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Concerns about compliance of IRDA regulations by insurance companies
by Sumant Prashant and
Before choosing to buy any product, we want to know what the product is actually offering for the price, and how it suits our requirement and taste. For this comparison to work, we need information that a) describes truthfully all the features, or at least the material features, of the product and b) allows us to compare similar features across competing products. As the Bose Committee Report pointed out, when a financial, and especially an insurance product advertises its product features, it is not clear that the advertisement correctly represents the product. Sometimes advertisements are blatantly misleading. Sometimes, they are just hard to decipher. This environment of opaque disclosures has contributed to episodes of mis-selling, and losses to customers.
To address the problem of misleading advertisements, IRDAI issued a Master Circular on advertisements on 13th August 2015. The Master Circular aims to achieve two objectives - (a) make advertisements/sales material more accurate, comprehensive and reliable for the benefit of insuring public and; (b) set out minimum standards to be followed by all insurance companies for advertising and soliciting insurance business. In this article we summarise the Circular, and evaluate compliance by five randomly picked advertisements.
The IRDAI Master Circular on Advertisements
The Master Circular divides advertisements into two categories based on their intended purpose:
Institutional Advertisements are meant to promote the brand image of the insurer company.
Of these, Insurance Advertisements are critical in influencing the purchase decision of a customer. They also have the potential of being misused by insurance companies through projection of exaggerated benefits or non-disclosure of important terms and conditions of a product. The Master Circular, therefore, provides detailed do's and dont's for Insurance Advertisements. Some of the requirements for an advertisement are:
The product should be identifiable as an insurance product, disclose risks, limitations and exclusions of the product.
The benefits of a guarantee, when advertised, should also mention the cost and charges of the guarantee. If conditions of guarantee are elaborate, the advertisement should be accompanied by conditions applicable to the guarantee in specific font size.
If promise, projection or past performance are mentioned, this should be accompanied by assumptions, sources of information and the statement that past performance is not an indication of future performance.
If tax benefits are mentioned, this should be accompanied by statement that tax laws are subject to change.
If a ranking or award is advertised, this should have been awarded by an agency independent of the insurance company which is advertising.
Viewers of Internet advertisements should be able to view all the key features of the product.
Insurer's website should flash a cautionary notice about spurious calls and fictitious offers.
In case of ULIPs, the asset mix of various underlying funds, approved asset composition and pattern should be placed on website on half yearly basis.
In promoting product combinations, all particulars of each product should be disclosed with an advice to refer to the sales brochure.
Evaluating Compliance
We examined 5 advertisements posted recently on the Facebook pages of leading insurance companies that fall into invitation to inquire category of advertisements, to ascertain the effectiveness of the Master Circular. Though these advertisements provide a weblink through which more details about the products can be accessed, they still have to comply with requirements of the invitation to inquire category of advertisements. The requirements placed by IRDA of these advertisements is less demanding, relative to the invitation to contract category of advertisements. We also focus on those aspects of the Master Circular that are clearly written and leave no ambiguity regarding their interpretation. The Table below shows how well the five advertisements we studied comply with the Master Circular. We find that:
Some of the requirements which seem easy to implement, like mentioning the registration and UIN number have not been satisfied.
Some advertisements did not mention that the product is an insurance product.
Some advertisements did not publish an unique identifiable reference number.
Some of advertisements did not follow the font and appearance requirement provided in the Master Circular.
Some advertisements did not include the disclaimer mandatorily required by regulations.
Here is the summary of the analysis of five advertisements: AD
1 AD
2 AD
3 AD
4 AD 5 Registration
number No No No No Yes Product identified as insurance
product Yes Yes No Yes Yes Unique Identifiable reference
number Yes No No No Yes Mandatory
disclaimer No No No No Yes Font N.A. N.A. N.A. No Yes
N.A. means "Not Applicable"
Conclusion
Many insurance companies appear to be violating the IRDAI Master Circular on Advertisements.
Source : indiacorplaw.blogspot.com
- 8:59 am
- 0 Comments
Concerns about compliance of IRDA regulations by insurance companies
by Sumant Prashant and
Before choosing to buy any product, we want to know what the product is actually offering for the price, and how it suits our requirement and taste. For this comparison to work, we need information that a) describes truthfully all the features, or at least the material features, of the product and b) allows us to compare similar features across competing products. As the Bose Committee Report pointed out, when a financial, and especially an insurance product advertises its product features, it is not clear that the advertisement correctly represents the product. Sometimes advertisements are blatantly misleading. Sometimes, they are just hard to decipher. This environment of opaque disclosures has contributed to episodes of mis-selling, and losses to customers.
To address the problem of misleading advertisements, IRDAI issued a Master Circular on advertisements on 13th August 2015. The Master Circular aims to achieve two objectives - (a) make advertisements/sales material more accurate, comprehensive and reliable for the benefit of insuring public and; (b) set out minimum standards to be followed by all insurance companies for advertising and soliciting insurance business. In this article we summarise the Circular, and evaluate compliance by five randomly picked advertisements.
The IRDAI Master Circular on Advertisements
The Master Circular divides advertisements into two categories based on their intended purpose:
Institutional Advertisements are meant to promote the brand image of the insurer company.
Of these, Insurance Advertisements are critical in influencing the purchase decision of a customer. They also have the potential of being misused by insurance companies through projection of exaggerated benefits or non-disclosure of important terms and conditions of a product. The Master Circular, therefore, provides detailed do's and dont's for Insurance Advertisements. Some of the requirements for an advertisement are:
The product should be identifiable as an insurance product, disclose risks, limitations and exclusions of the product.
The benefits of a guarantee, when advertised, should also mention the cost and charges of the guarantee. If conditions of guarantee are elaborate, the advertisement should be accompanied by conditions applicable to the guarantee in specific font size.
If promise, projection or past performance are mentioned, this should be accompanied by assumptions, sources of information and the statement that past performance is not an indication of future performance.
If tax benefits are mentioned, this should be accompanied by statement that tax laws are subject to change.
If a ranking or award is advertised, this should have been awarded by an agency independent of the insurance company which is advertising.
Viewers of Internet advertisements should be able to view all the key features of the product.
Insurer's website should flash a cautionary notice about spurious calls and fictitious offers.
In case of ULIPs, the asset mix of various underlying funds, approved asset composition and pattern should be placed on website on half yearly basis.
In promoting product combinations, all particulars of each product should be disclosed with an advice to refer to the sales brochure.
Evaluating Compliance
We examined 5 advertisements posted recently on the Facebook pages of leading insurance companies that fall into invitation to inquire category of advertisements, to ascertain the effectiveness of the Master Circular. Though these advertisements provide a weblink through which more details about the products can be accessed, they still have to comply with requirements of the invitation to inquire category of advertisements. The requirements placed by IRDA of these advertisements is less demanding, relative to the invitation to contract category of advertisements. We also focus on those aspects of the Master Circular that are clearly written and leave no ambiguity regarding their interpretation. The Table below shows how well the five advertisements we studied comply with the Master Circular. We find that:
Some of the requirements which seem easy to implement, like mentioning the registration and UIN number have not been satisfied.
Some advertisements did not mention that the product is an insurance product.
Some advertisements did not publish an unique identifiable reference number.
Some of advertisements did not follow the font and appearance requirement provided in the Master Circular.
Some advertisements did not include the disclaimer mandatorily required by regulations.
Here is the summary of the analysis of five advertisements: AD
1 AD
2 AD
3 AD
4 AD 5 Registration
number No No No No Yes Product identified as insurance
product Yes Yes No Yes Yes Unique Identifiable reference
number Yes No No No Yes Mandatory
disclaimer No No No No Yes Font N.A. N.A. N.A. No Yes
N.A. means "Not Applicable"
Conclusion
Many insurance companies appear to be violating the IRDAI Master Circular on Advertisements.
Source : indiacorplaw.blogspot.com
- 8:59 am
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Best health insurance plans for senior citizens: ET Wealth-PlanCover rankings
If you don't know which health insurance plan to buy, go through the ET Wealth-PlanCover.com rankings. In this issue, we list the top contenders for couples above 60 years of age.
Given the rising cost of health care and medical treatment, it is becoming increasingly important to insure oneself. However, the market is flooded with products, with as many as 24 companies in general insurance and many life insurers offering various types and sizes of covers. The features, terms and conditions, limits and sub-limits are often hidden away in the fine print and their interpretation is confusing. This makes it difficult to choose a product that suits a specific lifestage requirement and offers the best value for money. Since decisions are made mostly on the basis of lowest price, claims rate or recommendations of agents, it can result in claim rejections or partial settlements.
To ease this dilemma, we offer a ranking of various health insurance products available in the market. The ranking is done by PlanCover.com, HII Insurance Broking Services Private Limited, an IRDAI-licenced insurance broker. It will try to explain the impact of various terms and conditions and zero in on the policy that is most appropriate for you. Instead of offering a ranking on the basis of policy segments (individual/family) or assigning points to features independently, Plan-Cover.com links it to customer categories. The various features in a policy are assigned weightages according to their relevance to the given customer segment and the final rankings arrived at after this.
ET Wealth shall provide these rankings every alternate week for different customer segments. The listing shall be accompanied by star rating, premium rates, and five features that are most relevant to the given category. The details can be seen on the link provided. We hope this will reduce the trauma of choosing an insurance policy and shall meet your specific requirements.
METHODOLOGY: The individuals and families have been classified by modifying the 'sagacity' segmentation method to suit a broad range of readers. The most relevant features in health policies have been divided into five categories based on what PlanCover.com considers their importance for a given customer segment. These are—Critical, Motivation, Standard, Luxury and Does Not Matter. The rankings also take into account product pricing, not just the current one, but that charged by the insurer as the policyholder ages. The allocation and its individual weightage is based on the data of claims available in public records published by the Insurance Regulatory and Develop ment Authority of India (IRDAI), PlanCover.com's analysis of the claims it has handled, and its experience in managing claims.
FEATURE CATEGORIES:
CRITICAL (Weightage 80%)
These include features with the highest cost implication, such as benefits under room rent limit or capping for various treatments/ailments. If low or absent, these can result in higher out-of-pocket payment during hospitalisation.
MOTIVATION (Weightage 15%)
The features with low probability of occurrence for the segment, but high cost implication. It is mostly where innovation occurs for targeted marketing of products, say, restore benefits, which work specifically for family floaters. Given the wording, the probability of it being used is extremely low, but it offers peace of mind for consumers.
STANDARD (Weightage 4%)
The features with high probability of occurrence, but low/minimal cost implication in overall health care. These are seen as standard features that are needed, and are part of most covers typically due to the IRDAI directives. These include free-look period, claim intimation/submission, portability, etc.
LUXURY (Weightage 1%)
These are features that don't have a high cost implication and have low probability of occurrence. For instance, second medical opinion with another specialist, health check-up benefits, etc.
DOES NOT MATTER (Weightage 0%)
The features that are not needed and can be ignored, such as maternity benefits for senior citizens.
Premium is for a Rs 5 lakh cover for a 'Senior Citizen Couple', in Delhi, with the age of eldest member at 60 years, and includes 14% service tax. Premium rating takes into account the current applicable rate as well as the aggregate effect of premium increase with age. * In 'Final Rating', features have a weightage of 70% and pricing has 30%. CI is critical illness; E:CI is E-opinion on critical illness; Regain benefit is automatic availability of sum insured on exhaustion during a policy year. For detailed rankings in Rs3 lakh, Rs5 lakh and Rs10 lakh cover categories, go to our website: http://economictimes.indiatimes.com/wealth/healthinsurancerating/
DISCLAIMER: The ET Wealth-PlanCover.com ratings are provided as a general guide and do not take into account individual risk profile, financial circumstances or the needs of a customer and his family. The rankings do not constitute financial, taxation or other professional advice. You should seek professional advice and carefully consider the terms and conditions and other relevant product details before buying a policy. The data has been taken from websites or call centres of the respective insurers. All attempts have been made to ensure clarity and accuracy of the data. However, PlanCover.com and ET Wealth are in no manner responsible or liable for any discrepancies in the data published and are not accountable for any loss, harm or damage that may occur from the use of information provided herein. Insurance is a subject matter of solicitation and market risks. The basis of current rankings is subject to change with changes in policy terms and pricing as approved by IRDAI from time to time.
Source : ET wealth
- 8:57 am
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How Shah can go from high tax to zero tax
Taxspanner.com estimates that one can reduce one's tax to zero by claiming some exemptions, rejigging pay structure and investing more.
Utsav Shah, 32, is worried because he pays a high tax of almost Rs 6,300 every month. Taxspanner.com estimates that Shah can reduce his tax to zero by claiming some exemptions, rejigging his pay structure and investing more. Shah gets HRA, but doesn't claim exemption because he lives in his father's house. If he pays rent to his father, he can claim HRA exemption. This alone will reduce his tax by almost Rs 60,000. However, his father will be taxed for the rent from his son after a 30% standard deduction.
Shah's employer does not allow rejigging of the pay structure. If he can get certain tax-free benefits in lieu of the taxable components he currently draws, his tax comes down further. If the company deposits 10% of his basic pay in the NPS, instead of children's education allowance and ex gratia payment, his tax will be cut by almost Rs 7,500. Shah saves more than he needs to under Section 80C. He should opt for the Sukanya Samriddhi Scheme, instead of the PPF. He should also invest Rs 50,000 in the NPS to claim deduction under Section 80CCD(1b). It will cut his tax by Rs 5,000. Another Rs 4,000 can be cut by buying health cover.
Source : ET wealth
- 8:56 am
- 0 Comments
Advanced Enzyme Tech Files IPO Papers With Sebi
Advanced Enzyme is engaged in the research and development, manufacturing and marketing of proprietary enzyme products.
New Delhi: Advanced Enzyme Technologies has filed draft papers with capital markets regulator Sebi to float an initial public offering.
This is the company's second attempt to hit the capital markets.
As per the fresh draft red herring prospectus (DRHP) filed with capital markets watchdog, the IPO comprises fresh issue of shares aggregating up to Rs 60 crore and an offer for sale of up to 44,73,470 scrips by the existing shareholders.
Advanced Enzyme is engaged in the research and development, manufacturing and marketing of proprietary enzyme products.
Proceeds of the fresh issue will be utilised towards investment in the company's wholly-owned firm Advanced Enzymes USA, repayment of certain loans and for other general corporate purposes.
ICICI Securities and Axis Capital are the merchant bankers of the issue. The equity shares are proposed to be listed on BSE and NSE.
Earlier in 2013, the company had approached Sebi to launch its IPO and had also obtained the capital markets watchdog's approval too. However, the company did not go ahead with its plan.
Source : NDTV
- 8:54 am
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Government Hikes Import Tariff Value on Gold
The government on Friday hiked the import tariff value on gold to $363 per 10 gram in line with global prices. The import tariff value on silver, however, was reduced to $443 per kg.
For the first fortnight of this month, the import tariff value on gold was fixed at $354 per 10 gram and on silver was $457 per kg. The import tariff value is the base price at which the customs duty is determined to prevent under-invoicing. It is normally revised on a fortnightly basis.
The change in tariff value of these precious metals has been notified by the Central Board of Excise and Customs.
The import tariff value of gold and silver has been changed taking into account the price trend in the global market and rupee situation.
In London, both gold and silver prices were today ruling down at $1112.30 per ounce and $14.20 per ounce, respectively. However, rupee is ruling at a 29 months low.
The country's gold imports have more than doubled to $3.80 billion in December 2015 driven by dip in global prices, as against $1.36 billion in the year-ago period.
Source : NDTV
- 8:53 am
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Clash of titans, sec 192 Vs sec 206AA
Citation-: Rashtriya Ispat Nigam Ltd. v. Addl CIT (TDS), ITAT Visakhapatnam), ITA Nos. 115 To 117/Vizag/2015, Date of Pronouncement- 22/01/2016 , Assessment Years 2011-12 to 2013-14
This article is analysis of recent judicial pronouncement in the case of Rashtriya Ispat Nigam Ltd. v. Addl CIT (TDS) :-
1) The reason for this opening paragraph is to equip the reader to plan his order of reading. Invariably, it happens that, each of the reader is at different level of maturity and has different priorities at different times.
2) Rather than agreeing, it is more important to think and apply you mind on an issue. Thus objective of my article will be fulfilled even if one dis-agrees with my views.
Background-:
3) As you would be aware, section 206AA starts with “Non-Obstante Clause” over riding all other provisions of the Act. It makes the provision independentof other provisions contained in the law, even if the other provisions provide to the contrary.
4) When the deductor does not have PAN of deductee, the section requires deductor to deduct TDS at a rate higher out of the following
at the rates specified in the relevant provisions of the Act, or
at the rate or rates in force, or
at the rate of twenty percent.
5) In this case, emerging out of various reasons, the employer / deductor did not have PAN of employees.
Takeaway-:
6) TDS is deducted as per provisions of section 192 of employees without giving PAN.
7) Even if there is no PAN, if the deductor has deducted TDS as per provisions of sec 192, Section 206AA does not over-ride section 192 in terms of the requirement of “at the rates specified in the relevant provisions of the Act.
8) Thus, it is clear that the onus is on the revenue to demonstrate that the correct tax has not been recovered from the person who had the primary liability to pay tax. Without doing so, the A.O. cannot simply compute the short deduction by applying flat rate of 20% tax on gross payment.
Facts in specific
9) The assessee is a large public sector company with more than 17000 employees.
10) The assessee categorised the defaults into 7 categories and made his submission with regard to each of the seven categories.
11) The assessee submitted that basically the short deduction was computed for the following defaults.
i. Invalid PAN then and not yet corrected.
ii. Invalid PAN then but valid PAN obtained later.
iii. Invalid PAN then but valid PAN was available then.
iv. PAN not available then and now too.
v. PAN not available then but PAN obtained later.
vi. Rounding off of TDS to nearest ten rupees.
vii. Error in employee categorisation into female and senior citizen.
12) The assessee has taken all out efforts to collect PAN numbers from each employee like;
13) The assessee has filed rectification request and corrected most of the defaults by obtaining correct PAN from the employees. Although, it has corrected most of the defaults, the defaults mentioned in category (i) and (iv) was not rectified, because even now few employees have not furnished correct PAN.
14) The assessee further submitted that for such discrepancies, the tax was calculated at 20% without even allowing basic exemption limit, which has an adverse impact in the case of employees, whose income is subject to tax at progressive rate of taxation.
15) In spite of repeated reminders, few employees did not furnished PAN for various reasons. However, the assessee has filed rectification statements and corrected most of the defaults by obtaining correct PAN from the employees. Although, it has corrected most of the defaults, the defaults mentioned in category (i) and (iv) was not rectified, because even now few employees have not furnished correct PAN.
16) However, the correct amount of TDS recoverable from the payments have been deducted and paid to the Govt. Account. There is no short fall in recovery of TDS as per law. The short deduction was determined by applying higher rate of TDS without even deducting basic exemption limit allowable under the Act, which has an adverse impact in the case of employees, whose income is subject to tax at progressive rate of taxation.
Arguments – revenue
17) Once PAN is not made available even after opportunity given by CIT(A), section 206AA comes into play which starts with “Non-Obstante Clause” giving over-riding effect to all other provisions of the Act.
Arguments – assessee
18) The assessee argued that it has already taken all possible efforts.
19) The assessee further submitted that for such discrepancies, the tax was calculated at 20% without even allowing basic exemption limit, which has an adverse impact in the case of employees, whose income is subject to tax at progressive rate of taxation.
20) The assessee further submitted that demand can be made against the assessee, only when there was a failure on the part of employees in the payment of tax. To this effect placed its reliance on the following two decisions. (i) Jagran Prakashan Ltd v. DCIT [2012] 345 ITR 288 (All)(ii) Allahabad Bank v. ITO(TDS), Algarh in ITA No. 448 to 454/Agra/2011. Therefore, requested to set aside the order of CIT(A).
Judgement – First Appellate Authority – CIT(A)
21) The CIT(A), after considering the explanation of assessee, set aside the issue to the file of AO/TDS officer, in respect of defaults referred in clause (ii), (iii) and (v) and directed the AO/TDS officer to verify the revised TDS returns and wherever correct PAN and status of employee is quoted by the assessee.
22) Later credit should be given against the short deduction determined. In respect of cases falling under category (i) and (iv), upheld the action of AO/TDS officer.
23) With these observations, the CIT(A) allowed the appeal for statistical purpose. Aggrieved by the CIT(A) order, the assessee is in appeal before us.
Judgement – Second Appellate Authority – ITAT
24) Section 206AA of the Act, provides for deduction of tax at higher rates, in case the deductee fails to furnish the correct PAN to the person responsible for deducting tax at source.
25) In the event, the deductee fails to furnish PAN, then the deductor shall deduct tax at the rates which is higher of (i) at the rates specified in the relevant provisions of the Act, or (ii) at the rate or rates in force, or (iii) at the rate of twenty percent.
26) A careful study of the provisions of section 206AA made it clear that it is not automatic that a flat rate of 20% shall be deducted wherever PAN is not furnished. The deductor shall compute the tax in the manner specified under section 206AA of the Act, by applying the rate specified under the relevant provision of this act, or at the rate or rates in force and then, compared to flat rate of 20% to decide whichever is higher.
27) In the instant case, the assessee deducted TDS on salary payments to employees under sec. 192 of the Act. Sec. 192 of the act provides for computation of tax under normal rates in force for the financial year in which payment is made, on the estimated income of the assessee.
28) The assessee contended that it has deducted tax at source as per the applicable rates in force in the manner specified under sec. 192 after allowing basic exemption limit.
29) We find force in the arguments of the assessee, for the reason that the payment covered under dispute is salary to employees. TDS on salary shall be deducted in the manner specified under sec. 192 of the Act, after allowing basic exemption limit and deductions towards investments in savings scheme etc.
30) Unlike other provisions of TDS, TDS on salary cannot be deducted by applying flat rate of tax on gross payment. Therefore, sec. 206AA provides for higher of the three, i.e. at the rates specified in the relevant provisions of the Act, or at the rate or rates in force or at the rate of twenty percent. It is not necessarily that all payments are comes under 20% flat rate, in some cases the rate of tax may be at 10% and in some cases it may be at 30%. Unless, this was done, the A.O. cannot apply flat rate of 20% and compute the short deduction of tax. Thus, it is clear that the onus is on the revenue to demonstrate that the correct tax has not been recovered from the person who had the primary liability to pay tax. Without doing so, the A.O. cannot simply compute the short deduction by applying flat rate of 20% tax on gross payment.
31) It is settled position of law that a short deduction of tax at source, by itself does not result in a legally sustainable demand under sec. 201(1) and 201(1A). The taxes cannot be recovered once again from the assessee in a situation where the recipient of income has already paid the due taxes on such income. Unless, the A.O. verified himself that the recipient of income has not paid the tax on such income and also demonstrate that the rate applied by him was in accordance with the provisions of sec. 206AA, the assessee cannot be hold as assessee in default under sec. 201(1) and 201(1A).
Comments of author-:
32) TDS is a secondary and conditional liability. It does not absolve the assessee [employee in this case] from his Primary and absolute liability to pay taxes.
33) Practically speaking, section 206AA has put an onerous liability on deductor but one has to accept it as it is.
34) Karnataka High Court has already in the case of Smt. A. Kowsalya Bai dt June 5, 2012 watered down the rigour of section 206AA whereby the criteria of basic exemption has been take care of.
35) With respect, I hav only one query that, as been observed by ITAT, whether the onus stands shifted on revenue to show that there is failure to deduct TDS ?
36) The revenue / CIT(A) / AO could have taken following stand;
a) section 206AA penalises the offence of non furnishing of PAN by requiring higher TDS.
b) Section 200, 200A and / or 201 unlike section 234E does not specifically deal with default u/s 206AA.
c) The deductor should have deducted TDS at a rate of 20% or averate rate as mentioned in section 192 whichever is higher.
d) Legislature has, in its wisdom has drafted the section to act as deterent against those errant employees.
e) The order could have passed directly u/s 200(3) r.w.s 206AA. Refer following paragraph of the ITAT A Bench, Chennai in the case of Smt. G. Indhirani, M/s Rajaguru Spinning Mills Ltd., Shri A. Dhakshinamurthy, M/s Padma Textiles, M/s Murthy Lungi Company, on one side v DCIT, CPC, (TDS), Gaziabad dt 10-July-2015.
When Section 234E clearly says that the assessee is liable to pay fee for the delay in delivery of the statement with regard to tax deducted at source, the assessee shall pay the fee as provided under Section 234E(1) of the Act before delivery of the statement under Section 200(3) of the Act. If the assessee fails to pay the fee for the periods of delay, then the assessing authority has all the powers to levy fee while processing the statement under Section 200A of the Act by making adjustment after 01.06.2015. However, prior to 01.06.2015, the Assessing Officer had every authority to pass an order separately levying fee under Section 234E of the Act. What is not permissible is that levy of fee under Section 234E of the Act while processing the statement of tax deducted at source and making adjustment before 01.06.2015. It does not mean that the Assessing Officer cannot pass a separate order under Section 234E of the Act levying fee for the delay in filing the statement as required under Section 200(3) of the Act.
( Author CA. Yogesh S. Limaye can be reached at yogesh@salcoca.com)
- 8:49 am
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TP: Temporary price differentials occurring due to fluctuation in treatment charges should be ignored
Case Law Citation
Hindalco Industries Ltd. -Vs- The Addl. Commissioner of Income tax (ITAT Mumbai), ITA No. 4857/Mum/2012,Date of decision: 16-09-2015, Assessment Year :2005-06
Brief about the case
In the case of Hindalco Industries Ltd. -Vs- The Addl. Commissioner of Income tax, there were several grounds on which the appeal was made, both by the revenue as well as the assessee. The major ground being of transfer pricing has been discussed hereunder. Other grounds have been discussed in the facts mentioned herein.
The Assessee-company purchased cooper concentrates from its AE as well as non-AEs – Assessing Officer noticed that purchase price was higher in case of AE vis-a-vis non-AEs – Accordingly, he worked out differential price for purchases effected and added same to total income of assessee – It was found that there was no difference between AE and non-AE with regard to methodology adopted for determining price of copper concentrates but difference occurred as non-AEs had synchronized reduction of treatment charges with Japanese rates on calendar year basis whereas AE followed financial year basis for reduction of treatment charges. Held, temporary price differentials occurring due to fluctuation in treatment charges should be ignored and thus, addition made should be deleted.
The assessee had given corporate guarantee to its AEs and charged guarantee fee at 0.25 per cent per annum. The Assessing Officer noticed that a US bank had charged a fee of 1.5 per cent to 2 per cent to the guarantee given by it. Accordingly, he adopted the rate of 1.75 per cent and computed the guarantee commission/fee, which resulted in an addition of Rs. 9.70 crores. The Commissioner (Appeals) also confirmed the same. On appeal to the Mumbai ITAT , it relied on the case of CIT v. Everest Kanto Cylinder Ltd. [2015] 232 Taxman 307/58 taxmann.com 254 which was considered by the Bombay High Court. Accordingly, order of Commissioner (Appeals) on this issue was modified and the Assessing Officer is directed to compute the addition by adopting the rate of 0.50 per cent.
Facts of the case:
The assessee is engaged in the business of manufacture and sale of aluminium metal, copper metal, precious metals, certain chemicals including DAP/NPK and is also engaged in the generation of power, extraction of alumina, reduction of alumina into aluminium by electrolytic process, manufacture of Aluminium semi-fabricated products, Aluminium Foils etc.
The assessee appealed on a list of grounds as discussed below.
Issue 1: Disallowance made u/s 14A / 36(1)(iii) of the Act.
The AO noticed that the assessee has made investment in shares, Tax free bonds, GOI stock and Mutual Funds (Dividend Scheme). The AO noticed that the assessee has also borrowed funds for the purpose of business and paid interest thereon. Hence, the AO took the view that the assessee has used the interest bearing borrowed funds for making the above investments. Accordingly he worked out the interest attributable to said investments at Rs.27.93 crores and added the same to the total income of the assessee. The ld. CIT(A) enhanced the interest disallowance by 0.22 crores and accordingly held that the interest to the extent of Rs.28.15 crores is disallowable.
Thereafter the ITAT perused the Balance sheet of the assessee and observed that it had held own funds of Rs.6857.9 and Rs.7666.5 crores respectively as on 31.3.2004 and 31.3.2005, as against investments of Rs.3377.2 and Rs.3702.1 crores respectively on those dates. Hence, the ITAT relying on the decision rendered by Hon’ble Bombay High Court in the case of HDFC Bank (supra) held that the interest disallowance made by the tax authorities is not called for and directed the AO to delete the same.
Issue 2: Disallowance of foreign travelling expenses
Disallowance of foreign travelling expenses of Rs.2,12,010/- on the ground that the assessee incurred these expenses for the wife of Chairman, whole time Director and Executives on foreign tours. The CIT (A) confirmed the disallowance. The ITAT had earlier decided the same issue for the assessee and so following the same decision the disallowance was confirmed by ITAT (Mumbai)
Issue 3 : Assessment of rental income and service charges income
The third issue relates to the assessment of rental income under the head income of house property and service charges income under the head Income from other sources, as against the claim of the assessee that both the receipts should be assessed as business income of the assessee. Identical issue was considered by the Tribunal in the assessee’s own case in ITA No.5468/Mum/2001 wherein the CIT(A) confirmed the assessment of rental income as income from house property and recovery of service charges as income from other sources after allowing deduction of expenses under respective heads of income. Consistent with the view taken by the co-ordinate bench of Tribunal in the earlier years, ITAT confirmed the order of ld CIT(A).
Issue 4:
next issue relates to the disallowance of Rs.7,19,01,340/- paid to IFFCO as per the arbitration proceedings. The ICGL had entered into a MOU with the Indian Farmers Fertilizer Co-operative (IFFCO) in the previous year 1998-99, whereby IGCL agreed to supply certain chemicals to IFFCO. In the subsequent years, dispute arose between the ICGL and IFFCO about lifting and supply of chemicals. The disputes were referred to an Arbitrator. Pending receipt of arbitrator’s ward in the matters, the assessee made a provision of Rs.7,19,01,340/- in year ending 31.3.2003 relevant to the AY 2003-04. The claim of the assessee was disallowed both by the AO and ld.CIT(A) in that year. The Mumbai ITAT considered an identical issue in the case of Navijan Roller Flour and Pulse Mills Ltd Vs. Dy. CIT (supra) wherein the Hon’ble Gujrat High court said that merely because the award was challenged in appeal by the assessee cannot be a ground for holding that the liability had not been incurred. Accordingly by following the Hon’ble Gujarat High Court, the Mumbai ITAT directed the AO to allow deduction of the arbitration award.
Issue 5: Addition u/s 92CA
Further, the subsequent issue relates to the addition of Rs.6,03,07,020/- made u/s 92CA of the Act in respect of purchases made from the Associated Enterprises (AE) of the assessee.
The assessee has entered into a long-term contract with its AE for procuring the copper concentrates. The period of contract was for the life time of the mine. It is an admitted fact that no other comparables is having this feature and hence, on this ground alone, the comparables adopted by the Assessing Officer/TPO is liable to be rejected. Further, there is no difference between AE and non-AE with regard to the methodology adopted for determining the prices of copper concentrates, viz., ascertain the price quoted for copper metal in LME, ascertain the TC/RC charges fixed by Japanese smelters annually on calendar year basis, reduce the TC/RC charges from the price of copper and adjust the price so arrived at for freight differentials.
The difference in prices has occurred only due to the fact that the non-AEs have synchronized the reduction of TC/RC charges with Japanese rates, i.e., they have changed TC/RC charges on calendar year basis. However, AE has followed financial year basis for effecting such kind of change, i.e., the AE has given effect to the modified TC/RC charges from 1st April of every year, even though the modified rates were announced in the month of January itself. The effect of this practice is that the non-AEs shall adopt new rate of TC/RC charges for January to March every year, while the AE shall adopt old rates for that period. The natural effect of this practice is that there is bound to be price difference between the AE and non-AEs in these three months, mainly on account of TC/RC charges.· As submitted by assessee that it had to pay higher purchase price during the year under consideration for the purchases effected in the months of February and March, due to adoption of lower TC/RC charges applicable to immediately preceding calendar year. However, as can be seen from the details given in book, the difference in the rates of TC/RC charges adopted between AE and non-AE was 98 per cent during the year under consideration and it has come down to 12 per cent in the succeeding year, i.e., for calendar year 2006. However, from calendar year 2007 onwards, the TC/RC charges have fallen down resulting in payment of lower purchase price to AEs in the months of Jan. to March. For example, the TC/RC charges determined in 2007 was US $ 66, but the assessee was deducting US $ 104.5 (the rate applicable for calendar year 2006) in the months of January, 2007 to March, 2007 as per the practice followed by it. In the subsequent years also, the TC/RC charges has fallen down, but the AE was deducting TC/RC charges at higher rate resulting in payment of lower purchase price to AE. Thus, the pattern followed by the assessee and its AE shows that the same has been consistently followed and the difference in purchase prices was mainly on account of following a particular pattern. The same would show the bona fides of the assessee and also the AE. Hence, there is merit in the contention of the assessee that the temporary price differentials due to following a particular pattern should be ignored. Besides the above, as noticed earlier, the comparison should be between two cases having similar features. However, in the instant case, the assessee has entered into a long-term contract for the life time of the mines and hence the price paid to its AE should be compared with a case having similar features. Accordingly, the contract entered with AE cannot be compared with other cases having only annual contracts ‘No holiday contract’ is a variant of long-term contract. The assessee has entered no holiday contract with two parties, but they were for lifting fixed quantity of materials, i.e., they were not life time contracts. Hence, they cannot also be compared. Even otherwise, there is no difference in the methodology adopted by AE and non-AE for determining the price. The difference had occurred due to following ‘financial year basis’ for AE, where as the non-AEs had followed calendar year basis. Since the assessee was following a particular pattern for its AEs year after year, the temporary price difference occurring due to fluctuations in TC/RC charges should be ignored. These submissions brings out the exact reason for the price difference and, the said reasons are reasonable and need to be factored in, i.e., adjustments should be permitted, in which case it would result that the payments made to AE was at ALP. Further, it is not the case that the assessee was paying higher purchase price to its AE year after year in the months of Jan. to March. In subsequent years, the assessee has gained by paying lower purchase prices. In view of the foregoing, the assessee should be considered as having paid the purchase price to its AE at ALP only and, hence, there is no necessity to make adjustments. Accordingly, the order of Commissioner (Appeals) on this issue is set aside and the Assessing Officer is directed to delete the addition.
Issue 6: Addition of Corporate guarantee fee
The next issue relates to addition made u/s 92CA made on account of corporate guarantee fee, which has resulted in an addition of Rs.9,70,40,250/-In the additional ground no.3, the assessee is challenging the addition on the ground that the Explanation (i)(c) to sec. 92B was inserted by Finance Act, 2012 and hence the same should not be made applicable to the year under consideration.
The assessee has referred to the decision rendered by the co-ordinate Bench in the case of Manugraph India Ltd [IT Appeal No. 4761 (Mum.) of 2013], wherein the co-ordinate Bench has determined a rate of 0.50 per cent for guarantee given.
The rate of 0.50 per cent is consistently followed in many of the cases by the Tribunal. Even in the case of CIT Everest Kanto Cylinder Ltd. [2015] 232 Taxman 307/58 taxmann.com 254, which was considered by the Bombay High Court, the Tribunal had determined the rate at 0.50 per cent and the same has not been disturbed by the Bombay High Court. Accordingly, order of Commissioner (Appeals) on this issue was modified and the Assessing Officer is directed to compute the addition by adopting the rate of 0.50 per cent.
In the result, the appeal filed by the assessee is partly allowed and the appeal of the revenue is dismissed.
Contention of the Revenue
Where assessee had entered into a long-term contract with its AE for procuring copper concentrates for life time of mines, price paid to its AE should be compared with the prices paid to non-AE.
Rate of 0.50 per cent charged by assessee for giving corporate guarantee to its AE was appropriate .The ld D.R submitted that the assessee has not given any bench mark and hence the TPO/AO was constrained to adopt the rate charged by the banks. Accordingly he submitted that this matter may be restored back to the file of the AO for fresh consideration.
Contention of the Assessee
The assessee contended that:
Disallowance made u/s 14A of the Act is unjustified as he had invested the funds out of his owned funds and not borrowed funds.
Assessment of rental income of house property and service charges must be as business income.
The award given by the arbitrators has crystallized during the year under consideration since the award has been given during the year under consideration, and thereby eligible for deduction.
the Ld A.R placed reliance on the decision dated 08-05-2015 rendered by Hon‟ble jurisdictional Bombay High Court in the case of CIT Vs. M/s Everest Kento Cylinders Ltd (ITA No.1165 of 2013), wherein the High Court has held that the consideration which applied for issuance of Corporate guarantee are distinct and separate from that of bank guarantee. Accordingly he contended that the tax authorities are not justified in adopting the rate quoted by a bank for giving bank guarantee to the case of the assessee.
Held that temporary price differentials occurring due to fluctuation in treatment charges should be ignored and thus, addition made should be deleted.
Held that rate of 0.50 per cent charged by assessee for giving corporate guarantee to its AE was appropriate.
CA Geeti Grover
- 8:47 am
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Payments made as reimbursement towards shared technology services not subject to TDS u/s 195
Case Law Citation: DCIT vs. M/s AT & S India Pvt . Ltd. (ITAT Kolkata), IT Appeal No. 1160 & 2305 of 2013 , Date of Pronouncement -15.10.2015, Assessment Years :2008-09 & 2004-05
Brief of the case:
The ITAT Kolkata in the case of M/s AT & S India P. Ltd. held that the reimbursement made to holding co. by its subsidiary towards the share technology services is not taxable in the hands of receiving co. (holding co.) because the reimbursement is not an income for the holding co. and, therefore, such payments made by assessee are not subject to TDS provisions u/s 195 of the Act. Facts of the case:
The assessee is a private limited company and engaged into business of manufacture and sale of professional grade printed circuit boards. The assessee-company is a subsidiary of AT&S Austria. AT&S Austria has entered into global arrangements with various companies located in different part of world for various facilities and services, which are to be used by AT&S Austria and its group companies located in different countries, including India.
During the year under consideration, assessee company has claimed an expense of Rs.1,59,95,287/- towards share technology services paid to its Austria based holding co.- AT&S Austria towards reimbursement of its share paid by the holding co.
AO found that assessee has failed to deduct TDS of such expenses and after considering assessee’s explanation added the same to the total income of assessee for violating the provision of Sec. 40(a)(ia) of the Act.
On appeal to CIT(A), it was held by him that the expenses are out of the purview of TDS being reimbursed and also not chargeable of tax in India. Therefore, the addition made by AO stands deleted.
Aggrieved revenue is in appeal before ITAT.
Contention of the Assessee:
The learned counsel for the assessee presented two fold arguments:
i) The payment made by the assessee to M/s AT &S, Austria was only towards reimbursement made by it to its holding for share technology services cost. He pointed out that the allocation of the actual expenditure incurred has been made on a rational basis that is on the basis of number of PCs used by the assessee and other group concerns, the details of which were duly furnished before the AO and the CIT(A). He submitted that there is no liability of TDS for reimbursement of the expenditure. In support of this contention reliance was placed on the AAR decision in the case of Cholamandalam Ms General Insurance Co. Ltd. 142 ITR 493 (Cal.) 309 ITR 356 (AAR) and Hon’ble Calcutta HC in the case of CIT vs. Dunlop Rubber Co. Ltd.
ii)The assessee company was given a license to use the copy right products by its holding co. , but the license to use copy right products does not amount to rendering of technical services within the meaning of section 9(1)(vii) of the Act. Thus, no income can be deemed to accrue or arise in India and accordingly no liability to deduct any tax at source.
Contention of the Revenue:
The learned Departmental Representative argued that the assessee has utilized the services being provided by various service provider companies as it is also a consumer of services provided by the ultimate service provider companies.
Therefore, in effect, the payment was made by the assessee to various service providing companies through M/S AT & S Austria. In the whole story AT & S Austria was only a medium through which payment was made to service providers.
The services utilized by the assessee were highly technical and therefore, the same falls in the definition of technical services as given u/s. 9(1)(vii) of the Act. Consequently, assessee was liable to deduct and pay tax to the govt. which it has so failed. Therefore, such failure would attract disallowance u/s 40(a)(ia).
The tribunal relied on its own decision in assessee’s own case in 2005-06- ITA 1262-186/Kol/2010, 2006-07-ITA 2071/Kol/2010 & 2007-08 – ITA 779/Kol/ 2012 vide order dated 29-01- 2015, wherein this Tribunal has deleted the addition made by AO on account of TDS share technology services.
Tribunal followed the judgement of Hon’ble Calcutta HC in the case of Dunlop Rubber Co. Ltd. and held that where the assessee paid its share of expenses to its holding co in the nature of reimbursement of expenditure incurred by holding company for procuring services for the group , then the reimbursement cost incurred by the assessee is out of the purview of the TDS provision as it does not generate any income in the hands of the recipient and consequently the provisions of section 40(a)(ia) could not be invoked.
The above decision of Hon’ble Calcutta HC was also relied upon by the Authority for Advance Rulings in the case of Cholamandalam Ms Generai insurance Co. Ltd.
In result appeal of revenue was dismissed.
CA Saurabh Chokhra
- 8:46 am
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Recovery of out of pocket costs incurred by society from ultimate beneficiaries of grant not taxable in the hands of society
Case Law Citation: ITO vs. Haryana Renewable Energy (ITAT Chandigarh), IT Appeal No.-896/2009, AY 2006-07, Date of Pronouncement -24.09.2015 , Assessment Year : 2006-07
Brief of the case:
The ITAT Chandigarh in the case of Haryana Renewable Energy held that recovery of a part of cost from ultimate customers by the society working for funding the projects from government grant being in nature of reimbursements cannot be taxed in the hands of society. Facts of the case:
The assessee Haryana Renewable Energy Development Agency was incorporated in 1997 and was registered as a society. The objects of the assessee are to popularize, promote and implement the application of various types of new and renewable sources of energy in the State.
Its income comprises grants, interest and miscellaneous receipts. For the year under consideration, the assessee filed return declaring nil income as on 31.7.2007 claiming its income to be exempt.
The Assessing Officer during the course of assessment proceedings observed that the assessee is an AOP as per sect ion 2(31) (v) of the Income Tax Act, 1961.
During the course of assessment proceedings, the Assessing Officer noticed that the grants received by the assessee amounting to Rs.2,10,03,884/- includes receipt on account of user share of which the nature and utility of the same towards the aims and objects of the assessee society have not been explained. As such, the addition of Rs.2,10,03,884/- was made by the Assessing Officer.
The CIT(A) held that the user share is nothing but a part of the cost of the renewable energy devices recovered from the consumers, the rest being met by way of subsidy from the Governments. Since it is only recovery of part of the cost already incurred by the assessee, it cannot be termed as taxable income by any stretch of imagination. This way, the learned CIT (Appeals) deleted the addition on account of user share made by the Assessing Officer. Aggrieved revenue is in appeal before ITAT.
Contention of the Assessee:
It was submitted that the user share means that part of total cost of solar device which is to be borne by the ultimate beneficiary of that device for popularization of renewable energy in Haryana on subsidized rates.
Since nothing out of the user share is left over and the entire amount gets spent or utilized along with the grant, it is not a taxable receipt.
The ITAT observed that the assessee acted as facilitator in arranging energy resources for the ultimate user. The user share which assessee recovered represent the cost to be borne by ultimate user for use of energy, remaining cost is met by assessee out of grants received from state/central govt. for the same.
As such the assessee has only recovered the cost which was incurred by it and to be ultimately borne by the user as per the scheme announced by the state/central govt. termed as user share. In this way, by no stretch of imagination it can be said that the user share is any income earned by the assessee or any part of this user share is income earned by the assessee taxable as per Income Tax Act.
Other Issue: Whether Interest received by assessee on grants deposited in bank account taxable in its hands?
ITAT observed that the assessee is only getting grant from the Central Government or from the State Government for financing the subsidy part of the cost of renewable energy devices. Any surplus or unutilized amount belongs to the sanctioning authority and payable back to govt. The interest shown as received is fully accountable to the Government and is adjusted against future grant and in case a particular grant is not spent or utilized, it is refunded back to the grant sanctioning authority.
Thus, the amount does not belong to the assessee but to the sanctioning authority only. Therefore, the same cannot be taxable in the hands of the assessee.
CA Saurabh Chokhra
- 8:45 am
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Weeding out the black sheep under proposed Goods and Service Tax – will it work?
CMA Bogavalli Mallikarjuna Gupta
In the current tax architecture of India, Input Tax Credit i.e CENVAT Credit in case of purchase of manufactured goods and VAT credit in case of purchase of goods within in the same state is available based on the sales invoice issued by the selling dealer. The buyer on receipt of the goods will avail the input tax credit and adjusts / offsets it against the output tax liability. This process is simple for the business houses as credit is available immediately and saves the cash flows. Now let’s look from a taxman’s perspective. 1. The selling dealer pays the tax in the subsequent month and the tax collection / revenue increases. The buying dealer avails the credit, no impact on the tax collection as the amount got collected is utilized by the buyer in the same month or subsequent months.
2. The selling dealer does not pay the tax and the buying dealer avails the credit, in this process, there is revenue loss to the government.
In the second case, the government is not receiving any income but the buyer is availing credit, that means there is revenue loss and from a taxman’s parlance it is also known as revenue leakage. This happens due to some black sheep in the system and it also increase the menace of black money in the economy as the payment from the buyer goes unaccounted.
To plug this, it is being proposed to rate the dealers similar to CIBIL which evaluates the individuals for their creditworthiness. CIBIL report is followed by the banks before disbursing loans to the individuals. If the CIBIL score is good, the individual is disbursed with loan or rejected or disbursed if any discrepancies are cleared.
To avoid the revenue leakage, it is being proposed in GST that input tax credit will be available only when the seller pays the tax liability. The input tax credit is now under the control of the seller and the GSTN and no longer in the hands of the buyer. This is paradigm shift from the current process of availing the credit immediately on receipt of goods in case of Central Excise or receipt of invoice in case or service tax. The buying dealer is eligible for the input tax credit only when he selling dealer pays the tax liability.
Now the question arises, how will the buyer know if the seller is prompt in his tax payments? The government intends to send alerts on all the defaulting dealers though SMS with all his registered buyers and also make this information public. This process is called blacklisting of dealers. The blacklisting of dealers is not only based on this condition but also on other conditions
1. Continuous default for 3 months in paying ITC that has been reversed.
2. Continuous default of 3 months or any 3 month-period over duration of 12 months in uploading sales details leading to reversal of ITC for others. Defaulters of even a single event should also be flagged and put in public domain as being a potential black listed dealer so as to alert the buyers.
3. Continuous short reporting of sales beyond a prescribed limit of 5% (of total sales) for a period of 6 months.
Business Implications
Does purchases from a blacklisted dealer has business implications? The answer is “YES”.
Increase in the cost of production – if the seller does not remit the tax, it means the buying dealer cannot avail input tax credit, that means, the tax has to be treated as an expense based on the prevailing accounting standards. The moment it is taken as an expense tax, the cost of production will increase and thereby hitting the bottom line of the company.
Increase in the working capital limits – if the input tax credit it not available to the buying dealer, it is a double edge sword. As input tax credit is blocked for the said purchases, the output tax liability has to be paid from through cash that means there will be impact on the cash flows and there by impacting the working capital. Again more working capital means more financial costs, more financial costs means impact on the bottom-line of the organizations. It is expected that based on the nature of the industry there will be an average increase of 10% to 20% of the working capital. The business houses have to work on the modalities to meet the same either by applying for increased limits or fund through the same through internal accruals or by other means.
Complexity in handling the external reporting – the proposed laws under GST are not stringent, the input tax credit is available once the selling dealer remits the taxes. The complexity arises now, if the purchases are done in the month of February 2016 and the selling dealer remits the tax in May 2016. How do we handle this in the financial reporting as in India the financial year is 1st April to 31st March. As the credit is related to prior period item, do we need to make necessary changes to the reported financial statements? The other challenge is if the input tax is treated as recoverable, and the dealer does not pay and there is change of financial year, how to report the recoverable tax as expenses?
Cost sheets have to be submitted and if there is change post submission how to handle the same? These concerns have to be raised by the organizations directly or through trade bodies to make representation to the government.
Why blacklisting is being proposed
1. Only for regulating ITC by others.
2. Will be based on dealer rating. A dealer will be blacklisted if dealer rating falls below the prescribed limit.
3. To be put in public domain.
4. To be notified (auto-SMS) to all dealers who have pre-registered this dealer (black listed now) as their supplier.
5. To be prospective only (from month next to blacklisting)
6. Blacklisted GSTINs cannot be uploaded in purchase details. Corresponding denial of ITC to be supported by suitable provision in the law.
7. ITC reversal in hands of the buyer should take place for disowning of any tax invoice with date prior to effect of blacklisting of the seller.
8. Once blacklisting is lifted, buyers can avail unclaimed ITC subject to this dealer uploading sales details along with tax and interest.
How avoid getting into the trap?
In the current business process of any organization, the parameters which the purchasing teams look into while procuring the goods are
1. Quality of the goods
2. Consistent supply of the goods
3. Timely delivery
4. Prompt after sales service if required
5. Cost of the goods
6. Any other specific parameters based on the need of the hour
Payment of taxes by the seller also has to be added to the above list, this will ensure that the cost of production does not go up and also the cash flows which in turn impacts the bottom-line of the company/organization. This means the purchasing teams should be trained on the implications of the GST in advance to avoid any unpleasant surprises once GST is rolled out.
In most of the case the buyer has the upper hand and he can release the payment to the supplier once he gets confirmation that the taxes have been paid or reduce the tax amount from the suppliers payment. If the buyer opts for the second approach, the issue is resolved to some extent.
Can the new process proposed under GST will work? Only time has to answer this question……
Any views or opinions represented in this section are personal and belong solely to the author and do not represent those of people, institutions or organizations that the owner may or may not be associated with in professional or personal capacity, unless explicitly stated. Any views or opinions are not intended to malign any religion, ethnic group, club, organization, company, or individual.
(Author has written book titled “Roll Up Your Sleeves for GST, The Impending Tax Reform in India” and can be reached at mallikarjunagupta@india-gst.in)
- 8:44 am
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Are you ready to retire? Take this quiz to find out
In the good old days, retirement came when your boss said it was time. But with more people taking the entrepreneurial road or achieving great success early on in their careers, retirement is a valid option even for those in their 30s. Before you take the plunge though, take this quiz to find if you're truly ready for it:
Do you have your own fully paid for home?
a) Yes, I've been a home owner for a few years now.
b) Not yet, but I do plan on buying one eventually.
If you have children, do you still provide for them financially?
a) My children are grown up with stable jobs.
b) No, I am still doling out cash in a crisis to them.
Apart from your job, do you have another source of income, in the form of a rented home, side business or freelance options?
a) Yes, I do have another source of income.
b) One job. That's it.
Are people in your age group and social circle also retired?
a) A few of them are.
b) No, all my friends still have fulltime jobs.
Do you have hobbies or interests that engage you?
a) Yes. They bring me a lot of joy.
b) No, my work is my life.
Look at your friend circle. How have you met the majority of them?
a) My close friends circle comprises my college buddies.
b) I've met all of my close friends on the job.
Do you currently have any debt?
a) No. I have been debt-free for quite a few years.
b) Yes, but I am slowly working towards paying it off.
Does the idea of not having a routine excite you?
a) Yes, I can't wait to make my own.
b) Not really — it makes me a bit apprehensive.
Mostly As
It looks like you're ready to put in your retirement papers. Having your own home, being financially secure and not having any dependents means that you can enjoy t he freedom retirement brings without the daily stress of trying to m ake ends meet. Having a secondary source of income, hobbies and friends in the same situation as you, will make the transition even more enjoyable.
Mostly Bs
Perhaps it is best if you wait a little longer. Getti ng out of the game altogether when you are not on solid financial ground ca n be detrimental to your bank balance and even mental health. The thumb rule is: if you have debt, you need to keep your job. Being the first to retire in your social circle could mean you'll end up bored and could actually miss the routine a full-time job offers.
Source : ET wealth
- 8:49 am
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Tax Breaks Needed to Attract Retail Investors Into Stocks: Analysts
Experts feel separate tax-breaks are required to incentivise people to invest in equity through primary market.
Only 2 per cent of India's over 1.2 billion people are estimated to invest in equity markets. Analysts say Finance Minister Arun Jaitley must consider in announcing tax breaks and other incentives to increase the participation of retail investors in stock markets.
"The Securities Transaction Tax (STT) and Commodities Transaction Tax (CTT), which are levied on purchase or sale of securities, lower depth and liquidity in the market, thereby lowering volumes. We are currently seeing lower volumes in cash and future markets. We want STT to go or it should be reduced substantially," says D K Aggarwal, managing director of SMC Capital.
"In India, just 5 per cent of the total retail savings is into financial assets, while same number in developed markets is around 25 per cent," he added.
Jimmy Patel, CEO, Quantum Mutual Fund, says, "Equity mutual fund investors are paying double STT, firstly, at the time of buying and redeeming mutual fund units and secondly when the mutual fund goes to the market to sell shares or buy shares. The application of double STT needs to be addressed."
Experts feel separate tax-breaks are required to incentivise people to invest in equity through primary market.
"There is no incentive for new investors to put money in initial public offering. Retail response to IPOs has been quite muted. In order to create more retail participation some tax incentives are required," said Mr Aggarwal.
The government had introduced the Rajiv Gandhi Equity Savings Scheme (RGESS) in 2012-13. But experts feel the tax saving scheme has many conditions attached to it. Under RGESS, first time equity investors, with annual income of less than Rs. 12 lakh, will get a deduction of 50 per cent for the amount invested up to Rs 50,000.
Mutual Fund industry also wants a special status for tax-saving mutual funds known as Equity-Linked Saving Schemes (ELSS).
"I would like the government to increase the limit for ELSS," Waqar Naqvi, CEO, Taurus Mutual fund.
"For boosting equity investment, there has to be separate section for ELSS. Today ELSS is cluttered with other products under Section 80C," said Mr Patel of Quantum Mutual Fund.
He wants the government to reintroduce sections 54EA, EB (withdrawn in 2000), under which capital gains were not charged if the proceeds from a sale of capital assets were invested in specified bonds and debenture.
"Government should give tax breaks to investors if they invest in mutual funds which invest in the equity and bonds of infrastructure companies. It will benefit the government by helping it raising funds for infrastructure projects, benefit the mutual funds companies as well as retail investors," says Mr Patel of Quantum Mutual Fund.
The industry also wants gains on National Pension Scheme to be made tax-free in this year's Budget.
"NPS needs significant tax changes, making the withdrawals tax-free. Also, process of withdrawals should be more streamlined. It was the instruments created for unorganised sector but currently the tax-incentives makes it more attractive to the salaried class," says Manoj Nagpal CEO, Outlook Asia Capital, a wealth management firm.
"Currently, contributions up to 10 per cent of the salary by the employer on behalf of employee are eligible for additional deduction apart from Section 80C. This is basic flaw which needs to be corrected. It should have uniform tax exemption for both salaried and non-salaried class, to make NPS more amenable for non-salaried people, the category for it was introduced," he added.
Source : NDTV
- 8:47 am
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Many taxpayers don’t maximise sections 80C, 80D breaks
Of the people who filed their taxes through our website, 70% did not make full use of the section 80C benefits available under the Income-tax Act, 1961. They could have saved a few thousands by claiming the full Rs.1.5-lakh benefit. Given the host of eligible expenses and investments, I am astounded that such a large number (70%) of taxpayers did not make use of the breaks they had. Here’s how one can make the most of tax breaks available.
Start filling your cup with EPF: Your employer deducts 12% of your basic salary to put in Employees’ Provident Fund (EPF). This contribution can be claimed under section 80C. For a basic of Rs.30,000 per month, an amount of Rs.43,200 (Rs.3,600 x 12) is contributed to EPF by you annually. Claiming your EPF as deduction takes you one step closer to the Rs.1.5-lakh mark.
Choose a safe investment: Invest in Public Provident Fund (PPF), National Savings Certificate (NSC) or Sukanya Samridhi Account Yojana if your aim is steady returns and secure investment, and you are willing to stay invested for a longer term. Even today you are not late to make these investments. NSCs can be bought from the post office. PPF and Sukanya Samridhi accounts can be opened with some banks. Don’t worry if you can’t make a lump sum investment right away; you have time until 31 March.
As section 80C deductions can be claimed directly in your tax returns, you can choose to stagger your investments over the next two months. Though your employer will end up applying a higher rate of tax deducted at source (TDS), you can claim a refund by filing your tax return.
PPF, too, is a great way to save and invest, for freelancers, too, as they do not contribute to EPF. Investing Rs.1.50 lakh brings discipline in your savings and helps builds a good corpus over time.
Benefit from the equity markets: If you prefer aggressive investments albeit with higher risk, you can choose an equity-linked savings scheme (ELSS) or a unit-linked insurance plan (Ulip). An ELSS invests at least 65% of its funds in equity. Lock-in period is 3 years and returns are tax-free. Pick a consistent fund and if you plan to invest now, you can spread your investment over the coming two months. Deduction is also allowed on premium paid for a Ulip. Do remember though to weigh the Ulip for its benefits and conditions. Buying a Ulip involves investing regularly over a few years. Many taxpayers purchase Ulips in haste and do not pay premiums on time. If a Ulip is discontinued before two years, tax benefits availed under section 80C can be added back to your taxable income in the year in which the Ulip is closed.
Getting there without funds to invest: Don’t worry if you don’t have sufficient funds to make the above investments; that’s because a bunch of expenses are also allowed to be deducted under section 80C. Life insurance premium payments, school fees of children, principal repayments on home loan, stamp duty and registration charges paid on purchase of a house property, can all be claimed.
Purchase medical insurance: Medical insurance has also been largely ignored as a tax-saving mechanism. About 60% of tax filers with us did not claim deduction under section 80D, and earned in excess of Rs.5 lakh. Medical costs have been rising. A visit to the hospital or a short stay can set you back by a few thousands if not lakhs. While you may still enjoy the benefits of a corporate health cover, consider purchasing medical insurance for your family, including parents. A variety of ailments and situations can be covered. This year, there has been an enhancement in the deduction allowed. For medical insurance for self, spouse and children, Rs.25,000 can be claimed. An additional Rs.30,000 can be claimed for securing your parents. If your parents are more than 80 years of age and are uninsured, medical expenses of up to Rs.30,000 can be claimed under section 80D. But total deduction for parents should not exceed Rs.30,000.
Saving for pension: Those who belong to the higher tax bracket with taxable income in excess of Rs.10 lakh, could consider the National Pension System (NPS). If your employer does not offer NPS, you can open an account yourself. Deposits of up to Rs.50,000 can be claimed under section 80CCD(1B). Currently, withdrawals from NPS are taxable. But given the intensive lobbying by fund houses, in the coming years, NPS is likely to be brought at par with PPF and withdrawals and maturity shall be made exempt from tax. Pension funds when committed to over a long term (close to 20 years) can also offer higher returns than the traditional products.
Filing a tax return for capital losses: Several taxpayers who incur short-term losses in equity markets do not file a tax return or do not include losses. Not all losses are bad; short-term capital losses can help you save tax. Short-term loss from equity shares can be adjusted against short-term and long-term capital gains. If these are not set off fully in the year they are incurred, they can be carried forward for eight years. These can be set off against capital gains income in future. The only requirement to get this advantage is that tax return be filed before due date.
Staying invested in equities for the long term, upwards of 12 months, is tax efficient. There is zero tax on long-term gains on sale of equities.
Archit Gupta, co-founder and chief executive officer, ClearTax.in
Source : Livemint
- 8:44 am
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Taxability in India is based on your residential status
I came to work on a project in New Jersey, US, in October 2015 and had received my salary in India till then. Now I am getting my India salary and US wages here. How will taxation for this financial year (FY), 2015-16, be affected?
—Rajkumar Patel
In India, taxability of income is determined on the basis of the residential status of the individual during FY (1 April to 31 March of subsequent year) and source of income.
Residential status is determined on the basis of physical presence of an individual in India during a FY. If the individual satisfies any of the basic conditions mentioned below, she would qualify as a resident; else, as a non-resident.
Basic conditions:
Stay in India during FY is 182 days or more, or
Stay in India during FY is 60 days or more and in four years immediately preceding the FY is 365 days or more. The 60-day period can be extended to 182 days for a citizen of India who leaves India in any FY for employment purpose outside India.
A resident may either qualify as an ordinarily resident (OR) or not ordinarily resident (NOR). If any of the additional conditions mentioned below are not met, then the individual would qualify as NOR, otherwise as an OR.
Additional conditions:
Resident in India in nine of 10 FYs preceding the relevant FY, or
Stay in seven years preceding the relevant FY is in aggregate 729 days or more.
If in FY16 you have spent more than 182 days in India and more than 729 days in the past 7 years (1 April 2008 to 31 March 2015), you would qualify as OR and your global income would be taxable in India. Hence, your entire India and US salary income, and any other income worldwide, would be subject to tax in India.
However, in case of double taxation of income in the US and India, credit of taxes paid in the US on such income may be claimed in India under the Double Taxation Avoidance Agreement (DTAA) entered between India and the US.
If in FY16, you have spent less than 182 days in India, you would qualify as a non-resident. Such an individual is taxed only on income sourced in India. Therefore, salary income received in the US, for the period of employment exercised in US, will not be taxed in India. However, if this salary is received in India, it will be taxed in India. In case of double taxation of income in this situation, benefit of income exclusion under India-US DTAA could be explored.
Queries and views at mintmoney@livemint.com
Source : Livemint
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Sebi seeks explanation from NCDEX on castor seed matter
Capital markets regulator Sebi has sought explanation from the National Commodities and Derivatives Exchange (NCDEX) in the matter of castor seed contracts, whose futures trading was suspended with immediate effect on Wednesday evening.
Sebi has asked the NCDEX to explain what were the factors that led to suspension of trading and also the measures that were being taken by the exchange while positions were built up in that commodity, sources said.
The Securities and Exchange Board of India has also sought details about the risk management measures in place at the commodity exchange.
Sebi has been keeping a tight vigil on the commodities derivatives market ever since it began regulating it pursuant to the merger of erstwhile commodity regulator FMC with it. When contacted, an NCDEX spokesperson said the exchange would reply to Sebi at the earliest and the regulator was also informed about the decision to suspend trading.
The decision was taken after consulting the board, after the exchange apparently found the open interest positions for the next month contracts to be high and the prices were low. In a circular, the exchange had said on Wednesday that it was suspending futures trading in all running castor seed contracts to “safeguard market integrity and maintain equilibrium”.
“We have suspended futures trading in all running castor seed contracts at close of business today under the provisions of the bye laws and regulations. The outstanding positions will be settled at the daily settlement price as at the end of day 27 January,” NCDEX had said after the decision.
NCDEX said the contract has been under surveillance for some time and the price discovery process was getting affected, making it necessary to take the necessary steps.
With the new arrival season, any disturbance in efficient price discovery in these contracts could have had adverse impact on orderly functioning of the market, NCDEX said. This also could have impacted thousands of farmers, it said, adding that some of the members were expressing difficulty in meeting their mark-to-market (MTM) margin obligations.
Source : Livemint
- 8:42 am
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Exit Route For Companies Who Have Made Deemed Public Issues
[The following guest post is contributed by Amitabh Robin Singh, who is an Associate at DSK Legal]
The Securities and Exchange Board of India (“SEBI”) has recently issued a circular (“Circular”) which has allowed companies which have made deemed public offers (allotment of securities to more than 49 persons under the Companies Act, 1956) to escape penal action if the securities have not been allotted to more than 200 persons in a financial year (the threshold for deemed public issues under the Companies Act, 2013). This has been done considering that the threshold for a deemed public offer has increased from not more than 49 persons to not more than 200 persons with the enactment of the Companies Act, 2013.
The Circular applies to companies that have made deemed public issues prior to April 1, 2014, which is the date on which the relevant section (Section 42) and rule (Rule 14 of the Companies (Prospectus and Allotment of Securities) Rules, 2014) of the Companies Act, 2013 were brought into force.
Generally companies who make a deemed public offer without complying with the provisions of the then in force Companies Act and extant SEBI guidelines are barred along with their promoters and/or directors by SEBI from accessing the securities market for a particular period of time which is stipulated in the relevant order against the company.
Pursuant to the Circular, an erring company can avoid penal action by giving the holder of the security (if the security has been transferred since allotment, then to the transferee-current holder) an option to surrender the securities at a price not less than the subscription amount plus 15% interest or any such higher return which was promised to the investors.
It is pertinent to note that the term used is “amount of subscription money”. So it appears that if the holder of the security on the date of the refund is a subsequent transferee from the original subscriber, the base refund amount is to be the original subscription price and not the price at which the security was transferred to the current holder. This position seems to be reasonable.
An interesting point to examine here is the catchment area of the Circular. How many companies, which have made deemed public issues prior to April 1, 2014, will be able to benefit from the Circular and avoid penal action?
Upon perusing the last five orders passed (chronologically) in relation to deemed public issues being Amazon Agro Products Limited, Vaibhav Pariwar India Projects Limited, Bharatiya Real Estate Development Limited, Mondal Construction Company Limited and SEBA Real Estate Limited, it can be seen that none of these cases will fall within the purview of the Circular. This is due to the fact that none of the abovementioned companies had allotted securities to between 50 and 200 persons in all of the relevant years in which the concerned security was allotted. The number exceeded 200 in all of the abovementioned cases.
To see an order which would have come under the purview of the Circular, one has to go back to Prayas Projects India Limited, dated December 29, 2015, in which the securities were issued to not more than 200 persons in all of the concerned financial years in which the security was allotted. In this case the securities were allotted to 107 and 47 subscribers in the respective financial years.
The Circular goes on to lay down the procedure for implementing the refund stating that the process which the company undertakes to effect the mandated refund needs to be evidenced by proof of dispatch of the refund. Also, the refund is required to be made through cheques, demand drafts or Internet banking channels to enable the trail of the money to be clearly traced.
The company is also required to submit a certificate from a practicing chartered accountant to certify compliance with the refund process which states that the chartered account has verified all documents relating to the refund such as proof of dispatch of letters and the company’s bank statements, etc.
In conclusion, despite the fact that a good number of companies that have made deemed public issues will not benefit from the Circular, it does not seem to be the intention of SEBI to give such companies an escape from penal action which have mobilized funds from a larger amount of people going beyond the increased threshold ushered in by the Companies Act, 2013. Hence, companies and promoters/and or directors who have made comparatively smaller deemed public issues can avoid being barred from the securities market and continue their involvement in the.
- Amitabh Robin Singh
Source : indiacorplaw.blogspot.com
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Taxability of Conversion of Stock in trade to Investment
CA Falguni Padiya
Stock-in-trade is converted into investments to claim benefit of lower or nil tax on capital gains.
In case of a business of trading in shares assessee may transfer some of his stock in trade into his capital asset by deciding to hold it as an investment or on discontinue of delivery based trading of shares, convert the stock of shares into investments and sell the same at a later stage and pay tax on the profit as capital gain instead of business profit. It is here to be noted that long term capital gain from equity shares sold in stock exchange and on which Security Transaction Tax has been paid, is exempt u/s 10(38) of Income Tax Act. Thus in case of conversion of shares held as stock in trade into capital asset, the benefit of exemption u/s 10(38) will be available if such converted capital asset is sold later and long term capital gain arises from it. There will not be any capital gain at the time of conversion.
Section 45(2) of the Act are absolutely clear and applicable only in case when investment is converted into stock- in – trade and not vice – versa. On the date of conversion of stock-in-trade to capital asset, there shall be no business income. Generally, no one can earn income from oneself. [Kikabhai Premchand (Sir) vs. CIT (1953) 24 ITR 523 (SC)1. Unlike capital gains, there is no such provision under the provisions of “Income under the Business/Profession” creating a deeming fiction and charging the same as Business income.
In this article two decision contradictory to each other are discussed.
The controversy is whether gain arise on sale of shares in case of transfer of shares from stock –in –trade to investment is exempt or not:
ACIT vs. M/s. Superior Financial Consultancy Services (ITAT Mumbai),ITA No. 4208/Mum/2007
In the previous year relevant to assessment year 2004-05, the tax payer was engaged in the business of borrowing and lending of funds.
Prior to 31st March, 2002 the tax payer carried on the business of trading as well as speculation in shares. These shares were reflected as stock-in-trade in the Balance sheet for the year ended 31st March, 2002.
However, from 1st April, 2002 the tax payer discontinued delivery based trading of shares and converted the stock of shares into investments which was also duly reflected as Investments in the balance sheet as on 31st March, 2003 along with a suitable clarificatory note in the notes to accounts.
During the previous year relevant to assessment year 2004-05, the tax payer sold some of these shares held as investments and offered the gain arising there from amounting to Rs.7,13,29,191/- under the head “Capital Gains”. Since these shares were long term capital assets, the tax payer claimed exemption u/s 10(38) of the Income Tax Act (ITA).
The Assessing Officer was of the opinion that the conversion of shares from stock in trade to capital assets was not genuine and indicated a colourable tax saving device conceived by the tax payer. He accordingly, treated the income as “business income” and taxed it accordingly.
The Commissioner of Income Tax (Appeals) [CIT(A)] passed an order in favour of the tax payer and treated the gain as “capital gain”.
Aggrieved by the order of the CIT (A), the Revenue appealed to the ITAT.
ITAT accepted the tax payer’s contention, upheld the order of the CIT (A) and concluded that the tax payer cannot be said to have entered into a sham transaction since the conversion is transparent from the audited accounts and the notes to accounts. Lastly, the ITAT, agreeing with the view of CIT(A), held that the decision of Chandigarh Tribunal (Supra) would squarely apply to the present case and thus, a tax payer may be an investor as well as a speculator at the same time. Further, if the Revenue accepts such shares held as investments then the gains accruing there from shall be considered as capital gains.
Contrary Decision
lndo Stosec (P.) Ltd. vs. lncome-Tax Officer (ITAT Mumbai), Appeal No. I.T.A.No.3472/Mum/2010
Assessee was engaged in trading of shares and had been consistently declaring shares as its stock in trade – On opening date of current year, i.e., on 1-4-2005, it converted stock in trade into investment and immediately thereafter sold most of shares – Since shares had been classified as investment, assessee computed long term capital gain and short-term capital gain and claimed long term capital gain as exempt under section 10(38) – Whether on facts it was clear that assessee converted stock in trade into investment only to avail benefit of exemption and concessional rate of tax and, therefore, revenue authorities were justified in assessing gain arising on sale of shares as business income of assessee by disregarding claim of long-term capital gain and short – term capital gain. – Held, yes [para 5] [in favour of Revenue]
lT : Where assessee converted shares held as stock in trade into investment and sold same immediately thereafter with a view to avail benefit of exemption under section 10(38) and concessional rate of tax, conversion of stock in trade into investment was disregarded and gain on sale of shares was assessed as business income.
Amendment Recommended to Section 2(14) to provide clarity regarding Taxability Of Surplus On Sale Of Shares & Securities – Capital Gains or Business Income
Committee recommends that the Act be amended to specifically provide in a new clause (aa) of section 2(14) that a capital asset shall include shares and securities held by an assessee for a period exceeding 12 months from the date of acquisition (other than those declared as stock-in-trade/trading asset in the return of income furnished under section 139 of the Act) and the profits or gains arising from transfer of the same shall be taxable under the head “capital gains”. Shares and securities which are held for a period not exceeding twelve months will continue to be capital assets as per the existing clause (a) of section 2(14).
The result of the amendments recommended will be that:
(i) surplus arising on transfer of shares and securities held for a period exceeding twelve months will be, in all cases, chargeable as capital gains if they are not held as stock-in-trade.
(ii) surplus arising on transfer of shares and securities held for a period less than twelve months, upto a sum of rupees five lakhs, will be chargeable as capital gains if they are not held as stock-in-trade.
It is further proposed to provide that where the profits or gains arising to an assessee from transfer of shares or securities held by him for a period which is less than twelve months and which have been offered to tax under the head “capital gains”, do not exceed rupees five lakhs during the previous year, the Assessing Officer shall not treat such profits and gains as business income, provided the shares were not held as stock-in-trade.
Cases which are not covered by the above proposed amendment shall continue to be assessed on the basis of existing principles laid down by the courts and summarised by the CBDT.
The recommendations are aimed at reducing, if not altogether eliminating, a substantial chunk of litigation.
The proposed amendment will take effect from 1st April, 2017 and will, accordingly, apply in relation to the assessment year 2017-18 and subsequent years.
Source- Draft Report of Justice R.V. Easwar (Retd) Committee to Simplify the provisions of Income-tax Act, 1961
FRP’s Comments:
This judgment clearly brings out the fact that there are no provisions that restrict the conversion of stock-in-trade into investments and hence, such conversion holds good in law. The character of a transaction cannot be determined solely on the application of any abstract rule, principle or test but must depend upon all the facts and circumstances of the case. The facts that may be considered while determining the same are the magnitude and frequency of buying and selling of shares by the assessee; the period of holding of shares, ratio of sales to purchases and the total holding, etc. Mere classification of shares in the books of accounts of the assessee is not relevant for determining the nature of income for Income-tax purpose.
Thus, if the transaction is genuine and there is supporting circumstantial evidence, such as Board resolution passed in general meeting, Affidavit, suitable clarificatory note given in the Notes to Accounts, there is a strong ground for defending the claim that the same has not been entered into only for the purpose of tax evasion/avoidance. Of course, one has to follow the accounting treatment consistently to prove that it is bonafide.
Author CA Falguni Padiya, ACA, DISA is a Chartered Accountant and associated with Rajesh Lifespaces. Can be reached at frpandco@gmail.com
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