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Final ct

  1. 1. A Corporate Taxation PROJECT REPORT ON Tax Planning,Tax Avoidance AND Tax EvasionIn 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. 2. ACKNOWLEDGEMENTI would especially like to thank Prof. Dharmesh Shah, who guided us throughout the projectand gave us valuable suggestions and encouragement to complete project reportsuccessfully. We express our sincere gratitude to her that he gave his valuable time tosupport us.I would also like to thank Dr Hitesh Ruparel, Director of our college N. R. Institute ofBusiness Management to give us this opportunity.I would like to thank the Computer Lab Instructor, the Librarian and the Administrative staffof N. R. Institute of Business Management.
  3. 3. IntroductionThe use of legal methods to modify an individuals financial situation inorder to lower the amount of income tax owed. This is generallyaccomplished by claiming the permissible deductions and credits. Thispractice differs from tax evasion, which is illegal.The use of the terms tax avoidance and tax evasion can vary dependingon the jurisdiction. In general, the term "evasion" applies to illegal actionsand "avoidance" to actions within the law. The term "mitigation" is alsoused in some jurisdictions to further distinguish actions within the originalpurpose of the relevant provision from those actions that are within theletter 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plans withpre-tax funds are engaging in tax avoidance because the amount of taxespaid on the funds when they are withdrawn is usually less than theamount that the individual would owe today. Furthermore, retirementplans allow taxpayers to defer paying taxes until a much later date, whichallows their savings to grow at a faster rate.
  4. 4. 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 deedThe present appeal under Section 260A of the Income Tax Act, 1961 (Act,for short) has been preferred by Sood Brij & Associates, a partnershipfirm, consisting of two partners namely A.K. Sood and B.M. Gupta, whoare practicing Chartered Accountants. In their return for the assessmentyear 2007-08, Rs.21,40,000/- was claimed as a deduction towardssalary/remuneration paid to the partners. This was disallowed by theAssessing Officer on the ground of violation of Section 40(b)(v). Theappellant-assessee has been unsuccessful in appeals before theCommissioner of Income Tax (Appeals) and the Income Tax AppellateTribunal, Delhi (tribunal, for short). The impugned order of the tribunal isdated 29th October, 2010.2. After hearing the counsel, the following substantial question of law isframed:-“ Whether on reading of clause 7 of the partnership deed dated1st May,1976 and clauses 1 and 2 of the supplementary partnership deeddated 1st April,1992, the tribunal was right in holding that remuneration ofRs.21,40,000/- paid to the two partners cannot allowed as a deductionunder Section 40(b)(v) of the Act?”3. Relevant part of Section 40 of theAct reads as under:-“40. Amounts not deductible.–Notwithstanding anything to the contrary insections 30 to 38, the following amounts shall not be deducted incomputing the income chargeable under the head “Profits and gains ofbusiness or profession”,–(b) in the case of any firm assessable as such,–
  5. 5. (i) any payment of salary, bonus, commission or remuneration, bywhatever name called (hereinafter referred to as remuneration) to anypartner who is not a working partner; or(ii) any payment of remuneration to any partner who is a workingpartner, or of interest to any partner, which, in either case, is notauthorised by, or is not in accordance with, the terms of the partnershipdeed; or(iii) any payment of remuneration to any partner who is a workingpartner, or of interest to any partner, which, in either case, is authorisedby, and is in accordance with, the terms of the partnership deed, butwhich relates to any period (falling prior to the date of such partnershipdeed) for which such payment was not authorised by, or is not inaccordance with, any earlier partnership deed, so, however, that theperiod of authorisation for such payment by any earlier partnership deeddoes not cover any period prior to the date of such earlier partnershipdeed; or(iv) any payment of interest to any partner which is authorised by, and isin accordance with, the terms of the partnership deed and relates to anyperiod falling after the date of such partnership deed in so far as suchamount 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 workingpartner, which is authorised by, and is in accordance with, the terms ofthe partnership deed and relates to any period falling after the date ofsuch partnership deed in so far as the amount of such payment to all thepartners during the previous year exceeds the aggregate amountcomputed as hereunder:–Provided that in relation to any payment under this clause to the partnerduring the previous year relevant to the assessment year commencing.
  6. 6. Explanation 1.–Where an individual is a partner in a firm on behalf, or forthe benefit, of any other person (such partner and the other person beinghereinafter 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 partnerin a representative capacity, shall not be taken into account for thepurposes of this clause;(ii) interest paid by the firm to such individual as partner in arepresentative capacity and interest paid by the firm to the person sorepresented shall be taken into account for the purposes of this clause.Explanation 2.–Where an individual is a partner in a firm otherwise thanas partner in a representative capacity, interest paid by the firm to suchindividual 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 anyother person.Explanation 3.–For the purposes of this clause, “book-profit” means thenet profit, as shown in the profit and loss account for the relevantprevious year computed in the manner laid down in Chapter IV-D asincreased by the aggregate amount of the remuneration paid or payableto all the partners of the firm if such amount has been deducted whilecomputing the net profit.Explanation 4.-For the purposes of this clause, “working partner” meansan individual who is actively engaged in conducting the affairs of thebusiness or profession of the firm of which he is a partner.”4. Section 40(b) relates to firms and the clauses (i) to (v) areinterconnected and have to be read harmoniously. The aforesaid clausesprescribe the conditions, when and in what circumstances remunerationpaid to a partner are deductable as an expense from income of the
  7. 7. partnership firm. The remuneration paid to the said partners must relateto the period falling after the date of such partnership deed. Clause (iii) toSection 40(b) specifically stipulates that remuneration paid in the periodpre and posts the partnership deed, are treated differently. Former cannotbe deducted from the income of the firm but payment of remuneration toworking partners post the partnership deed, authorized by and inaccordance with the terms of the deed can be allowed as a deduction. Therequirement for allowing deduction is that the remuneration paid shouldbe authorized and in terms of the existing partnership deed. Bothconditions must be satisfied. The Section 40(b)(v) also fixes the upperlimit of the deduction, which can be claimed as a deduction by thepartnership firm.5. Clause (iii) and other clauses in Section 40(b) specifically use theexpression “in accordance with the terms of the partnership deed”. Thisclearly indicates and manifests the legislative mandate that the quantumof remuneration or the manner of computing the quantum ofremuneration should be stipulated in the partnership deed. Theexpression “in accordance with the terms of the partnership deed” readwith clause (iii) of section 40(b), requires and mandates that the quantumof remuneration or the manner of computation of quantum ofremuneration should be stated in the partnership deed and should not beleft undetermined, undecided or to be determined or decided on a futuredate.6.The question raised is whether the conditions stipulated in the aforesaidSection are satisfied in the present case or not. This requires examinationof the relevant clauses of the partnership deed dated 1st May, 1976 andthe supplementary partnership deed dated 1st April, 1992.7. Clauses 7 of the partnership deed dated 1st May, 1976 reads asunder:-
  8. 8. “7. That the profits or losses of the partnership, as the case may be, shallbe 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 theprovisions of the Income Tax Act, 1961, the working partner or partnersshall be paid such remuneration as may be mutually agreed betweenthemselves, from time to time, and such remuneration shall be deductibleexpense before arriving at the share of the partners as allocable from thenet profits.2. That both the partners (hereinafter referred as working partners), shalldevote their time and attention in the conduct of the affairs of thepartnership firm, as the circumstances and need of the firms businessmay require. The total remuneration payable to the working partners shallbe an amount permissible as remuneration to the working partners underthe Income Tax Act, 1961 and as applicable from time to time.”9.The partnership as noticed above is between two partners and underclause 7 of the partnership deed dated 1st May, 1976 profits and losses ofthe partnership, as the case may be, are to be divided and borne by thepartners equally. Clause 1 of the supplementary partnership deed dated1st April, 1992, authorizes payment of remuneration to the partners butdoes not quantify the same. It does not prescribe any method or mannerto calculate and compute the remuneration. It states that theremuneration payable is to be mutually agreed between the partners fromtime to time. Clause 1,therefore, requires a mutual agreement in future.The aforesaid clause, therefore, does not satisfy the requirement that thepayment of remuneration should be in accordance with the terms of thepartnership deed and that the remuneration should relate to paymentsmade in the period after the date of said partnership deed. The tribunal
  9. 9. is, therefore, right in their conclusion that clause 1 of the supplementarypartnership deed dated 1st April, 1992, does not satisfy the requirementsof Section 40(b)(v). From the said clause it is not possible to ascertain thequantum or the amount of remuneration which is payable in terms of thesupplementary 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 bethe working partners. The second sentence in clause 2 stipulates that thetotal remuneration payable to the working partners shall be the amountpermissible as remuneration to the working partners under the Act, asapplicable from time to time. The question is whether the secondsentence of clause 2 of the supplementary partnership deed read withclause 7 of the partnership deed, which states that the profits and losseswill be equally divided and borne by the partners, satisfies therequirements of Section 40(b)(v). In other words, whether the twoclauses read together quantify or stipulate the manner of quantifying theremuneration that is payable to the partners? Having examined the saidclauses, we feel that on conjoint reading of clause 7 of the partnershipdeed dated 1st May, 1976 and clauses 1 and 2 of the supplementarypartnership deed dated 1st April, 1992, conditions of Section 40(b)(v) arenot satisfied. Analysis of the case.On reading the supplementary partnership deed, in the present case, it isclear that the remuneration is not specified. The manner of computing theremuneration is not specified.One of the prescribed requirements is that payment of remunerationshould be made to a working partner and authorized by, and inaccordance with the terms of the partnership deed.
  10. 10. On the other hand, the remuneration payable is left to future mutualagreement between the partners who are entitled to decide and quantifythe quantum. Remuneration can be any amount or figure but not morethan 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 asstipulating that the two partners are entitled to remuneration equal to themaximum amount stipulated in Section 40(b)(v) of the Act. As per thereturn of income filed on 23rd August, 2007, the appellant firm haddeclared income of Rs.1,44,59,522/-. It is prudent to note that as per thebooks and the Act Rs. 98,81,165/- would be the maximum remunerationpayable to the two partners but the remuneration actually paid wasRs.21,40,000/-. This is admitted by the appellant and further in groundsof appeal it is stated that Rs.98,81,165/- represents the maximumamount payable under Section 40(b)(v) but not the amount that has beenmutually agreed to be paid as remuneration. In other words, theappellant has accepted that clause 2 does not quantify or provide themanner of computing remuneration payable to the partners but stipulatesthe maximum amount payable.Thus, the limits specified under Section 40(b)(v) are incorporated andhave become part and parcel of the partnership deed but not the amountor the quantum of remuneration. In the case of a firm carrying on aprofession referred to in section 44AA or which is notified for the purposeof 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 ismore;(b) on the next Rs. 1,00,000 of the book-profit at the rate of 60 percent.;
  11. 11. (c) on the balance of the book-profit at the rate of 40 per cent.; (2) in thecase 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 ismore;(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 twopartners to be decided at a future point in time. Therefore, payment ofRs.21,40,000/- was not in accordance with the terms of thesupplementary partnership deed dated 1st April, 1992 though authorizedby the said deed. The remuneration was paid in terms of a subsequentunderstanding between the two partners regarding the quantum and theamount to be pai The question of law is answered in favour of theRevenue 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 16.7.2009of 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 tohold that income from MODVAT credit is “derived from” industrialundertaking as contemplated in Sec. 80IB(1) ignoring the vital fact that
  12. 12. the very source of such income was government policy imposing exciseduty at differential rate, say 16% on the purchases of raw materials forthe earlier assessment year and 8% on finished goods sold during thecurrent financial year, which can be „attributed to‟ industrial undertakingbut not „derived from‟industrial undertaking.”3 The assessee availed/set off Modvat credit of excise duty of earlieryears amounting to Rs. 1 .93 crores. The Assessing Officer questioned theallowability of deduction claimed u/s 801B on Modvat credit. The assesseehas submitted before the Assessing Officer that the assessee could not setoff/availed the Modvat credit of the earlier years because of excise dutyon 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 beutilized because of the differential rates of excise duty on purchase of rawmaterial and sale of goods. The Assessing Officer disallowed the claim ofthe assessee and held that the income has arisen because of differentialrates of excise duty on purchase and sale; therefore, cannot be called asarising out of manufacturing activity of the undertaking.3.1 On appeal, the CIT(A) allowed the claim of the assessee vide theimpugned order.4 Before us, the ld DR has mainly contended that since the Modvat creditwas available with the assessee during t he earlier years; therefore, thisbenefit has not arisen during the year under consideration and thus is noteligible for deduction u/s 801B for the year under consideration.4.1 On the other hand, the ld AR has submitted that the amount ofincome has arisen because of the differential rates of excise duty onpurchase and sale and since the excise duty on sale was 8%; therefore,the assessee was not able to recover the full excise duty paid onpurchases. Vide Finance Act 2006, the government has amended thestructure of excise duty and reduced the excise duty from 16% to 8% on
  13. 13. raw material used by the assessee. Due to the change in the rate ofexcise duty vide Finance Act 2006; the assessee was able to recover theexcise duty paid in the earlier years by setting off of the excise duty paidon the purchases in the earlier years against the excise duty payable onsale during the year. Thus, the ld AR of the assessee has submitted thatthe income, in fact, arisen only during the year under consideration whenthe assessee availed the setting off of credit of the excise duty. He hasfurther submitted that the issue on merit is covered in favour of theassessee by the decision of the Hon‟ble Guwahati High Court in the caseof Commissioner of Income-tax v. Meghalaya Steels Ltd. reported in 332ITR 91 as well as the order dated 29th April 2001 of the Delhi Bench of theTribunal in ITA No. 3303/Del/2010.5 We have heard the rival contention and carefully perused the relevantmaterial on record. Undisputedly, the Modvat credit earned by theassessee during the earlier years could not be availed and set off becauseof the huge difference of excise duty rates on purchase of raw materialand sale of goods. Upto 31st March, 2005, the excise duty on raw materialwas 16% which the assessee used to pay whereas the excise duty onmanufactured goods collected by the assessee was 8%. Therefore, it wasnot possible to recover the full excise duty paid on purchases from theexcise duty collected on the finished goods. Vide Finance Act, 2006, theGovernment has amended the rates of excise duty and consequently, theexcise duty on purchases of raw material by the assessee was reducedfrom 16% to 8%. Thus, only after the amendment vide the Finance Act2006, the assessee was able not only to recover the full excise dutypayable 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 abenefit of Modvat credit was available to the assessee, which could be setoff and utilised against the collection of the excise duty on sale of goodsw.e.f Assessment Year 2006-07. Therefore, this amount has been rightly
  14. 14. taken into account as income for the year under consideration. Evenotherwise, the Assessing Officer has not treated this amount as theincome of the earlier years but denied the deduction on the ground thatthis is not the income derived from the industrial undertaking.6 In view of the above discussion, we do not find any merit or substancein the contention of the ld DR.6.1 On the issue whether this benefit of Modvat credit is the incomederived from the industrial undertaking or not, the Hon‟ble Guwahati HighCourt in the case of Meghalaya Steels Ltd. (supra), has held as under:“In so far as the second question is concerned, the Central excise dutyrefund claimed by the assessee is on the basis of an exemptionnotifications issued by the Ministry of Finance (Department of Revenue)being Notification No. 32 of 1999 and Notification No. 33 of 1999 bothdated July 8, 1999. In terms of these notifications, a manufacturer isrequired to first pay the Central excise duty and thereafter claimed arefund on fulfilment of certain conditions. In the next month, afterverification of the claim, the Central excise duty so deposited is refundedto 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 tothe Central excise duty refund.The Central Board of Excise and Customs in its circular dated December19, 2002 clarified that the refund is not on account of excess payment ofexcise duty but is basically designed to give effect to the exemption andto operationalise the exemption given by the notifications. In that sense,the Central excise duty refund does not appear to bear the character ofincome since what is refunded to the assessee is the amount paid underthe modalities provided by the Department of Revenue for giving effect tothe exemption notifications. There is also nothing to suggest that the
  15. 15. assessee has recovered or passed on the excise duty element to itscustomers.Even assuming the refund does amount to income in the hands of theassessee, it is a profit or gain directly derived by the assessee from itsindustrial activity. The payment of Central excise duty has a direct nexuswith the manufacturing activity and similarly, the refund of the Centralexcise duty also has a direct nexus with the manufacturing activity. Theissue of payment of Central excise duty would not arise in the absence ofany industrial activity. There is, therefore, an inextricable link betweenthe manufacturing activity, the payment of Central excise duty and itsrefund. In the circumstances, we are of the opinion that question No. 2must be answered in the affirmative in favour of the assessee and againstthe Revenue.”6.2 The Hon‟ble High Court has decided the issue in favour of theassessee after considering the decision of the Hon‟ble Supreme Court inthe 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 ofMeghalaya Steels Ltd (supra), we deicide this issue against the revenueand in favour of the assessee.The Total Packaging Services 7 In the result, the appeal filed by therevenue is dismissed.Order pronounced on the 4th,day of Nov 2011. Analysis of the case.In the present case MODVAT credit is “derived from” industrialundertaking as contemplated in Sec. 80IB(1) ignoring the vital fact thatthe very source of such income was government policy imposing exciseduty at differential rate, say 16% on the purchases of raw materials forthe earlier assessment year and 8% on finished goods sold during the
  16. 16. current financial year, which can be „attributed to‟ industrial undertakingbut 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 notionallyShri. Anil H. Lad v. DCIT (ITAT Bangalore)- Where the depreciationand loss of earlier assessment years have already been set off againstother business income of those assessment years, there is no need fornotionally carrying forward and setting off of the same depreciation andloss in computing the quantum of deduction available u/s.80I. TheHon‟ble Court has held further that the year of commencement aloneneed not be the “initial year”, but depending upon the facts of the caseand the option exercised by the assessee, the year of claim also can beconsidered as “initial assessment year”. The court has also examined theissue from a different legal angle and held that the proposition argued bythe Revenue is not compatible with the scheme of gross total incomeconceptualized in the IT Act, especially in the light of section 80AB whichare all relevant while considering the deduction u/s.80IA which is fallingunder Chapter VIA of the IT Act, 1961. Where the earlier depreciation andlosses have already been set off, those loss and depreciation do not go toreduce the gross total income of an assessee within the meaning ofsection 80AB and therefore bringing the notional concept of carryingforward and set off will be contrary to the scheme of section 80AB andconcept of gross total income.This is an appeal filed by the assessee. The relevant assessment year is2008-09. The appeal is directed against the order of the Commissioner ofIncome-tax(A)-VI at Bangalore, dated.29. 10.2010 and arises out of theassessment completed u/s. 143(3) r.w.s.153A of the IT Act, 1961.
  17. 17. 2. The assessee was the proprietor of M/s.VSL Mining Company, till thefinancial year preceding to the relevant assessment yearinvolved in thepresent appeal. The proprietary concern of the assessee was taken overby a company named M/s. VSL Mining Company P. Ltd., in the previousyear relevant to the assessment year under appeal. However, theassessee continued to remain as partner of M/s. V. S. Lad and Sons whichcarries on the business of mining operations of extractions, processingand export of iron ore. The assessee filed the return of income on a totalincome 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 asthe associate concerns. In the back drop of the search action, assessmentwas made by the assessing authority u/s. 153A. Naturally, 153Aassessments covered even the earlier assessment years. In the course ofthe 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 hasalso made an addition of Rs. 24,06,700/- on the ground of seizure ofcash at the time of search. He has further made an addition ofRs. 1,68,43,841/- by way of 50% of the disallowance of expensesincurred on running and maintenance of helicopter. The disallowance wasmade on the ground of personal user. Accordingly, the Assessing Officerdetermined a total income of Rs. 8,31,46,500/- as against a total incomeof Rs. 4,41,22,030/- returned by the assessee.4. The assessment was taken in first appeal. The Commissioner ofIncome-tax(A) confirmed the order of the assessing authority disallowedthe claim made by the assessee u/s.80IA and upheld the addition ofRs. 1,97,73,931/-. The Commissioner of Income-tax(A) also confirmedthe addition of Rs. 24,06,700/- made by the assessing authority on thebasis of seizure of cash in the course of search carried out u/s. 132.
  18. 18. Regarding the 50% disallowance of helicopter expenses, theCommissioner of Income-tax(A) set aside the disallowance and deletedthe addition of Rs. 1,68,43,841/-. The grounds raised on levy of interestwas disposed off as consequential.5. The assessee is aggrieved on the two additions sustained by theCommissioner of Income-tax(A) and also in respect of levy of interestu/s.234B and 234C.
  19. 19. Analysis of the case.In the present case the depreciation and loss of earlier assessment yearshave already been set off against other business income of thoseassessment years, there is no need for notionally carrying forward andsetting off of the same depreciation and loss in computing the quantum ofdeduction available u/s.80I. The Hon‟ble Court has held that the year ofcommencement alone need not be the “initial year”, but depending uponthe facts of the case and the option exercised by the assessee, the year ofclaim also can be considered as “initial assessment year”. The court hasalso examined the issue from a different legal angle and held that theproposition argued by the Revenue is not compatible with the scheme ofgross total income conceptualized in the IT Act, especially in the light ofsection 80AB which are all relevant while considering the deductionu/s.80IA which is falling under Chapter VIA of the IT Act, 1961. Wherethe earlier depreciation and losses have already been set off, those lossand depreciation do not go to reduce the gross total income of anassessee within the meaning of section 80AB and therefore bringing thenotional concept of carrying forward and set off will be contrary to thescheme of section 80AB and concept of gross total income.The Commissioner of Income-tax(A) confirmed the order of the assessingauthority disallowed the claim made by the assessee u/s.80IA and upheldthe 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 assessingauthority on the basis of seizure of cash in the course of search carriedout u/s. 132. Regarding the 50% disallowance of helicopter expenses, theCommissioner of Income-tax(A) set aside the disallowance
  20. 20. 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 duefrom the company to the Central or State Government or to a localauthority, all wages or salary or any employee, in respect of the servicesrendered to the company and due for a period not exceeding 4 months allaccrued holiday remuneration etc. and all sums due to any employee fromprovident fund, a pension fund, a gratuity fund or any other fund for thewelfare of the employees maintained by the company are payable inpriority to all other debtsThe effect of the amendment made in the Companies Act in 1985 is onlyto expand the scope of the dues of workmen and place them at par withthe debts due to secured creditors and there is no reason to interpret thisamendment as giving priority to the debts due to secured creditor overthe dues of provident fund payable by an employer.Of course, after the amount due from an employer under the EPF Act ispaid, the other dues of the workers will be treated at par with the debtsdue to secured creditors and payment thereof will be regulated by theprovisions contained in Section 529(1) read with Section 529(3), 529Aand 530 of the Companies Act.In view of what we have observed above on the interpretation of Section11 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, whichturned on the interpretation of Section 94 of the Employees‟ StateInsurance Act and Sections 529A and 530 of the Companies Act and onwhich reliance has been placed by the learned Company Judge and theDivision Bench of the High Court while dismissing the applications filed bythe appellant, cannot be treated as laying down the correct law.
  21. 21. Analysis of the case.In the present case when Section 11(2) was inserted in the EPF Act by ActNo. 40 of 1973 and any amount due from an employer in respect of theemployees‟ contribution was declared first charge on the assets of theestablishment and became payable in priority to all other debts. However,in the Companies Act by Act did not declare the workmen‟s dues (thisexpression includes various dues including provident fund) as first chargeIn the result, the appeals are allowed. The impugned judgment as alsothe order of the learned Company Judge are set aside and theapplications filed by the appellant are allowed in terms of the prayermade. The Official Liquidator appointed by the High Court shall depositthe dues of provident fund payable by the employer within a period of 3months. 5. Tax Planning- Save tax through your familyImplest 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 returnmay be higher as well. Here is how we can save tax through our familymembers.Through ParentsIts a fact that Your own parents as well as your own in-laws can becomelegal tools of tax planning for you and your family. If you want to achievethis dictum then all you are need to do is just to give away a portion ofyour funds, either as a gift or a loan, to your parents as well as yourparents in law so that in years to follow your income tax burden becomeslighter as the income on funds transferred by you to them which wouldbring in income would be taxed in their hands.
  22. 22. With the increase in the limit of exempted income for individuals, womentax payers and senior citizens, it is now a great time for having separateincome tax files for all family members.Assuming that both the parents are senior citizens. Here‟s how you goabout it. Income tax deductions allow senior citizens a tax-free income ofRs 2.4 lakh. To exhaust this limit, say you gift Rs 28 lakh to each parentin cash. Of this, both can individually put Rs 15 lakh in a senior citizenssavings scheme that earns a return of nine per cent and pays interestevery 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 percent) that pays interest each quarter, it will fetch them an income ofnearly Rs 1 lakh annually.That means both parents have earned Rs 2.8 lakh from the senior citizensaving scheme and another Rs 2 lakh from SBI‟s five-year deposits eachyear. A total savings of Rs 4.8 lakh – the tax-free limit (Rs 2.4 lakh) thateach parent enjoys. So, they don‟t even need to file tax returns.Same planning can be done for parents in laws.Through Major ChildrenAll your adult children are as solid as a rock to help you save your incometax. After October 1, 1998, the provisions relating to gift-tax have ceasedto exist.Now you are free to gift away your money to your children withoutattracting gift tax. This amendment makes it a good idea to make liberalgifts to your major children so that the income, if any, arising from theseinvestments in years to come can be taxed in the hands of your children.
  23. 23. For example, if you have fixed deposits let us say of Rs 50 lakh and youhave a son and a daughter, who are not minors, then it makes sense ifthe son is gifted Rs 21.25 lakh and if he invests the same in an FD (at aninterest 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 ofnearly Rs 25 lakh. On this amount the son as well as the daughter will notpay income tax because the amount is below the exemption limit. In thismanner, 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 lowerincome tax incidence in the family. If, however, due to some reasons youdo not feel inclined to make huge gifts to your major children, then youmay give interest-free loans to your adult children so as to legally reduceyour taxable income.It is lawful to grant interest-free loans to adult children from your ownfunds.Through Your wifeMarried taxpayers can make a substantial saving of income tax by settingup two separate independent income tax files, one each for the husbandand 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 incometax ward/circle where she was assessed. Your wife‟s Permanent AccountNumber would also continue to be the same though her surname wouldchange after marriage as also her residential address.After marriage all that is needed for a separate income tax return for yourwife is to file the income tax return with her new surname and newaddress. If your wife desires, she can continue to file the income taxreturn mentioning her old address (before marriage).
  24. 24. Due to marriage if the town changes, then she can file the income taxreturn in the new town according to the new jurisdiction which would beon the basis of residential address.
  25. 25. Tax Evasion cases. 1. ITAT order in Nokia tax evasion case, Challenged by department in HC 26 FEB,2010In its petition, the income tax department said the ITAT haswrongly deleted the penalty imposed by it on Nokia India forallegedly wrongly declaring its income.The government on Wednesday approached the Delhi high courtchallenging an order of the Income Tax Appellate Tribunal (ITAT) thatgave relief to mobile phone maker giant Nokia in a case of alleged taxevasion.A division bench comprising justice BD Ahmed and justice SiddharthMridul admitted the petition filed by the income tax department andposted the matter to 12 April for next hearing.In its petition, the IT department said the ITAT has wrongly deleted thepenalty imposed by it on Nokia India for allegedly wrongly declaring itsincome. It further said “assessee (Nokia) knowingly furnished inaccurateparticulars of its income and has concealed the facts relating tocomputation of its correct income for the year under consideration.”The IT department had imposed a penalty of Rs1.14 crore on Nokia on 27March 2006, for allegedly furnishing wrong returns for the financial year2001-02. According to IT department, Nokia had claimed nil tax on someaspects such as allowances on foreign travel, account provision ofwarranty, marketing expenses etc.Later, in March 2004, the department picked up Nokia‟s income tax returnfor scrutiny and sent a notice after finding alleged irregularities. Afterscrutiny, IT department assessed Nokia‟s income at Rs12 crore and
  26. 26. imposed a fine of Rs1.4 crore and equal amount of tax for alleged evasionof tax by the firm. Analysis of the caseIn the present nokia case the IT department said the ITAT has wronglydeleted the penalty imposed by it on Nokia India for allegedly wronglydeclaring its income. It further said “assessee (Nokia) knowingly furnishedinaccurate particulars of its income and has concealed the facts relating tocomputation 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,2011Tax sleuths unearthed central excise and service tax evasion amountingto over Rs 5,500 crore in the 2010-11 financial year, even as pressuremounted on the go crackdown on black money.Unravelling the trail of theill-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 registeredcases of duty evasion amounting to Rs 1,356 crore in FY‟11, cases ofevasion totalling an amount of Rs 4,352 crore were registered under theservice tax category, during the same period. Analysis of the case.Tax sleuths unearthed central excise and service tax evasion amountingto over Rs 5,500 crore in the 2010-11 financial year The number of casesof 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 inthe 2010-11 financial year in comparison to the previous year.
  27. 27. 3. Salman Khan Tax case- Court moved over Rs.40 million ‘evasion’ 18 oct.2010The Bombay High Court will soon hear a petition filed by the income tax(IT) department pertaining to a 10-year-old case involving alleged taxevasion of Rs.40 million by Bollywood actor Salman Khan.The ITdepartment has challenged an order of the income tax appellate tribunalwhich had earlier ruled in the actor‟s favour.He was found to have allegedly evaded the tax during the assessmentyear 2000-01.According to IT sources, Khan had declared his income asRs.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 ITcommissioner (appeals) who ruled in his favour. The IT departmentfollowed it up with an appeal before the tribunal which also ruled inKhan‟s favour. Now, the department has sought the quashing of thetribunal‟s order. Analysis of the case.The IT department has challenged an order of the income tax appellatetribunal which had earlier ruled in the actor‟s favour. According to ITsources, Khan had declared his income as Rs.9.32 crore during 2000-01which was later found to be Rs.13.61 crore. 4. Vodafone caseThe Income Tax Department has filed a caveat in the Bombay High Courtin the Vodafone tax case. The caveat was filed to avoid ex-parteproceedings. Vodafone is likely to move the Bombay High Court nextweek. It is learnt that the Income Tax Department has issued a seven-page showcause with its final order. The showcause represents newproceedings against Vodafone and relates to representative assesses.
  28. 28. The notice treats Vodafone as an agent of Hutchison TelecommunicationsInternational (HTIL). It is the first time that a tax notice is treating a non-resident as an agent of another non-resident. The notice proposessubstantive assessment for Vodafone under section 163 of the IncomeTax 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 cornerVodafone from both TDS as well as assessment sides.This entire case revolves around the Hutch–Vodafone deal, which wasstruck way back in 2007. Back then, Vodafone had acquired 67% stake inHutchison Essar from Hutchison Telecommunications International (HTIL).The taxman said this transaction was taxable in India because theunderlying asset was in India and therefore sought a capital gains tax.Vodafone‟s said the I-T Department has no clear jurisdiction over the dealbecause Vodafone is a Netherlands company and Hutchison isincorporated in the Cayman‟s Islands. Vodafone had moved the SupremeCourt in January 2009, but the apex court had refused to intervene andhad directed the I-T Department to revert on jurisdiction.This order could not have come at a worse time for Vodafone which isfacing intense pricing wars and fierce competition in the telecom space. Ithas recently been forced to write-off a staggering Rs 15,000 crore fromits local subsidiaries.The order was also drawn up on a circular issued in China last year. InDecember 2009, China issued the infamous circular 698, which broughtall transfers of Chinese resident enterprises that were executed offshoreunder the tax net.The circular said that all foreign entities must disclose details of transfersof Chinese companies to the Chinese tax authorities where such transfers
  29. 29. are executed through an offshore structure located in a no tax or nil taxjurisdiction.The Chinese circular asked for a variety of documentation to be disclosedto its tax authorities such as the contract between two companies, therelationship between the foreign entity and the holding company beingtransferred, the operations of the holding company, and most importantlywhy this particular holding company in that jurisdiction had been chosento execute the transfer of shares.Basically, the Chinese circular seeks to establish whether or not thisholding company has been established and is being used for the purposeof tax evasion.Indian tax authorities in the Vodafone case have not used the Chinesecircular to seek to establish jurisdiction over Vodafone in India. However,they have used it as an example of the fact that other jurisdictions havebrought Vodafone type transactions under the tax net. Analysis of the case.Vodafone had acquired 67% stake in Hutchison Essar from HutchisonTelecommunications International (HTIL). The taxman said thistransaction was taxable in India because the underlying asset was in Indiaand therefore sought a capital gains tax. Vodafone‟s said the I-TDepartment has no clear jurisdiction over the deal because Vodafone is aNetherlands company and Hutchison is incorporated in the Cayman‟sIslands. In the present case the main objective is to counter Vodafonearguments on tax deductible at source (TDS) liability. Vodafone said thateven 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 anyjurisdiction anywhere else in the world is incorrect
  30. 30. 5. Star TV case.In the Star TV case, a group of companies comprising owners of Indianlanguage channels, Star Plus, Star Gold, Star One and Star Utsav, areproposed to be merged with an Indian group company. The merger,organised as a scheme of amalgamation is presently awaiting approval ofthe Bombay High Court under the Companies Act. The merger sought toachieve synergies of operation and enhanced operational flexibility andthe AAR found merit in its commercial justification. Further, the AAR heldthat contracting parties are free to enter into a legitimate transaction,notwithstanding tax benefits. The judgement is well reasoned and bringsa 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 specifiedconditions for tax neutral merger under the Indian tax laws. The Revenue,however, contended that the merger is a „make-believe‟ scheme havingno legitimate purpose apart from tax evasion and avoidance of tax inIndia.Increasing legislative drive on tax avoidanceAfter Advance Ruling in Star debated related to TV Tax planning vstax evasion going on 22 feb 2010An anti-avoidance provision in the tax law is a measure to checkconvoluted transactions devised exclusively for the purpose of evadingtaxes. Such provisions attempt to strike down unacceptable tax avoidancepractices and have been in vogue in matured tax jurisdictions such asAustralia, Canada.
  31. 31. The present law contains specific anti-avoidance provisions as opposed togeneral provisions. Transfer pricing regulations are an example, whichseek to ensure adequate arms length payments between related partiesand curb profit shifting in cross-border scenarios. More importantly, theDirect Tax Code proposes to introduce a general Anti-Avoidance Rule(GAAR) law. GAAR will empower a Commissioner of Income Tax todeclare any transaction as an „impermissible avoidance arrangement‟ if itresults in certain tax benefits or it creates rights or obligations whichwould not normally be created between persons dealing at arm‟s length orit results in abuse of the provisions of the DTC, lacks commercialsubstance or bona fide business purpose, etc.,Amongst DTC provisions, the GAAR proposal has resulted in higher levelsof anxiety amongst business who fear that the judicially accepteddistinctions between permissible tax planning and tax evasion willdisappear due to its wide coverage and vague drafting. Tax Avoidance cases.1.Payment of commission in lieu of dividend is Tax Avoidance 23June 2011Dalal Broacha Stock Broking Pvt Ltd vs. ACIT (ITAT Mumbai –Special Bench)- Provisions of section 36(1)(ii) will apply in case of allemployees including share holder employees irrespective of the factwhether any extra services have been rendered or not. The issue whetherpayment of bonus or commission to an employee will be covered by theprovisions of section 36(1)(ii) or section 37(1) is also settled by thejudgment of Hon‟ble Jurisdictional High Court in case of Subodh ChandraPoppatlal vs. CIT (24 ITR 586) in which the Hon‟ble High Court whiledealing with similar provisions of the old Act held that when anexpenditure fell under section 10(2)(x) [which corresponds to section36(1)(ii)], in the sense that it is an expenditure in the nature of bonus or
  32. 32. commission paid to an employee for services rendered then its validitycan only be determined by the tests laid down in section 10(2)(x) and notby the tests laid down in section 10(2)(xv) which corresponds to section37(1). Respectively following the said judgment, we hold that thepayment of commission to the three director employees had been rightlyconsidered by the authorities below under the provisions of section36(1)(ii) and that the provisions of section 37(1) will not be applicable insuch cases. Analysis of the caseIt was also held that that the payment of commission of Rs.1.20 crores tothe three working directors was in lieu of dividend and the same is notallowable as deduction under section 36(1)(ii).2. Bonus stripping under the Income tax lens 13 june 2010After taxing investors for dividend stripping, the Income Tax (I-T)Department is gearing up to tax bonus stripping. Official sources sayscrutiny of returns filed by companies, brokers and individuals active inthe stock markets and in possession of shares revealed wide use of thismechanism to evade tax.According to data compiled by Business Standard Research Bureau, 314companies have announced bonus shares since 2005-06. Whileassessments are on for 2008-09, in most cases the department ischecking returns filed for the last four years under the scrutinyassessment, sources add.To explain how bonus stripping works, a source said: “Say, someone is inpossession 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, theshareholder gets 1,000 stocks more for free. By the end of the issue, the
  33. 33. investor owns 2,000 shares, each priced at Rs 500. He now sells the initial1,000 shares at Rs 500 each, incurring a short-term capital loss. He usesthe loss to reduce gains made in other market transactions. Later, he sellsthe remaining 1,000 shares, at a profit since they were acquired free andreaps the benefit of tax exemption on long-term capital gains.”While Section 94 of Indian Income Tax Act 1961 refers to tax avoidanceby certain transactions in securities, Section 94(8) covers taxation ofbonus shares held under the mutual fund units. Analysis of the casebonus equity shares held by individual investors or companies arecompletely out of the tax net. The department now proposes to extendthe coverage to securities, too, say sources. The I-T Departmentrecommends an amendment to Section 94(8) of the Income Tax Act tobring such proceeds within the tax ambit3. Govt may plug gaps in tax evasion laws to stop treaty shopping19 june 2009The party could end soon for domestic and multinational companies thatdo tax planning only to avoid paying taxes in India. The government is setto usher in the next stage of reforms in taxation, framing anti-abuse rulesthat will empower tax authorities to lift the corporate veil and look forwhat are called `avoidance‟ transactions. Other anti-avoidance measurescould include controlled foreign corporation (CFC) regulations and normson thin capitalisation.Tax benefits will be denied to firms found indulging in tax avoidancethrough one or a series of transactions. This would cover both cross-border and domestic deals. CFC regulations, on the other hand, will helpprevent domestic firms from accumulating profits in low tax jurisdictions.In the US, these rules apply to US investors who own substantial stock in
  34. 34. non-US corporations. It accelerates the taxation of passive income in thehands of US investors.Norms on thin capitalisation will ensure that domestic companies do notover-leverage on debt when they expand to set up operations overseas. Ifthey do so, such firms may not be able to claim a tax deduction on theexcess interest. Again in the US, thin capitalisation rules discourage UScompanies from having a debt-equity ratio higher than 3:1.4. Dividend Stripping Loss is Allowable – Bombay High CourtWallfort Shares & stock Brokers Ltd v ITO (2005) 96 ITD 1(Mum).Tax avoidance- dividend stripping-s- 4, 28 (1) 94 (7),715 oct 2008Where the assessee bought units of a mutual fund, received tax-freedividend thereon and immediately thereafter redeemed the units andclaimed the difference between the cost price and redemption value as aloss and the same had been upheld by a Five Member Special Bench ofthe Tribunal as a genuine loss, HELD affirming the order of the SpecialBench that:(i) S. 94(7) was inserted prospectively w.e.f. 1.4.2002 to disallowdividend stripping losses. If the argument of the Revenue that eventransactions prior to s. 94(7) can be disallowed is accepted, it will renders. 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) theloss was allowable. This Circular is binding on the revenue and theycannot argue contrary to that.(iii) Even otherwise it was not established that the motive was to earn aloss. The allegation that there was complicity between the mutual funds,
  35. 35. the brokers and the assessee was also without merit. Mc Dowell 154 ITR148 (SC) and Azadi Bachao Andolan 263 ITR 706 (SC) considered.(iv) The alternative argument that the loss should be treated asexpenditure incurred to earn dividend and disallowed u/s 14A is alsowithout for I-T, Interest paid on loans for acquisition of new machinerybefore same is first put to use, cannot be claimed as revenue expenditureeven as extension of existing business; to be added to „actual cost‟ ofassets : P & H High Court LB5. Interest paid on loans for acquisition of new machinery beforesame is first put to use, cannot be claimed as revenue expenditure1 feb 2008FOR the Income Tax Department, the latest ruling of the Larger Bench ofthe Punjab & Haryana High Court amounts to a big win.And, at the centre of the dispute was whether the interest paid onborrowed capital for purchasing new plant and machinery before the sameis put to use is revenue expenditure or to be added to the „actual cost‟ ofthe asset? What further complicated the issue was the fact that theassessee was a running company and wanted to set up a new plant bybuying new machinery out of borrowed capital. Since the new productionplant was mere an extension of the existing business, the assesseetreated the interest payment as revenue expenditure. Although to curbtax avoidance the CBDT had inserted explanation 8 to Sec 43(1) videFinance Act, 1986 w e f April 1, 1974 and also inserted a proviso to Sec36(1)(iii) vide Finance Act, 2003 to make it clear that and such amount ofinterest is for the period beginning from the date on which the capital wasborrowed for acquisition of the asset till the date on which such asset wasfirst put to use. Given that the laws were so unambiguous and clear whatwas the actual issue before the Larger Bench? It was the interpretation of
  36. 36. the converse whether the law also meant that the interest paymentbefore the capital assets are put to use are to be added to the „actualcost‟ 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 setup a new plant by buying new machinery out of borrowed capital. Sincethe new production plant was mere an extension of the existing business,the assessee treated the interest payment as revenue expenditure. nodeduction shall be allowed for interest paid, in respect of capital borrowedfor acquisition of an asset for extension of existing business or profession(whether capitalized in the books of account or not)