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            Corporate Taxation PROJECT REPORT

                                  ON

               Tax Planning,Tax Avoidance AND

                              Tax Evasion

In partial fulfilment for the requirement of comprehensive project in Two
    years Full-time MBA programme, Gujarat Technological University



                 SUBMITTED TO: PROF. Dharmesh Shah

                          Core faculty- NRIBM

                              SUBMITTED BY:

              Submitted by:    Kinjal Modha (NR10052)
ACKNOWLEDGEMENT

I would especially like to thank Prof. Dharmesh Shah, who guided us throughout the project
and gave us valuable suggestions and encouragement to complete project report
successfully. We express our sincere gratitude to her that he gave his valuable time to
support us.

I would also like to thank Dr Hitesh Ruparel, Director of our college N. R. Institute of
Business Management to give us this opportunity.

I would like to thank the Computer Lab Instructor, the Librarian and the Administrative staff
of N. R. Institute of Business Management.
Introduction

The use of legal methods to modify an individual's financial situation in
order to lower the amount of income tax owed. This is generally
accomplished by claiming the permissible deductions and credits. This
practice differs from tax evasion, which is illegal.


The use of the terms tax avoidance and tax evasion can vary depending
on the jurisdiction. In general, the term "evasion" applies to illegal actions
and "avoidance" to actions within the law. The term "mitigation" is also
used in some jurisdictions to further distinguish actions within the original
purpose of the relevant provision from those actions that are within the
letter of the law, but do not achieve its purpose.

Most taxpayers use some forms of tax avoidance. For example,
individuals who contribute to employer-sponsored retirement plans with
pre-tax funds are engaging in tax avoidance because the amount of taxes
paid on the funds when they are withdrawn is usually less than the
amount that the individual would owe today. Furthermore, retirement
plans allow taxpayers to defer paying taxes until a much later date, which
allows their savings to grow at a faster rate.
Final ct
Cases of Tax planning.

   1. Sec. 40(b)(v)- Quantum of remuneration or the manner of
      computing the quantum of remuneration should be
      stipulated in the partnership deed


The present appeal under Section 260A of the Income Tax Act, 1961 (Act,
for short) has been preferred by Sood Brij & Associates, a partnership
firm, consisting of two partners namely A.K. Sood and B.M. Gupta, who
are practicing Chartered Accountants. In their return for the assessment
year 2007-08, Rs.21,40,000/- was claimed as a deduction towards
salary/remuneration paid to the partners. This was disallowed by the
Assessing Officer on the ground of violation of Section 40(b)(v). The
appellant-assessee     has     been   unsuccessful   in   appeals   before   the
Commissioner of Income Tax (Appeals) and the Income Tax Appellate
Tribunal, Delhi (tribunal, for short). The impugned order of the tribunal is
dated 29th October, 2010.

2. After hearing the counsel, the following substantial question of law is
framed:-“ Whether on reading of clause 7 of the partnership deed dated
1st May,1976 and clauses 1 and 2 of the supplementary partnership deed
dated 1st April,1992, the tribunal was right in holding that remuneration of
Rs.21,40,000/- paid to the two partners cannot allowed as a deduction
under Section 40(b)(v) of the Act?”3. Relevant part of Section 40 of the
Act reads as under:-

“40. Amounts not deductible.–Notwithstanding anything to the contrary in
sections 30 to 38, the following amounts shall not be deducted in
computing the income chargeable under the head “Profits and gains of
business or profession”,–

(b) in the case of any firm assessable as such,–
(i)    any payment of salary, bonus, commission or remuneration, by
whatever name called (hereinafter referred to as remuneration) to any
partner who is not a working partner; or


(ii)     any payment of remuneration to any partner who is a working
partner, or of interest to any partner, which, in either case, is not
authorised by, or is not in accordance with, the terms of the partnership
deed; or


(iii) any payment of remuneration to any partner who is a working
partner, or of interest to any partner, which, in either case, is authorised
by, and is in accordance with, the terms of the partnership deed, but
which relates to any period (falling prior to the date of such partnership
deed) for which such payment was not authorised by, or is not in
accordance with, any earlier partnership deed, so, however, that the
period of authorisation for such payment by any earlier partnership deed
does not cover any period prior to the date of such earlier partnership
deed; or


(iv) any payment of interest to any partner which is authorised by, and is
in accordance with, the terms of the partnership deed and relates to any
period falling after the date of such partnership deed in so far as such
amount exceeds the amount calculated at the rate of *twelve per cent.
simple interest per annum; or


(v)    any payment of remuneration to any partner who is a working
partner, which is authorised by, and is in accordance with, the terms of
the partnership deed and relates to any period falling after the date of
such partnership deed in so far as the amount of such payment to all the
partners during the previous year exceeds the aggregate amount
computed as hereunder:–

Provided that in relation to any payment under this clause to the partner
during the previous year relevant to the assessment year commencing.
Explanation 1.–Where an individual is a partner in a firm on behalf, or for
the benefit, of any other person (such partner and the other person being
hereinafter referred to as “partner in a representative capacity” and
“person so represented”, respectively),–


(i)    interest paid by the firm to such individual otherwise than as partner
in a representative capacity, shall not be taken into account for the
purposes of this clause;


(ii)    interest paid by the firm to such individual as partner in a
representative capacity and interest paid by the firm to the person so
represented shall be taken into account for the purposes of this clause.


Explanation 2.–Where an individual is a partner in a firm otherwise than
as partner in a representative capacity, interest paid by the firm to such
individual shall not be taken into account for the purposes of this clause,
if such interest is received by him on behalf, or for the benefit, of any
other person.


Explanation 3.–For the purposes of this clause, “book-profit” means the
net profit, as shown in the profit and loss account for the relevant
previous year computed in the manner laid down in Chapter IV-D as
increased by the aggregate amount of the remuneration paid or payable
to all the partners of the firm if such amount has been deducted while
computing the net profit.


Explanation 4.-For the purposes of this clause, “working partner” means
an individual who is actively engaged in conducting the affairs of the
business or profession of the firm of which he is a partner.”


4. Section 40(b) relates to firms and the clauses (i) to (v) are
interconnected and have to be read harmoniously. The aforesaid clauses
prescribe the conditions, when and in what circumstances remuneration
paid to a partner are deductable as an expense from income of the
partnership firm. The remuneration paid to the said partners must relate
to the period falling after the date of such partnership deed. Clause (iii) to
Section 40(b) specifically stipulates that remuneration paid in the period
pre and posts the partnership deed, are treated differently. Former cannot
be deducted from the income of the firm but payment of remuneration to
working partners post the partnership deed, authorized by and in
accordance with the terms of the deed can be allowed as a deduction. The
requirement for allowing deduction is that the remuneration paid should
be authorized and in terms of the existing partnership deed. Both
conditions must be satisfied. The Section 40(b)(v) also fixes the upper
limit of the deduction, which can be claimed as a deduction by the
partnership firm.


5. Clause (iii) and other clauses in Section 40(b) specifically use the
expression “in accordance with the terms of the partnership deed”. This
clearly indicates and manifests the legislative mandate that the quantum
of   remuneration   or   the   manner       of    computing     the    quantum    of
remuneration    should   be    stipulated    in    the   partnership    deed.    The
expression “in accordance with the terms of the partnership deed” read
with clause (iii) of section 40(b), requires and mandates that the quantum
of   remuneration   or   the   manner       of    computation    of    quantum    of
remuneration should be stated in the partnership deed and should not be
left undetermined, undecided or to be determined or decided on a future
date.


6.The question raised is whether the conditions stipulated in the aforesaid
Section are satisfied in the present case or not. This requires examination
of the relevant clauses of the partnership deed dated 1st May, 1976 and
the supplementary partnership deed dated 1st April, 1992.
7. Clauses 7 of the partnership deed dated 1st May, 1976 reads as
under:-
“7. That the profits or losses of the partnership, as the case may be, shall
be divided amongst and borne by the partners equally.”


8. Clauses 1 and 2 of the supplementary partnership deed dated 1st April,
1992 read:


“1. That subject to mutual consent of the partners, and subject to the
provisions of the Income Tax Act, 1961, the working partner or partners
shall be paid such remuneration as may be mutually agreed between
themselves, from time to time, and such remuneration shall be deductible
expense before arriving at the share of the partners as allocable from the
net profits.


2. That both the partners (hereinafter referred as working partners), shall
devote their time and attention in the conduct of the affairs of the
partnership firm, as the circumstances and need of the firms business
may require. The total remuneration payable to the working partners shall
be an amount permissible as remuneration to the working partners under
the Income Tax Act, 1961 and as applicable from time to time.”


9.The partnership as noticed above is between two partners and under
clause 7 of the partnership deed dated 1st May, 1976 profits and losses of
the partnership, as the case may be, are to be divided and borne by the
partners equally. Clause 1 of the supplementary partnership deed dated
1st April, 1992, authorizes payment of remuneration to the partners but
does not quantify the same. It does not prescribe any method or manner
to   calculate   and   compute   the   remuneration.   It   states   that   the
remuneration payable is to be mutually agreed between the partners from
time to time.    Clause 1,therefore, requires a mutual agreement in future.
The aforesaid clause, therefore, does not satisfy the requirement that the
payment of remuneration should be in accordance with the terms of the
partnership deed and that the remuneration should relate to payments
made in the period after the date of said partnership deed. The tribunal
is, therefore, right in their conclusion that clause 1 of the supplementary
partnership deed dated 1st April, 1992, does not satisfy the requirements
of Section 40(b)(v). From the said clause it is not possible to ascertain the
quantum or the amount of remuneration which is payable in terms of the
supplementary partnership deed.

10. This brings us to clause 2 of the supplementary deed dated 1st April,
1992. The first sentence in clause 2 states that the two partners will be
the working partners. The second sentence in clause 2 stipulates that the
total remuneration payable to the working partners shall be the amount
permissible as remuneration to the working partners under the Act, as
applicable from time to time. The question is whether the second
sentence of clause 2 of the supplementary partnership deed read with
clause 7 of the partnership deed, which states that the profits and losses
will be equally divided and borne by the partners, satisfies the
requirements of Section 40(b)(v). In other words, whether the two
clauses read together quantify or stipulate the manner of quantifying the
remuneration that is payable to the partners? Having examined the said
clauses, we feel that on conjoint reading of clause 7 of the partnership
deed dated 1st May, 1976 and clauses 1 and 2 of the supplementary
partnership deed dated 1st April, 1992, conditions of Section 40(b)(v) are
not satisfied.

                          Analysis of the case.


On reading the supplementary partnership deed, in the present case, it is
clear that the remuneration is not specified. The manner of computing the
remuneration is not specified.


One of the prescribed requirements is that payment of remuneration
should be made to a working partner and authorized by, and in
accordance with the terms of the partnership deed.
On the other hand, the remuneration payable is left to future mutual
agreement between the partners who are entitled to decide and quantify
the quantum. Remuneration can be any amount or figure but not more
than the maximum amount stated in Section 40(b)(v) of the Act.
Therefore, the requirements of Section 40(b)(v) are not satisfied.


The appellant in actual practice has not read and understood clause 2 as
stipulating that the two partners are entitled to remuneration equal to the
maximum amount stipulated in Section 40(b)(v) of the Act. As per the
return of income filed on 23rd August, 2007, the appellant firm had
declared income of Rs.1,44,59,522/-. It is prudent to note that as per the
books and the Act Rs. 98,81,165/- would be the maximum remuneration
payable to the two partners but the remuneration actually paid was
Rs.21,40,000/-. This is admitted by the appellant and further in grounds
of appeal it is stated that Rs.98,81,165/- represents the maximum
amount payable under Section 40(b)(v) but not the amount that has been
mutually agreed to be paid as remuneration. In other words, the
appellant has accepted that clause 2 does not quantify or provide the
manner of computing remuneration payable to the partners but stipulates
the maximum amount payable.


Thus, the limits specified under Section 40(b)(v) are incorporated and
have become part and parcel of the partnership deed but not the amount
or the quantum of remuneration. In the case of a firm carrying on a
profession referred to in section 44AA or which is notified for the purpose
of that section–


(a) on the first Rs. 1,00,000 of the book-profit or in case of a loss Rs.
50,000 or at the rate of 90 per cent. of the book-profit, whichever is
more;


(b) on the next Rs. 1,00,000 of the book-profit at the rate of 60 per
cent.;
(c) on the balance of the book-profit at the rate of 40 per cent.; (2) in the
case of any other firm–


(a) on the first Rs. 75,000 of the book-profit or in case of a loss Rs.
50,000 or at the rate of 90 per cent. of the book-profit, whichever is
more;

(b) on the next Rs. 75,000 of the book-profit at the rate of 60 per cent.;

(c) on the balance of the book-profit at the rate of 40 per cent.;




This is left undecided, unstipulated and left to the discretion of the two
partners to be decided at a future point in time. Therefore, payment of
Rs.21,40,000/-    was     not   in   accordance   with   the   terms   of   the
supplementary partnership deed dated 1st April, 1992 though authorized
by the said deed. The remuneration was paid in terms of a subsequent
understanding between the two partners regarding the quantum and the
amount to be pai The question of law is answered in favour of the
Revenue and against the assessee. The appeal is dismissed. However,
there will be no orders as to costs.

   2. Excise duty Refund eligible for deduction u/s. 80IB(1)

      ACIT vs. The Total Packaging Services (ITAT Mumbai)-


His appeal by the revenue is directed against the order dated 16.7.2009
of the CIT(A) for the Assessment Year 2006-07.

2. The only effective raised by the revenue in this appeal is as under:


“On the facts and circumstances of the case, the ld CIT(A) erred in law to
hold that income from MODVAT credit is “derived from” industrial
undertaking as contemplated in Sec. 80IB(1) ignoring the vital fact that
the very source of such income was government policy imposing excise
duty at differential rate, say 16% on the purchases of raw materials for
the earlier assessment year and 8% on finished goods sold during the
current financial year, which can be „attributed to‟ industrial undertaking
but not „derived from‟industrial undertaking.”


3 The assessee availed/set off Modvat credit of excise duty of earlier
years amounting to Rs. 1 .93 crores. The Assessing Officer questioned the
allowability of deduction claimed u/s 801B on Modvat credit. The assessee
has submitted before the Assessing Officer that the assessee could not set
off/availed the Modvat credit of the earlier years because of excise duty
on the purchase of raw material was 16% whereas on sale, it was 8%.
Hence, the same was though available to the assessee; but could not be
utilized because of the differential rates of excise duty on purchase of raw
material and sale of goods. The Assessing Officer disallowed the claim of
the assessee and held that the income has arisen because of differential
rates of excise duty on purchase and sale; therefore, cannot be called as
arising out of manufacturing activity of the undertaking.


3.1 On appeal, the CIT(A) allowed the claim of the assessee vide the
impugned order.


4 Before us, the ld DR has mainly contended that since the Modvat credit
was available with the assessee during t he earlier years; therefore, this
benefit has not arisen during the year under consideration and thus is not
eligible for deduction u/s 801B for the year under consideration.


4.1 On the other hand, the ld AR has submitted that the amount of
income has arisen because of the differential rates of excise duty on
purchase and sale and since the excise duty on sale was 8%; therefore,
the assessee was not able to recover the full excise duty paid on
purchases. Vide Finance Act 2006, the government has amended the
structure of excise duty and reduced the excise duty from 16% to 8% on
raw material used by the assessee. Due to the change in the rate of
excise duty vide Finance Act 2006; the assessee was able to recover the
excise duty paid in the earlier years by setting off of the excise duty paid
on the purchases in the earlier years against the excise duty payable on
sale during the year. Thus, the ld AR of the assessee has submitted that
the income, in fact, arisen only during the year under consideration when
the assessee availed the setting off of credit of the excise duty. He has
further submitted that the issue on merit is covered in favour of the
assessee by the decision of the Hon‟ble Guwahati High Court in the case
of Commissioner of Income-tax v. Meghalaya Steels Ltd. reported in 332
ITR 91 as well as the order dated 29th April 2001 of the Delhi Bench of the
Tribunal in ITA No. 3303/Del/2010.


5 We have heard the rival contention and carefully perused the relevant
material on record. Undisputedly, the Modvat credit earned by the
assessee during the earlier years could not be availed and set off because
of the huge difference of excise duty rates on purchase of raw material
and sale of goods. Upto 31st March, 2005, the excise duty on raw material
was 16% which the assessee used to pay whereas the excise duty on
manufactured goods collected by the assessee was 8%. Therefore, it was
not possible to recover the full excise duty paid on purchases from the
excise duty collected on the finished goods. Vide Finance Act, 2006, the
Government has amended the rates of excise duty and consequently, the
excise duty on purchases of raw material by the assessee was reduced
from 16% to 8%. Thus, only after the amendment vide the Finance Act
2006, the assessee was able not only to recover the full excise duty
payable but also set off the Modvat credit earned in the earlier years.


5.1 It is not the case of the refund of excise duty in cash; but only a
benefit of Modvat credit was available to the assessee, which could be set
off and utilised against the collection of the excise duty on sale of goods
w.e.f Assessment Year 2006-07. Therefore, this amount has been rightly
taken into account as income for the year under consideration. Even
otherwise, the Assessing Officer has not treated this amount as the
income of the earlier years but denied the deduction on the ground that
this is not the income derived from the industrial undertaking.


6 In view of the above discussion, we do not find any merit or substance
in the contention of the ld DR.


6.1 On the issue whether this benefit of Modvat credit is the income
derived from the industrial undertaking or not, the Hon‟ble Guwahati High
Court in the case of Meghalaya Steels Ltd. (supra), has held as under:


“In so far as the second question is concerned, the Central excise duty
refund claimed by the assessee is on the basis of an exemption
notifications issued by the Ministry of Finance (Department of Revenue)
being Notification No. 32 of 1999 and Notification No. 33 of 1999 both
dated July 8, 1999. In terms of these notifications, a manufacturer is
required to first pay the Central excise duty and thereafter claimed a
refund on fulfilment of certain conditions. In the next month, after
verification of the claim, the Central excise duty so deposited is refunded
to the assessee if the conditions laid down in the notifications are fulfilled.
In the present case, there is no dispute that the assessee was entitled to
the Central excise duty refund.


The Central Board of Excise and Customs in its circular dated December
19, 2002 clarified that the refund is not on account of excess payment of
excise duty but is basically designed to give effect to the exemption and
to operationalise the exemption given by the notifications. In that sense,
the Central excise duty refund does not appear to bear the character of
income since what is refunded to the assessee is the amount paid under
the modalities provided by the Department of Revenue for giving effect to
the exemption notifications. There is also nothing to suggest that the
assessee has recovered or passed on the excise duty element to its
customers.


Even assuming the refund does amount to income in the hands of the
assessee, it is a profit or gain directly derived by the assessee from its
industrial activity. The payment of Central excise duty has a direct nexus
with the manufacturing activity and similarly, the refund of the Central
excise duty also has a direct nexus with the manufacturing activity. The
issue of payment of Central excise duty would not arise in the absence of
any industrial activity. There is, therefore, an inextricable link between
the manufacturing activity, the payment of Central excise duty and its
refund. In the circumstances, we are of the opinion that question No. 2
must be answered in the affirmative in favour of the assessee and against
the Revenue.”


6.2 The Hon‟ble High Court has decided the issue in favour of the
assessee after considering the decision of the Hon‟ble Supreme Court in
the case of Liberty India vs CIT reported in 317 ITR 218. Accordingly,
following the decision of the Hon‟ble Gawahati High Court in the case of
Meghalaya Steels Ltd (supra), we deicide this issue against the revenue
and in favour of the assessee.


The Total Packaging Services 7 In the result, the appeal filed by the
revenue is dismissed.

Order pronounced on the 4th,day of Nov 2011.

                            Analysis of the case.


In   the   present   case   MODVAT   credit   is   “derived   from”   industrial
undertaking as contemplated in Sec. 80IB(1) ignoring the vital fact that
the very source of such income was government policy imposing excise
duty at differential rate, say 16% on the purchases of raw materials for
the earlier assessment year and 8% on finished goods sold during the
current financial year, which can be „attributed to‟ industrial undertaking
but not „derived from‟industrial undertaking.”


   3. Section 80IA(5)- Once the set off Loss & Depreciation of
      eligible unit prior to initial assessment year has taken place
      in an earlier year against the other income, the Revenue
      cannot rework the set off amount and bring it notionally


Shri. Anil H. Lad v. DCIT (ITAT Bangalore)- Where the depreciation
and loss of earlier assessment years have already been set off against
other business income of those assessment years, there is no need for
notionally carrying forward and setting off of the same depreciation and
loss in computing the quantum of deduction available u/s.80I. The
Hon‟ble Court has held further that the year of commencement alone
need not be the “initial year”, but depending upon the facts of the case
and the option exercised by the assessee, the year of claim also can be
considered as “initial assessment year”. The court has also examined the
issue from a different legal angle and held that the proposition argued by
the Revenue is not compatible with the scheme of gross total income
conceptualized in the IT Act, especially in the light of section 80AB which
are all relevant while considering the deduction u/s.80IA which is falling
under Chapter VIA of the IT Act, 1961. Where the earlier depreciation and
losses have already been set off, those loss and depreciation do not go to
reduce the gross total income of an assessee within the meaning of
section 80AB and therefore bringing the notional concept of carrying
forward and set off will be contrary to the scheme of section 80AB and
concept of gross total income.

This is an appeal filed by the assessee. The relevant assessment year is
2008-09. The appeal is directed against the order of the Commissioner of
Income-tax(A)-VI at Bangalore, dated.29. 10.2010 and arises out of the
assessment completed u/s. 143(3) r.w.s.153A of the IT Act, 1961.
2. The assessee was the proprietor of M/s.VSL Mining Company, till the
financial year preceding to the relevant assessment yearinvolved in the
present appeal. The proprietary concern of the assessee was taken over
by a company named M/s. VSL Mining Company P. Ltd., in the previous
year relevant to the assessment year under appeal. However, the
assessee continued to remain as partner of M/s. V. S. Lad and Sons which
carries on the business of mining operations of extractions, processing
and export of iron ore. The assessee filed the return of income on a total
income of Rs. 4,41,22,030/- after claiming a sum of Rs. 1,97,73,931/-
as deduction u/s. 80IA of the Act.


3. There was a search and survey action in assessee‟s concerns as well as
the associate concerns. In the back drop of the search action, assessment
was made by the assessing authority u/s. 153A. Naturally, 153A
assessments covered even the earlier assessment years. In the course of
the assessment proceedings for the impugned assessment year 2008-09,
the Assessing Officer disallowed the deduction of Rs.       1,97,73,931/-
claimed by the assessee as deduction u/s.80IA. The Assessing Officer has
also made an addition of Rs. 24,06,700/- on the ground of seizure of
cash at the time of search. He has further made an addition of
Rs.   1,68,43,841/- by way of 50% of the disallowance of expenses
incurred on running and maintenance of helicopter. The disallowance was
made on the ground of personal user. Accordingly, the Assessing Officer
determined a total income of Rs. 8,31,46,500/- as against a total income
of Rs. 4,41,22,030/- returned by the assessee.


4. The assessment was taken in first appeal. The Commissioner of
Income-tax(A) confirmed the order of the assessing authority disallowed
the claim made by the assessee u/s.80IA and upheld the addition of
Rs. 1,97,73,931/-. The Commissioner of Income-tax(A) also confirmed
the addition of Rs. 24,06,700/- made by the assessing authority on the
basis of seizure of cash in the course of search carried out u/s. 132.
Regarding   the   50%    disallowance   of   helicopter   expenses,   the
Commissioner of Income-tax(A) set aside the disallowance and deleted
the addition of Rs. 1,68,43,841/-. The grounds raised on levy of interest
was disposed off as consequential.


5. The assessee is aggrieved on the two additions sustained by the
Commissioner of Income-tax(A) and also in respect of levy of interest
u/s.234B and 234C.
Analysis of the case.

In the present case the depreciation and loss of earlier assessment years
have already been set off against other business income of those
assessment years, there is no need for notionally carrying forward and
setting off of the same depreciation and loss in computing the quantum of
deduction available u/s.80I. The Hon‟ble Court has held that the year of
commencement alone need not be the “initial year”, but depending upon
the facts of the case and the option exercised by the assessee, the year of
claim also can be considered as “initial assessment year”. The court has
also examined the issue from a different legal angle and held that the
proposition argued by the Revenue is not compatible with the scheme of
gross total income conceptualized in the IT Act, especially in the light of
section 80AB which are all relevant while considering the deduction
u/s.80IA which is falling under Chapter VIA of the IT Act, 1961. Where
the earlier depreciation and losses have already been set off, those loss
and depreciation do not go to reduce the gross total income of an
assessee within the meaning of section 80AB and therefore bringing the
notional concept of carrying forward and set off will be contrary to the
scheme of section 80AB and concept of gross total income.


The Commissioner of Income-tax(A) confirmed the order of the assessing
authority disallowed the claim made by the assessee u/s.80IA and upheld
the addition of Rs. 1,97,73,931/-. The Commissioner of Income-tax(A)
also confirmed the addition of Rs. 24,06,700/- made by the assessing
authority on the basis of seizure of cash in the course of search carried
out u/s. 132. Regarding the 50% disallowance of helicopter expenses, the
Commissioner of Income-tax(A) set aside the disallowance
4. EPF dues from a company under liquidation has to get
      priority – SCEmployees Provident Fund Commissioner Vs.
      O.L. of Esskay Pharmaceuticals Limited (Supreme Court)


In terms of Section 530(1), all revenues, taxes, cesses and rates due
from the company to the Central or State Government or to a local
authority, all wages or salary or any employee, in respect of the services
rendered to the company and due for a period not exceeding 4 months all
accrued holiday remuneration etc. and all sums due to any employee from
provident fund, a pension fund, a gratuity fund or any other fund for the
welfare of the employees maintained by the company are payable in
priority to all other debts


The effect of the amendment made in the Companies Act in 1985 is only
to expand the scope of the dues of workmen and place them at par with
the debts due to secured creditors and there is no reason to interpret this
amendment as giving priority to the debts due to secured creditor over
the dues of provident fund payable by an employer.


Of course, after the amount due from an employer under the EPF Act is
paid, the other dues of the workers will be treated at par with the debts
due to secured creditors and payment thereof will be regulated by the
provisions contained in Section 529(1) read with Section 529(3), 529A
and 530 of the Companies Act.


In view of what we have observed above on the interpretation of Section
11 of the EPF Act and Sections 529, 529A and 530 of the Companies Act,
the judgment of the Division Bench of the Gujarat High Court, which
turned on the interpretation of Section 94 of the Employees‟ State
Insurance Act and Sections 529A and 530 of the Companies Act and on
which reliance has been placed by the learned Company Judge and the
Division Bench of the High Court while dismissing the applications filed by
the appellant, cannot be treated as laying down the correct law.
Analysis of the case.


In the present case when Section 11(2) was inserted in the EPF Act by Act
No. 40 of 1973 and any amount due from an employer in respect of the
employees‟ contribution was declared first charge on the assets of the
establishment and became payable in priority to all other debts. However,
in the Companies Act by Act did not declare the workmen‟s dues (this
expression includes various dues including provident fund) as first charge


In the result, the appeals are allowed. The impugned judgment as also
the order of the learned Company Judge are set aside and the
applications filed by the appellant are allowed in terms of the prayer
made. The Official Liquidator appointed by the High Court shall deposit
the dues of provident fund payable by the employer within a period of 3
months.




   5. Tax Planning- Save tax through your family


Implest way of saving tax is by investing through parents, parent in laws,
wife and children. If you invest in the right instrument, the rate of return
may be higher as well. Here is how we can save tax through our family
members.

Through Parents


Its a fact that Your own parents as well as your own in-laws can become
legal tools of tax planning for you and your family. If you want to achieve
this dictum then all you are need to do is just to give away a portion of
your funds, either as a gift or a loan, to your parents as well as your
parents in law so that in years to follow your income tax burden becomes
lighter as the income on funds transferred by you to them which would
bring in income would be taxed in their hands.
With the increase in the limit of exempted income for individuals, women
tax payers and senior citizens, it is now a great time for having separate
income tax files for all family members.


Assuming that both the parents are senior citizens. Here‟s how you go
about it. Income tax deductions allow senior citizens a tax-free income of
Rs 2.4 lakh. To exhaust this limit, say you gift Rs 28 lakh to each parent
in cash. Of this, both can individually put Rs 15 lakh in a senior citizens
savings scheme that earns a return of nine per cent and pays interest
every quarter. Each will get yearly interest of nearly Rs 1.4 lakh.


If they invest the remaining Rs 13 lakh each in the State Bank of India‟s
(SBI) fixed deposit (FD) of eight-years (at an interest rate of 7.5 per
cent) that pays interest each quarter, it will fetch them an income of
nearly Rs 1 lakh annually.


That means both parents have earned Rs 2.8 lakh from the senior citizen
saving scheme and another Rs 2 lakh from SBI‟s five-year deposits each
year. A total savings of Rs 4.8 lakh – the tax-free limit (Rs 2.4 lakh) that
each parent enjoys. So, they don‟t even need to file tax returns.

Same planning can be done for parents in laws.

Through Major Children


All your adult children are as solid as a rock to help you save your income
tax. After October 1, 1998, the provisions relating to gift-tax have ceased
to exist.


Now you are free to gift away your money to your children without
attracting gift tax. This amendment makes it a good idea to make liberal
gifts to your major children so that the income, if any, arising from these
investments in years to come can be taxed in the hands of your children.
For example, if you have fixed deposits let us say of Rs 50 lakh and you
have a son and a daughter, who are not minors, then it makes sense if
the son is gifted Rs 21.25 lakh and if he invests the same in an FD (at an
interest rate of 7.5 per cent) , his income of Rs 1.59 lakh will be tax-free.
For daughter, the tax-free income is Rs 1.9 lakh. This means a gift of
nearly Rs 25 lakh. On this amount the son as well as the daughter will not
pay income tax because the amount is below the exemption limit. In this
manner, your children can now be great source of tax saving for you.


Thus, a person making a gift to children can enjoy the benefit of lower
income tax incidence in the family. If, however, due to some reasons you
do not feel inclined to make huge gifts to your major children, then you
may give interest-free loans to your adult children so as to legally reduce
your taxable income.


It is lawful to grant interest-free loans to adult children from your own
funds.

Through Your wife


Married taxpayers can make a substantial saving of income tax by setting
up two separate independent income tax files, one each for the husband
and the wife.


If your wife prior to her marriage was already assessed for income tax,
then she may continue to file her income tax return in the same income
tax ward/circle where she was assessed. Your wife‟s Permanent Account
Number would also continue to be the same though her surname would
change after marriage as also her residential address.


After marriage all that is needed for a separate income tax return for your
wife is to file the income tax return with her new surname and new
address. If your wife desires, she can continue to file the income tax
return mentioning her old address (before marriage).
Due to marriage if the town changes, then she can file the income tax
return in the new town according to the new jurisdiction which would be
on the basis of residential address.
Tax Evasion cases.

      1. ITAT order in Nokia tax evasion case, Challenged by
           department in HC 26 FEB,2010


In its petition, the income tax department said the ITAT has
wrongly deleted the penalty imposed by it on Nokia India for
allegedly wrongly declaring its income.


The government on Wednesday approached the Delhi high court
challenging an order of the Income Tax Appellate Tribunal (ITAT) that
gave relief to mobile phone maker giant Nokia in a case of alleged tax
evasion.


A division bench comprising justice BD Ahmed and justice Siddharth
Mridul admitted the petition filed by the income tax department and
posted the matter to 12 April for next hearing.


In its petition, the IT department said the ITAT has wrongly deleted the
penalty imposed by it on Nokia India for allegedly wrongly declaring its
income. It further said “assessee (Nokia) knowingly furnished inaccurate
particulars of its income and has concealed the facts relating to
computation of its correct income for the year under consideration.”


The IT department had imposed a penalty of Rs1.14 crore on Nokia on 27
March 2006, for allegedly furnishing wrong returns for the financial year
2001-02. According to IT department, Nokia had claimed nil tax on some
aspects such as allowances on foreign travel, account provision of
warranty, marketing expenses etc.


Later, in March 2004, the department picked up Nokia‟s income tax return
for scrutiny and sent a notice after finding alleged irregularities. After
scrutiny, IT department assessed Nokia‟s income at Rs12 crore and
imposed a fine of Rs1.4 crore and equal amount of tax for alleged evasion
of tax by the firm.

                           Analysis of the case


In the present nokia case the IT department said the ITAT has wrongly
deleted the penalty imposed by it on Nokia India for allegedly wrongly
declaring its income. It further said “assessee (Nokia) knowingly furnished
inaccurate particulars of its income and has concealed the facts relating to
computation of its correct income for the year under consideration.


This was challenged by Nokia before the Income Tax Appellate Tribunal,
which deleted the penalty provision.


      2. Excise, service tax evasion of Rs 5,000 crore in FY’11 19
         May,2011


Tax sleuths unearthed central excise and service tax evasion amounting
to over Rs 5,500 crore in the 2010-11 financial year, even as pressure
mounted on the go crackdown on black money.Unravelling the trail of the
ill-gotten wealth, taxmen was able to recover Rs 431 crore in search-and-
seizure operations during the same period, official data shows.


While the intelligence wing of the Central Excise department registered
cases of duty evasion amounting to Rs 1,356 crore in FY‟11, cases of
evasion totalling an amount of Rs 4,352 crore were registered under the
service tax category, during the same period.

                          Analysis of the case.


Tax sleuths unearthed central excise and service tax evasion amounting
to over Rs 5,500 crore in the 2010-11 financial year The number of cases
of central excise and service tax evasion is on the rise, as per the data,
with a 14 per cent increase in the quantum of black money detected in
the 2010-11 financial year in comparison to the previous year.
3. Salman Khan Tax case- Court moved over Rs.40 million
         ‘evasion’ 18 oct.2010


The Bombay High Court will soon hear a petition filed by the income tax
(IT) department pertaining to a 10-year-old case involving alleged tax
evasion of Rs.40 million by Bollywood actor Salman Khan.The IT
department has challenged an order of the income tax appellate tribunal
which had earlier ruled in the actor‟s favour.


He was found to have allegedly evaded the tax during the assessment
year 2000-01.According to IT sources, Khan had declared his income as
Rs.9.32 crore during 2000-01 which was later found to be Rs.13.61 crore.
Khan challenged the IT department‟s assessment order before the IT
commissioner (appeals) who ruled in his favour. The IT department
followed it up with an appeal before the tribunal which also ruled in
Khan‟s favour. Now, the department has sought the quashing of the
tribunal‟s order.

                          Analysis of the case.


The IT department has challenged an order of the income tax appellate
tribunal which had earlier ruled in the actor‟s favour. According to IT
sources, Khan had declared his income as Rs.9.32 crore during 2000-01
which was later found to be Rs.13.61 crore.


      4. Vodafone case

The Income Tax Department has filed a caveat in the Bombay High Court
in the Vodafone tax case.       The caveat was filed to avoid ex-parte
proceedings. Vodafone is likely to move the Bombay High Court next
week. It is learnt that the Income Tax Department has issued a seven-
page showcause with its final order. The showcause represents new
proceedings against Vodafone and relates to representative assesses.
The notice treats Vodafone as an agent of Hutchison Telecommunications
International (HTIL). It is the first time that a tax notice is treating a non-
resident as an agent of another non-resident. The notice proposes
substantive assessment for Vodafone under section 163 of the Income
Tax Act.


“If courts say Hutch has tax liability, but no TDS liability for Vodafone,
then notice comes in handy.” The I-T Department is trying to corner
Vodafone from both TDS as well as assessment sides.


This entire case revolves around the Hutch–Vodafone deal, which was
struck way back in 2007. Back then, Vodafone had acquired 67% stake in
Hutchison Essar from Hutchison Telecommunications International (HTIL).
The taxman said this transaction was taxable in India because the
underlying asset was in India and therefore sought a capital gains tax.
Vodafone‟s said the I-T Department has no clear jurisdiction over the deal
because    Vodafone       is   a   Netherlands   company   and   Hutchison   is
incorporated in the Cayman‟s Islands. Vodafone had moved the Supreme
Court in January 2009, but the apex court had refused to intervene and
had directed the I-T Department to revert on jurisdiction.


This order could not have come at a worse time for Vodafone which is
facing intense pricing wars and fierce competition in the telecom space. It
has recently been forced to write-off a staggering Rs 15,000 crore from
its local subsidiaries.


The order was also drawn up on a circular issued in China last year. In
December 2009, China issued the infamous circular 698, which brought
all transfers of Chinese resident enterprises that were executed offshore
under the tax net.


The circular said that all foreign entities must disclose details of transfers
of Chinese companies to the Chinese tax authorities where such transfers
are executed through an offshore structure located in a no tax or nil tax
jurisdiction.


The Chinese circular asked for a variety of documentation to be disclosed
to its tax authorities such as the contract between two companies, the
relationship between the foreign entity and the holding company being
transferred, the operations of the holding company, and most importantly
why this particular holding company in that jurisdiction had been chosen
to execute the transfer of shares.


Basically, the Chinese circular seeks to establish whether or not this
holding company has been established and is being used for the purpose
of tax evasion.


Indian tax authorities in the Vodafone case have not used the Chinese
circular to seek to establish jurisdiction over Vodafone in India. However,
they have used it as an example of the fact that other jurisdictions have
brought Vodafone type transactions under the tax net.

                           Analysis of the case.


Vodafone had acquired 67% stake in Hutchison Essar from Hutchison
Telecommunications     International    (HTIL).   The   taxman     said   this
transaction was taxable in India because the underlying asset was in India
and therefore sought a capital gains tax. Vodafone‟s said the I-T
Department has no clear jurisdiction over the deal because Vodafone is a
Netherlands company and Hutchison is incorporated in the Cayman‟s
Islands. In the present case the main objective is to counter Vodafone
arguments on tax deductible at source (TDS) liability. Vodafone said that
even if the income is chargeable to tax, then it is not liable for TDS.

Hence, the claim that Vodafone is making that this is not done in any
jurisdiction anywhere else in the world is incorrect
5. Star TV case.


In the Star TV case, a group of companies comprising owners of Indian
language channels, Star Plus, Star Gold, Star One and Star Utsav, are
proposed to be merged with an Indian group company. The merger,
organised as a scheme of amalgamation is presently awaiting approval of
the Bombay High Court under the Companies Act. The merger sought to
achieve synergies of operation and enhanced operational flexibility and
the AAR found merit in its commercial justification. Further, the AAR held
that contracting parties are free to enter into a legitimate transaction,
notwithstanding tax benefits. The judgement is well reasoned and brings
a level of stability to the ongoing debate on tax avoidance.

                            Analysis of the case.


In the present case Star argued that the said merger met all the specified
conditions for tax neutral merger under the Indian tax laws. The Revenue,
however, contended that the merger is a „make-believe‟ scheme having
no legitimate purpose apart from tax evasion and avoidance of tax in
India.




Increasing legislative drive on tax avoidance


After Advance Ruling in Star debated related to TV Tax planning vs
tax evasion going on 22 feb 2010



An anti-avoidance provision in the tax law is a measure to check
convoluted transactions devised exclusively for the purpose of evading
taxes. Such provisions attempt to strike down unacceptable tax avoidance
practices and have been in vogue in matured tax jurisdictions such as
Australia, Canada.
The present law contains specific anti-avoidance provisions as opposed to
general provisions. Transfer pricing regulations are an example, which
seek to ensure adequate arms length payments between related parties
and curb profit shifting in cross-border scenarios. More importantly, the
Direct Tax Code proposes to introduce a general Anti-Avoidance Rule
(GAAR) law. GAAR will empower a Commissioner of Income Tax to
declare any transaction as an „impermissible avoidance arrangement‟ if it
results in certain tax benefits or it creates rights or obligations which
would not normally be created between persons dealing at arm‟s length or
it results in abuse of the provisions of the DTC, lacks commercial
substance or bona fide business purpose, etc.,


Amongst DTC provisions, the GAAR proposal has resulted in higher levels
of anxiety amongst business who fear that the judicially accepted
distinctions between permissible tax planning and tax evasion will
disappear due to its wide coverage and vague drafting.

                         Tax Avoidance cases.


1.Payment of commission in lieu of dividend is Tax Avoidance 23
June 2011

Dalal Broacha Stock Broking Pvt Ltd vs. ACIT (ITAT Mumbai –
Special Bench)- Provisions of section 36(1)(ii) will apply in case of all
employees including share holder employees irrespective of the fact
whether any extra services have been rendered or not. The issue whether
payment of bonus or commission to an employee will be covered by the
provisions of section 36(1)(ii) or section 37(1) is also settled by the
judgment of Hon‟ble Jurisdictional High Court in case of Subodh Chandra
Poppatlal vs. CIT (24 ITR 586) in which the Hon‟ble High Court while
dealing with similar provisions of the old Act held that when an
expenditure fell under section 10(2)(x) [which corresponds to section
36(1)(ii)], in the sense that it is an expenditure in the nature of bonus or
commission paid to an employee for services rendered then its validity
can only be determined by the tests laid down in section 10(2)(x) and not
by the tests laid down in section 10(2)(xv) which corresponds to section
37(1). Respectively following the said judgment, we hold that the
payment of commission to the three director employees had been rightly
considered by the authorities below under the provisions of section
36(1)(ii) and that the provisions of section 37(1) will not be applicable in
such cases.


                           Analysis of the case
It was also held that that the payment of commission of Rs.1.20 crores to
the three working directors was in lieu of dividend and the same is not
allowable as deduction under section 36(1)(ii).



2. Bonus stripping under the Income tax lens 13 june 2010


After taxing investors for dividend stripping, the Income Tax (I-T)
Department is gearing up to tax bonus stripping. Official sources say
scrutiny of returns filed by companies, brokers and individuals active in
the stock markets and in possession of shares revealed wide use of this
mechanism to evade tax.


According to data compiled by Business Standard Research Bureau, 314
companies     have   announced   bonus    shares   since   2005-06.   While
assessments are on for 2008-09, in most cases the department is
checking returns filed for the last four years under the scrutiny
assessment, sources add.


To explain how bonus stripping works, a source said: “Say, someone is in
possession of 1,000 shares of company XYZ, priced at Rs 1,000 each.
Following a bonus issue announced by XYZ in the ratio of 1:1, the
shareholder gets 1,000 stocks more for free. By the end of the issue, the
investor owns 2,000 shares, each priced at Rs 500. He now sells the initial
1,000 shares at Rs 500 each, incurring a short-term capital loss. He uses
the loss to reduce gains made in other market transactions. Later, he sells
the remaining 1,000 shares, at a profit since they were acquired free and
reaps the benefit of tax exemption on long-term capital gains.”


While Section 94 of Indian Income Tax Act 1961 refers to tax avoidance
by certain transactions in securities, Section 94(8) covers taxation of
bonus shares held under the mutual fund units.

                           Analysis of the case


bonus equity shares held by individual investors or companies are
completely out of the tax net. The department now proposes to extend
the coverage to securities, too, say sources. The I-T Department
recommends an amendment to Section 94(8) of the Income Tax Act to
bring such proceeds within the tax ambit


3. Govt may plug gaps in tax evasion laws to stop treaty shopping
19 june 2009


The party could end soon for domestic and multinational companies that
do tax planning only to avoid paying taxes in India. The government is set
to usher in the next stage of reforms in taxation, framing anti-abuse rules
that will empower tax authorities to lift the corporate veil and look for
what are called `avoidance‟ transactions. Other anti-avoidance measures
could include controlled foreign corporation (CFC) regulations and norms
on thin capitalisation.


Tax benefits will be denied to firms found indulging in tax avoidance
through one or a series of transactions. This would cover both cross-
border and domestic deals. CFC regulations, on the other hand, will help
prevent domestic firms from accumulating profits in low tax jurisdictions.
In the US, these rules apply to US investors who own substantial stock in
non-US corporations. It accelerates the taxation of passive income in the
hands of US investors.


Norms on thin capitalisation will ensure that domestic companies do not
over-leverage on debt when they expand to set up operations overseas. If
they do so, such firms may not be able to claim a tax deduction on the
excess interest. Again in the US, thin capitalisation rules discourage US
companies from having a debt-equity ratio higher than 3:1.

4. Dividend Stripping Loss is Allowable – Bombay High Court


Wallfort Shares & stock Brokers Ltd v ITO (2005) 96 ITD 1
(Mum).Tax avoidance- dividend stripping-s- 4, 28 (1) 94 (7),71
5 oct 2008


Where the assessee bought units of a mutual fund, received tax-free
dividend thereon and immediately thereafter redeemed the units and
claimed the difference between the cost price and redemption value as a
loss and the same had been upheld by a Five Member Special Bench of
the Tribunal as a genuine loss, HELD affirming the order of the Special
Bench                                                                  that:
(i) S. 94(7) was inserted prospectively w.e.f. 1.4.2002 to disallow
dividend stripping losses. If the argument of the Revenue that even
transactions prior to s. 94(7) can be disallowed is accepted, it will render
s. 94(7) redundant and also lead to anomalous results.

(ii) CBDT Circular No. 14 of 2001 makes it clear that prior to s. 94(7) the
loss was allowable. This Circular is binding on the revenue and they
cannot argue contrary to that.


(iii) Even otherwise it was not established that the motive was to earn a
loss. The allegation that there was complicity between the mutual funds,
the brokers and the assessee was also without merit. Mc Dowell 154 ITR
148 (SC) and Azadi Bachao Andolan 263 ITR 706 (SC) considered.


(iv) The alternative argument that the loss should be treated as
expenditure incurred to earn dividend and disallowed u/s 14A is also
without merit.


win for I-T, Interest paid on loans for acquisition of new machinery
before same is first put to use, cannot be claimed as revenue expenditure
even as extension of existing business; to be added to „actual cost‟ of
assets : P & H High Court LB

5. Interest paid on loans for acquisition of new machinery before
same is first put to use, cannot be claimed as revenue expenditure
1 feb 2008


FOR the Income Tax Department, the latest ruling of the Larger Bench of
the Punjab & Haryana High Court amounts to a big win.


And, at the centre of the dispute was whether the interest paid on
borrowed capital for purchasing new plant and machinery before the same
is put to use is revenue expenditure or to be added to the „actual cost‟ of
the asset? What further complicated the issue was the fact that the
assessee was a running company and wanted to set up a new plant by
buying new machinery out of borrowed capital. Since the new production
plant was mere an extension of the existing business, the assessee
treated the interest payment as revenue expenditure. Although to curb
tax avoidance the CBDT had inserted explanation 8 to Sec 43(1) vide
Finance Act, 1986 w e f April 1, 1974 and also inserted a proviso to Sec
36(1)(iii) vide Finance Act, 2003 to make it clear that and such amount of
interest is for the period beginning from the date on which the capital was
borrowed for acquisition of the asset till the date on which such asset was
first put to use. Given that the laws were so unambiguous and clear what
was the actual issue before the Larger Bench? It was the interpretation of
the converse whether the law also meant that the interest payment
before the capital assets are put to use are to be added to the „actual
cost‟ of the assets or to be allowed as revenue expenditure.

                          Analysis of the case.


In the present case assessee was a running company and wanted to set
up a new plant by buying new machinery out of borrowed capital. Since
the new production plant was mere an extension of the existing business,
the assessee treated the interest payment as revenue expenditure. no
deduction shall be allowed for interest paid, in respect of capital borrowed
for acquisition of an asset for extension of existing business or profession
(whether capitalized in the books of account or not)
REFERENCES

1. WWW.TAXGURU.IN
2. : http://www.investopedia.com/terms/t/tax_avoidance.asp#ixzz1cf7H4IXb

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Final ct

  • 1. A Corporate Taxation PROJECT REPORT ON Tax Planning,Tax Avoidance AND Tax Evasion In partial fulfilment for the requirement of comprehensive project in Two years Full-time MBA programme, Gujarat Technological University SUBMITTED TO: PROF. Dharmesh Shah Core faculty- NRIBM SUBMITTED BY: Submitted by: Kinjal Modha (NR10052)
  • 2. ACKNOWLEDGEMENT I would especially like to thank Prof. Dharmesh Shah, who guided us throughout the project and gave us valuable suggestions and encouragement to complete project report successfully. We express our sincere gratitude to her that he gave his valuable time to support us. I would also like to thank Dr Hitesh Ruparel, Director of our college N. R. Institute of Business Management to give us this opportunity. I would like to thank the Computer Lab Instructor, the Librarian and the Administrative staff of N. R. Institute of Business Management.
  • 3. Introduction The use of legal methods to modify an individual's financial situation in order to lower the amount of income tax owed. This is generally accomplished by claiming the permissible deductions and credits. This practice differs from tax evasion, which is illegal. The use of the terms tax avoidance and tax evasion can vary depending on the jurisdiction. In general, the term "evasion" applies to illegal actions and "avoidance" to actions within the law. The term "mitigation" is also used in some jurisdictions to further distinguish actions within the original purpose of the relevant provision from those actions that are within the letter of the law, but do not achieve its purpose. Most taxpayers use some forms of tax avoidance. For example, individuals who contribute to employer-sponsored retirement plans with pre-tax funds are engaging in tax avoidance because the amount of taxes paid on the funds when they are withdrawn is usually less than the amount that the individual would owe today. Furthermore, retirement plans allow taxpayers to defer paying taxes until a much later date, which allows their savings to grow at a faster rate.
  • 5. Cases of Tax planning. 1. Sec. 40(b)(v)- Quantum of remuneration or the manner of computing the quantum of remuneration should be stipulated in the partnership deed The present appeal under Section 260A of the Income Tax Act, 1961 (Act, for short) has been preferred by Sood Brij & Associates, a partnership firm, consisting of two partners namely A.K. Sood and B.M. Gupta, who are practicing Chartered Accountants. In their return for the assessment year 2007-08, Rs.21,40,000/- was claimed as a deduction towards salary/remuneration paid to the partners. This was disallowed by the Assessing Officer on the ground of violation of Section 40(b)(v). The appellant-assessee has been unsuccessful in appeals before the Commissioner of Income Tax (Appeals) and the Income Tax Appellate Tribunal, Delhi (tribunal, for short). The impugned order of the tribunal is dated 29th October, 2010. 2. After hearing the counsel, the following substantial question of law is framed:-“ Whether on reading of clause 7 of the partnership deed dated 1st May,1976 and clauses 1 and 2 of the supplementary partnership deed dated 1st April,1992, the tribunal was right in holding that remuneration of Rs.21,40,000/- paid to the two partners cannot allowed as a deduction under Section 40(b)(v) of the Act?”3. Relevant part of Section 40 of the Act reads as under:- “40. Amounts not deductible.–Notwithstanding anything to the contrary in sections 30 to 38, the following amounts shall not be deducted in computing the income chargeable under the head “Profits and gains of business or profession”,– (b) in the case of any firm assessable as such,–
  • 6. (i) any payment of salary, bonus, commission or remuneration, by whatever name called (hereinafter referred to as remuneration) to any partner who is not a working partner; or (ii) any payment of remuneration to any partner who is a working partner, or of interest to any partner, which, in either case, is not authorised by, or is not in accordance with, the terms of the partnership deed; or (iii) any payment of remuneration to any partner who is a working partner, or of interest to any partner, which, in either case, is authorised by, and is in accordance with, the terms of the partnership deed, but which relates to any period (falling prior to the date of such partnership deed) for which such payment was not authorised by, or is not in accordance with, any earlier partnership deed, so, however, that the period of authorisation for such payment by any earlier partnership deed does not cover any period prior to the date of such earlier partnership deed; or (iv) any payment of interest to any partner which is authorised by, and is in accordance with, the terms of the partnership deed and relates to any period falling after the date of such partnership deed in so far as such amount exceeds the amount calculated at the rate of *twelve per cent. simple interest per annum; or (v) any payment of remuneration to any partner who is a working partner, which is authorised by, and is in accordance with, the terms of the partnership deed and relates to any period falling after the date of such partnership deed in so far as the amount of such payment to all the partners during the previous year exceeds the aggregate amount computed as hereunder:– Provided that in relation to any payment under this clause to the partner during the previous year relevant to the assessment year commencing.
  • 7. Explanation 1.–Where an individual is a partner in a firm on behalf, or for the benefit, of any other person (such partner and the other person being hereinafter referred to as “partner in a representative capacity” and “person so represented”, respectively),– (i) interest paid by the firm to such individual otherwise than as partner in a representative capacity, shall not be taken into account for the purposes of this clause; (ii) interest paid by the firm to such individual as partner in a representative capacity and interest paid by the firm to the person so represented shall be taken into account for the purposes of this clause. Explanation 2.–Where an individual is a partner in a firm otherwise than as partner in a representative capacity, interest paid by the firm to such individual shall not be taken into account for the purposes of this clause, if such interest is received by him on behalf, or for the benefit, of any other person. Explanation 3.–For the purposes of this clause, “book-profit” means the net profit, as shown in the profit and loss account for the relevant previous year computed in the manner laid down in Chapter IV-D as increased by the aggregate amount of the remuneration paid or payable to all the partners of the firm if such amount has been deducted while computing the net profit. Explanation 4.-For the purposes of this clause, “working partner” means an individual who is actively engaged in conducting the affairs of the business or profession of the firm of which he is a partner.” 4. Section 40(b) relates to firms and the clauses (i) to (v) are interconnected and have to be read harmoniously. The aforesaid clauses prescribe the conditions, when and in what circumstances remuneration paid to a partner are deductable as an expense from income of the
  • 8. partnership firm. The remuneration paid to the said partners must relate to the period falling after the date of such partnership deed. Clause (iii) to Section 40(b) specifically stipulates that remuneration paid in the period pre and posts the partnership deed, are treated differently. Former cannot be deducted from the income of the firm but payment of remuneration to working partners post the partnership deed, authorized by and in accordance with the terms of the deed can be allowed as a deduction. The requirement for allowing deduction is that the remuneration paid should be authorized and in terms of the existing partnership deed. Both conditions must be satisfied. The Section 40(b)(v) also fixes the upper limit of the deduction, which can be claimed as a deduction by the partnership firm. 5. Clause (iii) and other clauses in Section 40(b) specifically use the expression “in accordance with the terms of the partnership deed”. This clearly indicates and manifests the legislative mandate that the quantum of remuneration or the manner of computing the quantum of remuneration should be stipulated in the partnership deed. The expression “in accordance with the terms of the partnership deed” read with clause (iii) of section 40(b), requires and mandates that the quantum of remuneration or the manner of computation of quantum of remuneration should be stated in the partnership deed and should not be left undetermined, undecided or to be determined or decided on a future date. 6.The question raised is whether the conditions stipulated in the aforesaid Section are satisfied in the present case or not. This requires examination of the relevant clauses of the partnership deed dated 1st May, 1976 and the supplementary partnership deed dated 1st April, 1992. 7. Clauses 7 of the partnership deed dated 1st May, 1976 reads as under:-
  • 9. “7. That the profits or losses of the partnership, as the case may be, shall be divided amongst and borne by the partners equally.” 8. Clauses 1 and 2 of the supplementary partnership deed dated 1st April, 1992 read: “1. That subject to mutual consent of the partners, and subject to the provisions of the Income Tax Act, 1961, the working partner or partners shall be paid such remuneration as may be mutually agreed between themselves, from time to time, and such remuneration shall be deductible expense before arriving at the share of the partners as allocable from the net profits. 2. That both the partners (hereinafter referred as working partners), shall devote their time and attention in the conduct of the affairs of the partnership firm, as the circumstances and need of the firms business may require. The total remuneration payable to the working partners shall be an amount permissible as remuneration to the working partners under the Income Tax Act, 1961 and as applicable from time to time.” 9.The partnership as noticed above is between two partners and under clause 7 of the partnership deed dated 1st May, 1976 profits and losses of the partnership, as the case may be, are to be divided and borne by the partners equally. Clause 1 of the supplementary partnership deed dated 1st April, 1992, authorizes payment of remuneration to the partners but does not quantify the same. It does not prescribe any method or manner to calculate and compute the remuneration. It states that the remuneration payable is to be mutually agreed between the partners from time to time. Clause 1,therefore, requires a mutual agreement in future. The aforesaid clause, therefore, does not satisfy the requirement that the payment of remuneration should be in accordance with the terms of the partnership deed and that the remuneration should relate to payments made in the period after the date of said partnership deed. The tribunal
  • 10. is, therefore, right in their conclusion that clause 1 of the supplementary partnership deed dated 1st April, 1992, does not satisfy the requirements of Section 40(b)(v). From the said clause it is not possible to ascertain the quantum or the amount of remuneration which is payable in terms of the supplementary partnership deed. 10. This brings us to clause 2 of the supplementary deed dated 1st April, 1992. The first sentence in clause 2 states that the two partners will be the working partners. The second sentence in clause 2 stipulates that the total remuneration payable to the working partners shall be the amount permissible as remuneration to the working partners under the Act, as applicable from time to time. The question is whether the second sentence of clause 2 of the supplementary partnership deed read with clause 7 of the partnership deed, which states that the profits and losses will be equally divided and borne by the partners, satisfies the requirements of Section 40(b)(v). In other words, whether the two clauses read together quantify or stipulate the manner of quantifying the remuneration that is payable to the partners? Having examined the said clauses, we feel that on conjoint reading of clause 7 of the partnership deed dated 1st May, 1976 and clauses 1 and 2 of the supplementary partnership deed dated 1st April, 1992, conditions of Section 40(b)(v) are not satisfied. Analysis of the case. On reading the supplementary partnership deed, in the present case, it is clear that the remuneration is not specified. The manner of computing the remuneration is not specified. One of the prescribed requirements is that payment of remuneration should be made to a working partner and authorized by, and in accordance with the terms of the partnership deed.
  • 11. On the other hand, the remuneration payable is left to future mutual agreement between the partners who are entitled to decide and quantify the quantum. Remuneration can be any amount or figure but not more than the maximum amount stated in Section 40(b)(v) of the Act. Therefore, the requirements of Section 40(b)(v) are not satisfied. The appellant in actual practice has not read and understood clause 2 as stipulating that the two partners are entitled to remuneration equal to the maximum amount stipulated in Section 40(b)(v) of the Act. As per the return of income filed on 23rd August, 2007, the appellant firm had declared income of Rs.1,44,59,522/-. It is prudent to note that as per the books and the Act Rs. 98,81,165/- would be the maximum remuneration payable to the two partners but the remuneration actually paid was Rs.21,40,000/-. This is admitted by the appellant and further in grounds of appeal it is stated that Rs.98,81,165/- represents the maximum amount payable under Section 40(b)(v) but not the amount that has been mutually agreed to be paid as remuneration. In other words, the appellant has accepted that clause 2 does not quantify or provide the manner of computing remuneration payable to the partners but stipulates the maximum amount payable. Thus, the limits specified under Section 40(b)(v) are incorporated and have become part and parcel of the partnership deed but not the amount or the quantum of remuneration. In the case of a firm carrying on a profession referred to in section 44AA or which is notified for the purpose of that section– (a) on the first Rs. 1,00,000 of the book-profit or in case of a loss Rs. 50,000 or at the rate of 90 per cent. of the book-profit, whichever is more; (b) on the next Rs. 1,00,000 of the book-profit at the rate of 60 per cent.;
  • 12. (c) on the balance of the book-profit at the rate of 40 per cent.; (2) in the case of any other firm– (a) on the first Rs. 75,000 of the book-profit or in case of a loss Rs. 50,000 or at the rate of 90 per cent. of the book-profit, whichever is more; (b) on the next Rs. 75,000 of the book-profit at the rate of 60 per cent.; (c) on the balance of the book-profit at the rate of 40 per cent.; This is left undecided, unstipulated and left to the discretion of the two partners to be decided at a future point in time. Therefore, payment of Rs.21,40,000/- was not in accordance with the terms of the supplementary partnership deed dated 1st April, 1992 though authorized by the said deed. The remuneration was paid in terms of a subsequent understanding between the two partners regarding the quantum and the amount to be pai The question of law is answered in favour of the Revenue and against the assessee. The appeal is dismissed. However, there will be no orders as to costs. 2. Excise duty Refund eligible for deduction u/s. 80IB(1) ACIT vs. The Total Packaging Services (ITAT Mumbai)- His appeal by the revenue is directed against the order dated 16.7.2009 of the CIT(A) for the Assessment Year 2006-07. 2. The only effective raised by the revenue in this appeal is as under: “On the facts and circumstances of the case, the ld CIT(A) erred in law to hold that income from MODVAT credit is “derived from” industrial undertaking as contemplated in Sec. 80IB(1) ignoring the vital fact that
  • 13. the very source of such income was government policy imposing excise duty at differential rate, say 16% on the purchases of raw materials for the earlier assessment year and 8% on finished goods sold during the current financial year, which can be „attributed to‟ industrial undertaking but not „derived from‟industrial undertaking.” 3 The assessee availed/set off Modvat credit of excise duty of earlier years amounting to Rs. 1 .93 crores. The Assessing Officer questioned the allowability of deduction claimed u/s 801B on Modvat credit. The assessee has submitted before the Assessing Officer that the assessee could not set off/availed the Modvat credit of the earlier years because of excise duty on the purchase of raw material was 16% whereas on sale, it was 8%. Hence, the same was though available to the assessee; but could not be utilized because of the differential rates of excise duty on purchase of raw material and sale of goods. The Assessing Officer disallowed the claim of the assessee and held that the income has arisen because of differential rates of excise duty on purchase and sale; therefore, cannot be called as arising out of manufacturing activity of the undertaking. 3.1 On appeal, the CIT(A) allowed the claim of the assessee vide the impugned order. 4 Before us, the ld DR has mainly contended that since the Modvat credit was available with the assessee during t he earlier years; therefore, this benefit has not arisen during the year under consideration and thus is not eligible for deduction u/s 801B for the year under consideration. 4.1 On the other hand, the ld AR has submitted that the amount of income has arisen because of the differential rates of excise duty on purchase and sale and since the excise duty on sale was 8%; therefore, the assessee was not able to recover the full excise duty paid on purchases. Vide Finance Act 2006, the government has amended the structure of excise duty and reduced the excise duty from 16% to 8% on
  • 14. raw material used by the assessee. Due to the change in the rate of excise duty vide Finance Act 2006; the assessee was able to recover the excise duty paid in the earlier years by setting off of the excise duty paid on the purchases in the earlier years against the excise duty payable on sale during the year. Thus, the ld AR of the assessee has submitted that the income, in fact, arisen only during the year under consideration when the assessee availed the setting off of credit of the excise duty. He has further submitted that the issue on merit is covered in favour of the assessee by the decision of the Hon‟ble Guwahati High Court in the case of Commissioner of Income-tax v. Meghalaya Steels Ltd. reported in 332 ITR 91 as well as the order dated 29th April 2001 of the Delhi Bench of the Tribunal in ITA No. 3303/Del/2010. 5 We have heard the rival contention and carefully perused the relevant material on record. Undisputedly, the Modvat credit earned by the assessee during the earlier years could not be availed and set off because of the huge difference of excise duty rates on purchase of raw material and sale of goods. Upto 31st March, 2005, the excise duty on raw material was 16% which the assessee used to pay whereas the excise duty on manufactured goods collected by the assessee was 8%. Therefore, it was not possible to recover the full excise duty paid on purchases from the excise duty collected on the finished goods. Vide Finance Act, 2006, the Government has amended the rates of excise duty and consequently, the excise duty on purchases of raw material by the assessee was reduced from 16% to 8%. Thus, only after the amendment vide the Finance Act 2006, the assessee was able not only to recover the full excise duty payable but also set off the Modvat credit earned in the earlier years. 5.1 It is not the case of the refund of excise duty in cash; but only a benefit of Modvat credit was available to the assessee, which could be set off and utilised against the collection of the excise duty on sale of goods w.e.f Assessment Year 2006-07. Therefore, this amount has been rightly
  • 15. taken into account as income for the year under consideration. Even otherwise, the Assessing Officer has not treated this amount as the income of the earlier years but denied the deduction on the ground that this is not the income derived from the industrial undertaking. 6 In view of the above discussion, we do not find any merit or substance in the contention of the ld DR. 6.1 On the issue whether this benefit of Modvat credit is the income derived from the industrial undertaking or not, the Hon‟ble Guwahati High Court in the case of Meghalaya Steels Ltd. (supra), has held as under: “In so far as the second question is concerned, the Central excise duty refund claimed by the assessee is on the basis of an exemption notifications issued by the Ministry of Finance (Department of Revenue) being Notification No. 32 of 1999 and Notification No. 33 of 1999 both dated July 8, 1999. In terms of these notifications, a manufacturer is required to first pay the Central excise duty and thereafter claimed a refund on fulfilment of certain conditions. In the next month, after verification of the claim, the Central excise duty so deposited is refunded to the assessee if the conditions laid down in the notifications are fulfilled. In the present case, there is no dispute that the assessee was entitled to the Central excise duty refund. The Central Board of Excise and Customs in its circular dated December 19, 2002 clarified that the refund is not on account of excess payment of excise duty but is basically designed to give effect to the exemption and to operationalise the exemption given by the notifications. In that sense, the Central excise duty refund does not appear to bear the character of income since what is refunded to the assessee is the amount paid under the modalities provided by the Department of Revenue for giving effect to the exemption notifications. There is also nothing to suggest that the
  • 16. assessee has recovered or passed on the excise duty element to its customers. Even assuming the refund does amount to income in the hands of the assessee, it is a profit or gain directly derived by the assessee from its industrial activity. The payment of Central excise duty has a direct nexus with the manufacturing activity and similarly, the refund of the Central excise duty also has a direct nexus with the manufacturing activity. The issue of payment of Central excise duty would not arise in the absence of any industrial activity. There is, therefore, an inextricable link between the manufacturing activity, the payment of Central excise duty and its refund. In the circumstances, we are of the opinion that question No. 2 must be answered in the affirmative in favour of the assessee and against the Revenue.” 6.2 The Hon‟ble High Court has decided the issue in favour of the assessee after considering the decision of the Hon‟ble Supreme Court in the case of Liberty India vs CIT reported in 317 ITR 218. Accordingly, following the decision of the Hon‟ble Gawahati High Court in the case of Meghalaya Steels Ltd (supra), we deicide this issue against the revenue and in favour of the assessee. The Total Packaging Services 7 In the result, the appeal filed by the revenue is dismissed. Order pronounced on the 4th,day of Nov 2011. Analysis of the case. In the present case MODVAT credit is “derived from” industrial undertaking as contemplated in Sec. 80IB(1) ignoring the vital fact that the very source of such income was government policy imposing excise duty at differential rate, say 16% on the purchases of raw materials for the earlier assessment year and 8% on finished goods sold during the
  • 17. current financial year, which can be „attributed to‟ industrial undertaking but not „derived from‟industrial undertaking.” 3. Section 80IA(5)- Once the set off Loss & Depreciation of eligible unit prior to initial assessment year has taken place in an earlier year against the other income, the Revenue cannot rework the set off amount and bring it notionally Shri. Anil H. Lad v. DCIT (ITAT Bangalore)- Where the depreciation and loss of earlier assessment years have already been set off against other business income of those assessment years, there is no need for notionally carrying forward and setting off of the same depreciation and loss in computing the quantum of deduction available u/s.80I. The Hon‟ble Court has held further that the year of commencement alone need not be the “initial year”, but depending upon the facts of the case and the option exercised by the assessee, the year of claim also can be considered as “initial assessment year”. The court has also examined the issue from a different legal angle and held that the proposition argued by the Revenue is not compatible with the scheme of gross total income conceptualized in the IT Act, especially in the light of section 80AB which are all relevant while considering the deduction u/s.80IA which is falling under Chapter VIA of the IT Act, 1961. Where the earlier depreciation and losses have already been set off, those loss and depreciation do not go to reduce the gross total income of an assessee within the meaning of section 80AB and therefore bringing the notional concept of carrying forward and set off will be contrary to the scheme of section 80AB and concept of gross total income. This is an appeal filed by the assessee. The relevant assessment year is 2008-09. The appeal is directed against the order of the Commissioner of Income-tax(A)-VI at Bangalore, dated.29. 10.2010 and arises out of the assessment completed u/s. 143(3) r.w.s.153A of the IT Act, 1961.
  • 18. 2. The assessee was the proprietor of M/s.VSL Mining Company, till the financial year preceding to the relevant assessment yearinvolved in the present appeal. The proprietary concern of the assessee was taken over by a company named M/s. VSL Mining Company P. Ltd., in the previous year relevant to the assessment year under appeal. However, the assessee continued to remain as partner of M/s. V. S. Lad and Sons which carries on the business of mining operations of extractions, processing and export of iron ore. The assessee filed the return of income on a total income of Rs. 4,41,22,030/- after claiming a sum of Rs. 1,97,73,931/- as deduction u/s. 80IA of the Act. 3. There was a search and survey action in assessee‟s concerns as well as the associate concerns. In the back drop of the search action, assessment was made by the assessing authority u/s. 153A. Naturally, 153A assessments covered even the earlier assessment years. In the course of the assessment proceedings for the impugned assessment year 2008-09, the Assessing Officer disallowed the deduction of Rs. 1,97,73,931/- claimed by the assessee as deduction u/s.80IA. The Assessing Officer has also made an addition of Rs. 24,06,700/- on the ground of seizure of cash at the time of search. He has further made an addition of Rs. 1,68,43,841/- by way of 50% of the disallowance of expenses incurred on running and maintenance of helicopter. The disallowance was made on the ground of personal user. Accordingly, the Assessing Officer determined a total income of Rs. 8,31,46,500/- as against a total income of Rs. 4,41,22,030/- returned by the assessee. 4. The assessment was taken in first appeal. The Commissioner of Income-tax(A) confirmed the order of the assessing authority disallowed the claim made by the assessee u/s.80IA and upheld the addition of Rs. 1,97,73,931/-. The Commissioner of Income-tax(A) also confirmed the addition of Rs. 24,06,700/- made by the assessing authority on the basis of seizure of cash in the course of search carried out u/s. 132.
  • 19. Regarding the 50% disallowance of helicopter expenses, the Commissioner of Income-tax(A) set aside the disallowance and deleted the addition of Rs. 1,68,43,841/-. The grounds raised on levy of interest was disposed off as consequential. 5. The assessee is aggrieved on the two additions sustained by the Commissioner of Income-tax(A) and also in respect of levy of interest u/s.234B and 234C.
  • 20. Analysis of the case. In the present case the depreciation and loss of earlier assessment years have already been set off against other business income of those assessment years, there is no need for notionally carrying forward and setting off of the same depreciation and loss in computing the quantum of deduction available u/s.80I. The Hon‟ble Court has held that the year of commencement alone need not be the “initial year”, but depending upon the facts of the case and the option exercised by the assessee, the year of claim also can be considered as “initial assessment year”. The court has also examined the issue from a different legal angle and held that the proposition argued by the Revenue is not compatible with the scheme of gross total income conceptualized in the IT Act, especially in the light of section 80AB which are all relevant while considering the deduction u/s.80IA which is falling under Chapter VIA of the IT Act, 1961. Where the earlier depreciation and losses have already been set off, those loss and depreciation do not go to reduce the gross total income of an assessee within the meaning of section 80AB and therefore bringing the notional concept of carrying forward and set off will be contrary to the scheme of section 80AB and concept of gross total income. The Commissioner of Income-tax(A) confirmed the order of the assessing authority disallowed the claim made by the assessee u/s.80IA and upheld the addition of Rs. 1,97,73,931/-. The Commissioner of Income-tax(A) also confirmed the addition of Rs. 24,06,700/- made by the assessing authority on the basis of seizure of cash in the course of search carried out u/s. 132. Regarding the 50% disallowance of helicopter expenses, the Commissioner of Income-tax(A) set aside the disallowance
  • 21. 4. EPF dues from a company under liquidation has to get priority – SCEmployees Provident Fund Commissioner Vs. O.L. of Esskay Pharmaceuticals Limited (Supreme Court) In terms of Section 530(1), all revenues, taxes, cesses and rates due from the company to the Central or State Government or to a local authority, all wages or salary or any employee, in respect of the services rendered to the company and due for a period not exceeding 4 months all accrued holiday remuneration etc. and all sums due to any employee from provident fund, a pension fund, a gratuity fund or any other fund for the welfare of the employees maintained by the company are payable in priority to all other debts The effect of the amendment made in the Companies Act in 1985 is only to expand the scope of the dues of workmen and place them at par with the debts due to secured creditors and there is no reason to interpret this amendment as giving priority to the debts due to secured creditor over the dues of provident fund payable by an employer. Of course, after the amount due from an employer under the EPF Act is paid, the other dues of the workers will be treated at par with the debts due to secured creditors and payment thereof will be regulated by the provisions contained in Section 529(1) read with Section 529(3), 529A and 530 of the Companies Act. In view of what we have observed above on the interpretation of Section 11 of the EPF Act and Sections 529, 529A and 530 of the Companies Act, the judgment of the Division Bench of the Gujarat High Court, which turned on the interpretation of Section 94 of the Employees‟ State Insurance Act and Sections 529A and 530 of the Companies Act and on which reliance has been placed by the learned Company Judge and the Division Bench of the High Court while dismissing the applications filed by the appellant, cannot be treated as laying down the correct law.
  • 22. Analysis of the case. In the present case when Section 11(2) was inserted in the EPF Act by Act No. 40 of 1973 and any amount due from an employer in respect of the employees‟ contribution was declared first charge on the assets of the establishment and became payable in priority to all other debts. However, in the Companies Act by Act did not declare the workmen‟s dues (this expression includes various dues including provident fund) as first charge In the result, the appeals are allowed. The impugned judgment as also the order of the learned Company Judge are set aside and the applications filed by the appellant are allowed in terms of the prayer made. The Official Liquidator appointed by the High Court shall deposit the dues of provident fund payable by the employer within a period of 3 months. 5. Tax Planning- Save tax through your family Implest way of saving tax is by investing through parents, parent in laws, wife and children. If you invest in the right instrument, the rate of return may be higher as well. Here is how we can save tax through our family members. Through Parents Its a fact that Your own parents as well as your own in-laws can become legal tools of tax planning for you and your family. If you want to achieve this dictum then all you are need to do is just to give away a portion of your funds, either as a gift or a loan, to your parents as well as your parents in law so that in years to follow your income tax burden becomes lighter as the income on funds transferred by you to them which would bring in income would be taxed in their hands.
  • 23. With the increase in the limit of exempted income for individuals, women tax payers and senior citizens, it is now a great time for having separate income tax files for all family members. Assuming that both the parents are senior citizens. Here‟s how you go about it. Income tax deductions allow senior citizens a tax-free income of Rs 2.4 lakh. To exhaust this limit, say you gift Rs 28 lakh to each parent in cash. Of this, both can individually put Rs 15 lakh in a senior citizens savings scheme that earns a return of nine per cent and pays interest every quarter. Each will get yearly interest of nearly Rs 1.4 lakh. If they invest the remaining Rs 13 lakh each in the State Bank of India‟s (SBI) fixed deposit (FD) of eight-years (at an interest rate of 7.5 per cent) that pays interest each quarter, it will fetch them an income of nearly Rs 1 lakh annually. That means both parents have earned Rs 2.8 lakh from the senior citizen saving scheme and another Rs 2 lakh from SBI‟s five-year deposits each year. A total savings of Rs 4.8 lakh – the tax-free limit (Rs 2.4 lakh) that each parent enjoys. So, they don‟t even need to file tax returns. Same planning can be done for parents in laws. Through Major Children All your adult children are as solid as a rock to help you save your income tax. After October 1, 1998, the provisions relating to gift-tax have ceased to exist. Now you are free to gift away your money to your children without attracting gift tax. This amendment makes it a good idea to make liberal gifts to your major children so that the income, if any, arising from these investments in years to come can be taxed in the hands of your children.
  • 24. For example, if you have fixed deposits let us say of Rs 50 lakh and you have a son and a daughter, who are not minors, then it makes sense if the son is gifted Rs 21.25 lakh and if he invests the same in an FD (at an interest rate of 7.5 per cent) , his income of Rs 1.59 lakh will be tax-free. For daughter, the tax-free income is Rs 1.9 lakh. This means a gift of nearly Rs 25 lakh. On this amount the son as well as the daughter will not pay income tax because the amount is below the exemption limit. In this manner, your children can now be great source of tax saving for you. Thus, a person making a gift to children can enjoy the benefit of lower income tax incidence in the family. If, however, due to some reasons you do not feel inclined to make huge gifts to your major children, then you may give interest-free loans to your adult children so as to legally reduce your taxable income. It is lawful to grant interest-free loans to adult children from your own funds. Through Your wife Married taxpayers can make a substantial saving of income tax by setting up two separate independent income tax files, one each for the husband and the wife. If your wife prior to her marriage was already assessed for income tax, then she may continue to file her income tax return in the same income tax ward/circle where she was assessed. Your wife‟s Permanent Account Number would also continue to be the same though her surname would change after marriage as also her residential address. After marriage all that is needed for a separate income tax return for your wife is to file the income tax return with her new surname and new address. If your wife desires, she can continue to file the income tax return mentioning her old address (before marriage).
  • 25. Due to marriage if the town changes, then she can file the income tax return in the new town according to the new jurisdiction which would be on the basis of residential address.
  • 26. Tax Evasion cases. 1. ITAT order in Nokia tax evasion case, Challenged by department in HC 26 FEB,2010 In its petition, the income tax department said the ITAT has wrongly deleted the penalty imposed by it on Nokia India for allegedly wrongly declaring its income. The government on Wednesday approached the Delhi high court challenging an order of the Income Tax Appellate Tribunal (ITAT) that gave relief to mobile phone maker giant Nokia in a case of alleged tax evasion. A division bench comprising justice BD Ahmed and justice Siddharth Mridul admitted the petition filed by the income tax department and posted the matter to 12 April for next hearing. In its petition, the IT department said the ITAT has wrongly deleted the penalty imposed by it on Nokia India for allegedly wrongly declaring its income. It further said “assessee (Nokia) knowingly furnished inaccurate particulars of its income and has concealed the facts relating to computation of its correct income for the year under consideration.” The IT department had imposed a penalty of Rs1.14 crore on Nokia on 27 March 2006, for allegedly furnishing wrong returns for the financial year 2001-02. According to IT department, Nokia had claimed nil tax on some aspects such as allowances on foreign travel, account provision of warranty, marketing expenses etc. Later, in March 2004, the department picked up Nokia‟s income tax return for scrutiny and sent a notice after finding alleged irregularities. After scrutiny, IT department assessed Nokia‟s income at Rs12 crore and
  • 27. imposed a fine of Rs1.4 crore and equal amount of tax for alleged evasion of tax by the firm. Analysis of the case In the present nokia case the IT department said the ITAT has wrongly deleted the penalty imposed by it on Nokia India for allegedly wrongly declaring its income. It further said “assessee (Nokia) knowingly furnished inaccurate particulars of its income and has concealed the facts relating to computation of its correct income for the year under consideration. This was challenged by Nokia before the Income Tax Appellate Tribunal, which deleted the penalty provision. 2. Excise, service tax evasion of Rs 5,000 crore in FY’11 19 May,2011 Tax sleuths unearthed central excise and service tax evasion amounting to over Rs 5,500 crore in the 2010-11 financial year, even as pressure mounted on the go crackdown on black money.Unravelling the trail of the ill-gotten wealth, taxmen was able to recover Rs 431 crore in search-and- seizure operations during the same period, official data shows. While the intelligence wing of the Central Excise department registered cases of duty evasion amounting to Rs 1,356 crore in FY‟11, cases of evasion totalling an amount of Rs 4,352 crore were registered under the service tax category, during the same period. Analysis of the case. Tax sleuths unearthed central excise and service tax evasion amounting to over Rs 5,500 crore in the 2010-11 financial year The number of cases of central excise and service tax evasion is on the rise, as per the data, with a 14 per cent increase in the quantum of black money detected in the 2010-11 financial year in comparison to the previous year.
  • 28. 3. Salman Khan Tax case- Court moved over Rs.40 million ‘evasion’ 18 oct.2010 The Bombay High Court will soon hear a petition filed by the income tax (IT) department pertaining to a 10-year-old case involving alleged tax evasion of Rs.40 million by Bollywood actor Salman Khan.The IT department has challenged an order of the income tax appellate tribunal which had earlier ruled in the actor‟s favour. He was found to have allegedly evaded the tax during the assessment year 2000-01.According to IT sources, Khan had declared his income as Rs.9.32 crore during 2000-01 which was later found to be Rs.13.61 crore. Khan challenged the IT department‟s assessment order before the IT commissioner (appeals) who ruled in his favour. The IT department followed it up with an appeal before the tribunal which also ruled in Khan‟s favour. Now, the department has sought the quashing of the tribunal‟s order. Analysis of the case. The IT department has challenged an order of the income tax appellate tribunal which had earlier ruled in the actor‟s favour. According to IT sources, Khan had declared his income as Rs.9.32 crore during 2000-01 which was later found to be Rs.13.61 crore. 4. Vodafone case The Income Tax Department has filed a caveat in the Bombay High Court in the Vodafone tax case. The caveat was filed to avoid ex-parte proceedings. Vodafone is likely to move the Bombay High Court next week. It is learnt that the Income Tax Department has issued a seven- page showcause with its final order. The showcause represents new proceedings against Vodafone and relates to representative assesses.
  • 29. The notice treats Vodafone as an agent of Hutchison Telecommunications International (HTIL). It is the first time that a tax notice is treating a non- resident as an agent of another non-resident. The notice proposes substantive assessment for Vodafone under section 163 of the Income Tax Act. “If courts say Hutch has tax liability, but no TDS liability for Vodafone, then notice comes in handy.” The I-T Department is trying to corner Vodafone from both TDS as well as assessment sides. This entire case revolves around the Hutch–Vodafone deal, which was struck way back in 2007. Back then, Vodafone had acquired 67% stake in Hutchison Essar from Hutchison Telecommunications International (HTIL). The taxman said this transaction was taxable in India because the underlying asset was in India and therefore sought a capital gains tax. Vodafone‟s said the I-T Department has no clear jurisdiction over the deal because Vodafone is a Netherlands company and Hutchison is incorporated in the Cayman‟s Islands. Vodafone had moved the Supreme Court in January 2009, but the apex court had refused to intervene and had directed the I-T Department to revert on jurisdiction. This order could not have come at a worse time for Vodafone which is facing intense pricing wars and fierce competition in the telecom space. It has recently been forced to write-off a staggering Rs 15,000 crore from its local subsidiaries. The order was also drawn up on a circular issued in China last year. In December 2009, China issued the infamous circular 698, which brought all transfers of Chinese resident enterprises that were executed offshore under the tax net. The circular said that all foreign entities must disclose details of transfers of Chinese companies to the Chinese tax authorities where such transfers
  • 30. are executed through an offshore structure located in a no tax or nil tax jurisdiction. The Chinese circular asked for a variety of documentation to be disclosed to its tax authorities such as the contract between two companies, the relationship between the foreign entity and the holding company being transferred, the operations of the holding company, and most importantly why this particular holding company in that jurisdiction had been chosen to execute the transfer of shares. Basically, the Chinese circular seeks to establish whether or not this holding company has been established and is being used for the purpose of tax evasion. Indian tax authorities in the Vodafone case have not used the Chinese circular to seek to establish jurisdiction over Vodafone in India. However, they have used it as an example of the fact that other jurisdictions have brought Vodafone type transactions under the tax net. Analysis of the case. Vodafone had acquired 67% stake in Hutchison Essar from Hutchison Telecommunications International (HTIL). The taxman said this transaction was taxable in India because the underlying asset was in India and therefore sought a capital gains tax. Vodafone‟s said the I-T Department has no clear jurisdiction over the deal because Vodafone is a Netherlands company and Hutchison is incorporated in the Cayman‟s Islands. In the present case the main objective is to counter Vodafone arguments on tax deductible at source (TDS) liability. Vodafone said that even if the income is chargeable to tax, then it is not liable for TDS. Hence, the claim that Vodafone is making that this is not done in any jurisdiction anywhere else in the world is incorrect
  • 31. 5. Star TV case. In the Star TV case, a group of companies comprising owners of Indian language channels, Star Plus, Star Gold, Star One and Star Utsav, are proposed to be merged with an Indian group company. The merger, organised as a scheme of amalgamation is presently awaiting approval of the Bombay High Court under the Companies Act. The merger sought to achieve synergies of operation and enhanced operational flexibility and the AAR found merit in its commercial justification. Further, the AAR held that contracting parties are free to enter into a legitimate transaction, notwithstanding tax benefits. The judgement is well reasoned and brings a level of stability to the ongoing debate on tax avoidance. Analysis of the case. In the present case Star argued that the said merger met all the specified conditions for tax neutral merger under the Indian tax laws. The Revenue, however, contended that the merger is a „make-believe‟ scheme having no legitimate purpose apart from tax evasion and avoidance of tax in India. Increasing legislative drive on tax avoidance After Advance Ruling in Star debated related to TV Tax planning vs tax evasion going on 22 feb 2010 An anti-avoidance provision in the tax law is a measure to check convoluted transactions devised exclusively for the purpose of evading taxes. Such provisions attempt to strike down unacceptable tax avoidance practices and have been in vogue in matured tax jurisdictions such as Australia, Canada.
  • 32. The present law contains specific anti-avoidance provisions as opposed to general provisions. Transfer pricing regulations are an example, which seek to ensure adequate arms length payments between related parties and curb profit shifting in cross-border scenarios. More importantly, the Direct Tax Code proposes to introduce a general Anti-Avoidance Rule (GAAR) law. GAAR will empower a Commissioner of Income Tax to declare any transaction as an „impermissible avoidance arrangement‟ if it results in certain tax benefits or it creates rights or obligations which would not normally be created between persons dealing at arm‟s length or it results in abuse of the provisions of the DTC, lacks commercial substance or bona fide business purpose, etc., Amongst DTC provisions, the GAAR proposal has resulted in higher levels of anxiety amongst business who fear that the judicially accepted distinctions between permissible tax planning and tax evasion will disappear due to its wide coverage and vague drafting. Tax Avoidance cases. 1.Payment of commission in lieu of dividend is Tax Avoidance 23 June 2011 Dalal Broacha Stock Broking Pvt Ltd vs. ACIT (ITAT Mumbai – Special Bench)- Provisions of section 36(1)(ii) will apply in case of all employees including share holder employees irrespective of the fact whether any extra services have been rendered or not. The issue whether payment of bonus or commission to an employee will be covered by the provisions of section 36(1)(ii) or section 37(1) is also settled by the judgment of Hon‟ble Jurisdictional High Court in case of Subodh Chandra Poppatlal vs. CIT (24 ITR 586) in which the Hon‟ble High Court while dealing with similar provisions of the old Act held that when an expenditure fell under section 10(2)(x) [which corresponds to section 36(1)(ii)], in the sense that it is an expenditure in the nature of bonus or
  • 33. commission paid to an employee for services rendered then its validity can only be determined by the tests laid down in section 10(2)(x) and not by the tests laid down in section 10(2)(xv) which corresponds to section 37(1). Respectively following the said judgment, we hold that the payment of commission to the three director employees had been rightly considered by the authorities below under the provisions of section 36(1)(ii) and that the provisions of section 37(1) will not be applicable in such cases. Analysis of the case It was also held that that the payment of commission of Rs.1.20 crores to the three working directors was in lieu of dividend and the same is not allowable as deduction under section 36(1)(ii). 2. Bonus stripping under the Income tax lens 13 june 2010 After taxing investors for dividend stripping, the Income Tax (I-T) Department is gearing up to tax bonus stripping. Official sources say scrutiny of returns filed by companies, brokers and individuals active in the stock markets and in possession of shares revealed wide use of this mechanism to evade tax. According to data compiled by Business Standard Research Bureau, 314 companies have announced bonus shares since 2005-06. While assessments are on for 2008-09, in most cases the department is checking returns filed for the last four years under the scrutiny assessment, sources add. To explain how bonus stripping works, a source said: “Say, someone is in possession of 1,000 shares of company XYZ, priced at Rs 1,000 each. Following a bonus issue announced by XYZ in the ratio of 1:1, the shareholder gets 1,000 stocks more for free. By the end of the issue, the
  • 34. investor owns 2,000 shares, each priced at Rs 500. He now sells the initial 1,000 shares at Rs 500 each, incurring a short-term capital loss. He uses the loss to reduce gains made in other market transactions. Later, he sells the remaining 1,000 shares, at a profit since they were acquired free and reaps the benefit of tax exemption on long-term capital gains.” While Section 94 of Indian Income Tax Act 1961 refers to tax avoidance by certain transactions in securities, Section 94(8) covers taxation of bonus shares held under the mutual fund units. Analysis of the case bonus equity shares held by individual investors or companies are completely out of the tax net. The department now proposes to extend the coverage to securities, too, say sources. The I-T Department recommends an amendment to Section 94(8) of the Income Tax Act to bring such proceeds within the tax ambit 3. Govt may plug gaps in tax evasion laws to stop treaty shopping 19 june 2009 The party could end soon for domestic and multinational companies that do tax planning only to avoid paying taxes in India. The government is set to usher in the next stage of reforms in taxation, framing anti-abuse rules that will empower tax authorities to lift the corporate veil and look for what are called `avoidance‟ transactions. Other anti-avoidance measures could include controlled foreign corporation (CFC) regulations and norms on thin capitalisation. Tax benefits will be denied to firms found indulging in tax avoidance through one or a series of transactions. This would cover both cross- border and domestic deals. CFC regulations, on the other hand, will help prevent domestic firms from accumulating profits in low tax jurisdictions. In the US, these rules apply to US investors who own substantial stock in
  • 35. non-US corporations. It accelerates the taxation of passive income in the hands of US investors. Norms on thin capitalisation will ensure that domestic companies do not over-leverage on debt when they expand to set up operations overseas. If they do so, such firms may not be able to claim a tax deduction on the excess interest. Again in the US, thin capitalisation rules discourage US companies from having a debt-equity ratio higher than 3:1. 4. Dividend Stripping Loss is Allowable – Bombay High Court Wallfort Shares & stock Brokers Ltd v ITO (2005) 96 ITD 1 (Mum).Tax avoidance- dividend stripping-s- 4, 28 (1) 94 (7),71 5 oct 2008 Where the assessee bought units of a mutual fund, received tax-free dividend thereon and immediately thereafter redeemed the units and claimed the difference between the cost price and redemption value as a loss and the same had been upheld by a Five Member Special Bench of the Tribunal as a genuine loss, HELD affirming the order of the Special Bench that: (i) S. 94(7) was inserted prospectively w.e.f. 1.4.2002 to disallow dividend stripping losses. If the argument of the Revenue that even transactions prior to s. 94(7) can be disallowed is accepted, it will render s. 94(7) redundant and also lead to anomalous results. (ii) CBDT Circular No. 14 of 2001 makes it clear that prior to s. 94(7) the loss was allowable. This Circular is binding on the revenue and they cannot argue contrary to that. (iii) Even otherwise it was not established that the motive was to earn a loss. The allegation that there was complicity between the mutual funds,
  • 36. the brokers and the assessee was also without merit. Mc Dowell 154 ITR 148 (SC) and Azadi Bachao Andolan 263 ITR 706 (SC) considered. (iv) The alternative argument that the loss should be treated as expenditure incurred to earn dividend and disallowed u/s 14A is also without merit. win for I-T, Interest paid on loans for acquisition of new machinery before same is first put to use, cannot be claimed as revenue expenditure even as extension of existing business; to be added to „actual cost‟ of assets : P & H High Court LB 5. Interest paid on loans for acquisition of new machinery before same is first put to use, cannot be claimed as revenue expenditure 1 feb 2008 FOR the Income Tax Department, the latest ruling of the Larger Bench of the Punjab & Haryana High Court amounts to a big win. And, at the centre of the dispute was whether the interest paid on borrowed capital for purchasing new plant and machinery before the same is put to use is revenue expenditure or to be added to the „actual cost‟ of the asset? What further complicated the issue was the fact that the assessee was a running company and wanted to set up a new plant by buying new machinery out of borrowed capital. Since the new production plant was mere an extension of the existing business, the assessee treated the interest payment as revenue expenditure. Although to curb tax avoidance the CBDT had inserted explanation 8 to Sec 43(1) vide Finance Act, 1986 w e f April 1, 1974 and also inserted a proviso to Sec 36(1)(iii) vide Finance Act, 2003 to make it clear that and such amount of interest is for the period beginning from the date on which the capital was borrowed for acquisition of the asset till the date on which such asset was first put to use. Given that the laws were so unambiguous and clear what was the actual issue before the Larger Bench? It was the interpretation of
  • 37. the converse whether the law also meant that the interest payment before the capital assets are put to use are to be added to the „actual cost‟ of the assets or to be allowed as revenue expenditure. Analysis of the case. In the present case assessee was a running company and wanted to set up a new plant by buying new machinery out of borrowed capital. Since the new production plant was mere an extension of the existing business, the assessee treated the interest payment as revenue expenditure. no deduction shall be allowed for interest paid, in respect of capital borrowed for acquisition of an asset for extension of existing business or profession (whether capitalized in the books of account or not)
  • 38. REFERENCES 1. WWW.TAXGURU.IN 2. : http://www.investopedia.com/terms/t/tax_avoidance.asp#ixzz1cf7H4IXb