. Offences under the Income Tax Act,1961 Sections 275A to 280 provides for various types of offences under which the Income Tax Department can prosecute an assessee in the Court of Law. The prosecution can be launched only at the instance of the Commissioner of Income Tax or Commissioner of Income Tax (Appeals) or the Appropriate Authority.The sections under which prosecution can be launched against an assessee are

Section	Offence	Particulars	Initiation of proceedings and penalty
275A	Contravention of order u/s. 132(3)	Order for non removal of moneybullion etc. under Search and seizure	Fine and 2 yearsbut approval of CIT or CIT(A) or Appropriate Authority (as defines u/s 269UA(c) needed for initiation of proceedings)-279(1)
275B	Contravention of order u/s. 132(1)(ii)	Failure to allow inspection of books of accounts and other documents to authorized officer	Fine and 2 yearsbut approval of CIT or CIT(A) or Appropriate Authority (as defines u/s 269UA(c) needed for initiation of proceedings)-279(1)
276	Removal, concealment, transfer or delivery of property to thwart recovery of taxes.		Fine and 2 yearsbut approval of CIT or CIT(A) or Appropriate Authority (as defines u/s 269UA(c) needed for initiation of proceedings)-279(1)
276A	Failure to comply with provisions of sections 178(1) and 178(3).	Notice by liquidator of a company within 30 days of his appointment to the A.O. 178(1)Non removal of assets of the company by liquidator without permission of the CCIT or CIT 178(3)	6 months to 2 years but approval of CIT or CIT(A) or Appropriate Authority (as defines u/s 269UA(c) needed for initiation of proceedings)-279(1)
276AB	Failure to comply with provisions of section 269 UC, UE, UL.	269UC: restrictions on transfer of immovable property, where value of such property exceeds Rs. 5 lac 269UE:Vesting of property in Central Government269UL: Restrictions onregistration etc of documents in respect of transfer of immovable property.	Fine and 6 months to 2 years
276B	Failure to pay tax to the credit of the central Govt. under chapter XIID or XVII-B	Failure to pay the tax deducted at source under Chapter XVII-B or pay tax as per 115O(2) or second proviso to section194B	Fine and 3 months to 7 yearsbut approval of CIT or CIT(A) or Appropriate Authority as defines u/s 269UA(c) needed for initiation of proceedings-279(1)
276BB	Failure to pay the tax collected at source.		Fine and 3 months to 7 yearsbut approval of CIT or CIT(A) or Appropriate Authority( as defines u/s 269UA(c) needed for initiation of proceedings)-279(1)
276C(1)	Wilful attempt to evade tax.	1. If the tax sought to be evaded exceeds Rs. 100000.002. In any other case	Fine and 6 months to 7 yearsFine and 3 months to 3 years
276C(2)	Wilful attempt to evade payment of tax		Fine and 3 months to 3 yearsbut approval of CIT or CIT(A) or Appropriate Authority (as defines u/s 269UA(c) needed for initiation of proceedings)-279(1)
276CC	Failure to furnish the return of income.	1. If the tax sought to be evaded exceeds Rs. 100000.002. In any other case	Fine and 6 months to 7 yearsFine and 3 months to 3 years but approval of CIT or CIT(A) or Appropriate Authority (as defines u/s 269UA(c) needed for initiation of proceedings)-279(1)
276CCC	Failure to furnish the return of income in search cases. u/s 158BC(a)		Fine and 3 months to 3 years
276D	Failure to produce  account books and documents.	Non compliance under section 142(1)-for production of books and 142(2A)- special audit	Upto 1 year or fine @ Rs. 4-10 per day during which default continues or both but approval of CIT or CIT(A) or Appropriate Authority as defines u/s 269UA(c) needed for initiation of proceedings-279(1)
277	False statement in verification, etc.	1. If the tax sought to be evaded exceeds Rs. 100000.002. In any other case	Fine and 6 months to 7 yearsFine and 3 months to 3 yearsbut approval of CIT or CIT(A) or Appropriate Authority as defines u/s 269UA(c) needed for initiation of proceedings-279(1)
277A	Falsification of books ofaccount or documents,etc..	If a person (1st person) falsifies books of another person (2nd person) then the 1st person is guilty and he is subject to imprisonment. The 1st person will be prosecuted whether or not the 2nd person has evaded any tax or not.	Fine and 3 months to 3 yearsbut approval of CIT or CIT(A) or Appropriate Authority as defines u/s 269UA(c) needed for initiation of proceedings-279(1)
278	Abatement of falsereturns etc.	If a person (1st person) induces any other person (2nd person) to make and deliver any false account or statement or declaration in relation to any income chargeable to tax then the 1st person is guilty and he is subject to imprisonment.1. If the tax sought to be evaded exceeds Rs. 100000.002. In any other case	Fine and 6 months to 7 yearsFine and 3 months to 3 years  but approval of CIT or CIT(A) or Appropriate Authority as defines u/s 269UA(c) needed for initiation of proceedings-279(1)

6. Compounding of offences under the Income Tax Act, 1961

The Act provides relief from prosecution u/s 278AA and 279. A list of compoundable offences is provided hereunder:

Section	Offence	Compounding possible by CCIT or DGIT as per section 279(2)		Rate of compounding as per guidelines of CBDT F.No. 285/26/2002- IT(Inv.) Dated 29th July, 2003 and other guidelines.
275A	Contravention of order u/s. 132(3)	Yes, with prior approval of the CBDT		Not prescribed-on case to case basis + 10%of composition fees as establishment expenses (max Rs. 50,000.00)
275B	Contravention of order u/s. 132(1)(ii)	Yes with prior approval of the CBDT		Not prescribed-on case to case basis + 10% of composition fees as establishment expenses (max Rs. 50,000.00)
276	Removal, concealment, transfer or delivery of property to thwart recovery of taxes.	Yes with prior approval of the CBDT		Not prescribed-on case to case basis + 10%of composition fees as establishment expenses (max Rs. 50,000.00)
276A	Failure to comply with provisions of sections 178(1) and 178(3).	U/s 278AA, if there is reasonable cause then no penalty proceedings can be initiated.Otherwise composition with the prior approval of the CBDT		2% per month or part of a month of amount in default irrespective of amount in default
276AB	Failure to comply with provisions of section 269UC, UE, UL.	U/s 278AA, if there is reasonable cause then no penalty proceedings can be initiated.Otherwise composition with the prior approval of the CBDT		2% per month or part of a month of amount in default irrespective of amount in default
276B	Failure to pay the tax deducted at source.	U/s 278AA, if there is reasonable cause then no penalty proceedings can be initiated.Otherwise composition by CCIT or DGIT		2% per month or part of a month of amount in default irrespective ofamount in default
276BB	Failure to pay the tax collected at source.	Composition by CCIT or DGIT		2% per month or part of a month of amount in default irrespective of amount in default
276C	276(1) Wilful attempt toevade tax. 276(2) Wilful attempt to evade payment of tax	Under section 279(1A)it is provided that prosecution for offences u/ss. 276C and 277 cannot be initiated if the penalty imposed or imposable for concealment of income has been reduced or waived by the Commissioner u/s. 273A.In other cases with prior approval of the CBDT -do-		50% of amount  sought to be evaded irrespective of the amount sought to be evaded.2% per month or part of a month of amount in default irrespective of amount in default
276CC	Failure to furnish the return of income.	Yes with prior approval of the CBDT		2% per month of the assessed tax.
276CCC	Failure to furnish the return of income in search cases.	Yes with prior approval of the CBDT		Not prescribed-on case to case basis + 10%ofcomposition fees as establishment expenses (maxRs. 50,000.00)
276D	Failure to produce account books and documents.	Yes with prior approval of the CBDT		Not prescribed-on case to case basis + 10% of composition fees as establishment expenses (max Rs. 50,000.00)
277	False statement in verification, etc.	Under section 279(1A) it is provided that prosecution for offences u/ss. 276C and 277 cannot be initiated if the penalty imposed or imposable for concealment of income has been reduced or waived by the Commissioner u/s. 273A. with prior approval of the CBDT		100% of the tax amount sought to be evaded where the tax sought to be evaded is less than Rs.1 lakh and 200% in other cases.
277A	Falsification of books of account or documents, etc.	Yeswith prior approval of the CBDT	Not prescribed-on case to case basis + 10%composition fees as establishment expenses
278	Abatement of false returns etc.	Yeswith prior approval of the CBDT	Not prescribed-on case to case basis + 10% of composition fees as establishment expenses (max Rs. 50,000.00)

No composition fee is prescribed for other offences. However, it has been provided that the Board can consider the same on a case to case basis. The compounding  charges shall also include prosecution establishment expenses which will be charged @ 10% of the composition fee subject to a maximum of Rs.   50,000/

Once a case is filed in the Court of Law, the authority filing the case has no power to withdraw the same except as specifically provided in the Act. There are certain circumstances under which the prosecution can get abated.

Note: 1. It has also been prescribed that all the existing guidelines as well as the amendments shall be applicable only to future as well as pending cases. In other words, the offences already compounded shall not be reconsidered.

Note 2: Thus, compounding of an offence could only be made if a written request by way of an application is made by an assessee bringing out in the application following points.

i. The nature of offence for which prosecution is launched or proposed to be launched;

ii. The reasons and circumstances under which the offence was committed;

iii. The applicant’s willingness to pay the compounding fees including the part of litigation expenses incurred by the Department till the date of compounding of the offence;

iv. Whether the applicant satisfies the requisite conditions or not.

v. Lastly there should be a prayer to compound the offence by accepting the compounding fees on getting the approval about the compounding fees by the compounding authority.

7. CBDT Guidelines

SECTION 279  PROSECUTION TO BE AT INSTANCE OF COMMISSIONER

Apart from the above, sub-section (2) of section 279 gives powers to the Chief Commissioner/Director General to compound offences under Chapter XXII of the Income Tax Act, 1961. Such compounding can be done either before or after the institution of prosecution proceedings.

1306. Power of Chief Commissioner to compound offence – Points to be considered before deciding to compound offence

1. It was emphasized that a prosecution should not ordinarily be compounded if the prospects of success were good. The Board desires that in such case, the request of the assessee for having the offence compounded should not ordinarily be recommended to the Board.

2. The provisions of section 279(2) give discretion to the Commissioner to compound any offence under the Income-tax Act and this discretion is an unfettered one. Even so it has to be exercised in a judicial manner. Although it is neither possible to precisely lay down all the circumstances in which an offence may be compounded nor it is intended to fetter the Commissioner’s discretion in this matter, it is nevertheless necessary to have a uniform policy for exercising the discretion in a judicial manner.

3. Some of the points which have to be considered before deciding to compound an offence are indicated below:

- Compounding of an offence may be considered only in those cases in which the assessee comes forward with a written request for compounding offence.

- Cases in which the prospects of a successful prosecution are good should not ordinarily be compounded.

- Bearing in mind the deterrent effect of a prosecution, it should be considered whether the purpose will be more effectively served by making the assessee pay a deterrent composition fee or by obtaining a conviction.

- In case, where subsequent to the launching of prosecution fresh evidence becomes available which may show that the case for the prosecution is weak and the assessee is agreeable to have the offence compounded, it may be advisable to compound the offence and not to proceed with the prosecution.

4. Ultimately the answer to the question whether the prosecution should be compounded or not will depend on the facts of each case. The above aspects are only intended to provide broad guidelines. The previous approval of the Board should always be obtained before deciding to compound an offence. No assurance of any kind should be given to the assessee before obtaining the Board’s approval.

——————————————————–

Letter : F. No. 4/7/69-IT(INV.), dated 21-3-1969.

1307. Guidelines for compounding offence

Clause (B) of the circular enumerates certain cases which should not be compounded :—

(1) No compounding will be done if the assessee belongs to a monopoly or large industrial house or is a director of a company belonging to or controlled by such house;

(2) Cases in which the prospects of a successful prosecution are good should not ordinarily be compounded;

(3) Compounding will not be done in cases of second and subsequent offences. Clause (C) of the instructions enumerates cases which may be compounded:

(1)  Except in cases falling within categories (1) and (3) of (B) above, compounding of an offence can be done with the consent of the Board, if the amount involved in the offence/default is less than Rs. 1 lakh.

(2)  Except in cases falling under categories (1) and (3) of (B) above and category of (1) of (C), compounding may be done with the approval of the Minister if, in view of the developments taking place subsequent to the launching of the prosecution, it is found, after consultation with the Ministry of Law, that chances of conviction are not good.

Clause (D) of these instructions lays down that notwithstanding anything stated in (b), the Board may approve compounding in deserving and suitable cases involving hardship, with the approval of the Minister.

Section 6 of the these instructions reads as under:

“While the above are only intended to provide broad guidelines to be followed before sending a proposal for compounding, the previous approval of the Board should always be obtained before deciding about the compounding of an offence. No assurance of any kind should be given to the assessee before obtaining the Board’s approval.”

CBDT Instruction: Extracts from CBDT Instruction No. 1317 of 1980, [reported in M.P. Tewari v.Y.P. Chawla, ITO [1991] 187 ITR 506 (Delhi), at pp. -510-511].

JUDICIAL ANALYSIS

EXPLAINED IN - In M.P. Tewari v. Y.P. Chawla, ITO [1991] 187 ITR 506 (Delhi), the above instruction was explained with the following observations :

“The above provisions of the instructions prima facie, if not completely, partially take away the powers of the Commissioner of Income-tax to use the discretion vested in him under section 279(2) of the Act to compound the offence, if any application is made before him for this purpose. Under the impugned instruction, he is required to obtain “the previous approval of the Board before deciding to compound an offence”. Once the Legislature has vested in the Commissioner discretion to compound a particular offence, the same cannot be set at naught or curtailed substantially and/or materially by issuing the offending instructions which we hold are in direct contravention of the statutory provisions conferring the powers to compound offences on the Commissioner.” (p. 511)

“… We have already reproduced some of the clauses of the instructions which, on the face of it, run counter to the provisions of the Act. This circular, in our opinion, has substantially curtailed the powers of the Commissioner of Income-tax which are vested in him under section 279 of the Act. In fact, the decision of the Commissioner has ceased to be his decision and has become the decision of the Board and/or that of the Minister, in view of the instructions that “the previous approval of the Board should always be obtained before deciding to compound an offence”. “… No assurance of any kind should be given to the assessee before obtaining the Board’s approval”.

This was not the intention of the Legislature when section 279 of the Act was incorporated.

In the result, we allow the petition and quash that part of the instructions referred to above being clauses (B), (C) and (D) and section 6 which arbitrarily take away the powers of the commissioner to compound offences… (p. 514).

Note : In Y.P. Chawla v. CBDT [1992] 195 ITR 607, the Supreme Court reversed the above Delhi High Court decision.

1308. Liberalized guidelines for compounding of offences

The Central Board of Direct Taxes has liberalised its guidelines for compounding of offences under the Direct Tax Laws. The guidelines have liberalised the conditions for compounding of technical offences such as delay in depositing the tax deducted at source of the tax collected at source. The Chief Commissioners of Income-tax are now empowered to compound the first technical offence in any case if the compounding charges do not exceed Rs. 10 lakhs. Taxpayers whose cases were rejected earlier may also seek reconsideration of their applications under the new guidelines. However, cases in which the compounding orders have already been passed shall not be reviewed.

The revised guidelines have been issued with the objective of ensuring fairness and objectivity in compounding of offences, reducing the pendency of prosecutions before the courts and removal of unintended hardship to the taxpayers. It is expected that the liberalised guidelines will attract a large number of assessees to come forward with requests for compounding of offences for which they have been charged.

[Source : PIB Press release dated 11-10-1994].

Instruction No: 5206

Section(s) Referred: 279(2)

Statute: Income – Tax Act, 1961

Date of Issue: 30/9/1994

The existing instructions regarding compounding of offences under the laws relating to Direct Taxes have been reviewed by the Board. After careful consideration of the matter, these revised guidelines are hereby issued.

2.1 The distinction between technical and non-technical offences for the purpose of compounding of offences was removed in Board’s Instruction No. 1317 dated 11-03-1980. It has now been decided to reintroduce the concept of technical and non-technical offences for the limited purpose of compounding of the offences.

2.2 Offences punishable under the following sections showed be treated as technical offences:-

Sections (i) 275 (prior to 1.4.75 – failure to make payment or deliver returns or statements or allow inspection)

(ii)  276B (prior to 1.4.89 – failure to deduct or pay tax)

(iii)  276B (w.e.f. 1.4.89 – failure to pay tax deducted at source)

(iv)  276BB (failure to pay the tax collected at source)

(v)  276DD (failure to comply with the provisions of section 269SS)

(vi) 276E (failure to comply with the provisions of section 269I)

2.3 Offences punishable under the following sections shall be treated as non-technical or substantive offences:-

Sections i) 275A (contravention of order made u/s 132(3))

ii)  276 (w.e.f. 1.4.89 – removal, concealment, transfer or delivery of property to thwart tax recovery)

iii)  276A (failure to comply with the provisions of sections 178(1) and 178(3))

iv) 276AA (prior to 1-10-86 – failure to comply with provisions of section 269AB or section 269I)

v) 276AB (failure to comply with the provisions of section 269UC, 269UE and 269UL)

vi) 276D (wilful attempt to evade tax etc.)

vii) 276DD (wilful failure to furnish returns of Income)

viii)  276D (failure to produce accounts and documents)

ix) 277 (false statement in verification etc.)

x) 278 (abetment of false return etc.)

3.Offences under Indian Penal Code cannot be compounded. They can, however, be withdrawn. Offences under Direct Tax Laws may be compounded subject to the conditions prescribed in paragraph 4 and 5. It must be borne in mind that an assessee cannot claim, as of right, that his offence should be compounded. Factors such as conduct of the assessee, nature and magnitude of the offence and facts and circumstance of each offence will be considered while dealing with such a request.

4.Conditions for compounding technical offences:-

The following conditions should be satisfied before compounding a technical offence:-

4.1 The assessee should make a written request for compounding of the offence.

4.2 The case should be considered for compounding only when the assessee has paid the amount of undisputed tax as well as interest and penalties relating to the default. 4.3 The assessee should state that he is willing to pay the compounding fee prescribed in Para 9 below, and the prosecution establishment expenses prescribed in Para 10 below. The order compounding an offence should be passed only when the compounding charges comprising of the composition fee and establishment expenses are paid by the assessee/defaulter.

4.4 Technical offences may be compounded by CCIT or DGIT (as the case may be) if the following conditions are satisfied cumulatively:-

(i)  It is the first offence by an assessee.

(ii)  The compounding charges do not exceed Rs. 10 lakhs.

(iii) The offence is compounded only before the filing of complaint.

In the case of offences punishable u/s 276 (prior to 1.4.76), 276B (prior to 1.4.89), 276DD & 276E, complaints in respect of which have been filed before coming into force of these Revised guidelines, the CCIT/DGIT may compound the offence without seeking Board’s approval if the other conditions prescribed above are satisfied.

In all other cases, the offence shall not be compounded except with the previous approval of the Board.

4.5 The second and subsequent offences may be compounded with the approval of the Board in the following circumstances:-

(i)  The default does not involve mens rea i.e. it is not deliberate or intended to conceal any information from the department or to defraud the revenue directly or indirectly.

(ii)  Necessary steps for compliance of relevant provisions of Direct Tax Laws have been taken by the assessee prior to the detection of the default by the department. (For example in case of default in respect of tax deducted at source/tax collected at source, the tax should have been deposited by the assessee voluntarily and prior to detection of the default by the department).

4.6 In case of second and subsequent offence, the compounding fee shall be enhanced by 100% each time. Thus for second offence it will be 200% of the normal fee and so on. 4.7 For the limited purpose of determining authority granting approval for compounding, the compounding charges at the time of passing order u/s 279(2) shall be considered. However if the computation of compounding charges is dependent upon the income or tax etc. determined in the assessment order or any other order which is subject matter of appeal, revision, reference etc., the compounding charges shall be calculated on the basis of the assessment order or such other order. It may be clarified that compounding charges payable

5. Compounding of substantive/non-technical offences:-

Following conditions must be cumulatively satisfied before compounding a substantive offence.

(i)  the conditions prescribed in Para 4.1, 4.2, 4.3, are satisfied,

(ii)  It is first substantive offence.

(iii) The prior approval of the Board is obtained. If the amount involved in the offence Exceeds Rs. 1 lakh, the Board shall grant approval if MOL advises that the chances of successful prosecution are not good.

6. Notwithstanding anything contained in paragraph 4 & 5 above, the F.M. may grant approval for compounding the offence in a suitable and deserving case.

7. While seeking the Board’s approval CCIT/DGIT shall clearly report whether all the prescribed conditions for compounding have been met.

8. For the purpose of these guidelines the “first offence” will mean the following:-

a) Offences under any of the Direct Tax Laws committed prior to the date of issue of any prosecution show-cause notice or any other mode of intimation by the department to the person concerned or prior to launching of prosecution, whichever is earlier. Any offence, even though committed prior to the issue of such show cause notice or intimation or filing of complaint but discovered or disclosed after the first compounding order shall not be considered as “first offence”.

(b) Offences not detected by the department but voluntarily disclosed by a person prior to the first compounding of offence in his case under any Direct Taxes Acts. For this purpose offence is relevant if it is committed by the same taxable entity.

9. Fees for compounding:-

The composition fee for compounding of various offences in addition to any interest / penalty leviable) will be as follows:-

9.1 Section 276:- Failure to make payment or deliver return or (prior to 1.4.76) statement or allow inspection. The composition fee would be an amount of Rs. 2/- for every day during which the default continues.

9.2 Section 276B:- Failure to deduct or pay tax (prior to 1.4.89). 10% per month or part of a month of the amount in default where the said amount exceeds one lac and 5% per month or part of a month of the amount in default in other cases.

9.3 Section 276B:- Failure to pay the tax deducted at source (w.e.f. 1.4.89) 5% per month or part of a month of the amount of tax in default.

9.4 Section 276DD. Failure to pay the tax collected at source. The same guidelines as in respect of Section 276B in Para 9.3 above shall be applicable for an offence under this section also.

9.5 Section 276D (1):- Wilful attempt to evade tax etc.

(a)  If the amount sought to evaded is less than Rs. one lac the compounding fee shall be 100% of amount sought to be evaded.

(b)  If the amount sought to be evaded is more than Rs. one lac the compounding fee shall be 200% of the amount sought to be evaded.

For the removal of doubts, it is clarified that the composition fee as per the scale given above shall be charged even if no penalty was actually levied or the amount of penalty was reduced or cancelled in appeal. It is also clarified that where the same set of facts and circumstances attract prosecution u/s 276C (1), 277 and 278, the compounding fee shall be charged by treating all these offences as one offence.

9.6 Section 276C(2):- Wilful attempt to evade payment of any tax etc. 5% per month or part of a month of the amount, the payment of which is sought to be evaded, for the period of default.

9.7.1 Section 276CC:- Failure to furnish returns of income 5% per month or part of a month of the tax determined on regular assessment as reduced by the tax deducted at source and advance tax, if any, paid during the financial year immediately preceding the assessment year reckoned from the date immediately following the date on which the return of income was due to be furnished, to the date of furnishing of the return or where no return was furnished, the date of completion of the assessment.

9.7.2 Where before the date of furnishing of the return or when no return was furnished, the date of completion of assessment any tax is paid by the assessee u/s 143A or otherwise:

(i)  Compounding fee shall be calculated in the manner prescribed in Para 9.7.1 above, Upto the date on which the tax is so paid and

(ii)thereafter the fee shall be calculated at the aforesaid rate on the amount of tax determined on regular assessment as reduced by the TDS, advance tax and tax paid u/s 140A or otherwise before filing the return of income or where no return was furnished, the date of completion of assessment.

9.8 Section 276DD:- Failure to comply with the provisions of section 269SS) (prior to 02-04-89)

A sum equal to 50% of the amount of any loan or deposit accepted in contravention of the provisions of section 269SS.

9.9 Section 276E:- Failure to comply with the provisions of section 269I (prior to 01-04- 89). A sum equal to 50% of the amount of deposit repaid in contravention of the provisions of section 269I.

9.10 Section 277:- False statement in verification etc.

Section 278:- Abetment of false return etc.

For both these offences the same guidelines will be applicable as for the offences u/s 276D(1).

9.11 No composition fee has been prescribed for offences u/s 275A, 276(w.e.f. 1.4.89), 276A (w.e.f. 1.4.65), 276AA, 276AB and 276D as these provisions should be strictly enforced. However if there are any mitigating circumstances in any given case, the Board may consider the same on a case to case basis.

9.12 The prescribed compounding charges shall be chargeable while compounding offence. However, in extreme and exceptional case of genuine financial hardship the compounding charges may be suitably reduced with the approval of F.M.

10. In addition to the composition fee, the compounding charges shall include prosecution establishment expenses. A consolidated fee for prosecution establishment expenses will be charged which would cover the litigation expenses also. Accordingly, prosecution establishment expenses will be charged at the 10% of the composition fee subject to a maximum amount of Rs. 50,000/-. This limit will apply even where a number of offences are compounded under a single order.

11. The revised guidelines outlined above are in supersession of all earlier instructions / clarifications on the subject and apply to future as well as pending cases. However the offences already compounded under the old guidelines shall not be reconsidered. 12. In a case where prosecution has not been filed, no order for compounding of offence need be passed, if as per guidelines issued vide F.No. 285/160/90-IT(Inv.) dated 7.2. 1991, the smallness of the default does not call for launching of prosecution. However in such cases levy of interest and penalties prescribed under the Direct Taxes Acts must be considered on merits.

13. These guidelines shall apply mutatis mutandis to offences under the other Direct tax Laws also.

These guidelines may be brought to the notice of all concerned. [Board's F.No. 285/161/90-IT (INV>), dt. 30.9.'94]

————————————————————————

F.No.  285/26/2002IT(Inv.)
Government of India
Ministry of Finance
Department of Revenue
Central Board of Direct xesTa

New Delhi, the 29th July, 2003

To

All Chief Commissioners of Income Tax,

All Directors General of Income Tax (Inv.).

Subject: Guidelines for compounding of offences under Direct Tax Laws –Amendments – regarding.

Sir,

The existing Guidelines for compounding of offences under the Direct Tax Laws issued vide Board’s F.No. 285/161/90-IT(Inv.) dated 30th September, 1994 have been reviewed in the light of past experience and future needs. Following amendments are hereby made to these Guidelines with immediate effect:

(A) PROCEDURAL -AMENDMENTS:

(I) Under the existing Guidelines, Technical Offences (enlisted in para 2.2 of the said Guidelines) are to be compounded, by the Chief Commissioner of Income Tax or Director General of Income Tax(Inv.) (as the case may be), if following conditions are collectively satisfied:

(i)  It is the first offence by the assessee.

(ii)  The compounding charges do not exceed Rs. 10 lakh.

(iii) The offence is compounded only before the filing of complaint.

In all other cases, the technical offences as per existing Guidelines are to be compounded with the approval of the Board.

In this regard, it has now been decided that:

(a)  all types of cases relating to technical offences are to be compounded by CCIT/DGIT;

(b)  distinction between first offence and subsequent offence is removed; and (c) CCIT/DGIT shall not reject an application for compounding of a technical offence, if all conditions prescribed in the Guidelines are satisfied.

(II) Para 5(iii) of the existing Guidelines provides that for compounding of substantive/non-technical offences, in which the amount involved in the offence exceeds Rs. 1 lakh, the Board shall grant approval if Ministry of Law advises that the chances of successful prosecution are not good. This requirement of referring the matter to the Ministry of Law has now been done away with.

(B) REDUCTION OF COMPOUNDING FEE

With a view to encourage the assessees to get their offences compounded, compounding fee in respect of the following offences has been substantially reduced as under: (I) Section 276B (prior to 1.4. 1989) – Failure to deduct or pay tax –

Under the existing guidelines, compounding fee is 10% per month or part of a month, of the amount in default where the said amount exceeds Rs. one lakh and 5% per month or part of a month of the amount in default in other cases. It has now been reduced to 2% per month or part of a month of amount in default irrespective of amount in default.

(II)   Section 276DD (prior to 2.4. 1989) – Failure to comply with the provisions of Section 269SS –  Under the existing Guidelines, compounding fee is 50% of the amount of any loan or deposit accepted in contravention of the provisions of Section 269SS. It has now been reduced to 20% of the amount of any loan or deposit accepted in contravention of the provision of Section 269SS

(III)  Section 276E (prior to 1.4.1989) – Failure to comply with the provisions of Section 269T -Under the existing Guidelines, compounding fee is 50% of the amount of deposit repaid in contravention of the provisions of Section 269T. It has now been reduced to 20% of the amount of deposit repaid in contravention of the provisions of Section 269T.

(IV) Section 276CC – Failure to furnish returns of income – Under the existing Guidelines, compounding fee is as under “9.7.1 – 5% per month or part of a month of the tax determined on regular assessment as reduced by the tax deducted at source and advance tax, if any, paid during the financial year immediately preceding the assessment year reckoned from the date immediately following the date on which the return of income was due to be furnished, to the date of furnishing of t he return or where no return was furnished, the date of completion of the assessment. 9.7.2 – Where before the date of furnishing of the return or where no returns was furnished, the date of completion of assessment of any tax is paid by the assessee u/s 140A or otherwise:

(ii)  Compounding fee shall be calculated in the manner prescribed in para 9.7.1 above, up to the date on which the tax is so paid and

(iii)  Thereafter the fee shall be calculated at the aforesaid rate on the amount of tax determined on regular assessment as reduced by the TDS, advance tax and tax paid u/s 140A or otherwise before filing the return of income or where no return was furnished the date of completion of assessment.”

It has now been reduced to 2% per month or part of a month of the tax to be calculated as above.

(V) Section 276C(1) willful attempt to evade tax, etc. –

Under the existing Guidelines, the fee is:

(a)  If the amount sought to be evaded is less than Rs. one lakh, the compounding fee shall be 100% of amount sought to be evaded.

(b)  If the amount sought to be evaded is more than Rs. one lakh, the compounding fee shall be 200% of the amount sought to be evaded.

It has now been reduced to 50% of amount sought to be evaded irrespective of the amount sought to be evaded.

2. All other provisions of the existing Guidelines and clarifications issued subsequently from time to time shall continue to be applicable.

3. Above amendments shall be applicable to future as well as to cases pending at any stage. However, the offences already compounded shall not be reconsidered.

4. These amendments shall apply mutatis mutandis to offences under the other Direct Tax Laws also.

5. These amendments may be brought to all concerned and be given wide publicity. Yours faithfully,

Sd/-

( SHARAT CHANDRA )

Director (Inv. II & III) & OSD (Legal)

Copy to:

1. PS to Finance Minister/Secretary (R)/Chairman & Members (CBDT)

2. All Joint Secretaries/Directors/Dy. Secretaries/Under Secretaries in CBDT.

Sd/-

( SHARAT CHANDRA )

Director (Inv. II & III) & OSD (Legal)

Salient features of CBDT Circulars/Guidelines

CBDT Instructions: The Central Board of Direct Taxes has been issuing instructions and guidelines to its officers, to be followed before compounding any offence. However, there was a lot of debate over the Board’s powers to fetter the discretion of the tax authorities by issuing instructions or directions, particularly in the wake of Delhi High

Court’s judgment in the case of M.P. Tiwari vs. Y. P. Chawla ITO 187 ITR 506 (M.P.),

wherein it was held that instructions issued are invalid and ultra vires. This led to a retrospective insertion of explanation to section 279 consequent to which the Hon’ble Supreme Court reversed the Delhi High Court’s decision. The Supreme Court’s decision is reported in 195 ITR 607 (SC).Subsequently, in September 1994, the Central Board of Direct Taxes, after reviewing the earlier guidelines, has issued revised guidelines. These guidelines have also been amended vide CBDT’s F No.265/26/2002 IT(INV) dated 29-7-2003 [263 ITR(St.)3] The salient features of these guidelines are as under:

1. The guidelines have reintroduced the concept of distinction between technical and non-technical offences. Offences u/ss. 276B, 276BB, and 276E are regarded as technical. All other offences are regarded non-technical.

2. The technical offences can be compounded even before filing complaint.

3. The restriction on compounding of offences by large and monopoly industrial houses has been removed.

4. The powers of compounding have been delegated to the Chief Commissioners of Income-tax and the requirement of CBDT’s consent has been reduced to the minimum.

5. The revised guidelines have been made applicable to all pending applications and even the cases rejected under the old guidelines can be considered.

6. The following conditions should be satisfied for compounding an offence.

i. There should be a written request from the assessee.

ii. The amount of undisputed tax, interest and penalties relating to the default should have been paid.

iii. The assessee should express his willingness to pay both the prescribed compounding fees as well as establishment expenses.

7. A technical offence may be compounded by Chief Commissioner of Income Tax or Director General of Income Tax if the following conditions are satisfied cumulatively.

i. The offence is the first one by the assessee.

ii. The compounding charges do not exceed Rs. 10 lakhs.

iii. The complaint should not have been filed.

In all other cases, the offence can be compounded only with the previous approval of the Board. In this regard, it has now been prescribed that

a. All types of cases relating to technical offences are to be compounded by CCIT/DGIT.

b. Distinction between first offence and subsequent offence is removed and

c.  CCIT/DGIT shall not reject an application for compounding of a technical offence, if all conditions prescribed in the guidelines are satisfied.

8. A non-technical offence can be compounded with the approval of the Board subject to satisfaction of the following conditions cumulatively in addition to conditions mentioned in Para 6 above.

i. The offence is the first one by the assessee.

ii. The Board’s prior approval is obtained. However, if the amount involved exceeds Rs. 1 lakh, approval can be granted only after seeking advice from Ministry of Law. This requirement of referring the matter to Ministry of Law has not been done away with vide amendment dated 29-7-2003 referred above.

9. The guidelines also provide that in suitable and deserving case, the offence may be compounded after seeking approval from F.M.

10. The composition fees for compounding of various offences are as under: Sec 276B 2% per month of the amount of tax in default.Sec 276BB        2% per month of the amount of tax in default.

Sec 276C(1)     50% of the tax amount sought to be evaded

Sec  276C(2)     2% per month of the amount of tax the payment of which is sought to be   evaded.

Sec 276CC         2% per month of the assessed tax.

Sec 277     100% of the tax amount sought to be evaded where the tax sought to be evaded is less than Rs.1 lakh and 200% in other cases.

No composition fee is prescribed for other offences. However, it has been provided that the Board can consider the same on a case to case basis. The compounding charges shall also include prosecution establishment expenses which will be charged @ 10% of the composition fee subject to a maximum of Rs. 50,000/-.

11. It has also been prescribed that all the existing guidelines as well as the amendments shall be applicable only to future as well as pending cases. In other words, the offences already compounded shall not be reconsidered.

12. Thus, compounding of an offence could only be made if a written request by way of an application is made by an assessee bringing out in the application following points.

i. The nature of offence for which prosecution is launched or proposed to be launched;

ii. The reasons and circumstances under which the offence was committed;

iii. The applicant’s willingness to pay the compounding fees including the part of litigation expenses incurred by the Department till the date of compounding of the offence;

iv. Whether the applicant satisfies the requisite conditions or not.

v. Lastly there should be a prayer to compound the offence by accepting the compounding fees on getting the approval about the compounding fees by the compounding authority.

13. Draft Applications

13.1 In case of section 276B

Name
Address
Date

The Chief Commissioner of Income Tax,
Mumbai,

Sir,

Sub : Application for compounding of prosecution u/s. 276-B in the case of ……………….. for A.Y. …………………. Regarding.

1. The applicant is assessed to income-tax with the I.T.O., … ……/A.C.I.T.,…. ……../Dy. C.I.T., …………./Jt. C.I.T………… Range ……….., Mumbai.

2. The applicant is being prosecuted for non-payment of following taxes deducted at source from the salary of the employees within the time stipulated under section 200 read with Rule 30 of the I.T. Rules, 1962 for the Assessment Year written hereunder:

A.Y. Amount of tax Due Actual deducted date of date of at source payment payment

3. The applicant states that the following factors have contributed for the alleged failure in payment of the tax deducted at source within the stipulated time under the Acts and Rules.

1.     The appellant is doing business of ………………………… for last ………… years. In the initial stages, it was having a monopoly in this business. However, due to passage of time competition increased and in the accounting years relevant to the Assessment Years referred to above the applicant found it extremely difficult to face the stiff competition. As a result of this stiff competition, the sales has shown regular downward trend and has gone down from …………………………. in the year ……………. to Rs……………….. in the year ………………………….

2.     The applicant had also experienced labour problems from …………….. to …………….. There was a strike for a period of ………………. days by the workers of …………………… The workers after calling off the strike, after the period of …………….. days had adopted ‘go slow’ tactics with the result that the applicant suffered heavy financial losses and disruption of office work.

3.     The applicant is regular in payment of tax deducted at source and filing the returns thereof up to the A.Y. ………………… i.e., immediate previous A.Y. relevant to the A.Y. for which the proceeding u/s. 276B are initiated for the first time and a complaint is lodged in the Presidency Magistrate Court, Bombay.

4.     In the accounting year relevant to the years for which prosecution proceedings are commenced, due to strike as explained above, the office work was completely disturbed/disrupted. The applicant was, therefore, not in a position to comply with the requirement of the I.T. Law in the absence of the books of account.

5.     Due to fire in the factory premises in the month of ………………. 199… the applicant had lost almost all the record for the period up to ……………………. date and therefore had to reconstruct the record. The reconstruction of record was delayed as the factory and the office premises were totally closed for a period ………………. years.

6.     The applicant for the above Assessment Years has suffered losses and these losses are accepted by the Department.

7.     Considering the above facts as reasonable cause and as nominal penalties as detailed below were levied u/s. 201 for the alleged default in non-compliance with the provisions of section 200 as detailed below, were cancelled by the CIT(A).

A.Y. Amount of Penalty

4. The applicant is prepared to pay the Compounding Fees as prescribed. The applicant understands that as per the present norms, the Compounding Fees, payable may work out Rs. …………………….. which the applicant is prepared to pay.

5. The amount of tax involved is small and the applicant has discharged all its obligation under the Act. There are no taxes outstanding as far as the Assessment Years referred to above are concerned.

6. The applicant in the above circumstances, requests the Hon’ble Chief Commissioner to kindly consider the applicant’s case for compounding the above offence in terms of section 279(2) of the I.T. Act, 1961 and the prosecution may kindly be waived/the case filed in the Court of the Presidency Magistrate may kindly be withdrawn.

Thanking you,

Yours faithfully,

13.2 General Application

Name
Address
Date

The Chief Commissioner of Income Tax,
Mumbai

Sir,

Sub: Application for compounding of prosecution u/ss. 276/C & 277 in the case of …………….. for A.Y. ………………… Regarding.

1. The applicant is assessed to income-tax with the I.T.O., … ……/A.C.I.T.,… …../Dy. C.I.T., …/Jt. C.I.T…………. Range ………, Mumbai.

2. The applicant is being prosecuted u/ss. 276C, 277 and 278 for alleged concealment of income of Rs. ………………. for the A.Y. ……………. Briefly the facts of the case are as under.

1.     A.The applicant had filed a return of income showing total income of Rs………………. on ………………………… for the A.Y. ……………………… The business of the applicant is that of dealer in ……………. The applicant in the course of carrying on business had taken certain loans on hundies amounting to Rs………………. as per details hereunder.
Date of Name of Amount Remarks Loan the Banker of Loan
Besides this, the applicant had also effected purchases from following parties amounting to Rs………………… as under:
Name Date Amount Whether register of the or unregistered seller dealer under sales tax

o    The A.O. in the course of the assessment proceedings had called upon the applicant to produce the evidence in support of the loans taken as well as the purchases effected by the applicant as detailed above.

o    The applicant had filed the confirmation of loans from all the above parties. However, as the A.O. was not satisfied about genuineness of the above loans since these loans were either in cash from these parties, who were assessed to income tax or were from the parties who were not assessed to Income-tax. The A.O. was therefore, of the view that the loans amounting to Rs……………… as detailed above were not genuine. The A.O. further observed that if the applicant was readily agreeable for certain addition on account of non-genuineness of loans and purchases, no penalty proceeding u/s. 271(1)(c) would be initiated if the assessee files a revised return disclosing additional income.
The applicant in the circumstances and in order to avoid protracted litigation in the matter readily agreed for an addition of Rs…………….. as against the total loan of Rs……………. referred to above on the condition that no proceedings u/s. 271(1)(c) or the prosecution for alleged concealment of income was initiated. Hereto annexed is a copy of letter dated …………….. of the applicant narrating the above facts and conditions under which the return was revised for your ready reference and record.

o    As regards the alleged non genuineness purchases, it was submitted to the A.O. that the assessee is carrying on business in which at times it is difficult to obtain proper bills of purchase. The assessee filed with the A.O. details of purchase and sales to show that the purchases were genuine as the same were matched by corresponding sales. The A.O. did not doubt the sales as the quantity account matching the purchases and sales was also filed. It was in these circumstances submitted that simply because certain purchases were in cash and because the parties concerned had moved from their last known addresses, no adverse inference could be drawn against the applicant regarding the genuineness the purchases referred to above. The applicant had also filed sales tax order in support of the above fact. The applicant had, therefore, submitted that simply because the purchases were from unregistered dealers who were not available now at the addresses available with the applicant, no addition on account of alleged purchases could be made. The A.O. completed the assessment by making an addition of Rs……………….. as non genuine purchases. The A.O. did not accept the conditions referred to above, viz. that no penalty or prosecution proceedings could be initiated. The A.O. levied a penalty of Rs……………. u/s. 271(1)(c).

o    The applicant, as a matter of compromise, accepted the Assessment Order but has filed appeal against the said penalty order u/s. 271(1)(c) levying penalty of Rs…………………. The CIT(A) confirmed the penalty order. The applicant has now filed an appeal to the Income Tax Tribunal which is pending.

o    In the meantime, the Department initiated proceeding u/s. 276C for wilful attempt to evade tax and also initiated proceedings u/s. 277 for false verification in the return of income.

B. The applicant, in the above circumstances, submit that the case of the applicant is fit for compounding the prosecution u/ss. 276C and 277 for following reasons.

1.     The applicant had voluntarily and readily agreed for addition of Rs…………….. to the total income of the applicant. The Assessment Order would not show that the A.O. has given any finding that the loans of Rs…………….. were proved to be non genuine and represented the applicant’s income. The A.O. simply accepted the revised return disclosing additional income of Rs…………….. which was disclosed without specifying the exact amount of loans creditorwise considered as non genuine. Thus there is no finding in the Assessment Order that the applicant concealed income by showing specific non genuine loans.

2.     Further as against the amount of Rs………………….. as per details in para A(i) only Rs…………. a part of the same is offered for taxation in the hands of the applicant. This fact would clearly show that the loans referred to above were not considered as non genuine but were only suspected to be non genuine and thus there was no detection of any concealed income by the Department.

3.     As regards the URD purchases the sales tax order would clearly establish that the purchases were effected by the applicant. The quantity account details and the sales were accepted by the Department which would clearly show that the applicant had effectively and genuinely made the purchases. However, because of the peculiar nature of the business, the applicant was not in a position to produce the parties. Inability to produce should not be construed to mean that the purchases were not genuine. The applicant in order to avoid protracted litigation had agreed to the addition. There is no finding in the Assessment Order that the applicant did not genuinely made the purchase. Hence the charge of concealment of income cannot be substantiated.

4.     The applicant had cooperated with the Department in completing the assessment and has also paid all taxes for these years.

5.     The applicant is prepared to pay the prescribed compounding fees which the applicant understand works out to Rs………………….

 C. The applicant in the above circumstances, requests the Hon’ble Chief Commissioner to kindly consider the applicant’s case for compounding the above offence in terms of section 279(2) of the I.T. Act, 1961 and the prosecution may kindly be waived/the case filed in the Court of the Presidency Magistrate may kindly be withdrawn.

Recession

Recession : Loss of Commonsense

You can fool some persons for some time or all the persons for some time but you can not fool all the persons at all the times. Lot has been said and lot has been heard about recession. Recession is the result of loss of commonsense not only of Americans but all the people of the world for some time. Fear and Greed had occupied our minds for some time. We forgot to apply our minds .Money had made the Americans to consume blindly and fear had made the Chines to invest in the treasury of Americans.

Major mistake made by the Financial Sector is that they had given loans against the security of houses.. Houses cannot generate money (unless you give them on rent) rather they consume money if borrower is living in pledged house. Financial sectors had given the money to the consumers to consume on the basis of security of houses in which they were living. Thus value of the security became important rather then purpose of loan which ultimately leads to recession in the economy.

Financial Sector should gives the money to the householders even against the security only when there is a regular source of the income of householder. But it is not the regular income that is important but the source of regular income that is important while lending the money to the household. Financial Sector lost the commonsense that source of the regular income should be permanent. Job in a private sector (even from last 10 years) cannot be said to be the permanent source of income as we are seeing now a days in the form of huge job cuts all over the world.

Financial Sector is there to lend the money to the productive sectors of the economy so that these sectors can add to the GDP of the country by investing that money into income and employments generating assets.

Financial sector should always think about the purpose for which the money is being given. Money is always given by financial sector for investment and not for consumption purpose. Value of the security for loan is not as important as purpose for which loan is being given. When loan is given for the long term it will be the purpose of loan that will return the money of financial sectors. Financial sector is not the taker of assets (Security) of the householders rather it is to get the money back with appreciation.

Financial Sector forgot the basic concept that purpose of giving the loan against security is just to set fear in the minds of the borrowers that in case they did not applied the money for the intended purpose then they will loose something valuable for them. It is this fear that forces a borrower to work hard to apply the loan for intended purpose i.e. to create an asset that will produce money for him and for lenders.

Financial Sector lost commonsense that money is only a piece of paper in the hands of lenders but when it comes in the hands of borrowers then it changes its meaning and form instantly. Same piece of paper can be used to create a bomb or building depending upon the purpose of borrower.



Financial Sector applied technology i.e computers and complex models to calculate earnings and payback periods. Discounted Cash Flow techniques were applied without thinking that commonsense is also required to make decision which cannot be depicted on any paper. Technology cannot do anything except analysis of the data but choice has to be made by humans by applying non-monetary factors, facts, figures, commonsense. There are the models to control the prices of commodities but hardly there are measures to control the price of assets. Financial sector lost the commonsense that it is the Decision Maker that is important rather then technology used by decision maker. Technology can assist but cannot replace humans at any cost.

There is also a failure on the part of international financial institutions to track flow of money between different nations, its utilization and purpose of utilization.

With the lesson learnt from recession, we can say that money is not everything but money can do anything. We have to rebuild our commonsense to avoid recession in future. We have to again learn basics what is money? What is Loan? What is consumption? What is investment? before entering into financial world. Money should be given only for the investment purpose and financial sector has to be very strict about its usage.
I CERTIFY THAT THIS ARTICLE IS MY OWN CREATION.
CA SATBIR SINGH
casatbirgill@gmail.com

100 Days Programme

First 100 Days Programme of Govt of India

President Pratibha Patil while addressing the joint session of the two houses of Parliament on Thursday (04/06/09) also outlined the priorities of new government for the next 100 days:
• Early passage of the Women’s Reservation Bill providing for one-third reservation to women in state legislatures and in Parliament.
• Constitutional amendment to provide 50 percent reservation for women in panchayats and urban local bodies.
• Concerted efforts to increase representation of women in central government jobs.
• A National Mission on Empowerment of Women for implementation of women-centric programme in a mission mode to achieve better coordination.
• A voluntary national youth corps which could take up creative social action for river cleaning and beautification programme beginning with the Ganga.
• Restructuring the Backward Regional Grant Fund which overlaps with other development investment, to focus on decentralised planning and capacity building of elected panchayat representatives. The next three years would be devoted to training panchayat raj functionaries in administrating flagship programmes.
• A public data policy to place all information covering nonstrategic areas in the public domain.
• Increasing transparency and public accountability of National Rural Employment Guarantee Act (NREGA) by enforcing social audit and ensuring grievances redressal by setting up district level ombudsmen.
• Strengthening Right to Information Act by suitably amending the law to provide for disclosure by government in all non-strategic areas.
• Strengthening public accountability of flagship programmes by the creation of an Independent
Evaluation Officer at an arm’s distance from the government catalysed by the Planning ommission.
• Establishing mechanisms for performance monitoring and performance evaluation in government on a regular basis.
• Five annual reports to be presented by government as Reports to the People on Education, Health, Employment, Environment and Infrastructure to generate a national debate.
• Facilitating a voluntary technical corps of professionals in all urban areas through Jawaharlal Nehru National Urban Renewal Mission to support city development activities.
• Enabling non government organisations in the area of development action seeking government support through a web-based transaction on a government portal in which the status of the application will be transparently monitorable.
• Provisions of scholarships and social security schemes through accounts in post offices and banks and phased transaction to smart cards.
• Revamping of banks and post offices to become outreach units for financial inclusion complemented by business correspondents aided by technology.
• Electronic governance through Bharat Nirman common service centres in all panchayats in the next three years.
• A model Public Services Law, that covers functionaries providing important social services like education, health, rural development etc and commit them to their duties, will be drawn up in consultations with states.

The President outlined a paradigm shift in governance, to be effected through:-

• One, ongoing, independent evaluation and public reporting of progress in implementing schemes;
• Two, big strides in e-governance;
• Three, decentralisation and empowerment of panchayats and non-government organisations to implement and monitor government schemes;
• Four, breaking barriers between departments and schemes to achieve synergy and integration;
• Five, innovative regulation of health, education and provision of public services;
• Six, liberal use of technology in welfare transfers and achieving public awareness; and
• Seven, institutionalisation of the government’s basic commitments by requiring all cabinet notes to specify how their proposals would enhance the goals of equity or inclusion, innovation and publicaccountability

Rules of Happy Life

100 Ways To Be Happy
1. Never put yourself last.
2. When you extend a helping hand to one person,
be careful not to kick someone else in the teeth.
3. Always own a pair of old, faded jeans.
4. Count your blessings every day.
5. Acknowledge your successes along with your downfalls.
6. Burn the candle that has been in storage for the last two years.
7. Strive for progress, not perfection.
8. Remember, the voice telling you that you cannot do something is always lying.
9. At least once a day sit and do nothing.
10. Don't close your heart so tightly against life's pain that you shut out life's blessings.
11. Celebrate all your birthdays no matter how old you get.
12. Examine your life for limitations and ask yourself why you put them there.
13. Plant a tree, pull weeds, or get your hands dirty.
14. Diminish your wants instead of increasing your needs.
15. Cry when you feel like it.16. Rejoice in other people's triumphs.
17. Don't wait for someone else to laugh or express joy.
18. Forgive yourself for any mistake you make, no matter how big or small.
19. Keep good company.
20. Never take a pill for a pain you need to feel.
21. Use your enthusiasm to put yourself in forward gear
and give yourself a spark to move ahead.
22. Look in the eyes of the ones you love when you are talking to them.
23. Remember that one is a whole number.
24. Walk in a summer rain shower without an umbrella.
25. Do a kind deed for someone else.
26. Keep your eyes and ears open to get the messages you need
from people and events in your daily life.
27. Be patient.
28. Eat something green.
29. Change what you can and leave the rest alone.
30. Walk hand and hand with truth.
31. Make laughter and joy a greater part of your life than anger and grief.
32. Embrace solitude instead of running from it.
33. Be zealous, not jealous.
34. Forgive anyone you've been holding a grudge against.
35. Slow down and enjoy the present.
36. Walk in others' shoes before judging them.
37. Send yourself a kind message.
38. Remind yourself that the company you keep is a reflection of
what you think of yourself.
39. Go on a picnic.
40. Accept your fears, no matter how crazy they seem.
41. Don't let other people's opinions shape who you are.
42. Say a prayer.
43. Never attribute your accomplishments to luck or chance.
44. Know when to say no.
45. Look at the positive side of negative situation.
46. Remember that you are a spiritual being in a physical body.
47. Avoid seeking out other people for constant approval, because
it make them the master and you the slave.
48. Go fly a kite.49. Avoid fads and bandwagons.
50. Accept the things you cannot change.
51. Look inside instead of outside yourself for answers to life's problems.
52. Remember that all feelings are okay.
53. Shield yourself from bad influences.
54. Stand up for what you believe in.
55. Respect the wishes of others when they say no.
56. Seize every moment and live it fully.
57. Give away or sell anything you haven't used in the past five years.
58. Never downgrade yourself.
59. Take responsibility for what you think, feel, and do.
60. Pamper yourself.
61. Never say or do anything abusive to a child.
62. Let yourself be God powered instead of flying solo.
63. Volunteer to help someone in need.
64. Refrain from overindulging in food, drink, and work.
65. Finish unfinished business.
66. Be spontaneous.
67. Find a constructive outlet for your anger.
68. Think about abundance instead of lack, because whatever
you think about expands.
69. Think of yourself as a survivor, not a victim.
70. Cuddle an animal.
71. Be open to life.
72. See success as something you already have, not something
you must attain.
73. Experience the splendor and awe of a sunset.
74. When you score a base hit, don't wish it were a home run.
75. Learn to be in the present moment.
76. Instead of believing in miracles, depend on them.
77. Take a child to the circus.
78. Change your attitude and your whole life will change.
79. Never turn your power over to another person.
80. When your heart is at odds with your head, follow your heart.
81. Always remember that the past is gone forever and the future never comes.
82. Live your life according to what is right for you.83. Acknowledge your imperfections.
84. Plant a tree and watch it grow.
85. See "friend" instead of "enemy" on the face of strangers.
86. Watch an army of ants build their houses and cities and carry food ten times their weight.
87. Believe in something bigger than yourself.
88. Let the playful child within you come out.
89. Make haste slowly.
90. Work through your problems step by step and one day at a time.
91. Accept compliments from others so you can see the truth about yourself.
92. Sit on the lawn without worrying about grass stains.
93. Don't condemn yourself for your imperfections.
94. Do a humility check periodically by loving the truth about yourself.
95. Tell someone you appreciate them.
96. Never live your life according to what is right for someone else.
97. Talk less and listen more.
98. Admit your wrongdoing and forgive yourself for it.
99. Thrive on inner peace instead of on crises.
100. Affirm all the good things about yourself.

INDIAN BUDGET TERMINOLOGY

INDIAN BUDGET TERMINOLOGY

READING THE BALANCE SHEET

The lines and figures that reveal the receipts and expenditure of the year

ANNUAL FINANCIAL STATEMENT

This is the last word on the state’s receipts and expenditure for the financial year, presented to Parliament by the government. Divided into three parts — Consolidated Fund, Contingency Fund and Public Account — it has a statement of receipts and expenditure of each. Expenditure from the Consolidated Fund and Contingency Fund requires the mandatory nod of Parliament. CONSOLIDATED FUND

The government’s life line: it is a consortium of all revenues, money borrowed and receipts from loans it has given. All state expenditure is made from this fund.

CONTINGENCY FUND

As the name suggests, any urgent or unforeseen expenditure is met from this Rs 500-crore fund, which is at the disposal of the President. The amount withdrawn is returned from the Consolidated Fund.

PUBLIC ACCOUNT

When it comes to this account, the government’s nothing more than a banker, as this fund is a collection of money belonging to others, like public provident fund.

REVENUE VS CAPITAL

The budget has to distinguish revenue receipts/expenditur e on revenue account from other expenditure. So all receipts in, say, the consolidated fund, are split into Revenue Budget (revenue account) and Capital Budget (capital account), which includes non-revenue receipts and expenditure.

REVENUE RECEIPT/EXPENDITURE

All receipts like taxes and expenditure like salaries, subsidies and interest payments that in general do not entail sale or creation of assets fall under the revenue account.

CAPITAL RECEIPT/EXPENDITURE

Capital account shows all receipts from liquidating (eg. selling shares in a public sector company) assets and spending to create assets (lending to receive interest).

REVENUE/CAPITAL BUDGET

The government has to prepare a Revenue Budget (detailing revenue receipts and revenue expenditure) and a Capital Budget (capital receipts and capital expenditure) .

CREATING A HOLE IN THE POCKET

Taxes come in various shapes and sizes, but primarily fit into two little slots:

DIRECT TAX

This is the tax that you, I (and India Inc) directly pay the government for our income and wealth. So income tax, FBT, STT and BCTT are all direct taxes.

INDIRECT TAX

This one’s a double whammy: It’s essentially a tax on our expenditure, and includes customs, excise and service tax. It’s not just you who thinks this isn’t fair - governments too consider this tax ‘regressive’, as it doesn’t check whether you’re rich or poor. You spend, you pay. That’s precisely why most governments aim to raise more through direct taxes.

MAKING YOU PAY

The various taxes that the government levies

CORPORATION (CORPORATE) TAX

It’s the tax that India Inc pays on its profits.

TAXES ON INCOME OTHER THAN CORPORATION TAX

It’s income-tax paid by ‘non-corporate assessees’ — people like us.

FRINGE BENEFIT TAX (FBT)

No free lunches here. If you want the jam with the bread and butter, you’d better pay for it. In the 2005-06 Budget, the government decided to tax all perks — what is calls the ‘fringe benefit’ — given to employees. No longer could companies get away with saying ‘ordinary business expenses’ and escape tax when they actually gave out club memberships to their employees. Employers have to now pay a tax (FBT) on a percentage of the expense incurred on such perquisites.

SECURITIES TRANSACTION TAX (STT)

If you’re dealing in shares or mutual funds , you have to loosen those purse strings a wee bit too. STT is a small tax you need to pay on the total amount you pay or receive in a share deal. In the 2004-05 Budget, the government did away with the tax on profits earned on the sale of shares held for over a year (known as long-term capital gains tax) and replaced it with STT. CUSTOMS Anything you bring home from across the seas comes with a price. By levying a tax on imports, the government’s firing on two fronts: it’s filling its coffers and protecting Indian industry. UNION EXCISE DUTY

Made in India? Either way, there’s no escape. In other words, this is a duty imposed on goods manufactured in the country. SERVICE TAX If you text your friend a hundred times a day, or can’t do with-out the coiffeured look at the neighbourhood salon, your monthly bill will show up a little charge for the services you use. It is a tax on services rendered.

MINIMUM ALTERNATE TAX (MAT)

It’s known that a company pays tax on profits as per the Income-Tax Act. That just may not always be enough. If its tax liability is less than 10% of its profits, the company has to pay a minimum alternate tax of 10% of the book profits. SURCHARGE This is an extra bit of 10% on their tax liability individuals pay for earning more than Rs 10 lakh. Companies with a revenue of up to Rs 1 crore are spared this rod. VAT AND GST After a lot of discussion and brainstorming, the government levies what is called a ‘value-added tax’: a more transparent form of taxation. The tax is based on the difference between the value of the output and the value of the inputs used to produce it.. The aim here is to tax a firm only for the value it adds to the manufacturing inputs, and not the entire input cost. Thus, VAT helps avoid a cascading of taxes as a product passes through different stages of production/value addition. A GST, or goods and services tax, on the other hand, contains the entire element of tax borne by a good — including a Central and a state-level tax. MORE REVENUE Of course, tax isn’t the only way governments make money. There’s also ‘nontax revenue’ NON-TAX REVENUE Any loan given to state governments, public institutions, PSUs come with a price (interests) and forms the most important receipts under this head apart from dividends and profits received from PSUs. The government also earns from the various services including public services it provides. Of this only the Railways is a separate department, though all its receipts and expenditure are routed through the consolidated fund.

CAPITAL RECEIPTS RECEIPTS

in the capital account of the consolidated fund are grouped under three broad heads — public debt, recoveries of loans and advances, and miscellaneous receipts PUBLIC DEBT Don’t mistake the phrase. Public debt is not something incurred by the public. In Budget parlance the difference between borrowings (public debt receipts) and repayments (public debt disbursals) during the year is the net accretion to the public debt.. Public debt can be split into two heads, internal debt (money borrowed within the country) and external debt (funds borrowed from non-Indian sources). The internal debt comprises Treasury Bills, market stabilisation scheme, ways and means advance, and securities against small savings.

TREASURY BILL (T-BILLS)

These are bonds (debt securities) with maturity of less than a year. These are issued to meet short-term mismatches in receipts and expenditure. Bonds of longer maturity are called dated securities.

MARKET STABILISATION SCHEME (MSS)

The scheme was launched in April 2004 to strengthen Reserve Bank of India’s (RBI) ability to conduct exchange rate and monetary manage-ment. . These securities are issued not to meet the government’s expenditure but to provide the RBI with a stock of securities with which to intervene in the market to manage liquidity.

WAYS AND MEANS ADVANCE (WMA)

RBI is the big daddy of banks being the banker for both the Central and State governments. Therefore, the RBI provides a breather to manage mismatches in their receipts and payments in the form of ways and means advances.

SECURITIES AGAINST SMALL SAVINGS

The government meets a small part of its loan requirement by appropriating small savings collection by issuing securities to the fund.

MISCELLANEOUS CAPITAL RECEIPTS:

These are primarily receipts from disinvestment in public sector undertakings. The capital account receipts of the consolidated fund — public debt, recoveries of loans and advances, and miscellaneous receipts — and revenue receipts make up the total receipts of the consolidated fund.

EXPENDITURE

Before we begin to examine the nitty gritty of where and how the government spends its money, we need to understand what’s called the Central Plan. This is what every child in the country learns about in school; only, we all know it better as the Five-Year Plan. A Central Plan is the government’s annual expenditure sheet, with a five-year roadmap. Here’s where the government gets the money for the grand five-year exercise: The funding of the Central Plan is split almost evenly between government support (from the Budget) and internal and extra-budgetary resources of stateowned enterprises. The government’s support to the Central Plan is called the Budget support.

PLAN EXPENDITURE

This is essentially the Budget support to the Central Plan. It also comprises the amount the Centre sets aside for plans of states and Union Territories. Like all Budget heads, this is also split into revenue and capital components.

NON-PLAN EXPENDITURE

All those bills the government has to pay, under the ‘revenue expenditure’ head are bunched up here: interest payments, subsidies, salaries, defence and pension. The ‘capital’ component, in comparison, is small; the largest chunk of this goes to defence.

DEFICIT

When government’s expenditure exceeds its receipts it has to borrow to meet the shortfall. This deficit has material implication for the economy.

FISCAL DEFICIT

This is where the government feels the pinch. It often lives beyond its means, a lot like the situation mere mortals find themselves in. And then, the vicious circle is complete: it goes right back to the people for more money. Here’s how that works out: The government’s ‘non-borrowed receipts’ — revenue receipts plus loan repayments received by the government plus miscellaneous capital receipts, primarily disinvestment proceeds — fall short of its expenditure. The excess of total expenditure over total nonborrowed receipts is called ‘fiscal deficit’. The government then has to borrow money from the people to meet the shortfall.

REVENUE DEFICIT

It’s not just because it’s a deficit, but that it’s a revenue deficit makes it an important control indicator. All expenditure on revenue account should ideally be met from receipts on revenue account; the revenue deficit should be zero, else the government will be in debt.

PRIMARY DEFICIT

This is one ‘primary’ indicator everyone likes to watch: when it shrinks, it indicates we’re not doing too badly on fiscal health. The primary deficit is the fiscal deficit less interest payments the government makes on its earlier borrowings. It’s the basic deficit figure, if you will.

DEFICIT AND THE GDP

It’s important to see where all this fits, in the larger economic picture. The Budget document mentions deficit as a percentage of GDP. In absolute terms, the fiscal deficit may be large, but if it is small compared to the size of the economy, then it’s not such a bad thing after all. Prudent fiscal management requires that government does not borrow to consume, in the normal course. FRBM ACT Enacted in 2003, the Fiscal Responsibility and Budget Management Act required the elimination of revenue deficit by 2008-09. This means that from 2008-09, the government was to meet all its revenue expenditure from its revenue receipts. Any borrowing was to be done to meet capital expenditure — that is, repayment of loans, lending and fresh investment. The Act also mandates a 3% limit on the fiscal deficit after 2008-09 —one that allows the government to build capacities in the economy without compromising on fiscal stability. The financial crisis and the subsequent slowdown has forced the government to abandon the path of fiscal consolidation. ...AND THE REST Some of the other important terms that figure in the Budget

BHARAT NIRMAN:

Bharat Nirman is UPA’s unfulfilled dream of Build India, Build: irrigation, roads, water supply, housing, rural electrification and rural telecom connectivity. Though it couldn’t meet the target of 2009, the government is still at it.

FINANCE BILL:

This, all important sheaf of papers, is all about taxes and is presented in time before the levy breaks.

FINANCIAL INCLUSION:

This is to ensure that everyone has a bank account and financial institutions are accountable. It sees to it the common denizen is not denied of timely and cheap credit and, more importantly, not intimidated by the facade of a modern bank. However, it has not fully got past the counter. PASS-THROUGH STATUS:

Nothing can be more dreadful than having to pay twice for the same thing. This position is accorded to those investments which stands the danger of being taxed twice like mutual funds. SUBVENTION:

This is how a government bears the loss that financial institutions incur when asked to give farmers loans below the market rates.

RESOURCES TRANSFERRED TO THE STATES

As we saw earlier, the Centre gives states a helping hand in two ways — a part of its gross tax collections goes to state governments. The Centre also transfers funds to states to support their plans. These are largely in the nature of grants, and include those given to states for managing Centrally-sponsored schemes.

Work contract tax

Work contract tax

Goods involved in works contract’ have been included in definition of ‘sale’ w.e.f. 11-5-2002. Note that the CST is on ‘goods involved in works contract’ and not on ‘works contract’ as such. This distinction is vital in deciding aspects of valuation and also whether a particular transaction is inter state sale.What is works contract - Some contracts are for contracts for labour, work or service and not for sale of goods, though goods are used in executing the contract for labour, work or service e.g. when a contractor constructs a building, the buyer pays for cost of building which includes cost of building material, labour and other services offered by the Contractor. Property in building is passed on to buyer and there is no contract for supply of building material as such. An air conditioner manufacturer may undertake a ‘works contract’ for designing, fitting and commissioning of air conditioning equipment. This is contract for sale of labour and material and not contract of sale. Property in air conditioning equipment passes as an incidental to the works contract. Here, there is no sale of ‘goods’. It is a ‘works contract’ and not liable to CST. – State of Madras v. Voltas Ltd. (1963) 14 STC 446 and 861 (Mad HC) – also indirectly approved in Batliboi v. STO (2000) 119 STC 583 (Guj HC DB).Laying of pipe line is yet another example of works contract, where passing of property in the pipe is incidental to works contract.It is difficult to establish whether a particular contract is ‘contract for work’ or ‘contract of sale’ and rigid and inflexible fast tests cannot be laid down. It depends on main object of the parties, circumstances and custom of trade. Generally, a contract of sale is a contract whose main object is the transfer of the property in, and delivery and possession of, a chattel as a chattel to the buyer. Where the main object of work undertaken by the payee of the price is not the transfer of a chattel qua chattel, the contract is one for labour and work. The aspects like ownership of material, value of skill and labour compared to value of material can be considered, but these are not conclusive. - Halsbury’s Laws of England - quoted with approval in State of Gujarat v. Variety Body Builders - AIR 1976 SC 2108 = (1976) 38 STC 176 (SC). – same view in State of Himachal Pradesh v. Associated Hotels - (1972) 29 STC 474 (SC) = AIR 1972 SC 1131 = 1972(2) SCR 937 = (1972) 1 SCC 472In Vanguard Rolling Shutters v. CST - (1977) 39 STC 372 (SC) = AIR 1977 SC 1505, it was observed that it is difficult to lay down any rule of universal application to decide whether a contract is a works contract or contract for sale of goods. If the contract is primarily for supply of materials at prices agreed and the work or service is incidental to the execution of contract, it will be contract for sale. On the other hand, where contract is primarily a contract of work and labour and materials are supplied in execution of such contract, it is a works contract.In Hindustan Aeronautics Ltd. v. State of Orissa (1984) 55 STC 327 (SC) = (1984) 1 SCC 706 = 1983(2) SCALE 1090 = AIR 1984 SC 744 (SC 3 members), HAL imported materials and components on behalf of Government of India and manufactured aircrafts on behalf of Government of India. The goods belonged to Government of India but were entrusted to HAL for manufacture of aircraft to be delivered to Air Force. It was held that it is a works contract. It was observed that in contract for work, person producing has no 'property' in the thing produced as a whole, even if part or even whole of material used by him may have been his property. In contract of sale, the thing produced as a whole has individual existence as sole property of the party who produces it some time before delivery and the property therein passes only under the contract relating thereto to the other party for a price. In State of Gujarat v. Kailash Engineering Co. (1967) 19 STC 13 (SC) = AIR 1976 SC 2108, it was held that if unfinished goods are held as property of buyer, it is a works contract. In UOI v. Central India Machinery Mfg Co. Ltd. (CIMMCO) AIR 1977 SC 1537 = (1977) 40 STC 246 (SC), it was held that if property in final article passes only after it is completed, the contract will be of sale, even if raw material is purchased on behalf of buyer.In State of Tamilnadu v. Anandam Viswanathan – (1989) 1 SCC 613 = (1989) 73 STC 1 (SC), it was observed that nature of contract can be found out only when intentions of parties are found out. The fact that in the execution of works contract some materials are used, and the property in the goods so used, passes to other party, the contractor undertaking the work will not necessarily be deemed, on that account, to sell the materials. - - Primary difference between a contract of work or service and a contract for sale is that in the former, there is in the person performing or rendering service, no property in the thing produced as a whole, notwithstanding that a part or even the whole of the material used by him may have been his property. Where the finished product supplied to a particular customer is not a commercial commodity in the sense that it cannot be sold in the market to any other person, the transaction is only a works contract.In Hindustan Shipyard Ltd. v. State of Andhra Pradesh 2000 AIR SCW 2582 =(2000) 6 SCC 579 = 119 STC 533 = 2000(5) SCALE 216, after reviewing entire case law, following principles were evolved - (1) It is difficult to lay down any inflexible rule (2) Transfer of property of goods for a price is the linchpin of definition of sale. Main object of parties has to be found out. Substance of the contract and not form is to be looked into. (3) If the thing to be delivered has individual existence before the delivery as sole property of the party who is to deliver it, it is a sale. (4) If bulk of material used belongs to the manufacturer who sells the end product, it is strong pointer that the contract is for sale of goods and not of work and labour. However, the test is not decisive. Relative importance of material qua work is important. Supreme Court in a very old case - State of Madras v. Gannon Dunkerley & Co. - AIR 1958 SC 560 = 1959 SCR 379 = (1958) 9 STC 353 (SC), had held that no tax can be levied on works contract, as tax can be levied only on ‘sale of goods’ as defined in Sale of Goods Act. In an indivisible works contract, there is no sale of goods as there could be no agreement to sell materials as such and moreover, the property does not pass as movables. The material used therein becomes property of the other party on the theory of accretion and, as such, no sales tax can be levied on such material.‘Works Contract’ was one of the ways of avoiding sales tax. Hence, Constitution was amended on 2nd February, 1983 (46th amendment). Clause 29A was added to Article 366 to cover ‘transfer of property in goods involved in execution of works contract’. Subsequently, most of States have amended their sales tax laws to cover ‘works contract’, but Central Sales Tax Act was not amended till May 2002. Thus, till 11-5-2002, CST was not leviable on indivisible works contracts.In Builders' Association of India v. UOI - (1989) 2 SCR 320 = (1989) 1 CLA 332 (SC) = (1989) 73 STC 370 (SC) = (1989) 1 SCALE 770 = (1989) 2 SCC 645 = AIR 1989 SC 1371 (SC 5 member constitution bench), it has been observed : ‘After the 46th amendment, the works contract which was indivisible one, is by a legal fiction altered into one for sale of goods and the other for supply of labour and services. After 46th amendment, it has become possible for States to levy tax on value of goods involved in a works contract in the same way in which the sales tax was leviable on the price of goods and materials supplied in a building contract which had been entered into two distinct and separate parts.’In Associated Cement Companies Ltd. v. CC 2001(1) SCALE 436 = (2001) 4 SCC 593 = 124 STC 59 = AIR 2001 SC 862 = 2001 AIR SCW 559 (SC 3 member bench), it was held that even if the dominant intention of the contract is rendering of service which will amount to a works contract, after forty-sixth amendment to Constitution, the State would now be empowered to levy sales tax on material used in such contract.Contract of skill & labour - Some contracts are essentially contracts of skill & labour e.g. tailoring work, printing or cyclostyling etc. These jobs are not covered under 'works contract'. - - A contract to paint a portrait is a contract for skill and labour and not a contract for sale of goods, as substance of contract is for artist’s skill and it is only ancillary to that there would pass to the customer some materials like paint and canvas. – Robinson v. Graves (1935) 1 KB 579. However, in Lee v. Griffn (1861) 30 LJ QB 252, when a dentist agreed to make set of false teeth for a lady and to fit them into mouth, it was held a contract for sale of goods [There can be two views on the issue].Mere supply of labour not covered – Taxable event is transfer of property in goods. In case of contract for supply of labour, there is no transfer of property in goods and hence there is no tax liability. – Ashok Kumar Garg v. UOI (2002) 128 STC 442 (P&H HC DB) * Rajiv Gumber v. S. (2002) 128 STC 494 (P&H HC DB). Contractor need not be owner if he sales flat before construction – The contractor need not be owner of property. He will be liable even if he never had absolute ownership of the flat. – Mittal Investment Corporation v. ACCT (2001) 121 STC 3 (Karn HC DB). The judgment was modified in Mittal Investment Corporation v. ACCT (2001) 121 STC 14 (Karn HC DB) to the extent that it was held that the contractor is not liable if he enters into agreement with buyer after construction of flat, but will be liable if he enters into contract before construction of flat. [Decision as per Karnataka Sales Tax Act, but principle may apply in other cases also.]Value liable for Works Contract Tax – Some important case law is discussed here.Builders Association of India v. UOI - This is a landmark judgment of Supreme Court on ‘works contract’. (1989) 2 SCR 320 = (1989) 1 CLA 332 (SC) = (1989) 73 STC 370 (SC) = 1989(1) SCALE 770 = (1989) 2 SCC 645 = AIR 1989 SC 1371 ( 5 member Constitution bench). The background of this case is that after amendment to Constitution in 1983, various State Governments imposed levy on works contract. The tax was levied by some State Governments on full value of contract which included the material cost and other costs like labour, supply of services etc. However, in the judgment, Hon. Supreme Court held that the power of States to levy tax on works contract is subject to limitation of Article 286 i.e. tax cannot be levied by State on (a) Outside the State (b) during import/export. (c) Restrictions placed on ‘declared goods’ are applicable even while levying tax on works contract. Further, tax cannot be imposed on full value of contract. The tax is on ‘transfer of property in goods involved in execution of works contract.’ Thus, tax on works contract can be levied only on ‘value of goods involved’ and not on whole value of works contract.Gannon Dunkerley and Co. v. State of Rajasthan - This is also an important judgment on ‘Works Contract' (1993) 66 Taxman 229 = (1993) 10 CLA 56 (SC) = 1992 (3) SCALE 173 = 1993 AIR SCW 2621 = (1993) 1 SCC 364 = (1993) 88 STC 204 (SC - 5 member bench judgment)]. Here, it was held that taxable event is the transfer of property in the goods involved in the execution of a works contract. The said transfer of property takes place when goods are incorporated in the works. Hence, value of goods at the time of incorporation in the works can constitute measure for levy of tax. However, cost of incorporation of the goods in works contract cannot be made part of measure for the levy of tax. It was held that value of goods involved in works contract would have to be considered for taxation on works contract. Charges for labour and services have to be deducted from total value of works contract. Moreover, tax cannot be levied on goods which are not taxable under sections 3, 4 and 5 of CST and goods covered under sections 14 and 15 of CST. If contractor is not able to give detailed break up, legislature can prescribe scales for deductions permissible on account of cost of labour and services for various types of works contract. It is permissible to have a uniform rate for works contract. This rate may be different from the rates applicable to individual goods. The judgment in this case was subsequently followed in Builders’ Association of India v. State of Karnataka - (1993) 88 STC 248 = AIR 1993 SC 991 = (1993) 1 SCC 409 = 1993 AIR SCW 152 (SC - 5 member bench).In Daelim Industrial Co. v. State of Assam (2003) 130) STC 53 (Gau HC), it was held that in case of works contract, tax is payable only of value of goods and not on cost of design and engineering.State of Kerala v. Builders Association - In State of Kerala v. Builders Association of India - 1996 (8) SCALE 730 = (1997) 104 STC 134 = (1997) 2 SCC 183 = AIR 1997 SC 3640 = 1997 AIR SCW 977 (SC), the position was that a convenient, hassle-free and simple method, which was 'rough and ready method' was evolved by State Government for collection of sales tax on Works Contract. This was optional to assessee. It was held that legislature can evolve such alternate, simplified and hassle-free methods of assessment, making it optional to assessee. - . - In the field of taxation, legislation must be allowed greater 'play in joints'. Allowance must be made for 'trial and error' by the legislature. - - In Mycon Construction v. State of Karnataka 2002 AIR SCW 2156 = 127 STC 105 (SC), it was held that a simplified composition scheme instead of regular assessment, can be evolved, if it is on optional basis. Validity of such provision has been upheld.Other judgments - In Cooch Bihar Contractors Assn v. State of West Bengal (1996) 103 STC 477 (SC), it was observed that State Legislature can tax all the goods involved in works contract at a uniform rate which may be different from the rates applicable to individual goods which are involved in execution of works contract.Government can make a provision allowing contractors option to opt for composition by paying a sum based on total consideration of contract. - Mytcon Construction v. State of Karnataka (1998) 111 STC 322 (Karn HC).Royalty payable can be included for purpose of works contract tax – If contractor has to pay royalty and property gets transferred to him, it can be included for purpose of works contract tax. – Cooch Bihar Contractors Assn v. State of West Bengal (1996) 103 STC 477 (SC) – followed in B Seenaiah v. CTO (2001) 124 STC 248 (AP HC DB). However, in ACTO v. R K Constructions (2001) 124 STC 701 (Raj HC), it was held that if material is supplied by Government to contractor for use in Government contract, there is no ‘transfer of property in goods’ to contractor and no sales tax is leviable, even if Government had collected royalty. Sale price for purpose of CST – So far, no specific provision has been made in CST and hence ‘sale price’ will have to be determined on basis of definition of ‘sale price’ as contained in section 2(h) of CST Act. As per this definition, freight or delivery or the cost of installation is not includible when separately charged. Thus, value of goods involved will have to be calculated excluding these charges.‘C’ form can be supplied/ received for purchases / sales for works contract - Many High Courts have held that ‘C’ form can be issued for purchase of goods which are used in works contract. The dealer is entitled to registration and he can receive sales tax forms in respect of his sales. See the discussions under ‘C Form’ in a later chapter. These judgments pertain to period prior to 11-5-2002.After amendment of definition of ‘sale’ w.e.f. 11-5-2002, now C form can certainly be issued as ‘works contract’ has been specifically included in definition of ‘sale’.CST on works contract - Central Sales Tax will be payable on goods involved in works contract, if goods move from one State to another on account of such works contract from 11th May 2002 onwards. Works contract of movable property - There can certainly be inter State works contract in case of movable property e.g. printing contracts. In fact, Central sales tax can be levied on any goods involved in works contract in case of movable property.Works contract in case of immovable property - One interesting question that is likely to arise is whether there can be ‘goods involved in works contract’ if finally the article becomes immovable property in other State. For example, if a dealer undertakes supply and erection of machinery in other State, whether it will be a ‘inter State works contract’. In the opinion of author, it will be held so, as the movement of goods from one State to another certainly occasions on account of the works contract. - - It must be remembered that in case of works contract, the sales tax is on ‘goods involved in the execution of contract’ whether the property passes as goods or in some other form. There is no CST on ‘works contract’ as such. Thus, CST on works contract is really only on goods involved, which certainly move from one State to another.It may be noted that a ‘sale’ can be inter-State even if property in goods is transferred in other State.

REVERSE MORTGAGE SCHEME, 2008

REVERSE MORTGAGE SCHEME, 2008 - AN OVERVIEW

The Central Government has brought out a scheme for the purpose of senior citizens to face monetary problems. In exercise of the powers conferred by Sec. 47(xvi) of the Income Tax Act, 1961 the Central Government made the scheme called as 'Reverse Mortgage Scheme, 2008' ('scheme' for short). The scheme came into force from the 1st day of April, 2008.
Reverse mortgage is defined as mortgage of a capital asset by an eligible person against a loan obtained by him from an approved lending institution. The scheme provides a list of approved lending institution as follows:
National Housing Bank established under Sec. 3 of the National Housing Bank Act, 1987;
· A scheduled bank included in the second schedule to the Reserve Bank of India Act, 1934; or
· A housing finance company registered with the National Housing bank.
The scheme defines the term 'reverse mortgagor' as the eligible person who has mortgaged the capital asset for the purpose of obtaining loan. Then the question arises who is the eligible person. The scheme also defines the term 'eligible person' as-
Any person, being an individual, who is of, or above, the age of sixty years; or
· Any married couple, if either of the husband or wife is of, or above, the age of sixty years.
Reverse Mortgage transaction, according to the scheme is a transaction in which the loan may be disbursed to the reverse mortgagor but does not include transaction of sale, or disposal of the property for settlement of loan.
PROCEDURE:
1. Any eligible person may enter into a reverse mortgage transaction by applying in writing to the approved lending institution, if the capital asset, being mortgaged is owned by him and free from encumbrances;
2. The approved lending institution on receipt of the application shall process the application received from the eligible person and it may charge nominal amount as processing fees;
3. The approved lending institution, before taking mortgage of capital asset and before disbursing any loan under reverse scheme shall enter into a loan agreement in writing with the reverse mortgagor and obtain and maintain the following particulars from the reverse mortgagor-
Name and address of the owner of the capital asset;
· Permanent Account Number of the owner of the capital asset;
· Total area, including built up or covered area, of the capital asset;
· Cost of acquisition and the year of acquisition of the capital asset;
· Cost of improvement and the year of improvement of the capital asset;
· Name, address and Permanent Account Number of all the legal heirs and estate of the owner of the capital asset;
· A copy of the registered will of the owner of the capital asset including any changes made therein during the currency of the term of the loan.
4. The approved lending institution may disburse the loan to the reverse mortgagor either by period payments to be decided mutually between the approved lending institution and the reverse mortgagor or lump sum payment in one more trenches, to the extent that the aggregate of the amount disbursed as lump sum payments does not exceed fifty per cent of the total loan amount sanctioned.
5. The period of mortgage shall not be exceeding twenty years from the date of signing the agreement by the reverse mortgagor and the approved lending institution.
6. The reverse mortgagor, or his legal heirs or estate, shall be liable for repayment of the principal amount of loan along with the interest to the approved lending institution at the time of foreclosure of the loan agreement.

Limited Liability Partnership

Parliament Passes Limited Liability Partnership (LLP) Bill 2008

15/12/2008
Parliament has passed the Limited Liability Partnership (LLP) Bill 2008. Lok Sabha today gave its assent to the Bill which was earlier passed by the Rajya Sabha. Replying to the debate on the Bill in the Lok Sabha, Shri Prem Chand Gupta, Minister for Corporate Affairs, expressed the hope that the first ever LLP in the country would be registered by the first day of the new Financial Year i.e. 1.4.2009. In this context he informed the Hose that concept LLP Rules have already been placed on the website of the Ministry. Shri Gupta also assured the House that registration of LLPs will also be a paperless affair as it will also be covered under MCA-21 e-governance program of the Ministry. Regarding taxation, Shri Gupta said that as the matter relates to the Finance Ministry, this concern will be taken care of by that Ministry, but he assured the House that Indian LLPs will in no way be put to any disadvantage and our LLPs will have a level playing field with other similar bodies outside the country.
LLP is a new corporate form that enables professional expertise and entrepreneurial initiative to combine, organize and operate in an innovative and efficient manner.
For a long time, a need has been felt to provide for a business format that would combine the flexibility of a partnership and the advantages of limited liability of a company at a low compliance cost.
The Limited Liability Partnership format is an alternative corporate business vehicle that provides the benefits of limited liability of a company but allows its members the flexibility of organizing their internal management on the basis of a mutually arrived agreement, as is the case in a partnership firm. This format would be quite useful for small and medium enterprises in general and for the enterprises in services sector in particular. Internationally, LLPs are the preferred vehicle of business particularly for service industry or for activities involving professionals.
In our country, several expert groups have examined the need for such a concept since 1972 and recommended from time to time, the enactment of a law that would enable the setting up and functioning of the LLPs. These include the Abid Hussain Committee 1997, the Naresh Chandra Committee on Private Companies and Partnerships 2003 and the Irani Committee for new Company Law, 2005.
As proposed in the Bill, LLP shall be a body corporate and a legal entity separate from its partners. It will have perpetual succession. While the LLP will be a separate legal entity, liable to the full extent of its assets, the liability of the partners would be limited to their agreed contribution in the LLP.
Further, no partner would be liable on account of the independent or unauthorized actions of other partners, thus allowing individual partners to be shielded from joint liability created by another partner’s wrongful business decisions or misconduct.
Today, the world is in the grip of an unprecedented financial crisis, which is adversely affecting economies of most of the countries, including our own. In such a situation, availability of LLP as an alternative business vehicle to our trade and industry will be an important step. Service industry has grown considerably in India and it accounts for nearly half of our GDP. We believe that the LLPs would further contribute to the growth of the service industry in the future.
An earlier version of the LLP Bill was introduced in the Rajya Sabha around 2 years ago on 15th December, 2006 and was referred to the Parliamentary Standing Committee on Finance. The Standing Committee submitted its report on 27th November, 2007. Taking into consideration the suggestions of the August Committee, the revised Bill, namely the Limited Liability Partnership Bill, 2008 was introduced in the Rajya Sabha on 21st October, 2008. The House passed it on 24th October, 2008.
The salient features of the LLP Bill, 2008 are as under:‑
(i) The LLP will be an alternative corporate business vehicle that would give the benefits of limited liability but would allow its members the flexibility of organizing their internal structure as a partnership based on an agreement.
(ii) The proposed Bill does not restrict the benefit of LLP structure to certain classes of professionals only and would be available for use by any enterprise which fulfills the requirements of the Act.
(iii)While the LLP will be a separate legal entity, liable to the full extent of its assets, the liability of the partners would be limited to their agreed contribution in the LLP. Further, no partner would be liable on account of the independent or un-authorized actions of other partners, thus allowing individual partners to be shielded from joint liability created by another partner’s wrongful business decisions or misconduct.
(iv) LLP shall be a body corporate and a legal entity separate from its partners. It will have perpetual succession. Indian Partnership Act, 1932 shall not be
applicable to LLPs and there shall not be any upper limit on number of partners in an LLP unlike a ordinary partnership firm where the maximum number of partners can not exceed 20.
(iv) An LLP shall be under obligation to maintain annual accounts reflecting true and fair view of its state of affairs. Since tax matters of all entities in India are addressed in the Income Tax Act, 1961, the taxation of LLPs shall be addressed in that Act.
(v) Provisions have been made in the Bill for corporate actions like mergers, amalgamations etc.
(vii) While enabling provisions in respect of winding up and dissolutions of LLPs have been made in the Bill, detailed provisions in this regard would be provided by way of rules under the Act.

New Companies Bill

New Companies Bill to fix responsibility at top
Sapna Dogra Singh / New Delhi December 12, 2008, 0:48 IST
The new Companies Bill 2008, which is before the standing committee of Parliament, for the first time has fixed responsibility and accountability on the top management instead of leaving it loose and broad-based as in the existing Companies Act. The draft Companies Bill 2008 has identified the three key managerial positions as chief executive officer (CEO), chief finance officer (CFO) and company secretary (CS).
By recognising these three key managerial positions, the Bill is fixing responsibility to bring out a system which is more accountable, transparent and workable, according to an official at the Ministry of Corporate Affairs (MCA). It would be mandatory to mention the names of people holding these three positions in the annual report of the company.
In the present system, it is the ‘officer in default’ who is held responsible for offences committed by a company. However, the definition of ‘officer in default’ is so vast in the Companies Act of 1956 that it is virtually impossible to put the blame on anyone.
“This is an era of self regulation where you need a team of competent professionals at helm who can be held responsible,” said NK Jain, secretary and CEO of the Institute of Companies Secretaries of India (ICSI). This will have a positive impact, added Jain.
Besides bringing accountability and transparency in companies, by recognising the three key managerial personnel, the draft Bill has provided relief to the honorary directors and independent directors and the non-executive members of the company.
In the existing Companies Act, the term ‘officer in default’ encompasses all the senior officials in a company, which include all directors both executive, non-executive and independent. In case of any offence or lapse, any one of them could be made responsible even if they have nothing to do with the actual business of the company, stated Pawan Jain, company secretary of the Abhishek Industries — a leading textiles company in the country.
He cites a recent example in which a leading Bollywood star was implicated because a cheque, issued by a company where the actor was an honorary director, got bounced and the person reportedly filed a suit against the actor.
Also, said Jain, in cases where companies have not filed their returns, action can be taken against anyone in the company under the definition of ‘offer in default’ and hence the new draft Bill will give respite to companies from such incidents.
The draft Bill aims to ensure financial integrity, corporate governance and risk management in the companies, said E Balaji, CEO of Ma Foi Management Consultants.
Many public sector companies feel that this would bring good governance in the companies. The bill is a good step in bringing corporate responsibility by giving statutory recognition to the role of CFO, said DK Saraf, CFO of Oil and Natural Gas Corporation.
Another important step that the draft Bill has proposed is doing away with the need for central government approval for appointments and fixing remuneration of the key managerial positions. It also envisage removal of the ceiling on managerial remuneration based on net profits.
However, AK Singhal, director (finance) NTPC, feels that this wouldn’t be applicable to state-owned companies as the government would continue to fix their remuneration.

360 degree feedback

360 degree feedback
Performance-appraisal data collected from 'all around' an employee-his or her peers, subordinates, supervisors, and sometimes, from internal and external customers. Its main objective usually is to assess training and development needs and to provide competence-related information for succession planning-not promotion or pay increase. Also called multi-rater assessment, multi-source assessment, multi-source feedback.