The DTC 2010 has had its fair share of criticism. Before DTC 2010 is steam-rolled into Law, its detractors have a last chance to voice their grievances before a Select Committee which promises to look into all issues objectively. The author urges all tax payers to make the most of this opportunity and starts off by listing his litany of woes
1. Direct Taxes Code Bill 2010 which was introduced in the Parliament on 30th August 2010, has been referred to Parliament “Standing Committee on Finance” headed by Shri Yashwant Sinha Former Finance Minister. The code will come into force on the 1st day of April 2012. As per the advertisement published in DNA DT 13-11-2010, the Government of India has invited the suggestions from various individuals/experts /institutions etc and the suggestions are required to be forwarded to the committee within 20 days of the publication of the advertisement. My past experience with the parliament standing committee is very much encouraging because they consider the suggestions objectively without any political bias hence, I am of the considered opinion that the professionals and organizations must put forward their views without any fear or favour taking into consideration, the interest of nation and honest tax payers of our country. I have made an attempt to discuss certain conceptual issues which may be considered and if found fit may be forwarded to the committee along with other important issues which you may feel requires consideration.
For the last 69 years the Government was satisfied with the functioning of Tribunal and there is no reason to bring an outsider to head the Institution, unless there are advantages to be gained by appointing a sitting or retired Chief Justice of High court. The legislature has not given any one reason how the institution will be benefited by bringing a retired Chief Justice to head the institution. Further, as the order of Tribunal is subject to challenge before the High Court, according to me it will lower the status of Chief Justice of the High Court. I am of the opinion that as the present system is working satisfactorily there is no need to bring an outsider to head the institution
2. Direct Taxes Code 2010 (2010) 326 ITR (St.) 41 – Drafted by few tax officials and not on the basis of an expert opinion.
The replacement of the 1922 Act, with 1961 Act was introduced by considering the experts opinion in its panel like N. A. Palkhivala, P. Satyanarayan Rao, G. N. Joshi and many more. Before the introduction of 1961 Act, the Committee had the input by Kaldor’s Committee (1956), Tyagi’s Committee (1958) Law Commission Report (1958). Even after 1961 Act, we had Boothalingam committee report 1967, on rationalization and simplification of the tax structure, Administrative Reform Committee Report 1968, Direct Taxes Enquiry Committee (Wanchoo Committee) Report 1969, Direct Taxes Laws Committee (Chokshi Committee) Report 1978, Economic Adminstrative Reforms Commission (Jha Committee) Report 1983, Tax Reform Committee (Dr. Raja J. Chellia) (Final report) 1992, Expert group to rationalize and simplify Income Tax Law 1997, Committee on Electronic Commerce and Taxation-2001. Consultation Paper – Task Force on Direct Taxes (Dr. Kelkar Committee). However, without taking into consideration the recommendations of various committees, and without involving the tax professionals, and tax payers, the present code is introduced. One will appreciate that the Income tax Act 1961, became more complicated because of frequent amendment of law, with retrospective effect. One can achieve the desired objects of simplification and rationalization of direct taxes by retaining same sections and making amendments wherever desired. First question to be asked is “do we need the new code in the present form?” I am of the opinion that the present code may not achieve the desired object of simplification; on the contrary it will lead to more litigation. If the Government really desire to simplify the tax law, there has to be committee of experts, and the committee should travel all parts of the country interact with the judiciary, members of the tribunal, tax professional’s taxpayers, tax officials, expert in technology and thereafter bring the new code.
Dr. Raja Chellia (Tax Reform Committee) in his committee report (1992) 197 ITR 257 (St.) para. 5.9 had this to say about accountability, “Ways must be found to hold the officer accountable for the kinds of assessments he makes. Under the present procedure an Assessing officer, whether he be a Superintendent of Central Excise or an Income Tax Officer, can over-assess, raise additional demands without sufficient grounds and yet remain unconcerned and unaffected if his overassessments and additional demands or orders confirming demands raised by him are dismissed as untenable by the Tribunal. In fact, there is tendency on the part of some of the assessing Officers to recommend to the Commissioner / Collector that almost every case in which the Commissioner (Appeals) or the Collector (Appeals) has not sustained the additional demands created by them should be referred to the Tribunal because they stand to lose nothing if the Tribunal also should rule against their action. The Assessing Officers should be made accountable for their actions by being blamed for raising demands which are not upheld by the tribunal”. However the Direct Taxes Code has not addressed this issue at all. Unless the provision of accountability is introduced whatever may be the law, the honest taxpayers may have to face the unintended litigation. It is desired that Accountability provision must be introduced in the New Code.
Some of the following specific clauses, of Code which requires reconsideration.
4. Clause 4 (3) – Residential Status of a Company.
Federation has made representation to Government from time to time to appoint at least few professionals from the field of law and accountancy which will benefit the institution. Federation once thought of filing the PIL why no professionals have been invited to join the settlement commission. As per the Direct taxes code only departmental officials can be appointed, only qualification is number of years of service and the requirement of men of integrity and outstanding ability. Such a good provision has been given a go by without any reason
A Company shall be resident in India in any financial year, if
(a) It is an Indian company; or
(b) Its place of effective management, at any time in the year is situated in India.
As per definition clause 314 (192), “place of effective management” means:
(i) the place where the board of directors of the company or its executive directors, as the case may be, make their decisions; or
(ii) In a case where the board of directors routinely approve the commercial and strategic decisions made by the executive directors or officers of the company, the place where such executive directors or officers of the company perform their functions.
As per section 6 (3) of the Indian Income Tax act 1961,
A company shall be resident in India, if the control and management of its affairs is situated wholly in India.
With the removal of word “wholly” the company may be treated as resident in India even if the effective management of the company is partly situated in India. The word “Partly” will be a matter of debate and potential source for litigation.
5. Clause 123 : General Anti Avoidance Rule (GAAR)
This is a new concept which is introduced in the Code; wide powers are given to the commissioner. GAAR provides for declaration of arrangement by commissioner as “impermissible avoidance arrangement” if the same has been entered into by the tax payer with the objective of deriving tax benefits. Such arrangement may be determined by;
– Disregarding, combining or re characterizing any step in the arrangement.
– Treating, the arrangement as if it had not been entered into or carried out or such other manner as in the circumstances of the case, the commissioner deems appropriate for the prevention or reduction of the relevant tax benefit.
– Disregarding any accommodating party or treating any accommodating party and any other party as one and the same person.
– Deeming persons who are connected persons in relation to each other to be one and the same person.
– Re-allocating, amongst the parties to the arrangement , any accrual or receipt of a capital or revenue nature or any expenditure , deduction relief or rebate, or
– Re-characterizing any equity in to debt or vice versa any accrual or receipt of a capital or revenue nature or any expenditure, deduction relief or rebate.
The arrangement entered into by the tax payer would be presumed to have been entered into for the main purpose of obtaining tax benefit unless otherwise proved by the tax payer. It is implied that GAAR provisions shall override all other provisions including provisions of DTAA.
As the law understood today one may arrange his affairs with in frame work of law, tax planning is permissible and tax avoidance is not valid. GAAR will have far reaching consequences for the assessee engaged in the business on a larger scale with Indian and Foreign parties.
6. Clause 159 and 163 – Reopening of assessment and search and seizure.
The reopening of assessment and regulation pertaining to the search and seizure matters are incorporated in clauses 159 and 163.
As per the new provision if the Assessing Officer has a reason to believe that any tax base chargeable to tax has escaped the assessment for the relevant assessment year, he can reopen the assessment. He only has to record the reasons in writing. The scope of deemed escaped assessment is widened to include the cases where for eg. (i) Computation or assessment has not made in accordance with any order, direction, instruction or circular issued by the Board. (ii) Any objection has been raised by the comptroller and auditor General of India to the effect that the assessment has not been made in accordance with the provisions of Income Tax Act. Concept of change of opinion is done away with. As per present sections 147 to 152, 153A to 153C, Assessing Officer may assess or reassess such income other than the income involving matters which are subject to any appeal, reference or revision; such restrictions are not there in the proposed code. For issue of notice the period is extended from the present six years to seven financial years immediately preceding the financial year in which the search and seizure has been carried out or material has been obtained. If the present code becomes an act, there cannot be any finality to the assessment though the assessing officer might have applied his mind and passed the speaking order. It is desired that the present provision of law may be retained.
7. Clauses 179(3)(b) – Power of CIT(A), 183(7) – Power of Tribunal, Clause 192(6)(b) – Power of Commissioner
As per the new code Appellate authorities have no power to condone the delay beyond one year. There may be delay due to mistake of tax consultant, or due to any other genuine reason. As there is no power to condone the delay, the assessee may have to approach the High Court by way of writ. Where as under present income tax there are no such restrictions, but if the CIT (A), CIT or Tribunal is satisfied, they may condone the delay. It is suggested that present provisions of law may be retained.
8. Clause 181 – Power of CIT(A)
Clause 181 provides for extending the power of the CIT(A) while disposing an appeal to consider and decide on any matter which has not been considered by the AO. No such power is there under the present income tax Act under section 251.
9. Clause 182 (6) – Chief justice of High Court to head the Income Tax Appellate Tribunal.
As per clause 182(6), the Central Government may appoint a person who is or has been a Chief Justice of High Court to be the President of the Appellate Tribunal. Under the present Income Tax Act the President of ITAT is selected amongst the Sr. vice president and Vice presidents on merit by a committee inter alia consisting of senior most judge of Supreme Court, and the system is working satisfactorily. At present the Income Tax appellate Tribunal has benches in 27 Cities having sanctioned strength of 126 members.
It may be noted that most of the other Tribunals are constituted of retired employees and Judges who are appointed for fixed tenure ranging from 3 to five years and even the Benches are in not more than three places, hence other Tribunals cannot be compared with the Income Tax Appellate Tribunal. Normally a Member is selected as President after serving more than 20 Years in the Tribunal. As a Member he has to undergo transfer at least once in four years. When a person is selected as a president he is fully aware of functioning of various benches of Tribunal, knowledge and integrity of each and every member which makes him to discharge his duties more efficiently. Bringing an outsider, may affect the functioning of Tribunal. For the last 69 years the Government was satisfied with the functioning of Tribunal and there is no reason to bring an outsider to head the Institution, unless there are advantages to be gained by appointing a sitting or retired Chief Justice of High court. The legislature has not given any one reason how the institution will be benefited by bringing a retired Chief Justice to head the institution. Further, as the order of Tribunal is subject to challenge before the High Court, according to me it will lower the status of Chief Justice of the High Court. I am of the opinion that as the present system is working satisfactorily there is no need to bring an outsider to head the institution.
10. Clause 186(5) – Constitution of Special Bench
As per the clause 186 (5), the President shall on a reference received from the Board for disposal of any particular case, constitute a Special Bench consisting of Five members or more. The wording “shall” means whenever the reference is received from the Board the President shall constitute a special Bench. It may lead to interfering with the judicial functioning of the President. As the law stands today, the president may constitute a special Bench considering the importance of law involved and not on a particular case at the sweet will of the Board.
11. Clause 257 – Authority for Advance Ruling and Dispute Resolution
As per the qualification fixed for appointing vice Chairperson is concerned, even the ITAT members who has completed more than 7 years of service may be considered as eligible for the appointment as vice chairperson and members who have completed 5 years of service may be considered as eligible for appointment as members of authority for Advance Ruling and Dispute Resolution. By Qualification and experience the members of the ITAT are most suited as members of Authority for Advance Ruling and Dispute Resolution.
12. Clause 234 – Penalty- Bar of limitation for imposing penalty
Section 275(IA)(a) of the present Act, specifically state that no order of imposing or enhancing or reducing or cancellation of penalty or dropping the proceedings for imposition of penalty shall be passed (a) unless the assessee has been heard or has been given reasonable opportunity being heard.
However, clause (a) is missing in proposed clause 234. It may be desired that old provision may be retained.
13. Clause 268(3) – Settlement Commission – Qualification for Members
As per the proposed clause the Chairperson, Vice chairperson and other members, shall be appointed by the Central Government from amongst the officers of the Indian Revenue service who have served for last twenty years in the service including at least five years in the rank of Commissioner or above.
As per section 245B (3) of the Income Tax Act 1961, the members can be appointed from “amongst persons of integrity and outstanding ability having special knowledge of and experience in problems relating to direct taxes and business accounts.”
Federation has made representation to Government from time to time to appoint at least few professionals from the field of law and accountancy which will benefit the institution. Federation once thought of filing the PIL why no professionals have been invited to join the settlement commission. As per the Direct taxes code only departmental officials can be appointed, only qualification is number of years of service and the requirement of men of integrity and outstanding ability. Such a good provision has been given a go by without any reason. An ideal settlement commission should consist of a member from the department, one from the legal field and one from the field of accountancy.
1. In many of the sections of the present Income Tax Act, there was no minimum fine prescribed. Now as per the code, the minimum fine is Rs 50000. Judge has no discretion to reduce the minimum fine.
2. Clause 252 – Prosecution to be at instance of Chief Commissioner or Commissioner.
Section 279(1A) of the Income Tax 1961 provided that “A person shall not be proceeded against for an offence under section 276C or section 277 in relation to the assessment for an assessment year in respect of which the penalty imposed or imposable on him under clause (iii) of section 271 has been reduced or waived by an order under section 273A.,
Where as such a good provision is omitted in the code.
3. Clauses 243 and 244 – Willfully Failure to furnish statements, reports etc. and willful failure to comply with direction under this code.
Two new clauses have been introduced, as per clause 243 if a person willfully fails to produce or cause to be produced ,on or before the date specified in any notice served on him under sub clause 2 of clause 150 (Notices for enquiry before assessment) such accounts and documents as referred to in the notice, he shall be punishable with rigorous imprisonment for a term which may extend to one year or with fine equal to a sum calculated at rate which shall not be less than fifty rupees or more than one hundred rupees for every day during which the default continues or with both. Similar punishment is also prescribed as per clause 244 for failure to comply with the direction as per clause 151(1). (Special audit)
15. Clause 314 (215) – Remission or cessation of any liability.
As per clause 314 it includes remission/ cessation of any liability, by virtue of there being no transaction with the creditor during the period of five years from the end of the financial year in which the last transaction took place.
That means any credit in the book beyond five years will be treated as income of the assessee, whether the assessee may be disputing or some litigation may be pending.
16. Recovery and attachment-. Mode of Recovery-Gift held to be Invalid – Fifth Schedule. Rule 3(2).
In fifth Schedule, provision of rule 3(2), has permitted the TRO to challenge transfer to spouse, or minor child, otherwise than for adequate consideration. However there is no time limit provided as to how far back the transfer can be challenged. There has to be time limit to be fixed. It may be reasonable to fix one year prior to arising of tax liability by passing of order by Assessing Officer. Further the expression “inadequate consideration” will be a matter of debate and appeal.
Further, if transfer is to a minor child and he attains the majority then it should not be permitted to be challenged.
It may be noted that similar provision was not there in second schedule Rule 4 of the Income Tax Act, 1961.
17. Clauses 112 – 114 – Wealth Tax
All assessees are covered other than a nonprofit organization. At present only few assets are covered, however the proposed code proposes to add tax also on following specified assets.
– Archaeological collections, Drawings, sculptures or any other work of Art.
– Watch having value in excess of Rs 50000/-.
– Interest in foreign trust or any other body located outside India (Whether incorporated or not) other than a foreign company.
– Equity or preference shares held by a resident in a CFC.
– Cash in hand in excess of ` 2,00,000/- in case of an individual.
– Bank deposits outside India, in case of individuals and HUFs, and in the case of other persons, any such deposit not recorded in the books of account.
18. Federation is proposing to make a presentation before the Parliament standing committee. I as a citizen of this country make an sincere appeal to the tax professionals and Professional organizations to forward their suggestions ,by participating in the process of Nation Building process, which will be a great service to the Nation . You may forward the suggestions to following address.
Dr. K. Shivaram
Editor in Chief
Reproduced with permission from the AIFTP Journal, November 2010