CA and CS HUB

Eligible business profits to be computed as per law & not as per treatment by assessee in its books

Case Law Details
Case Name : M/s. Kumarakom Lake Resort Pvt. Ltd. Vs ACIT (ITAT Cochin)
Appeal Number : I.T.A. No. 240-242/Coch/2015
Date of Judgement/Order : 01/03/2016
Related Assessment Year : 2007-08,2008-09 & 2010-11
Courts : All ITAT  ITAT Cochin

Brief of the case:

The ITAT Bench Cochin held that the assessee would be entitled to deduction u/s 80 IB(7) if its incomes are derived from eligible business irrespective of the manner in which the entries in the books of account are maintained.
Further , in the present case the “other income “ mentioned in books of assessee is not earned from any other commercial activity carried on by the assessee and the source of the same continues to be the business profits from the hotel business.
Facts of the case:

The assessee is a private limited company which is engaged in the business of running hotel by the name and style of ‘Kumarakom Lake Resort’. For AY 2007-08, the assessment was completed u/s. 143(3) of the Act on 22/12/2009 making certain disallowances. Subsequently, the Assessing Officer issued notice u/s. 148 and re-assessment u/s. 143(3) r.w.s. 147 of the Act was completed vide order dated 29/07/2013.
In reassessment , AO excluded ‘other income’ earned by the assessee amounting to Rs.9,85,097/- from the purview of business profits for the purpose of calculating deduction u/s. 80IB(7)(a) of the Act stating that the same is not derived from the business of the Hotel.
CIT(A) also confirmed the assessment order The CIT(A) held that though “other income” appears to have arisen from business and its related activities of the assessee, it cannot be said to have been “derived from” business of Hotel.
Aggrieved assessee is in appeal before ITAT.
Contention of the Revenue:

It was submitted by revenue that the income is mentioned as ‘other income’ does not have direct nexus with the running of the hotel. It was submitted that in view of the judgment of the Apex Court in the case of CIT vs. Sterling Foods reported in 104 Taxman 204, the assessee is not entitled to the benefit of 80IB(7)(a) of the Act in respect of various receipts mentioned as “other income”.
Held by ITAT Cochin:

Section 80-IB of the Act provides for deduction in respect of profits and gains from certain industrial undertakings other than infrastructure development undertakings. As per the provisions of section 80-IB of the Act, deduction is available to profits and gains “derived from” the specific business.
Further, sub-section (7) to section 80IB reads as that the amount of deduction in the case of any hotel shall be 50% of the profits and gains derived from the business of such hotel for a period of ten consecutive years.
As per the Institute of Chartered Accountants of India (ICAI) guide there are some major revenue generating streams in a hotel industry viz. Room Rentals , Food and beverages , Other operated departments , Rentals and Other Income ,
Rent received by the assessee from Heritage Shop which represents rental income from Curio Shop and for the space and amenities will fall within the key revenue generation category of ‘Space Rentals’ and ‘Arcade revenue’ and ‘Housekeeping bill’ for a hotel industry whose broad category is Rentals and Other Income , Communication revenue , Club use revenue , Disposal of empties/sale of scrap etc.
Revenue from staff mess will fall within the key revenue generation category of ‘Food and Beverages’ for a hotel industry. Revenue from staff telephone of R.90,048/- will fall within the key revenue category of Communication revenue (both telephone & internet)’ as per ICAI guidelines. Income from club cultural program/DJ of Rs.475,216/- will fall within the key revenue generation category of Club use revenue. Further the sale of used packing materials, recovery of material damage from staff etc. will fall within the key revenue category of ‘Disposal of empties/sale of scrap’ as per the ICAI guidelines.
Thus it can be seen that the other income earned by the assessee company would fall within the ambit of key revenue generating activity in case of a hotel industry and, accordingly, has a direct nexus with the hotel business of the undertaking.
AO made disallowance on the contention that, the assessee in the books of account has termed such incomes as “Other Income” which as per AO cannot be said to have been derived from the business of the assessee.
In the case of Kedarnath Jute Mfg. Co. Ltd. vs. CIT Hon’ble Supreme Court made it very clear that the assessee would be entitled to eligible deduction, irrespective of the manner in which the entries in the books of account are maintained.
Therefore, the “other income “ mentioned in books of assessee is not earned from any other commercial activity carried on by the assessee and the source of the same continues to be the business profits from the hotel business.
Accordingly, the assessee’s appeal was allowed.

CA Sourabh Chokhra

Click here to Download Summary on Mutual Fund

Click here to Download Summary notes on Derivatives

Click here to Download Summary on Liquidation of Company Accounts

Complete Summary of Accounts in 50 Pages

How to Get Good Marks in Audit

Claiming tax relief on salary arrears? Don't forget to file Form 10E

How to file Income Tax Return

If IPR owner is abroad, its transfer cannot be taxed in India: Delhi HC

In a significant decision, the Delhi high court on Monday ruled that transfer of intangible assets like intellectual property whose owners were not based in India could not be taxed in the country.

In what would benefit Foster’s Australia, the petitioner (now known as CUB Pty), the high court overturned a decision of the Authority of Advance ruling which said that such transfer would mean that income accrued in India.

A two-judge bench comprising justices Badar Durrez Ahmed and Sanjeev Sachdeva said that the legislature, while clarifying what would mean capital assets, refers to shares and derivatives, but excludes intellectual property.

“The situs of the owner of an intangible asset would be the closest approximation of the situs of an intangible asset. This is an internationally accepted rule, unless it is altered by local legislation,” the court noted in its ruling.

“Since there is no such alteration in the Indian context, we would agree with the submissions made on behalf of the petitioner that the situs of the trademarks and intellectual property rights...would not be in India,” it added.

The fact situation leading to the case was one not seen before and the law was unclear when the high court case arose in 2008.

Foster’s Australia held a certificate of registration in India with respect to trademarks pertaining to the Foster’s brand. It had entered into a brewing licence agreement with Foster’s India Ltd, a Foster’s Group company. It had also granted Foster’s India an exclusive right to use the Foster’s trademarks in the territory of India.

Subsequently, Foster’s and SABMiller executed an India sale and purchase (S&P) agreement which included the transfer of Foster’s brand intellectual property and trademarks to SABMiller in India.

In addition, SABMiller was also granted an exclusive, perpetual and irrevocable licence of Foster’s brewing intellectual property in India by virtue of the S&P agreement. The S&P agreement was executed in Australia.

The petitioner asked the Authority for Advance Ruling (AAR) to decide whether such a transfer would be taxable in India, under the Income Tax Act and the Double Taxation Avoidance Agreement between India and Australia.

By way of a ruling on 14 May 2008, AAR said that transfer of CUB Pty’s right, title and interest in and to the trademarks and Foster’s Brand Intellectual Property would be taxable in India. The reason for this decision of the AAR was that the intellectual property pertained to India, some were even registered here, so income would be deemed to accrue in India.

However, the petitioner, Cub Pty, argued that since intellectual property rights were intangible assets, it couldn’t be said that they were based in India. For such intangible assets, one had to consider where the owner of the IPR was based, in this case, Australia. Accordingly, transfer of those assets would not result in any income accrued in India.
Source : livemint

Sebi apologizes, SAT withdraws Rs1 lakh penalty
SAT considers affidavits filed by Sebi to be an unconditional apology

If it is rare for the Securities and Exchange Board of India (Sebi) to find itself at the receiving end of a Securities Appellate Tribunal (SAT) order, it is even rarer for the market regulator to tender an unconditional apology.

The SAT on Tuesday reversed an earlier ruling imposing a Rs.1 lakh penalty on Sebi for delay in passing a final order after the latter apologised.

“Applicant Sebi has filed an affidavit of the chief general manager (Sebi) and an affidavit of the whole-time member of Sebi, wherein an unconditional apology is tendered,” read the SAT order.

In an order on 16 July, SAT had imposed a cost of Rs.1 lakh on Sebi for delay in passing a final order in an issue concerning Adventz Finance Pvt. Ltd. SAT had also directed that a different whole-time member take over the adjudication proceedings. The tribunal had held that Sebi was in violation of an earlier SAT directive that it pass a final order by 24 June.

Then, SAT had directed that a copy of the order be forwarded to the finance ministry and Sebi chairman U.K. Sinha. Following the SAT order, Sebi filed a review petition before the tribunal.

While recalling the costs imposed on Sebi, SAT considered the affidavits filed by Sebi to be an unconditional apology.

“In view of the assurance given to the effect that appropriate orders would be passed in accordance with law, we modify our order dated July 15, 2016 and permit the WTM (whole-time member) of Sebi who had heard the appellant on June 21, 2016 to pass an appropriate order in accordance with law within one week from today after giving an opportunity of hearing to the appellant,” the SAT order added.
Source : livemint

25 years of economic reforms

The decades prior to 1991 may have been years of slow growth, but it is equally true that state-led growth did create capacities

This week marks the 25th anniversary of the historic budget speech by Manmohan Singh, finance minister in 1991, which heralded economic reforms. While many would argue that the process of economic reforms and opening up of the economy had started earlier, in the 1980s, the fact remains that the events that unfolded after 1991 did result in a clear shift in the ideology behind Indian economic policy, from a dirigisme regime to a market-friendly regime. It is then appropriate to evaluate the successes and failures of the past 25 years, a period which has seen unprecedented growth as well as poverty reduction.

While there is a consensus that the economy has done better after 1991 than in the earlier period according to standard metrics of economic performance, there are concerns about the performance of the economy on various social indicators. These appear to be worse, given the high growth rate that the economy has achieved in the past decade.

But the real issues are not just the successes and failures of reforms but also the sustainability of the growth path that the economy has followed since 1991. The recent slowdown in economic growth may just be temporary but there are serious concerns that raise questions about the sustainability of the reforms as well as the future of economic reforms.

First among these is the issue of inequality, which by all measures has continued to rise since 1991. The rise in economic inequality has been consistent and has been seen on measures of consumption expenditure as well as on incomes. Some of the inequality may not be harmful if it is seen as just reward for skills or entrepreneurship.

Unfortunately, on both these counts concerns remain. While wages of highly skilled employees have shown a secular upward trend, a large majority of workers, particularly in the unorganized sector, haven’t seen wages rise commensurately in real terms. Along with a trend towards casualization and contractualization, there has been a worsening of employment quality and lack of social security even for those employed in the organized sector.

But a far more serious issue is the rise of crony capitalism. If the purpose of economic reforms was to get rid of the licence-permit raj, the reforms have failed to create a level playing field with crony capitalism, not just obvious in the case of natural resources such as petroleum, coal, iron and spectrum, but also among industries which have seen the opening up of markets and deregulation. The fact that the banking and finance sector, which was among the first to be opened up, is struggling with non-performing assets is a clear reminder of the perils of unregulated liberalization and crony capitalism.

While economic inequality has certainly been a hindrance for the majority of the poor to benefit from the fruits of economic reforms, the failure of the government to deal with structural inequality has also created a class of marginalized and vulnerable people.

These structural inequalities embedded in class, caste, gender and religion have not only grown after reforms, attempts at privatizing public services such as health and education have also led to further marginalization of the disadvantaged groups from the mainstream. The low improvement in social indicators has also been accompanied by growing distance between the Scheduled Castes/Scheduled Tribes/minorities versus the rest. The net result of the accentuation of the trend of rising inequality has been social unrest across social categories and across states.

However, the biggest challenge for the economy ever since the economic reforms were initiated has been the lack of employment creation. The fact that the workforce structure hasn’t seen much change from 1991 is a clear reflection of the lopsided nature of economic growth.

The agricultural sector continues to remain the largest employer with the absolute number of workers declining only recently. But the non-farm sector, which has been the engine of growth, has failed to absorb either those displaced by the agricultural sector or the new entrants to the labour force. These new entrants to the labour force are not just better educated and skilled than their counterparts in agriculture, but also more aspirational.

The lack of employment opportunities for a large majority is now reflected in social unrest such as the clamour for reservation by certain groups such as the Patidars, Marathas and the Jats. The deterioration of employment quality has also created a class of workers who are employed but remain vulnerable.

Twenty-five years since the reforms were initiated, it is not just an opportunity to evaluate what has happened in the past 25 years but also reassess the challenges of economic growth and poverty reduction in the next 25 years.

The decades prior to 1991 may have been years of slow growth, but it is equally true that state-led growth did create capacities which enabled the economic reforms to reap the benefits of liberalization. At a time when the economy is still vulnerable to rainfall variation despite decades of agricultural growth, the issue of economic revival is not just about opening up the economy and liberalizing the trade environment.

The fundamental issues of inequality, lack of social progress and inability of the economy to generate jobs require a strategic response if the process of reforms and growth has to continue. It is time for the next generation of reforms—those that deal with the structural bottlenecks to growth—rather than more of the same.

Himanshu is an associate professor at Jawaharlal Nehru University and visiting fellow at Centre de Sciences Humaines, New Delhi.

Source : livemint

Features and steps involved in incorporating One Person Company

One person company (OPC) is an entity which consists of only with one person and is considered as a private company for all legal purposes. This concept was introduced in India through the Companies’ Act 2013.

The OPC has only one share holder who is citizen of India. The shareholder can nominate another person to take over in case of death or incapacity. This will be done with the consent of the other person. The nominee should also be an Indian citizen.

Director:

The company can have a minimum of one director who can also be the sole share holder. A maximum of 15 directors are allowed.

Terms and conditions to follow while starting an OPC:

A person cannot start more than one OPC or become a nominee in more than one such organization.

A minor cannot be a member or nominee of the one person company or cannot hold any share with beneficial interest.

A one person company cannot be incorporated or converted into a company under section 8 of the act

An OPC cannot convert voluntarily into any other type of organization until the expiry of two years starting from the date of incorporation of the company. This condition has an exception; if the share capital of the company crosses INR 50 lakh or the annual turnover of that particular year crosses INR 2 crore then the company has to file ROC for conversion in to a private company within a period of 6 months after exceeding the threshold limits. Form INC-5 has to be filled for this conversion.

Incorporating a OPC

Obtain Digital Signature Certificate (DSC) for the proposed director. And also obtain digital identification number (DIN).

Digital signature certificate (DSC)

It is the digital equivalent of physical certificates. It is issued by the office of controller of certifying authorities (CCA) to Certifying Authorities (CA). CA issues DSC to end user.

Director Identification number (DIN)

It is an unique identification number issued by the ministry of Corporate Affairs for an existing director or a person who has applied for being the director of a company

Name reservation

To check the availability of name of the company, form INC-1 should be filled. The proposed name will end with private limited.

Incorporation

Within 60 days of name approval, form INC-2 should be filled for the incorporation of OPC. If the promoter is not the sole director of the OPC form DIR-12 has to be filled along with this.

If the company address is not specified in INC-2, within next 30 days, INC-22 has to be filled.

Incorporation of OPC with single integrated incorporation form INC-29 is allowed for this INC-1 is not a pre-requisite.

Mandatory attachments to e-form INC-2

Memorandum of association

Articles of Association

Along with this the residential proof, identity proof, PAN, consent and signature of the member and nomine. Utility bills (electricity, telephone, gas etc)

Memorandum of Association (MOA)

MOA contains the fundamental provision of the company and their objectives.

Articles of Association (AOA)

AOA contains rules and regulations of the internal management of the company. It is a contract defining the relationship between company and it members, along with rights and duties.

After name approval by ROC, MOA and AOA have to be drafted. The subscriber has to fill all the details regarding the name, address and occupation in their own handwriting and sign the subscription pages of AOA and MOA.

Payment of fees and stamp duty

After all the documents, the register has to make ROC fee payment and stamp duty electronically based on the authorized capital of the company.

Verification

After the submission of all the forms and payment of fees, ROC will verify and scrutinize the documents and will suggest changes in case of any discrepancy or errors.

Certificate:

After all the forms are duly approved by the ROC the digitally signed “certificate of incorporation” is issued in electronic form with the digital signature of ROC registrar. The company can begin operation post receiving the certificate.

Formalities after incorporation

According to the companies act 2013 following provision have to be followed post the incorporation:

To apply for shop act license, PAN TAN

Open current bank account

Pay subscription money with current bank account

Issue share certificate to subscriber by company.

File e-form INC-21 for the certificate of commencement of business with registrar of companies within 180 days from the date of incorporation.                                           

Membership change

In case of death or incapacity of the member of OPC form INC- 4 should be filled for the change of ownership. The detail of the new owner has to be filled in this form.

OPC into private company

If after the completion of 2 years the OPC organization willing to convert into private company has to fill form INC-6.

Private company into OPC

A private company willing to convert itself into OPC also has to fill form INC-6. However the company should not have share capital of more than INR 50 lakh and annual turnover more than INR 2 crore at the time of conversion.

Advantages of One Person Company:

Separate legal entity

Registering as a company will give legal advantages, incur debts and can own properties. The members (share holder or director) of the company have no liability to the creditors of a company for debts.

Uninterrupted existence

A company can continue its existence until it legally decides to dissolve. This means it remains unaffected by the death of any member and continues to operate with new membership.

Borrowing capacity

A company has lot of channels for borrowing funds. It can accept deposits from public issue debenture, secured and unsecured). Even banks favor giving a large amount of financial assistance to the company rather than partnership firms or proprietary entities.

Transferability

Shares of a company are transferable to any other person. This can be done easily with signing the share certificates.

Property

A company being a legal entity can acquire and sell properties and no shareholder can gain claim rights over the property.

Limited liability

The members of the company in respect to the company’s debt are limited.

With the lengthy process involved in the registration of the company it is flexible to avail the services of various consulting firms who complete all the legal norms involved in the process.

Author Bio

Anand Rajendran, CEO of Uptra.in, a leading provider of legal services, including company registration. He is the Head of Communications at Uptra Consultancy Services, India’s largest online legal services facilitator.

MVAT- 41 FAQ’s on Settlement of Arrears in Disputes Act, 2016

8th floor, Vikrikar Bhavan,
Mazgaon, Mumbai-400010.

TRADE CIRCULAR

To,

No. VAT/MMB-2015/47/2016-17/ADM-8 dated 19th July 2016.

Trade Cir. No. 20T of 2016

Subject : FAQ’s on Settlement of Arrears in Disputes Act, 2016

Ref. (1) The Maharashtra Settlement of Arrears in Disputes Act, 2016. (Act No. XVI of 2016)

(2) Trade Circular No. 10T of 2016 dated 3rd May 2016

(3) Trade Circular No. 10(A) T of 2016 dated 3rd May 2016.

(4) Trade Circular No. 19T of 2016 dated 30th June 2016 and revised on 7th July 2016.

Gentlemen/ Sir/ Madam,

The trade is gearing up in full swing to unlock the arrears pending in appeal. To facilitate and speed up this, the Trade Circulars cited at Ref. (2) and (3), above were issued. To address doubts and concerns raised by the stakeholders, this office has earlier issued two sets of FAQ’s vide Trade Circular cited at Ref. (3), above.

Subsequently, further queries have been received from the Trade and Associations about various provisions of the Settlement Act. Same are examined and considered. So as to mitigate the issues raised, a third set of FAQs are added to the existing FAQ’s. A Trade Circular is being issued and all the earlier FAQ’s are clubbed together. The Trade and Associations may e-mail their queries related to Settlement Act at mahasettlementact@gmail.com.

Yours faithfully,
(Rajiv Jalota)
Commissioner of Sales Tax, Maharashtra State, Mumbai.

FAQ’S

(Dated 30th June 2016)

1. Which are the Acts that are covered under the Settlement Act?

Ans. The Maharashtra Settlement of Arrears in Disputes Act, 2016 provides the opportunity of settlement of arrears in disputes that have arisen as a result of any Statutory order passed under the below given Acts administered by the Maharashtra Sales Tax Department:

(a)  the Central Sales Tax Act, 1956;

(b) the Bombay Sales of Motor Spirit Taxation Act, 1958;

(c)  the Bombay Sales Tax Act, 1959;

(d) the Maharashtra Purchase Tax on Sugarcane. Act, 1962; (e) the Maharashtra State Tax on Professions, Trades, Callings and Employments Act, 1975;

(1) the Maharashtra Sales Tax on the Transfer of the Right to use any Goods for any Purpose Act, 1985;

(g)  the Maharashtra Tax on Entry of Motor Vehicles into Local Areas Act, 1987;

(h) the Maharashtra Tax on Luxuries Act, 1987;

(i)    the Maharashtra Sales Tax on the Transfer of Property in Goods involved in the Execution of Works Contract (Re-enacted) Act, 1989;

(j)    the Maharashtra Tax on Entry of Goods into Local Areas Act, 2002;

(k) the Maharashtra Value Added Tax Act, 2002,

2. For which period(s) the Arrears in Disputes may be settled under the Settlement Act, 2016?

Ans. The Maharashtra Settlement of Arrears in Disputes Act, 2016 provides the Settlement of Arrears in Disputes for any period ending on or before 31st March 2012.

3. What is the extent of the waiver for the demand raised by statutory order in respect of Tax, Interest and Penalty?

Ans. The Maharashtra Settlement of Arrears in Disputes Act, 2016 provides the Settlement of Arrears in Disputes only in respect of interest and penalty amount.

It should be kept in mind that this Act does not provide any relief towards the Tax determined as payable by any Statutory Order.

The waiver in respect of Interest and Penalty will depend upon the period of Arrears in Disputes. The details are presented in the TABLE below:

(a) For periods ending on or before 31st March 2005.

TABLE-1 UNDISPUTED AMOUNT

Sr. No. Particulars Amount to be
paid Extent of
Waiver
1. Tax 100% NIL
2. Interest 100% NIL
3. Penalty 100% NIL
TABLE-2 DISPUTED AMOUNT

Sr. No. Particulars Amount to be
paid Extent of
Waiver
1. Tax 100% NIL
2. Interest NIL 100%
3. Penalty NIL 100%
(b) For periods starting on or after 1st April 2005 and ending on or before 31st March 2012.

TABLE-3 UNDISPUTED AMOUNT

Sr. No. Particulars Amount to be
paid Extent of
Waiver
1. Tax 100% NIL
2. Interest 100% NIL
3. Penalty 100% NIL
TABLE-4 DISPUTED AMOUNT

Sr. No. Particulars Amount to be
paid Extent of
Waiver
1. Tax 100% NIL
2. Interest 25% 75%
3. Penalty NIL 100%
4. Whether benefits under Settlement Act in respect of the Undisputed Dues can be claimed?

Ans. No, the benefits of waiver in respect of dues Viz., Interest and Penalty is available only in respect of disputed amount. If dealer has in the Appeal memo or during the pendency of Appeal stated any amount payable as per Statutory Order as undisputed then no waiver is provided in respect of said undisputed amount, notwithstanding that the amount is interest or penalty.

5. Under Settlement Act what is the meaning of ‘Arrears in Dispute?

Ans. For the purposes of Settlement Act the Arrears in Dispute should satisfy the following ingredients,‑

(1) it is a Tax, interest or, as the case may be, penalty payable as per any Statutory Order passed under the Relevant Act(s);

(2) appeal has been filed against aforesaid order;

(3) the appellate authority has granted the stay either in full or part of the recovery of the demand so raised.

(4) the stay so granted is effective at least till the date of appeal withdrawal order.

6. For the Settlement of Arrears in Dispute which Form needs to be filled by the applicant?

Ans. The applicant who desires to avail the benefits under the Settlement Act needs to submit a duly filled application in Form-1  appended to the Trade Circular No. 10T of 2016 issued on 3rd May 2016.

7. Where is the Application in Form-1 to be filed?

Ans. The Application in Form-1 for the Settlement of Arrears in Dispute must be submitted to the Nodal Officer to whom said case is assigned. For details please refer Para-3 (Page-2) of the Trade Circular 10T of 2016 dated 3rd May 2016.

8. What are the documents that needs to be enclosed with the Application seeking benefits under the Settlement Act?

Ans. The application in respect of Settlement of Arrears in Dispute shall be accompanied by,-

(1) Photocopy of the Statutory Order against which waiver is sought,

(2) Proof of,‑

(a)       stay given by the Appellate Authority and is effective at least till the date of appeal withdrawal order;

(b)      Withdrawal of appeal;

(c) Payment of the requisite amount paid towards disputed dues and undisputed dues.

9. Whether it is necessary to prefer an appeal so as to avail the benefits under the Settlement Act?

Ans. Yes. As per the provisions of sub-section (2) of section 2 of the Settlement Act the arrears so as to qualify for the waiver it is mandatory to file the appeal against statutory order and obtain stay. In other words the arrears under any Act are not eligible for waiver unless the appeal is filed with appropriate appellate authority and for recovery of arrears stay is obtained.

10. Whether for the period ending on or before 31St March 2010, an appeal can be preferred against the order passed levying interest under section 30(2) or 30(4) of the MVAT Act? If yes, whether the benefits in respect of such orders is available under Settlement Act?

Ans. Yes. As per the provisions of the MVAT Act in respect of periods ending on or before 31st March 2010 an appeal may be preferred in respect of any statutory order passed levying interest under section 30(2) or 30(4) of the MVAT Act. For aforesaid periods the benefits under the Settlement Act in respect of the interest levied as per section 30(2) or 30(4) will be available subject to the fulfillment of other conditions regarding stay and withdrawal of appeal etc.

11. Whether for the period starting on or after 1st April 2010 an appeal can be preferred against the order passed levying interest under section 30(2) or 30(4) of the MVAT Act? Whether the benefits in respect of such orders is available under Settlement Act?

Ans. No. Section 85 of the MVAT Act is amended and the order levying interest under section 30(2) or 30(4) of the MVAT Act is made non-appealable with effect from 1st May 2010. Hence no appeal can be preferred against such orders whether such orders are separate or composite. Therefore, these orders would not be eligible for availing the benefits under the Settlement Act.

12. Whether it is necessary to enclose in original the proof of withdrawal of appeal or will it be sufficient if only the request letter (duly acknowledged by appellate authority) for withdrawal of appeal submitted to appellate authority is enough?

Ans. It is necessary to enclose in original the proof of withdrawal of appeal. The acknowledgement given towards the receipt of a request letter by the appellate authority for withdrawal of appeal will not be  enough to claim the benefits under the Settlement Act.

13. What are the mandatory requirements so as to avail the benefits under the Settlement Act?

Ans. The benefits under the Settlement Act are available in respect of,‑

(a)  statutory order that pertains to the period ending on or before 31st March 2012;

(b) against such order an appeal is filed;

(c)  the stay for the recovery is obtained either in full or part and the stay so granted is effective at least till the date of appeal withdrawal order;

(d) the payment of requisite amount computed as per the provisions of section 6(1) and 6(2) of the Settlement Act is paid on or before 30th September 2016.

(e) the applicant shall file correct and complete application in Form-1 appended to the Trade Circular with the enclosures mentioned in the said Form-1.

without requisite enclosures the application cannot be considered as correct and complete application.

14. Whether waiver of the penalty in respect of cases where penalty proceedings are deferred is possible?

Ans. The benefits under the Settlement Act are available only against the statutory orders where demand/dues are raised. Therefore, in respect of the proceedings where penalty is deferred and no actual order of the penalty is passed or the demand is raised in all such cases the dealer will not be eligible to avail the benefits under the Settlement Act.

15. Para 4(b) of Trade Circular 10T of 2016 dated 3rd May, 2016 mentions that “Applicant” can be any person who desires to settle disputes as Financial Institutions, Banks, Official Assignee etc. Kindly clarify as to how can the other persons apply in the Settlement Act and what status should they mention in point no. 4 of Form-1?

Ans. As per the provisions of Settlement Act any person may participate in the Settlement process. This includes person such as Financial Institutions, Banks, Official Assignee who may have financial interest and hence may take part in the Settlement process. Such persons require to file appeal, obtain stay, make the payment of requisite amount on behalf of dealer and qualifies other related conditions as prescribed in the Settlement Act. On fulfilment of these requirements it becomes eligible to filed application in Form-1.

16. In para 5(D)(iv and v) of Trade Circular 10T of 2016, it is stated that the application shall be accompanied by – “challans showing payment of the requisite amount” and “challans showing payment of undisputed arrears”. Kindly clarify that credit will be given where such payments are made by an applicant in a single challan or in separate challans.

Ans. Payment of requisite amount and payment of undisputed dues preferably be made by two separate chalans. However, if the dealer has made consolidated payment by a single challan under such circumstances also credit of the requisite amount and undisputed arrears will be available to the applicant subject to the verification of same.

17. Section 6(3) of the Maharashtra Settlement of Arrears in Dispute Act, 2016 read with para 6(B)(b) of Trade Circular 10T of 2016 dated 3rdMay 2016 specifies that payments are to be made vide Challan MTR­6, if applicant has TIN and by others in Challan prescribed under the relevant Act. In this regard, kindly guide how to make such payments in the following situations:

(A) When RC no. of the dealer has been surrendered / cancelled;

(B) Payments in respect of periods prior to 01.04.2005 and payments to be made under repealed laws such as BST Act, WCT Act, Lease Act, etc., as the experience is that banks do not accept payments for period prior to 01.04.2005.

In this regard, it is urged to kindly provide challans online so that it can be downloaded and paid thereafter. Alternatively, kindly instruct banks / nodal officers to follow liberal approach and accept payments even for periods prior to 01.04.2005. Payments in the form of Demand draft or banker’s cheque should also be accepted.

Ans. In respect of the periods on or before 31st March 2005 under the relevant Act(s) if Registration Certificate is cancelled or surrendered then the payment of the requisite amount shall be made in the challan prescribed under the respective Act strictly in the bank by quoting the registration number granted to the dealer under the relevant Act(s).

In case of a registered dealer who holds TIN under the MVAT Act or CST Act then such dealer is required to pay electronically the requisite amount in MTR-6 by quoting the TIN number irrespective of whether the TIN is subsequently cancelled or is live.

If the Banks refuses to accept the manual payment in respect of repealed Act(s) or,

where the relevant Act(s) which are in force but do not provide facility for electronic mode of payment then under these circumstances the issues may be brought to the notice of the concerned Nodal Joint Commissioner who will intervene in the matter and instruct the Banks accordingly. Nevertheless, necessary instruction in this behalf will be given to the Banks.

18. Section 5 read with Section 4(3) of the Settlement Act prescribes that the applicant shall withdraw the Appeal pending before the Appellate authority or Tribunal or Courts and shall produce the proof of withdrawal of appeal. Further, para 5(D)(iii) of Trade Circular 10T of 2016 dated 3rd May 2016, mentions that an application shall be accompanied by “order of withdrawal of the appeal or any proceeding pending before the Tribunal or Court”. Please clarify.

Ans. The person who desires to avail the benefits under the Settlement Act is required to file an application in Form-i. This application should accompany the proof of,‑

(a) stay which is effective at least till the date of submission of application in Form-1;

(b) withdrawal of appeal i.e. the order of withdrawal of appeal passed by the appellate authority;

(c) payment of requisite amount. etc.

in the absence of aforesaid enclosures the benefits under Settlement Act will remain unavailable unless these defects are not removed.

19. TDS liability is also a tax liability, which can be considered for Settlement. Please clarify same.

Ans. Yes, if the demand as result of any Statutory order arises due to failure to take credit of TDS made by employer or an employer has failed to deduct the TDS or TDS deducted is late paid then under such circumstances any statutory order is made which raises the Demand then the benefits under Settlement Act are available subject to other conditions related to Appeal and Stay or fulfilled.

20. Faster processing of pending assessments / rectifications including appeal for the periods up to F.Y. 2011-12, should be undertaken and hearings should be expedited, so that dealers can avail maximum benefit of the Settlement Scheme.

Ans. Instructions are given to the assessing/appellate officers to expedite the assessment, rectification or appeal proceedings so that the large number of dealers can avail maximum benefit of the settlement scheme.

21. As per the Scheme the penalty waiver is 100%. Tax is payable fully & Interest payable at NIL or 25%, as the case may be. However, in some cases the penalty is deferred. In fact such deferred penalty shall be treated like post assessment interest / penalty, which shall be covered by this scheme. How such a case will be taken care of and that in such a case the deferred penalty shall never be invoked in future but be waived under this scheme.

Ans: The benefits of waiver under the Settlement Act are only available against the demand raised by the Statutory Order. However, in the case where penalty is deferred, suitable instructions are given to the officials to expedite the process and pass the respective penalty orders so that the dealer can avail benefit under the Settlement Act.

22. Once dealer opts for the Settlement of arrears in dispute whether immunity will be given from the prosecution vis-a-vis offences that may have committed under the relevant Act?

Ans: Yes. Immunity will be available vis-a-vis offences that may have been committed under the Relevant Acts.

FAQ’S Settlement Act.
(7th July, 2016)

23.   Is it possible to prefer appeal after limitation period specified in the Relevant Act is over? Whether the appellate authority will condone the delay?

Ans. Yes, in normal cases an appeal may be preferred after the limitation provided in the Relevant Act is over. The said Act also provides for the condonation of delay. The appellate authority will decide the issue of condonation of delay as per the provisions of the law.

24. The appeal is pending before the appellate authority who has fixed the Part Payment to be made on or before the date specified therein. Till such date stay was also given. However, the part payment so fixed is not paid subsequently (till date). In such circumstances, whether dealer can file application for settlement?

Ans. In aforesaid circumstances appellant should file a letter to the appellate authority and request for extension of time period required to make the part payment so fixed. On receipt of such request, appellate authority, may extend the time so specified and provide Ad-interim stay towards the recovery of the disputed amount. The applicant should make the said payment within the extended time period. Thereafter, the other formalities such as request for withdrawal of appeal and submission of application for Settlement in Form-1.

25.   If the condonation application is rejected whether the dealer would be eligible for settlement?

Ans. If the condonation application is rejected and thereafter the dealer applies for settlement of arrears under these circumstances the application cannot qualify the conditions for settlement i.e. the admission of appeal, grant of stay etc.

26.     What remedy is available to the dealer if the appellate authority under MVAT Act rejects the application for restoration?

Ans. Application for restoration of appeal to the Appellate Authority is an independent proceeding. The dealer may prefer an appeal to Tribunal against the order of rejection of restoration of appeal.

27.   Whether the application for settlement can be filed against the disallowance of Input Tax Credit where statutory order does not result into additional demand or if the said order grants the refund.

Ans. No. The application under the Settlement Act can only be made in respect of the statutory order that raises the additional demand and such arrears are pending in the appeal.

28.   How the payment made after assessment order but before filing of appeal is appropriated? What treatment is given for the mandatory payment made towards non-production of declarations or certificates under CST Act before filing an Appeal?

Ans. The payment made before filing of appeal shall be appropriated as per the provision of the relevant Act.

Eg. In case of MVAT Act the payment made after date of assessment order but before submission of appeal will be

appropriated as per the provisions of section 40 of the MVAT Act i. e.

(a)  towards the interest payable by him on the date of payment in respect of the said period

(b)  thereafter towards the amounts due as a penalty, sum forfeited and fine.

(c) any amount remaining unadjusted shall then be adjusted towards the tax payable in respect of that period.

(2)  In the assessment order if the tax is levied for non-production of declaration or certificate and if appeal is being filed after two years from the end of the year to which such claim relates, the appellant has to make 100% payment of the tax levied in the assessment order for disallowance of such declarations.

(3)   The payment made as above will be get reduced from the outstanding dues. The balance dues, if any will only qualify for the purpose of benefits under the Settlement Act.

(4) In the light of the provisions of the MVAT Act the payment made any time after filing of appeal shall be considered as payment made towards the requisite amount computed as per the provisions of section 6 of the Settlement Act.

29. In case of Assessment orders passed under section 23 of [other than sub-section (5)] the MVAT Act where the credit of the amount paid prior to the assessment order is not given in the order so passed. What procedure needs to be adopted so as to consider the payment so made and not considered in the Assessment Order?

Ans. In case of assessment orders are passed under any sub-section of section 23 [other than sub-section (5)] of the MVAT Act and the credit of the amount paid prior to said order has not been given then the appellant may bring these facts to the knowledge of the appellate authority and appellate authority may consider and give credit of the said amount subject to the verification in this behalf.

And any order passed under the Relevant Act whether Ex-parte or otherwise will be a Statutory Order within the meaning of Settlement Act and therefore would be eligible for waiver subject to fulfillment of other conditions under the Settlement Act.

30. Kindly clarify that if an application for settlement is not considered/rejected or an order of settlement is subsequently reviewed /revoked, then the Appeal along with stay would automatically stand restored and credit of amounts paid under Amnesty scheme be considered.

Ans. Rejection, review, revocation etc. as per the provisions of Settlement Act will depend upon the fact of each case. Restoration of appeal is an independent proceeding and the appellate authority will processes it as per the merit and provisions of the Relevant Act.

31. Statutory Order or Assessment order received after 1 Apr 2016 for which appeal is filed before Sept 2016 and subsequently withdrawn before Sept 2016 with an intention of availing benefit of Settlement Act. Whether against such order benefits under Settlement Act is available?

Ans. The assessment order or Statutory Order in respect of any period ending on 31st March 2012 if passed on or before 30th Sept. 2016 and where the application so submitted accompany the proof of,-

(1)  stay either in part or full to be effective at least till the date of withdrawal of appeal;

(2)  withdrawal of appeal;

(3)  the payment of requisite amount calculated as per the provisions of section 6 of the Settlement Act;

(4)   payment made during the pendency of appeal, if any; subject to the fulfillment of aforesaid conditions the benefits under the Settlement Act are available.

32. In case of builders and developers, a Special Leave Petition is pending before Hon’ble Supreme Court. In such a case the levy of tax itself is in dispute. Kindly clarify whether interest u/s 30(2) and 30(4) in such a case would be considered as undisputed arrears?

Ans. Interest under section 30(2) and 30(4) of the MVAT Act is made non-appealable with effect from 1st May 2010. Thus the orders in respect of the periods starting on or after 1st April 2010 being non-appealable the benefits of the waiver under Settlement Act will not be available as this interest will be undisputed arrears. For more details refer Q. No. 10 and 11 above.

33.   Para 7(3) requires to file vat audit report to apply for Settlement of penalty IV s 61(2) under the Scheme. We draw your kind attention to the fact that by now certain periods have become time barred for assessment. Mentioning of TIN of Buyer in a sales Tax Invoice u/s 86 of MVAT Act was made mandatory from 1 May 2010 so till then no such data was available in systems of dealer for putting in annex J1 / J2 of vat audit report. Further, prior to FY 2008-09 filing of report was in physical form 86 in different format as compared to e-704 form so not possible to file vat audit report for such periods. Thus in such a case, not advisable to insist for filing vat audit report and to put an end to such old pending litigations vide this scheme. Please clarify.

Ans. The audit report in respect of periods stated in aforesaid query can be filed either in the old format or, as the case may be, existing format depending upon the convenience and ease. The said submission of Audit Report shall be treated as good compliance. Thus on fulfilment of other conditions given in Settlement Act this may qualify for the benefits.

34.   In cases where Department has filed appeal, can dealer be considered as applicant under this Scheme? How to withdraw the appeal in such a case. What would be the procedure to do so if the dealer wants to avail the benefit of the Act?

Ans. The cases where the department has filed appeal and the appeal order is not yet finalized, in such cases the dues position as per the order which is the subject matter of challenge by the department is an undisputed dues in the point of view of the dealer. As the appeal is not withdrawn such cases will not qualify for the benefits under the Settlement Act.

35.   Instructions to be given to Appellate authority to grant stay without emphasis on payment, when dealer approaches for withdrawal of Appeal under Settlement Act. Also to issue the appeal withdrawal order soon to the applicant in response to his application.

Ans. After filing of an appeal the appellate officer immediately grant ad-interim stay for certain period such ad-interim stay can be considered as stay for the purpose of settlement. But the application for settlement should made along with the requisite proof/documents before expiry of the period as mentioned in ad-interim stay.

36.   In case of Appeals, Appellate officers be given necessary instructions to accept

A_ Appeal filed after the due date i.e. belated appeals.

B.    Restoration of Appeal and provide stay thereon, soon.

C.    The benefits of Settlement Act be extended to first/ second appeal

Ans. The appellate officers will accept the appeals or application for restoration of appeals. The application for condonation of delay will be decided as per merit of the case. In such cases ad-interim stay granted by the Appellate Authority shall be considered as stay for settlement under the Settlement Act.

37. In terms of Sec. 6(5) of Settlement Act read with Para 8(vii) of Trade Circular, extent of waiver shall be granted in proportion of the payment made of Requisite amount. Kindly explain the same by way of an example.

Ans. If the applicant has made short payment of requisite amount for settlement, in such cases, the proportionate benefit will be given in proportion with the tax payment out of total requisite amount to be paid under the Settlement Act.

FAQ’S Settlement Act.

(19th July, 2016)

38. Settlement Act provides for partial withdrawal of some “issues” raised in the appeal. How the issues are to be identified? The partial withdrawal in respect of said identified issues is allowed or not?

Ans.

(1)  The proviso to section 5 of the Settlement Act provides for the partial withdrawal of certain issues raised in the appeal. With regards to this it is clarified that for the purposes of Settlement Act a transaction may be considered as an issue. So as to achieve this, transaction in respect of which appeal is to be contested or appeal is to be withdrawn should be identified clearly.

(2)  On such identification, the appellant should file a request before appellate authority so as to withdraw appeal in respect desired identified transactions.

(3)  On receipt request as aforesaid the appellate authority will allow the withdrawal of appeals corresponding to the issues so identified.

(4)  The transactions illustrated below will constitute an issue.

(a) An appeal under the CST Act related to different types of declaration/ certificates such as `C”F”H’ etc. will mean separate issues. The declarations/certificates if are‑

(i) defective;

(ii)     partly received;

(iii)   partly not received;

be considered as separate issue.

(b) issues related to Set-off (Input Tax Credit) i.e. disallowance of Set-off due to suppliers failure to pay tax, (short filer), or to file return (non-filer) etc.;

(c)  mis-match of set-off (passed on by supplier and claimed by the buyer) due to any reason;

(d)  error in computation of retention of set-off or denial of set-off etc. will also be considered as an issue.

(e) Application of wrong rate of tax, treatment of particular transaction of sales as taxable or tax free, exempted etc. will also be treated as an issue;

(5) However, it is clarified that the interest or penalty itself will not be treated as an issue.

(6)   The list given above is indicative and not exhaustive.

(7)   The conditions with regards to stay, proof of withdrawal of appeal, requisite payment under Settlement Act etc. remains unchanged.

39.   Say under MVAT Act for period 2008-09 an assessment order is made which raises additional demand as tax, interest and penalty. Against this order appeal is filed. Now dealer desires to get the benefits under Settlement Act only in respect of penalty. To get 100% waiver of penalty whether the appeal in respect of penalty alone is allowed to be withdrawn?

Ans. No. Under aforesaid circumstances, to get the benefits towards 100% waiver of penalty, dealer needs to pay 100% tax and 25% interest and withdraw the appeal in respect of tax, interest and penalty as well. On payment of 100% Tax and 25% of interest dealer will get the waiver of 100% penalty and 75% of interest. Needless to state that to get full benefits as provided under the Settlement Act, dealer can’t withdraw appeal only in respect of interest or penalty.

40.   Say under MVAT Act for period 2008-09 an assessment order was made and additional tax and interest demand was raised. However penalty proceedings were deferred. Subsequently, the penalty order was also passed. Against both orders dealer has preferred independent appeals. Both orders being statutory orders whether dealer can withdraw appeal in respect of penalty order and contest the assessment order? If done so whether 100% waiver against the penalty can be claimed under Settlement Act?

Ans. No. So as to get the benefits under the Settlement Act dealer needs to withdraw both the appeals and pay 100% tax and 25% of interest as determined under the assessment order.

It is clarified that although the assessment, interest and penalty orders are passed separately same have the nexus with the tax levied under the assessment order. Therefore, unless such corresponding disputed tax is paid 100% with 25% interest, the benefits towards interest or penalty or both as contemplated under Settlement Act will not be available.

In the light of the above clarification it is advised to consider the impact of the tax, interest and penalty together (whether such orders are passed composite or separately) and only on the payment of requisite amount appeal may be withdrawn.

41. The Auditor has recommended to claim refund in the Audit Report in Form-704. The Hon’ble Sales Tax Tribunal has considered such refund for allowing reliefs in part payment orders. Whether refund as determined aforesaid may be considered as payment for the purposes of section 6 of the Settlement Act?

Ans. No. The Auditors recommendation under Audit Report in Form-704 to the dealer to claim refund can’t be equated with the order under the MVAT Act. Hence such refund determined by the Auditor do not qualify for as the amount under Section 6 of the Settlement Act. The requisite payment to be made needs to be determined in the light of the provisions made under section 6 of the Settlement Act.

No. VAT/MMB-2015/47/2016-17/ADM-8   dated 19th July 2016.
Trade Circular No. 20T Of 2016.

(D.M. Thorat)

Joint Commissioner of Sales Tax,

(HQ)-1, Maharashtra State, Mumbai.

Attachment of Bank Account, pending stay petition, by VAT Authorities

CA K. Jitendra Babu

Attachment of Bank Account pending stay petition – Need for instructions to VAT Authorities

1. VAT authorities in various States resort to attachment of bank accounts of dealers in a routine manner, totally ignoring the judicial precedents on the subject and against the principles of natural justice.

2. Many a time, bank accounts are attached while stay petition filed by the dealer is pending before the appellate authority.
Attachment notice is sent to the bank along with notice to the dealer to deposit pending disputed dues, without giving any opportunity to the dealer to represent his case. In some of the cases, attachment notices are sent to the bank simultaneously along with assessment orders, even before expiry of time allowed for filing appeal and stay petitions, in gross violation of the legal provisions.

3. Attachment of bank accounts disrupt the business operations of the dealers and therefore they would have no other option but to move jurisdictional high courts to get the attachment notices vacated, which involves huge expenditure and waste of time which could have been otherwise used for business purposes.

4. High Courts have time and again granted relief to the dealers, by vacating the attachment notices and directing the appellate authorities to dispose the stay petitions on priority. But, pity is VAT departments continue to resort to attachment of bank accounts of dealers, ignoring the directions of the High Courts, on flimsy ground that the relief given by High Court in a particular case does not applicable to other assesses.

5. In the recent case of Automark Industries (I) Ltd. Vs. State of Gujarat, the High Court of Gujarat vide its order Dt.17.10.2015 vacated the attachment notices issued by the department and directed the Dy. Commissioner (Appeals) to decide the stay petitions filed by the dealers within 15 days. In this case the department has served attachment notices on three banks for the same amount of disputed demand. Had there been balance in three banks, the money would have been transferred by banks to Government account resulting in recovery of thrice the amount of disputed demands. The High Court held that “When the petitioner had already preferred an appeal with a stay application, the least that was expected of the fourth respondent was to wait for the outcome of the stay application before resorting to coercive measures as has been done in the present case. Besides, the orders u/s 44 also suffer from the vice of non-application of mind, in as much as, in the notices issued to each of the banks, the fourth respondent has sought to recover the entire demand covered under the notice from each of the banks. As rightly submitted by the counsel for the petitioner, in case there were sufficient funds in each of the bank accounts, the fourth respondent would have succeeded in recovering thrice the amount covered under the demand notice. When drastic powers are conferred on the executive, it is imperative that those powers be exercised with due sense of responsibility and with circumspection by an officer or authority. While the fourth respondent is vested with drastic powers u/s 44, it is expected that such powers are exercised in a reasonable manner and not arbitrarily, as has been done in the present case. In the opinion of this court, the conduct of the fourth respondent in attaching the bank accounts under section 44 in the facts and circumstances of the case was not warranted when the appeals preferred by the petitioner together with the stay applications were pending consideration before the first appellate authority. The impugned orders dated 17.7.2015, 9.6.2015 and 17.7.2015 (Annexure-E collectively to the petition) as well as the impugned orders dated 11.9.2015 Annexure-R-III collectively to the affidavit-in-reply of the respondent are hereby quashed and set aside. The third respondent Deputy Commissioner of Commercial Tax (Appeals) is directed to decide the stay applications filed by the petitioner within a period of fifteen days from the date of receipt of a copy of this order. Rule is made absolute accordingly with no order as to costs.

6. Not long ago, the High Court of Madras vide its judgment dt.05.06.2015 in the case of EDELWEISS COMMODITIES SERVICES LTD Vs COMMERCIAL TAX OFFICER held that “the respondent ought not to have rushed to issue the impugned notice when the revision petition is pending along with the stay application. In view of the same, the reivsional authority is hereby directed to take up the pending revision petition along with the stay application, and dispose of the same on merits and in accordance with law, within a period of four weeks from the date of receipt of a copy of this Order. It is made clear that till such time, the impugned orders shall be kept in abeyance. The writ petition is disposed of accordingly. No costs. Connected miscellaneous petition is closed”.

7. Copies of the judgements are attached herewith, which can be quoted by the trade and industry while representing their case.

8. Even though various High Courts have directed the VAT department in various States not to resort to attachment of bank accounts, pending stay petition before the appellate authorities, the practice of attachment of bank accounts to meet revenue targets is not dispensed with. In some of the cases, before the dealer approaches the High Court, amount is transferred by the banks to the department and thereby leaving the dealer remediless. Therefore, there is need for issue of circulars by the Commissioners of Commercial Taxes of all the States to the assessing authorities under their jurisdiction instructing them to desist with the practice of attaching bank accounts in a very routine manner, when the stay petition is pending before the appellate authorities. The instructions from the Commissioners are expected only on directions by the High Courts. Trade and Industry need to take up at the Commissioners level for necessary instructions to the assessing authority. At the same time, they should pray the High Courts through the advocates at the time of hearing of attachment cases, for issue of directions to the VAT department for executive instructions in general that would be applicable to all dealers, which would help in saving of lot of time and money of dealers and precious time of Courts.

(Author may be contacted onfcakoduri@gmail.com)

Presumptive taxation U/s. 44AD, 44ADA, 44AE with FAQs

Sections 44AD, 44AE and 44ADA cover special provisions of computing profits on a presumptive basis. All the schemes are optional at the discretion of the assessee. Conditions and manner of computation common to all three sections are given at the end after specific provisions applying to each section.

A. Section 44AD – Presumptive computation of profits for taxation for business

(Provisions as Applicable from A.Y. 2011-12, the old provisions pertaining to Section 44AD will continue to apply till March 2010)

1] Applies to:

Any eligible assessee engaged in an eligible business. Eligible assessee is defined as an individual, HUF, resident partnership firm, but excludes an LLP under the LLP Act, 2008 and any assessee who has claimed a deduction under sections 10A, 10AA, 10B, 10BA or heading C of Chapter VIA (sections 80I-A, 80-IB, etc.). An eligible business means any business other than the business of plying, hiring, or leasing of goods carriage as given in section 44AE and whose turnover/gross receipt in the previous year does not exceed Rs. 60,00,000 in A.Y. 2011-12 and 2012-13 ,  Rs. 1,00,00,000 in AY 2013-14 to Assessment Year 2016-17 and Rs. 2 Crore from A.Y. 2017-18.

2] Deemed Income:

8% of the total turnover or gross receipts of the assessee on account of such business or any higher amount voluntarily declared by him shall be deemed to be his income chargeable to tax.

Refer to ‘A] Conditions’ and ‘B] Computation’ below.

Provisions of Chapter XVII C relating to Advance Payment of taxes will not apply to the eligible assessee in respect of eligible business only.

C. Section 44AE – Business of plying, leasing or hiring trucks

(Applicable till A.Y. 2010-11, this section is amended from A.Y. 2011-12 details of which are given in paragraph D)

1] Applies to:

Any person engaged in the business of plying, leasing or hiring of trucks if he owns not more than 10 goods carriages at any time during the previous year including those taken on hire purchase or on instalments. This scheme does not apply to those who operate trucks on hire without owning them (Circular 684, dt. 10-6-1994)

2] Income:

Type of Goods CarriageEstimated Income
Heavy Goods VehicleRs. 3,500 for every month (or part of a month) during which the goods carriage is owned by the taxpayer.
Other than Heavy goods vehicleRs. 3,150 for every month (or part of a month) during which the goods carriage is owned by the tax-payer.
Refer to ‘A] Conditions’ and ‘B] Computation’ below.

D. Business of plying, leasing or hiring trucks – Section 44AE

(Applicable from A.Y. 2011-12, the old provisions pertaining to Section 44AE will continue to apply till March 2010)

1] Applies to:

Any person engaged in the business of plying, leasing or hiring of trucks if he owns not more than 10 goods carriages at any time during the previous year including those taken on hire purchase or on instalments. This scheme does not apply to those who operate trucks on hire without owning them (Circular 684, dt. 10-6-1994)

2] Deemed Income:

Type of Goods CarriageEstimated Income
Heavy Goods Vehicle
From Assessment Year 2015-16 i.e. Financial Year 2014-15 the same is been increased to Rs. 7500/- per month and differentiation between Heavy and other good vehicles been removed.
Other than Heavy goods vehicle
From Assessment Year 2015-16 i.e. Financial Year 2014-15 the same is been increased to Rs. 7500/- per month and differentiation between Heavy and other good vehicles been removed.
Refer to ‘A] Conditions’ and ‘B] Computation’ below.

E. Section 44ADA – Special provision for computing profits and gains of profession on presumptive basis

Applicable from A.Y. 2017-18

1] Applies to:

The presumptive taxation scheme of sections 44ADA can be adopted by a person resident in India, carrying on specified profession whose gross receipts do not exceed fifty lakh rupees in a financial year. Following professions are specified profession:

1) Legal
2) Medical
3) Engineering or architectural
4) Accountancy
5) Technical consultancy
6) Interior decoration
7) Any other profession as notified by CBDT
2] Deemed Income:

In case of a person adopting the provisions of sections 44ADA, income will be computed on presumptive basis, i.e. @ 50% of the total gross receipts of the profession. However such person can declare income higher than 50%.

In other words, in case of a person adopting the provisions of sections 44ADA, income will not be computed in normal manner but will be computed @50% of the gross receipts.

Common Conditions and Computation method:

A. Conditions:

All deductions u/s. 30 to 38 including depreciation deemed to be allowed. No further deduction allowed under those sections.

The written down value of asset used in the business will be computed as if depreciation, as applicable, was allowed.

It will be assumed that disallowances if any u/ss. 40, 40A and 43B were considered by calculating the income estimated in 2] above.

In the case of a firm, the deduction in respect of salary and interest to partners u/s. 40(b) will be allowed.

In respect of this business the assessee is not required to maintain books of account as per the provisions of s. 44AA.

The assessee is not required to get the books of account audited u/s. 44AB in respect of the above business.

If the assessee wants to declare lower income than the deemed profits as calculated above, he will have to maintain the books of account as per s. 44AA and get the accounts audited as per s. 44AB irrespective of turnover if his total income exceeds basic exemption limit.

B. Computation:

The income calculated above shall be aggregated with income from any other business or other heads of income under the other provisions of the Income-tax Act.

The brought forward business losses and other losses will be deducted.

All deductions u/ss. 80CCC to 80U shall be allowed

NOTE:

1. The profit and loss from related businesses covered by sections 44B, 44BB, 44BBA, 44BBB, namely Shipping business in case of non-residents, Business of exploration, etc. of mineral oils, Operation of aircraft in case of non-residents, Foreign companies engaged in the business of civil construction, etc., in certain turnkey projects are not covered here as they have lower relevance and usage.

FAQs on Tax on Presumptive Taxation Scheme

What is the meaning of presumptive taxation scheme?

As per sections 44AA of the Income-tax Act, 1961, a person engaged in business is required to maintain regular books of account under certain circumstances. To give relief to small taxpayers from this tedious work, the Income-tax Act has framed the presumptive taxation scheme under sections 44AD and 44AE.

A person adopting the presumptive taxation scheme can declare income at a prescribed rate and, in turn, is relieved from tedious job of maintenance of books of account.

For small taxpayers the Income-tax Act has framed two presumptive taxation schemes as given below:

1) The presumptive taxation scheme of sections 44AD.

2)The presumptive taxation scheme of sections 44ADA.

3) The presumptive taxation scheme of sections 44AE.

Who is eligible to take advantage of the presumptive taxation scheme of section 44AD?

The presumptive taxation scheme of section 44AD can be adopted by following persons :

1) Resident Individual

2) Resident Hindu Undivided Family

3) Resident Partnership Firm (not Limited Liability Partnership Firm)

In other words, the scheme cannot be adopted by a non-resident and by any person other than an individual, a HUF or a partnership firm (not Limited Liability Partnership Firm).

Further, this Scheme cannot be adopted by a person who has made any claim towards deductions under section 10A/10AA/10B/10BA or under  sections 80HH to 80RRB in the relevant year.

Which businesses are not eligible for presumptive taxation scheme?

The scheme of   section 44AD is designed to give relief to small taxpayers engaged in any business, except the following businesses:

Business of plying, hiring or leasing goods carriages referred to in sections 44AE.
A person who is carrying on any agency business.
A person who is earning income in the nature of commission or brokerage
Any business whose total turnover or gross receipts exceeds two crore rupees.
Apart from above discussed businesses, a person carrying on profession as referred to in  section 44AA(1)  is not eligible for presumptive taxation scheme.

Can an insurance agent adopt the presumptive taxation scheme of section 44AD?

A person who is earning income in the nature of commission or brokerage cannot adopt the presumptive taxation scheme of section 44D. Insurance agents earn income by way of commission and, hence, they cannot adopt the presumptive taxation scheme of section 44D.

Can a person engaged in a profession as prescribed under section 44AA(1) adopt the presumptive taxation scheme of section 44AD?

A person who is engaged in any profession as prescribed under section 44AA(1) cannot adopt the presumptive taxation scheme of section 44AD.

However, he can opt for presumptive taxation scheme under section 44ADA and declare 50% of gross receipts of profession as his presumptive income. Presumptive Scheme under section 44ADA is applicable only for resident assessee whose total gross receipts of profession do not exceed fifty lakh rupees.

Can a person whose total turnover or gross receipts for the year exceed Rs. 2,00,00,000 adopt the presumptive taxation scheme of section 44AD?

The presumptive taxation scheme of section 44AD can be opted by the eligible persons if the total turnover or gross receipts from the business do not exceed the limit prescribed under section 44AB (i.e., Rs. 2,00,00,000). In other words, if the total turnover or gross receipt of the business exceeds Rs. 2,00,00,000 then the scheme of section 44AD cannot be adopted.
What is the manner of computation of taxable business income under the normal provisions of the Income-tax Law, i.e., in case of a person not adopting the presumptive taxation scheme of section 44AD?

Generally, as per the Income-tax Law, the taxable business income of every person is computed as follows :

ParticularsAmount
Turnover or gross receipts from the businessXXXXX
Less : Expenses incurred in relation to earning of the income(XXXXX)
Taxable Business IncomeXXXXX
For the purpose of computing taxable business income in the above manner, the taxpayers have to maintain books of account of the business and income will be computed on the basis of the information revealed in the books of account.

What is the manner of computation of taxable business income in case of a person adopting the presumptive taxation scheme of section 44AD?

In case of a person adopting the provisions of section 44AD, income will be computed on presumptive basis, i.e., @ 8% of the turnover or gross receipts of the eligible business for the year.

In other words, in case of a person adopting the provisions of section 44AD, income will not be computed in normal manner as discussed in previous FAQ (i.e., Turnover less Expense) but will be computed @ 8% of the turnover.

Income at higher rate, i.e., higher than 8% can be declared if the actual income is higher than 8%.

As per the presumptive taxation scheme of section 44AD, income of a taxpayer will be computed @ 8% of the turnover or gross receipt and from the income of 8% can the taxpayer claim any further deductions?

Under the normal provisions of the Income-tax Law, taxable business income will be computed after allowing deduction in respect of expenses which are deductible as per the Income-tax Actand after disallowing expenses which are not deductible as per the Income-tax Act.

In case of a person who is opting for the presumptive taxation scheme of section 44AD, the provisions of allowance/disallowances as provided under the Income-tax Law will not apply and income computed at the presumptive rate of 8% will be the final taxable income of the business covered under the presumptive taxation scheme and no further expenses will be allowed or disallowed.

While computing income as per the provisions of section 44AD, separate deduction on account of depreciation is not available, however, the written down value of any asset used in such business shall be calculated as if depreciation as per section 32 is claimed and has been actually allowed.

If a person adopts the presumptive taxation scheme of section 44AD, then is he required to maintain books of account as per section 44AA?

Section 44AA deals with provisions relating to maintenance of books of account by a person engaged in business/profession. Thus, a person engaged in business/profession has to maintain books of account of his business/profession according to the provisions of section 44AA.

In case of a person engaged in a business and opting for the presumptive taxation scheme of section 44AD, the provisions of section 44AA  relating to maintenance of books of account will not apply. In other words, if a person adopts the provisions of section 44AD and declares income @ 8% of the turnover, then he is not requiredto maintain the books of account as provided under section 44AA in respect of business covered under the presumptive taxation scheme of section 44AD.

If a person adopts the presumptive taxation scheme of section 44AD, then is he liable to pay advance tax in respect of income from business covered under section 44AD?

Any person opting for the presumptive taxation scheme under section 44AD is liable to pay whole amount of advance tax on or before 15th March of the previous year. If he fails to pay the advance tax by 15th march of previous year, he shall be liable to pay interest as per section 234C.

Note: Any amount paid by way of advance tax on or before 31st day of March shall also be treated as advance tax paid during the financial year ending on that day.

What provisions will apply if a person who is eligible for the presumptive taxation scheme of section 44AD declares his income at a lower rate (i.e. less than 8%)?

A person can declare income at lower rate (i.e., less than 8%), however, if he does so, and his income exceeds the maximum amount which is not chargeable to tax, then he is required to maintain the books of account as per the provisions of section 44AA and has to get his accounts auditedas per section 44AB.

If a person adopts the presumptive taxation scheme but he opts out from the scheme in any of the subsequent five years, then what are the consequences?

If a person opts for presumptive taxation scheme then he is also require to follow the same scheme for next 5 years. If he failed to do so, then presumptive taxation scheme will not be available for him for next 5 years. [For example, an assessee claims to be taxed on presumptive basis under Section 44AD for AY 2017-18. For AY 2018-19 and 2019-20 also he offers income on basis of presumptive taxation scheme. However, for AY 2020-21, he did not opt for presumptive taxation Scheme. In this case, he will not be eligible to claim benefit of presumptive taxation scheme for five AYs, i.e. from AY 2021-22 to 2025-26.]

He is required to keep and maintain books of account and he is also liable for tax audit as per section 44AB from the AY in which he opts out from the presumptive taxation scheme. [If his total income exceeds maximum amount not chargeable to tax]

Who is eligible to take advantage of the presumptive taxation scheme of section 44ADA?

The presumptive taxation scheme of sections 44ADA can be adopted by a person resident in India, carrying on specified profession whose gross receipts do not exceed fifty lakh rupees in a financial year. Following professions are specified profession:

1) Legal
2) Medical
3) Engineering or architectural
4) Accountancy
5) Technical consultancy
6) Interior decoration
7) Any other profession as notified by CBDT
What is the manner of computation of taxable income in case of a person adopting the presumptive taxation scheme of section 44ADA?

In case of a person adopting the provisions of sections 44ADA, income will be computed on presumptive basis, i.e. @ 50% of the total gross receipts of the profession. However such person can declare income higher than 50%.

In other words, in case of a person adopting the provisions of sections 44ADA, income will not be computed in normal manner but will be computed @50% of the gross receipts.

Can a person who adopts the presumptive taxation scheme of section 44ADA claim any further deduction of expenses after declaring profit @ 50% of gross receipts?

No, a person who adopts the presumptive taxation scheme is deemed to have claimed all deduction of expenses. Any further claim of deduction is not allowed after declaring profit @ 50%.

If a person adopts the presumptive taxation scheme of section 44ADA, then is he liable to pay advance tax in respect of income from profession covered under section 44ADA?

A person opting for the presumptive taxation scheme of sections 44ADA is also liable to pay advance tax.

If a person adopts the presumptive taxation scheme of section 44ADA, then he is required to maintain books of account as per section 44AA?

In case of a person engaged in a specified profession as referred in sections 44AA(1) and opts for presumptive taxation scheme of section 44ADA, the provision of sections 44AA relating to maintenance of books of account will not apply. In other words, if a person opt for the provisions of sections 44ADA and declares income @50% of the gross receipts, then he is not required to maintain the books of account in respect of specified profession.

What provision will apply if a person opt for the presumptive taxation scheme of section 44ADA and declares his income from profession at lower rate (i.e. less than 50%)?

A person can declare income at lower rate (i.e. less than 50%), however, if he does so, and his income exceeds the maximum amount which is not chargeable to tax, then he is required to maintain the books of account as per the provisions of sections 44AA and has to get his accounts audited as per sections 44AB.

For whom the presumptive taxation scheme of section 44AE is designed?

The scheme of sections 44AE is designed to give relief to small taxpayers engaged in the business of plying, hiring or leasing goods carriages.

Who is eligible to take advantage of the presumptive taxation scheme of section 44AE and which business is eligible for the presumptive taxation scheme of section 44AE?

The provisions of sections 44AE are applicable to every person (i.e., an individual, HUF, firm, company, etc.).

The presumptive taxation scheme of sections 44AE can be adopted by a person who is engaged in the business of plying, hiring or leasinggoods carriages and who does not own more than 10 goods vehicles at any time during the year.

Can a person who owns more than 10 goods vehicles adopt the presumptive taxation scheme of section 44AE?

The presumptive taxation scheme of sections 44AE can be adopted by a person who is engaged in the business of plying, hiring or leasing goods carriages and who does not own more than 10 goods vehicles at any time during the year.

The important criterion of the scheme is the restriction of owning of not more than 10 goods vehicles at any time during the year. Thus, if a person owns more than 10 goods vehicles at any time during the year, then he cannot take advantage of this scheme.

What is the manner of computation of taxable business income in case of a person adopting the presumptive taxation scheme of section 44AE?

In case of a person who is willing to opt for the presumptive taxation scheme of sections 44AE, income will be computed on an estimated basis. Income will be computed @ Rs. 7,500 per month or part thereof during which the goods vehicle is owned by the taxpayer, in the previous year. Part of the month would be considered as full month.

Note: If the actual income is higher, than the presumptive rate, i.e., higher than Rs. 7,500, then such higher income can be declared.

Illustration for better understanding

Mr. Khush is engaged in the business of plying, hiring or leasing goods carriage. Throughout the year 2015-16 he owned 9 goods vehicle (5 heavy goods vehicle and 4 other than heavy goods vehicle). What will be the taxable income from the business of plying, hiring or leasing goods carriages if he adopts the provisions of sections 44AE?

**

As per the provisions of sections 44AE, income will be computed @ Rs. 7,500 per month or part thereof during which the goods vehicle is owned by the taxpayer. The rate of Rs. 7,500 per month is same for heavy as well as other than heavy goods vehicle.

In the present case Mr. Khush owned 9 goods vehicle throughout the year and hence income will be computed as follows:

ParticularsRs.
Income per month per goods vehicle7,500
(×) No. of goods vehicle9
Monthly income as per the provisions of sections 44AE from 9 goods vehicle67,500
(×) No. of months in the year during which the vehicles were owned12
Total income from business of plying, hiring or leasing goods carriages as per the provisions of sections 44AE
8,10,000
As per the presumptive taxation scheme of section 44AE, income of a taxpayer will be computed at the rate of Rs. 7,500 per goods vehicle per month and in such a case can the taxpayer claim any further deductions from the presumptive income declared at the prescribed rate?

Under the normal provisions of the Income-tax Act, taxable business income will be computed after allowing deduction in respect of expenses which are deductible as per the Income-tax Actand after disallowing expenses which are not deductible as per the Income-tax Act.

In case of a person who is opting for the presumptive taxation scheme of sections 44AE, the provisions of allowance/disallowances as provided under the Income-tax Act, will not apply and income computed at the presumptive rate of Rs. 7,500 per goods vehicle per month will be the final incomeand no further expenses will be allowed or disallowed.

However, in case of a taxpayer, being a partnership firm, opting for the presumptive taxation scheme, from the income computed at the rate of Rs. 7,500 per goods vehicle per month, further deduction can be claimed on account of remuneration and interest paid to partners (computed as per the Income-tax Act).

While computing income as per the provisions of sections 44AE, separate deduction on account of depreciation is not available, however, the written down value of any asset used in such business shall be calculated as if depreciation as per section 32 is claimed and has been actually allowed.

If a person adopts the presumptive taxation scheme of section 44AE, then is he required to maintain books of account as per section 44AA?

Section 44AA of the Income-tax Act, 1961 has provisions relating to maintenance of books of account by a person engaged in business/profession. Thus, a person engaged in business/profession has to maintain books of account of his business according to the provisions of section 44AA.

In case of a person opting for the presumptive taxation scheme of section 44AE, the provisions of section 44AA relating to maintenance of books of account will not apply. In other words, if a person adopts the provisions of section 44AE and declares his income at the rate of Rs. 7,500 per goods vehicle per month, then he is not required to maintain the books of account as provided under section 44AA in respect of business covered under the presumptive taxation scheme of section 44AE.

If a person adopts the presumptive taxation scheme of section 44AE, then is he liable to pay advance tax in respect of income from business covered under section 44AE?

There is no concession as regards payment of advance tax in case of a person who is adopting the presumptive taxation scheme of section 44AE and, hence, he will be liable to pay advance tax even if he adopts the presumptive taxation scheme of section 44AE.
What provisions will apply if a person does not opt for the presumptive taxation scheme of section 44AE and declares his income at a lower rate?
A person can declare his income at lower rate (i.e., less than Rs. 7,500 per goods vehicle per month).However, if he does so, then he is required to maintain the books of account as per the provisions of section 44AA and has to get his accounts audited under section 44AB.

(Republished with amendments with  inputs from Incometaxindia Website on FAQ)

Source : taxguru.in