Budget 2011: Highlights of the Direct Tax Proposals

The key points in the speech of the Hon’ble Finance Minister, Mr. Pranab Mukherjee in relation to Direct Taxes are highlighted hereunder:

Ø Direct Taxes Code proposed to be effective from April 1, 2012

Ø The tirade against black-money continued with a 5 fold strategy being proposed by the Govt. viz.

o Joining the global crusade against 'black money';

o Creating an appropriate legislative framework;

o Setting up institutions for dealing with illicit funds;

o Developing systems for implementation;

o and Imparting skills to the manpower for effective action.

Ø 11 new Tax Information Exchange Agreements and 13 Double Taxation Avoidance Agreements’s entered into.

Ø E-filing of Income Tax Returns and e-filing of Tax Deducted at Source.

Ø New Centralized Processing Centers proposed in Manesar, Pune and Kolkala, besides the existing one in Bengaluru.

Ø Notified salaried persons not to file returns since their tax liability discharged by the employer.

Ø New simplified tax return form titled ‘Sugam’ to be introduced.

Ø 3 more benches of the Settlement Commission to be set-up.

Ø Gross Tax Receipts are estimated at ` 9,32,440 crore.

Ø Exemption limit for individuals raised to ` 1,80,000

Ø Qualifying age for senior citizens reduced to 60 years; exemption limit enhanced to ` 2,50,000

Ø New category of ‘Very Senior Citizens’ – qualifying limit 80 years and exemption limit ` 5,00,000

Ø Corporates: Surcharge reduced to 5% from 7.5%

Ø Minimum Alternate Tax (MAT) increased to 18.5% from 18%

Ø MAT to be levied on developers of the Special Economic Zones and units operating in SEZ’s

Ø In financing of infrastructure:

o special vehicles in the form of notified infrastructure debt funds to be created;

o interest payment on the borrowings of these funds to a reduced withholding tax rate of 5%, down from 20%;

o exemption of the income of the fund from tax.

Ø Additional deduction of ` 20,000 for investment in long-term infrastructure bonds.

Ø A much lower rate of 15% of tax on dividends received by an Indian company from its foreign subsidiary.

Ø Investment linked deduction to businesses engaged in the production of fertilizers.

Ø Investment linked deduction to businesses which develop affordable housing under a notified scheme.

Ø Weighted deduction on payments made to National Laboratories, universities and Institutes of technology, for scientific research to be increased to 200%.

Ø Disincentives in dealing with Non-cooperative Tax Jurisdictions.

Ø Net revenue loss to the exchequer to be ` 11,500 Crore.

Supreme Court: Exemption notification to be construed strictly; No interference on fact findings of lower authorities, unless evidence to contrary.

M/s. Uttam Industries v. Commnr. of Central Excise, Haryana, dated 21 February, 2011

CIVIL APPEAL Nos. 3727-3728 OF 2005

Relevant Facts:

The appellants were engaged in the manufacture of aluminum circles and utensils. The appellants claimed benefit of Notification No. 1/93 dated 28.02.1993 as well as benefit of Notification No. 135/94-CE dated 27.10.1994. A show cause notice was issued to the appellants contending inter alia that the benefit of the second Notification was not available to the appellants.

The appellants filed an appeal before the Commissioner Central Excise (Appeals), wherein it was held that the appellants had not fulfilled the stipulated conditions laid down in Notification as the appellants availed Modvat Credit and therefore they are not entitled to the benefit of the said Notification. It was also held by the appellate authority that the appellants did not place any material on record to show that they had fulfilled conditions of the Notifications for availing benefit of Modvat Credit.

The appellants filed an appeal before the Customs, Excise and Service Tax Appellate Tribunal. By Judgment and Order dated 10.03.2004 the aforesaid appeal filed by the appellants was also dismissed holding inter alia that in this case it is not disputed by the appellants that they were availing the credit in respect of the inputs used in the manufacture of the aluminum circles and therefore they are not entitled to the benefit of the Notification granting exemption.

Still aggrieved the appellants filed the present appeals.

Held:

The court upheld the decisions of the lower authorities. It observed:

Para 8: ‘On going through the records it is clearly established that the appellants are availing Modvat Credit in respect of inputs used in the manufacture of aluminum circles. The order-in-original, the orders passed by the appellate authority and as also by the Tribunal concurrently held that admittedly the appellants are availing such Modvat Credit in respect inputs used in the manufacture of the aluminum circles. Consequently, the appellants are not entitled to avail the benefit of Notification granting exemption inasmuch as for availing such benefit under the said notification the pre-condition is that the aluminum circles are to be cleared for intended use in the manufacture of utensils and no credit of duty paid on inputs has been taken in respect of the inputs used in the manufacture of the aluminum circles. All the aforesaid three authorities below having held concurrently in the same manner as stated hereinabove. Such finding has become final and it is not open to the appellants to challenge the same. We also hold that the appellants failed to bring any evidence on record that the appellants were not availing of Modvat Credit on the same goods in respect of which they were also claiming benefit of exemption under Notification.’

Para 9: ‘That being the position we are not inclined to interfere with the aforesaid finding of fact recorded by the Tribunal and the authorities below on the aforesaid issue.’

Para 10: ‘It is by now a settled law that the exemption notification has to be construed strictly and there has to be strict interpretation of the same by reading the same literally. In this connection reference can be made to the decision of this Court in Collector of Customs (Preventive), Amritsar vs. Malwa Industries Limited reported at 10 (2009) 12 SCC 735 as also to the decision in Kartar Rolling Mills vs. Commissioner of Central Excise, New Delhi reported at (2006) 4 SCC 772 wherein also it was held by this Court that finding recorded by the Tribunal and the two authorities below are findings of fact and such findings in absence of evidence on record to the contrary is not subject to interference.’

Delhi High Court: Waiver of loan, used for acquiring capital asset not to be treated as income

CIT v. Jubilant Securities Pvt. Ltd., decided on 18^th February, 2011

ITA No.503 of 2010

Assessment Year: 2004-05

Question/s before the Hon’ble Tribunal:

Whether learned ITAT erred in deleting the addition of Rs. 25 lacs made by the Assessing Officer on account of Unsecured Loan Written Back is applicable to waiver of loan?"

Relevant facts: The AO found that the assessee had credited a sum of `25,00,000/- in Profit and Loss Account on account of remission of liability with respect of certain unsecured loans appearing in its financial results. This amount represented loan taken from one M/s. Sail Holdings Pvt. Ltd. more than ten years ago. Since there was no communication from the party and no claim was made for so many years the loan was written back. It was treated as capital receipt and was reduced from taxable income in the computation of assessable income for the assessment year in question. The AO was of the view that the assessee had treated such write off (Loan Written Back) as receipt of a capital nature without explaining as to how and in what manner such cash credited were transferred to the Profit and Loss Account.

Dismissing the appeal of the department, the Hon’ble Court held that:

Para 23: “In the context of waiver of loan amount, what follows from the reading of the aforesaid judgment is that the answer would depend upon the purpose for which the said loan was taken. If the loan was taken for acquiring the capital asset, waiver thereof would not amount to any income exigible to tax. On the other hand, if this loan was for trading purpose and was treated as such from the very beginning in the books of account, as per Sundaram Iyengar (T.V.) and Songs Ltd. (supra), the waiver thereof may result in the income, more so when it was transferred to Profit and Loss account.”

The decision is available here.

Supreme Court: Penalty/criminal proceedings not to continue if adjudication proceedings in favour of person, except on technical grounds

Radheshyam Kejriwal v. State of West Bengal, on 18^th February, 2011

3 Judge bench, per majority of Justice H. S. Bedi and Justice C. K. Prasad

Question/s before the Hon’ble Court: “It is trite that standard of proof required in criminal proceedings is higher than that required before adjudicating authority and in case accused is exonerated before the adjudicating authority whether his prosecution on same set of facts can be allowed or not is the precise question which falls for determination in this case.”

Relevant facts: On 22nd May, 1992 various premises in occupation of the appellant Radheshyam Kejriwal besides other persons were searched by the officers of the Enforcement Directorate. The appellant was arrested on 3rd May, 1992 by the officers of the Enforcement Directorate in exercise of the power under Section 35 of the Foreign Exchange Regulation Act, 1973 (hereinafter referred to as the `Act') and enlarged on bail on the same day.

The Enforcement Directorate on the same allegation which was the subject matter of adjudication proceeding laid complaint against the appellant for prosecution under Section 56 of the Act before the Metropolitan Magistrate. After the issuance of process and exoneration in the adjudication proceeding appellant filed application for dropping the proceedings, inter alia, contending that on the same allegation the adjudication proceedings having been dropped and the appellant exonerated, his continued prosecution is an abuse of the process of the Court.

Upholding the appeal of the accused, the Hon’ble Court held that:

“Para 19: “It will not make any difference on principle that latter judgments pertain to cases under the Income Tax Act. The ratio which can be culled out from these decisions can broadly be stated as follows:-

(i) Adjudication proceeding and criminal prosecution can be launched simultaneously;

(ii) Decision in adjudication proceeding is not necessary before initiating criminal prosecution;

(iii) Adjudication proceeding and criminal proceeding are independent in nature to each other;

(iv) The finding against the person facing prosecution in the adjudication proceeding is not binding on the proceeding for criminal prosecution;

(v) Adjudication proceeding by the Enforcement Directorate is not prosecution by a competent court of law to attract the provisions of Article 20 (2) of the Constitution or Section 300 of the Code of Criminal Procedure;

(vi) The finding in the adjudication proceeding in favour of the person facing trial for identical violation will depend upon the nature of finding. If the exoneration in adjudication proceeding is on technical ground and not on merit, prosecution may continue; and

(vii) In case of exoneration, however, on merits where allegation is found to be not sustainable at all and person held innocent, criminal prosecution on the same set of facts and circumstances cannot be allowed to continue underlying principle being the higher standard of proof in criminal cases. (emphasis supplied)

In our opinion, therefore, the yardstick would be to judge as to whether allegation in the adjudication proceeding as well as proceeding for prosecution is identical and the exoneration of the person concerned in the adjudication proceeding is on merits. In case it is found on merit that there is no contravention of the provisions of the Act in the adjudication proceeding, the trial of the person concerned shall be in abuse of the process of the court.”

The decision is available here.

Mumbai ITAT: Purchase and sale of shares of other companies does not include purchase and sale of mutual funds

Equest India Pvt. Ltd. v. ITO, decided on 18^th February, 2011

ITA NO.3921/MUM/05

Assessment Year: 2001-02

Question/s before the Hon’ble Tribunal: Whether loss in purchase and sale of mutual funds is loss speculative business as it appears in the explanation to section 73 of the Income tax Act, 1961?

Relevant facts: A loss of Rs. 1,02,07,278/- which was treated as loss in speculative business also included loss of Rs.46,68,912/- relating transactions pertaining to units of mutual funds.

Upholding the appeal of the assessee, the Hon’ble Tribunal held that:

Para 4: “It was the contention of the ld. Counsel for the assessee that units of mutual funds cannot be treated as “purchase and sale of shares” so as to attract the provisions of Explanation to section 73 of the Act. We find force in the contention raised by the ld. Counsel for the assessee. We direct the Assessing Officer to verify the claim of the assessee with regard to the loss on sale of units of mutual funds and if the claim of the assessee is found to be correct to treat such loss as ordinary loss and not speculative loss.”