Sr. Advocate Firoze Andhyarujina has conducted a comprehensive analysis of the various provisions in the Income-tax Act relating to eradication of Black Money. He has focused on the menance of bogus share capital/ premium and bogus capital gains through penny stocks. He has also explained the impact of GAAR on these transactions. All the important judgements on the subject have been referenced
1. Year of credit for section 68.
2. Recent Judgment of Supreme Court in CIT v. NRA Iron and Steel Pvt Ltd ( 2019) 412 ITR 161 (SC) – Share capital / share premium.
3. Brought forward loss eligible for setoff u/s.68.
4. Special provisions 115BBE for section 68 – 69D .
5. Section 285 BA obligation to furnish financial statement–AIR .
6. Deposits in Jan Dhan Accounts.
7. Donation – Case study
8. Illiquid Stock Option.
9. Preponderance of Probability.
10. Data confidentiality and protection.
11. Revised returns post – demonetisation.
12. Receiving Rs 2 lakhs attracts penalty – S269 ST.
13. Taxability of gifts exceeding Rs. 50,000/- from companies .
14. Provisions relating to real estate sector .
15. Blackmoney undisclosed foreign Income and Asset Act.
16.Paradise and Panama Papers.
17. MAT and P Notes – FII.
18.Base Erosion and Profit Sharing – BEPS.
19. GAAR – Tax treaty abuse.
20. RTI ACT- SIT.
21. Shell Firms and Active in 22 FORM – Companies Act.
22. Compounding of offences – Recent circular dated 17/06/2019.
Year of credit for section 68.
1. CIT v. Usha Stud Agricultural Farms Ltd.  301 ITR 384 (Delhi)(HC)
1.1 .During assessment proceedings, Assessing Officer noticed that assessee had shown certain amount as advance from one ‘B’. As assessee failed to file confirmation from B, Assessing Officer made addition of that amount under section 68 – On appeal, Commissioner (Appeals) deleted addition on ground that said cash credit was appearing in books of assessee over past four to five years and, thus, it was not fresh credit entry pertaining to relevant assessment year – Tribunal dismissed appeal filed by revenue – Whether finding recorded by Commissioner (Appeals) was a finding of fact and, as such, no fault could be found with order of Tribunal in endorsing decision of Commissioner (Appeals).
1.2. ITO v. Nasir Khan J. Mahadik ( 2012)134 ITD 168 (Mum.)(Trib.)
Mumbai ITAT has in the following case deleted the additions made on account of opening balances of unsecured loans and the notional interest on such loans. The Tribunal held that only fresh loans or additions to the loans during the year in question can be considered for the purpose of addition. Previous years loans cannot be added to subsequent year’s income by claiming them to be unexplained.
1.3 DCIT v. Global Mercantiles (P.) Ltd.  157 ITD 924 (Kol.) (Trib.)
Where assessee received share application monies in earlier year and only shares were allotted to applicants during assessment year under appeal, provisions of section 68 could not be invoked to make addition
III. Section 68 of the Income-tax Act, 1961 – Cash credits (Share application money) – Assessment year 2006-07 – During assessment year 2005-06 assessee received share application monies from 20 individuals but shares were allotted to them during assessment year under appeal – Whether since no monies were received during assessment year under appeal there was no scope for invoking provisions of section 68 – Held, yes [Para 4.4.1] [in favour of assessee]
1.4 Sooraj Leathers v. ITO, ITA No. 305/CHN/2016 (Chennai) (Trib.)
In a recent judgment, ITAT Chennai has stated that consent/acceptance given by assessee could not give jurisdiction and a right to the assessing authority to make an addition. The taxing authority can act only if there is power under the statute to do so. It further held that if the liabilities are old representing opening balances only , Section 68 cannot be applied.
1.5. Suraj Bhan Bajaj v. ITO,  102 TTJ 665 /  21 SOT 22 (URO) (Delhi)(Trib.)
Section 68 of the Income-tax Act, 1961 – Cash credits – Assessment year 1995-96 – Assessee constructed a residential house during period from July 1994 to April 1996 – Whether while invoking deeming provisions for making addition, Income-tax Act does not empower revenue authorities to include certain receipt as income of year which actually pertains to some other years – Held, yes – Assessing Officer asked assessee to explain source of investment in house – Assessee explained that gifts and loans were received in earlier years from his close relations and family friends – Assessee furnished cash flow statement and explained receipt of gifts in each assessment year – He also produced affidavits from all donors who categorically accepted fact of giving gift, reason for giving gift and their source of income – However, Assessing Officer made addition of whole of gifted amount in assessment year in question .On appeal, Commissioner (Appeals) deleted gifts and loans which were not pertaining to year under consideration and were received by assessee in earlier years – Whether Commissioner (Appeals) correctly deleted addition – Held, yes
2. Recent Judgment of Supreme court in CIT v. NRA Iron and Steel Pvt. Ltd. (2019) 412 ITR 161 (SC)
2.1. In Pr. CIT v. NRA Iron And Steel Pvt. Ltd. (2019) 412 ITR 161 (SC) it was laid down where monies are credited as share capital/ premium :
1) The assessee is under a legal obligation to prove the genuineness of the transaction , identity of the creditor and credit worthiness of investors who should have financial capacity to make investment.
2) The AO is duty – bound to investigate the credit- worthiness of the creditor/ subscriber to verify the identity of the subscriber and to ascertain the genuineness of the transaction or to find out whether these are bogus or to ascertain whether there are bogus entries of name lenders.
3) If the inquiries and investigation reveal that identity of creditors is dubious or doubtful or they lack credit-worthiness, then the genuineness of the transaction would not be established and the assessee would not have discharged the primary onus contemplated by section 68 of the act .
4) AO should independently summon the investors and also independently conduct field inquires and investigation. The test is also whether the investor could justify making the investment as well as the justification for making a high premium .The court further noted that it would be also be permissible to go in to the details of bank statements to established the sources of funds . It is also to be examined whether the investor companies were found to be non existent and for which cogent evidence is required.
One important point to not is that the Supreme Court over turned the decision of CIT ( A) ITAT and High Court and stated that the evidence
A) respondent had filed confirmation from investor companies, B) filed Tax returns , c) acknowledgments , D) PAN Numbers , E) copies of their bank accounts and F) Arguments that the amount has been paid through normal banking channels would not be sufficient to discharge initial onus under section 68 of the IT Act .
The Supreme Court observed that the practice of conversion of unaccounted money through the Cloak of share capital / premium particularly in the context of private placement of shares would require a HIGHER ONUS of proof and burden on the assessee. The Assessee is under a legal obligation to prove the receipt of share capital/ premium to the satisfaction of the AO failure of which the addition could be made.
3. Brought forward losses are eligible for set off against addition under section 68 of the Act.
3.1. ACIT vs. Shree Raghupati Fibers Pvt. Ltd. ITA No.256/Ahd/2011 (Ahd.) (Trib.)– dt.12.09.2014
“2. The sole ground taken by the Revenue is that the Commissioner of Income Tax (Appeals) erred in allowing set off of addition made u/s. 68 of the Act of Rs 13,80,000/- against the unabsorbed depreciation loss.
7. We find that the Hon’ble Supreme Court in the case of CIT v. D.P. Sandu Bros. Chembur (P) Ltd. (2005) 273 ITR 1 (SC) has held as under:
“Section 14 of the Income-tax Act, 1961 as it stood at the relevant time similarly provided that “all income shall for the purposes of charge of income-tax and computation of total income be classified under six heads of income,” namely:-
(B) Interest on Securities;
(C) Income from house property;
(D) Profits and gains of business or profession;
(E) Capital gains;
(F) Income from other sources unless otherwise, provided in the Act.
Section 56 provides for the chargeability of income of every kind which has not to be excluded from the total income under the Act, only if it is not chargeable to income-tax under any of the heads specified in section 14, items A to E.”
8. Thus, in view of the above decision of the Hon’ble Supreme Court, the amount which has been deemed as income u/s. 68 is assessable as income from other sources and because of the same, it forms part of the total income of the assessee.
9. It is not in dispute that brought forward unabsorbed depreciation can be set off against the income which is assessable under the head ‘income from other sources’. We, therefore, do not find any error in the order of the Commissioner of Income Tax (Appeals). It is confirmed. The ground of appeal of Revenue is dismissed.
10. In the result, the appeal of the Revenue is dismissed.”
3.2 K.R. Automobiles v. ACIT (2015) 153 ITD 240 (Ahd.)(Trib.)
IT: Set off of business loss against addition under section 68 to be allowed
Section 71, read with section 68, of the Income-tax Act, 1961 – Losses – Set off of from one head against income from another (Illustration) – Assessment year 2008-09 – Whether once loss is determined, same should be set off against income determined under any other head of income including undisclosed income – Held, yes [Para 6] [In favour of assessee]
3.3 Kerala Sponge Iron Ltd. v. ACIT (2014) 32 ITR (T) 718 (Cochin)(Trib.)
“8.6 In the instant case, the contention of the assessee is that it has no other source of income other than business income. The said contention was not controverted by the tax authorities. The assessee has credited the loan amount of Rs.18.00 lakhs and the profit from commodity trading of Rs.5.13 crores in its books of account. In fact the profit from Commodity trading was credited in the Profit and Loss account and offered as business income. Since the assessee could not explain to the satisfaction of the assessing officer about the nature and source of loan amount as well as the profit from commodity trading, the assessing officer has treated them as deemed income, i.e., as unexplained Cash credits u/s 68 of the Act.
While dealing with the issue relating to the disallowance of interest, the assessing officer has pointed out that the assessee has a loan liability of Rs. 21.56 crores and claimed interest expenditure of Rs. 3.33 crores. The AO has allowed depreciation of rs.2.63 crores. All these figures throw light on the magnitude of operations of the Company. Under these set of facts, we are of the view that it may not be unreasonable to treat the loan receipts and profit from commodity trading assessed u/s 68 of the Act as the receipts from the business activity of the assessee. Accordingly, we are of the view that the assessee is entitled to claim set off of current year loss and also brought forward loss / unabsorbed depreciation against the same in accordance with the relevant provisions of the Act.
8.7 In view of the foregoing discussions, we set aside the order of Ld CIT(A) on this issue and direct the assessing officer to allow set off of current year’s business loss as well as the brought forward business loss / unabsorbed depreciation against the income assessed u/s 68 of the Act in accordance with the provisions of the Act relating to set off.”
3.4 Further, this aspect has been considered by the Apex court in Lakhmichand Baijnath (supra) and it is held that even if the explanation given by the assessee, as to how the amounts came to be received, is rejected as untenable, the credits were to be treated as business receipts which are chargeable.
3.5 Lakhmichand Baijnath v. CIT  35 ITR 416 (SC)
“(3) Lastly, the question was sought to be raised that even if the credits aggregating to Rs. 2,30,346 are held to be concealed income, no levy of excess profits tax can be made on them without a further finding that they represented business income, and that there is no such finding. When an amount is credited in business books, it is not an unreasonable inference to draw that it is a receipt from business. It is unnecessary to pursue this matter further, as this is not one of the questions referred under section 66(2).”
4. SPECIAL PROVISION 115BBE for INCOME u/s. 68 or 69 or 69A or 69 B or 69 C or 69 D:
S 68 Chapter vi of IT Act contains section 68 to 69 which deal with charging to Income Tax :Amounts credited in books of accounts but nature and source is not satisfactorily explained – cash credits.
S 69 Investments made which are not recorded in the books of accounts and source is not satisfactorily explained .
S 69A Money , Bullion, jewelry or other valuable articles of which assessee is found to be the owner and are not recorded in books of account and assessee offers no explanation about the nature and source or the explanation is not satisfactory.
S 69B Amount of investment , Bullion , jewelry or other valuable article not fully disclosed in books of accounts .
S 69C Expenditure incurred the source of which is not explained satisfactorily .
S 69D Amount borrowed or repaid on Hundi.
Section 115BBE states that where the total income of the assessee includes the above categories of income then the tax payable would be not at the normal rate but 60% and further the assessee would not be entitled to claim deduction of any expenditure or allowance or set off of any loss in computing his income.
The said section is to be read with section 271 AAB & AAC which levies penalty. Penalty cannot be levied twice under both the sections that is penalty can be only under S271 AAB or 271 AAC . Appeal against such penalty can be filed as it is an appealable order where appeal will lie to CIT(A) U/s 246(1)(q).Explanation to section 271 AAB defines undisclosed income as well as specified previous year.
5. SECTION 285BA –OBLIGATION TO FURNISH STATEMENT OF FINANCIAL TRANSACTION OR REPORTABLE ACCOUNTS:
5.1. Any person being
B) Prescribed person in case of Office of Government.
C) Local Authority.
D) Registrar or Sub Registrar u/s 6 of Registration Act.
E) Authority empowered to register under motor vehicle Act.
F) Office of Post master General.
G) Collector Under Land acquisition Act.
H) Stock Exchange.
I) Officer of RBI.
K) Prescribed reporting financial institutions.
Who maintains books of account or record are required to furnish specified financial transactions to income tax authority and such other authority.
Section 285 BA (3) specifies “specified financial transaction as.
1) purchase , sale, exchange of Goods and Property or rights or Interest in property to
2) rendering any service .
3) Works contract.
4) Investment made or expenditure incurred.
5) Taking or accepting any loan or deposit.
Provided the aggregate value of such transactions during the financial year does shall not be more than Rs. 50,000/-.
The scope and effect is explained in circular no 7 of 203 dated 05/09/2003 reported in 263 ITR (St.) 62. In para 81 that the information is to be utilized to widen tax base . It may be noted that filing AIR the person need not be an assessee. Even government department are covered and the return has to be filled in electronic form being form no 61 A. Rule 114E prescribes the class of persons being reporting persons and the nature and value of transactions .
Interestingly 11 categories are specified more particularly banking companies , company issuing bonds or debentures , company issuing shares listed recognized stock exchanges , trustee of mutual fund and any person who is liable for audit u/s 44AB and who is in receipt 0f cash payment exceeding Rs. 2lakh for sale of goods or services . Section 271 FA provides that if a person who is required to furnish statement of financial transactions or reportable accounts fails to furnish such statements then penalty of RS. 1000/- every day of default . Section 273 B provides that no penalty u/s. 271 FA shall be levied where assessee proves that there is “ reasonable cause” for failure to file AIR . These sections are enacted to bring in transparency and curb black money.
Editorial: Finance (No .2) Bill 2019 (2019) 415 ITR 1 (St)( 79) Clause 66 proposed to insert a new clause (1) in the said sub section so as to provide that a person , other than those referred to in clauses (a) to (k) as may be prescribed , shall also be required furnish a statement under the said section. It is proposed to amend the sub -section (4) so as to provide that if the defect in the statement is not rectified with in the time specified there in , the provisions of the Act shall apply if such person had furnished inaccurate information in the statement . The amendment will take effect from 1st day of September , 2019 .
6. DEPOSITS IN JAN DHAN ACCOUNTS :
6.1 Jan Dhan Accounts having low balances were used to launder black money by making huge deposits. In the Jhan Dhan Accounts money was deposited and withdrawn in new currency and was one major method to convert black money into white. Question is whether such arrangement with the Jan DHan account holder can be questioned under Benami Act .
Section 2 of the Benami Act defines “Benami transactions as a transaction where a property is held or transferred to a person but the consideration has been provided or paid for by some other person. The property is held for the immediate or future benefit of the person who has provided the consideration – section 2(9).
Cases and circumstances held to be Benami nature are
1) Transaction or arrangement of property in fictitious name 2)
2) Transaction or arrangement of property where owner is not aware or denies knowledge of ownership.
3) Transaction or arrangement in respect of property where person providing consideration is not traceable or is fictitious .
It may be noted that section 190 of Fiancé Act 2015 provides that undisclosed income declared under Income Disclosure Scheme will not be treated as Benami Transaction.
7. DONATION – Disallowance of deduction u/s 35(1)(ii): case study.
7.1 Assessee makes donations and claims weighted deduction of 175 % of the amount paid as per provisions of section 35 of the IT ACT In terms of section 35, assessee claims to have made an expenditure on scientific research to a research association which has its object for undertaking scientific research.
Modus – operandi:
The donation given is bogus. This information is received from Investigation Wing that bogus donation cases u/s 35(1)(ii) is received and the name of the assessee figures in the list . The main issue is that the institute which is engage in scientific research is in reality collecting donations through brokers in lieu of commission. The donations are received by cheque/ RTGS and the same is rooted back to the donor in form of cash vide in 3-4 layers after bogus billing or accommodation entries in the books of the institute. The institute is approved u/s 35(1)(ii) and is required to follow Rule 5C ,5D,5E of IT rules.
The assessee is confronted with the fact as to what the institution to which donation is given does ? It appears that assessee has very little knowledge and understanding of the field in which the trust operates . The assessee has made large sums of donation in the field which is not pertaining to his business but, dominant motive is to claim weighted deduction u/s 35(1)(ii) rather than going into genuineness of the activities performed by the trust.
Survey is conducted on the institute where the officials admit that they are engaged in the activity of receiving bogus donation which they route back to agents and to beneficiaries thus there is tax evasion .
7.2 DEFENCE STRATERGIES:
1. Assessee genuinely believes that the institute carries on research and that it is not within his duties to go and examine the functions of research,
2. That when a survey had taken place and the brokers were questioned , none of the brokers specifically named the assessee in their statement and that there is no allegation for bogus donation made against the assessee.
3. There is no specific evidence that cash has been returned to the assessee neither any circumstantial evidence brought on record .
1. Transaction not genuine but only a colourable device to bring unaccounted cash back to the assessee.
2. Onus of proving donation as genuine on the assessee.
3. AO not strictly bound by provisions of Indian Evidence ACT.
One has to look into principles of natural justice being violated and actual prejudice caused to the assessee on specific denial. That the statements and evidences are admissions which are “rebuttable presumptions” . The assessee has a right to cross examine and to prove his innocence in such circumstances looking into the totality of facts and circumstances the matter has to be judged whether the donation was made as per normal prudent business practices.
7.3 ILLIQUID STOCK OPTIONS- CASE STUDY:
SEBI passes ex parte order restraining certain entities from buying, selling or dealing in securities directly or indirectly in illiquid stocks. It is observed that suspected entities have misused stock exchange system to generate fictitious profits/ losses for the purpose of tax evasion. It is further alleged that the suspected entities indulge in availing fictitious profit/ loss by executing “reversal trades in illiquid stock option for purpose of facilitating of tax evasion.
Loss making entities were trading mainly in options on individual stocks which are thinly traded mostly the quantity of stock options bought and sold by the loss making entities for a contract is identical the difference in sell value and buy value resulting in to significant loss . Substantial number of transactions are then squared up by virtue of trade reversals that is if the stock options were sold first to an entity, they would be bought back in exact same quantity from the same entity or vice – versa.
The price of an option is a combination of its intrinsic value and time value . The former is a function of difference between option strike price and the underlying price and the later being a function of time remaining till expiry of the option contract. In normal conditions, the minimum price which the option seller would demand to take the risk of writing the option would be equivalent to the intrinsic value of the option. In reversal trades the options sold are at unreasonably low price and subsequently bought back on the same day or on the next trading day and are bought at substantially higher prices.
SEBI concluded that loss making entities and profit making entities have deviced a scheme with ulterior motives and the entire transaction is non genuine covered under the definition of fraud as defined under regulation 2(1)(c) of SEBI (prohibition of Fraudulent and Unfair Trade Practice relating to securities Market ) Regulations 2003 R.W. section 12A(a), (b) and (c) of SEBI Act 1992.
Information is received from investigation wing of SEBI to the Tax Department . The issue and the case study is on profit/loss of alleged reversal trades in illiquid stop options on stock exchange leading to tax evasion .
Argument: Assessee has fully and truly disclosed all the transactions that it is nothing unusual to trade in thinly traded stock options and that it is a regular practice to square of the transactions during the day or on the next day. That the information received is not reliable as the same is challenged in appeal. Infact in thinly traded shares the stock exchange itself encourages brokers to trade in such stocks.
Support and reliance can be placed on the decision of ITO 24(3)(1) vs. Arvind Kumar Jain HUF ITA no 4862/Mum 2014 AY. 2005 -2006 dated 18 /09/2017. In this case asseessee claimed to have purchased share at rupees 3.12 per share in 2003 and sold the same at Rs. 165.83 per share in 2005 the script was “penny stock” . The allegation was that Capital Gains was only accommodation entry and the broker was being probed for irregularities and synchronized trades . Thus, the LTCG was disallowed and treated as unexplained cash credit u/s 68. the assessee relied on bank statement , brokers bill for ;purchase and sale of shares, contract note, demat account transaction on recognized stock exchange and statement of STT.
The fact that SEBI had passed an order against the broker would not be a fact to disbelieve the transaction. In this connection the Bombay High Court CIT vs. Shyam R. Pawar (2015) 54 taxmann.com 108 held that where demat account and contract note showed details of share transactions and the assessing officer had not proved transaction as bogus, the transaction cannot be treated as unaccounted income u/s 68 . Further in CIT vs. Arun kumar Agarwal (2012) 26 Taxman .com 113 (Jharkhand) it was held that transaction is bonafide in all respects then merely because share broker was tainted violating SEBI regulations would not make assessee’s share transactions bogus.
9. PREPONDERENCE OF PROBABILITES:
In Sumati Dayal v. CIT (1995) 214 ITR 801 (SC) the Supreme Court considered the question whether the apparent could be considered as real it was held that the apparent must be considered real until it is shown that there are reasons to believe that the apparent is not real and that the taxing authorities are entitled to look into the surrounding circumstances to find out the reality and the matter has to be considered by applying the test of human probabilities .
10. DATA CONFIDENTIALITY & PROTECTION:
“Historically , privacy was almost implicit ,
because it was hard to find and gather information.
But in the digital world, we need to have more explicit rules.”
-BILL GATES .
In its pursuit to curb black money the question arises concerning data of individuals and companies and the level of confidentiality and protection . The data collected of an individual concerning all his transactions falls within the realm of ‘sensitive data’ – data concerns all types of information medical , financial ,biometrics etc. This would amount to invading privacy of an individual the question therefore arises that to what extent there should be protection qua government and companies for sharing computer related data . With the growth digital economy which keeps personal data of citizens with the government there must be some kind of security , protection and confidentiality .
Government and other agencies are increasing scope of Aadhaar linking for services .With personal information regularly being shared among different parties , without the knowledge of the customer creates the issue of privacy . Aadhaar linking for day-to-day transaction is akin to having a “digital master key” that can open all facets of an individual’s life. This would violate the right to privacy which is upheld by the Apex Court’s landmark decision upholding right to privacy as a fundamental right ,data protection must strictly impose purpose limitation .
Issue arises that (A) if there is breach of private rights whether an individual can receive amounts from the government those being penalties for breach of confidential information. This appears more significant as there is no provision in the income tax act to give any adequate protection more particularly with the emergence of e-commerce. (B) Question also arises whether individual can sue for compensation incurred for loss or damage to reputation and for putting personal data in public domain. Hence a strong mechanism is required for effectively protecting personal data while combating black money.
11. REVISED RETURNS POST DEMONITISATION:
Post demonetization many tax payers have filed revised/ belated income tax returns. In the tax returns cash deposits with a particular reason has been explained as the reason for filing the revised /belated returns .
CBDT has issued instructions that unaccounted income is to be assessed in scrutiny assessment and the same would be liable at “higher rate of tax”. This is further compounded with the fact that the assessee would not be allowed to set- off losses, expenses etc u/s 115 BBE of the IT Act. In the revised returns the assessee would show “enhanced sales” to show that cash has been generated because of sales. Point of precaution for manufacturers / business is that if enhance sales are reflected then the same may be compared with central excise / VAT returns . Thus this requires caution in filing revised/belated returns and at the same time whether higher rate of tax would be legitimate.
12. RECEIVING MORE THAN RS. 2 LAKHS ATTRACTS PENALTY:
Section 269 ST states that no person shall receive an amount of Rs. 2lakh or more by way of cash in aggregate from a person in a day, in respect of a single transaction, or in respect of transactions relating to one event or occasion from a person. However the restrictions will not apply to the government, any banking company, post office savings bank or cooperative bank. The violation would attract penalty u/s 271 DA of a sum equal to the amount of such receipt.
In a bid to check generation of black money a steep penalty is attracted for those accepting cash in excess of Rs. 2 lakhs. Penalty for the cash transaction will be on the receiver who will have to pay an amount equivalent to the cash received. By illustration if someone buys an expensive watch for cash, it is the shopkeeper who will have to pay the tax . The provision is intended to deter people from doing large cash transactions. Demonetisation brought to account the stock of black money and now the government wants to stop further generation of the same. The attempt is to track all large cash transactions and curb the avenues of conspicuous consumption through cash. This would also cover people with large sum of unaccounted money usually spend on holidays or buying luxury items like cars, watches and jewellery. The aim is to curb spending avenues and this disincentivise people from generating black money.
Editorial: In order to discourage cash transactions , Finance (No 2 )Bill 2019 ,( 2019 ) 415 ITR 1 (St) (73 ) Clause 46 proposed insertion of new section 194N with effect from the Ist day of September 2019 .
As per the new section 194N whereby withdrawal of an amount exceeding Rs. 1 Crore during the year from an account maintained with a banking company or a co-operative society or post office shall attract tax deduction at source equal to 2 % of the sum exceeding Rs. 1 crore.
13. TAXABILITY OF GIFTS OF MORE THAN 50 THOUSHAND RUPEES RECIVED FROM COMPANIES BY EMPLOYEES:
Company employees receiving large gifts from company or from somebody 9other than immovable property) are liable to pay tax if gifts are valued at more than Rs. 50,000/- Section 56 delineates the tax treatment meted out to ‘Income from other sources’. The law is now amended that gifts to an individual even by a company would be covered, This is to plug the loophole that people were taking gifts from companies and not paying tax on it, thus the provision would apply to anybody. This is in line with the concept of taxing large gifts. Where the consideration, the aggregate fair market value exceeds Rs. 50,000/- the whole of the aggregate; and where the consideration is less than the aggregate FMV of the property by an amount exceeding Rs. 50,000/- the excess of such consideration would be taxed.
Companies reward or compensate there employees with non cash gifts which will now be taxed. Section 56(2)(x)(c) now expands the scope of provisions to all categories of assessee’s so that asset received without or inadequate consideration is brought to tax.
The proviso outlines gifts which are still exempt like gifts from any relative, on occasion of marriage inheritance in contemplation of the death of the payer or donor etc.
14. PROVISIONS REGULATING REAL ESTATE & PROPERTY TRANSACTIONS :
14.1 Real estate sector and immoveable properties have been a source to generate black money in order to regulate various amendments have been enacted by the finance act 2017 which are analyzed as follows :
1. Section 2(42A): For investments in real estate w.e.f. 01/04/2017 the holding period for Capital Gains arising from immoveable property is reduced from 36 months to 24 months – proviso to section 2(42A) .
The base year u/s 55 for indexation benefit prescribed is 01/04/2001 from 01/04/1981 , thereby reducing Capital Gains tax liability both by reduction of holding period and also shifting base year from 1981 to 2001. Section 48 Explanation (iii) provides that base year for computing index cost for acquisition shall be the first year in which the asset is held or 1/04/2001 whichever is later .
2. Section 23(5): In CIT v. Ansal Housing & Construction (2016) 389 ITR 373 (Delhi)(HC) and in CIT vs. Sane and Doshi Enterprises (2015) 377 ITR 165(Bom.)(HC) courts have held that sections 22 and 23 is applicable to assesses who are engaged in business of construction of house property and are therefore liable to pay tax on the annual letting value of the unsold flats as “Income from House Property”. Section 23(5) now seeks to tax notional income in respect of house property held as stock–in–trade. Thus the developers who have unsold completed /built flats as inventory / stock in trade would be covered, thereby charging to tax notional rental income without actually earning the same.
Standard deduction would be allowed u/s 24(a) while computing notional income of unsold flats held as stock-in- trade thereby the rate of effective taxation would be 24% of notional annual value of unsold flats held as stock-in-trade.
U/s 23(5) incidence of tax would arise after period of one year from the end of financial year in which certificate of completion of construction is obtained from the competent authority.
3. Section 45(5A) : Joint Development Agreement where possession or part possession of immoveable property is given by the land-owner to the developer that would trigger the transfer u/s 2(47)(v) as on the date of handing over the possession, irrespective of the fact whether the title has been transferred or not. The position was that Capital Gains liability would arise or accrue irrespective of whether land owner had received consideration or not.
In case of specified agreement capital gains would arise in the year in which the project is completed wholly or partly and certificate of completion is obtained. Stamp duty value of land or building or both for the land owner would be as on the date of issuance of completion certificate increased by any consideration received which shall be deemed to be full value of consideration.
The full value of consideration would be regarded as cost of acquisition in the hands of land owner in the developed property and would be allowed as a deduction on subsequent transfer of the develop property by the land owner in the proportion of the area sold.
Capital gains on sale of such premises will be chargeable to LTCG or STCG depending upon the holding period from the date of issuance of completion certificate. S.45(5A) applies only to a specified agreement entered by individuals and HUF and does not apply to companies, LLP and any other non-corperate entities.
14.2 ISSUE 1 Whether 45(5A) would affect joint development agreement where land owner retains constructed premises for his own personal use. The position could be that land owners would now be liable to tax on market value of premises retained by them at the value ascribed at the time of issuance of completion certificate and would be allowed deduction on subsequent transfer.
ISSUE 2 Where joint development agreement is based on revenue sharing model whether the benefit of 45(5A) would apply.
ISSUE 3 Section 2(47)(5) has not been amended so as to defer tax liability of land- owner at the time of completion of the project.
It provides that capital gains on transfer of land or building or both under “Specified agreement” by induvial or HUF is chargeable to tax in the year in which completion certificate is issued for the whole or part of the project. Stamp duty valuation of assessee’s share in land or building or both will be on the date of issue of completion certificate as increased by consideration received which shall be deemed to be the full value of consideration.
14.3 Section 50CA: Capital Gains on transfer of any capital asset being unquoted share is to be computed with reference to fair market value of such share. U/s 50 CA FMV of unquoted shares of company where the underlying asset is immoveable property shall be now taken to be fair market value and the valuation provided under rule 11UA of IT rules shall not apply. Note any transfer of unquoted shares of a company owning immoveable property prior to 01/04/2017 will be outside the purview of section 50 CA and the transfer at book value will be valid.
14. 4 .Section 56(2)(x): Where there is transfer of immovable property without consideration ( stamp duty value of which exceeds Rupees 50,000/-), stamp duty valuation will have to be considered; and in those cases where the transfer value is less than the stamp duty valuation the difference between stamp duty value and consideration paid would be liable to tax. Section 56(2)(x) applies only to receipt of consideration of immovable property by any person for nil or inadequate consideration and not held by him as stock –in – trade , however if there is transfer in ordinary course of business as stock- in- trade then the provisions would not apply . Land or building or both would include all type of rights attached to immoveable property such as FSI, TDR, shares with occupancy rights.
14. 5 ISSUE 1: Whether difference between stamp duty valuation is affected where the property devolves under auction sale, distress sale or sale through court or debt recovery tribunal or where there is dispute and litigation.
14.6 .ISSUE 2: Whether 56(2)(X) would apply to additional area allotted to members of a cooperative society at concessional rate by developer under scheme of redevelopment.
14.7 Section 71 (3A): Limits inter-head set off of losses under the head income from house property in any particular assessment year to rupees 2 lakhs, thus loss under the head “ Income from house properties” in excess of rupees 2 lakhs shall not be allowed to set off against income chargeable under any other head of income . Thus section 71(3A) provides that loss under income from house property in excess of rupees 2 lakhs cannot be set off against income from any other head .
14.8 Section 80 IBA : Gives impetus to affordable housing projects by expanding size of units required to be eligible for “Affordable Housing Unit” by
i. Increasing limit of 30 sq. meters in non-metropolitan cities to 60 sq. meters.
ii. Increasing size of unit in non-metropolitan and metropolitan region from built up area of 30 sq. meters and 60 sq. meters to “carpet area” to 30 and 60 sq. meters respectively .
The approval from the competent authority is defined to mean building plan and layout plan approvals. The period of completion of project is increased from 3 years to 5 years .
Editorial : Finance Bill 2019 ( 2019) 415 ITR 1 (st) ( 62 ) clause 26 . Finance Bill 2019 , has extended the time limit for approval of the project by competent authority from 31 st March 2019 to 1 April 2020. Clause 26 is also proposed to amend the said section so as to provide that housing project approved on or after the 1-9-2019 shall be eligible for deduction under this section , if following new conditions specified in clause (d) to (i) are fulfilled along with certain other existing conditions are fulfilled :
(d) the project is on a plot of land measuring not less than—
(i) one thousand square metres, where such project is located within the metropolitan cities of Bengaluru, Chennai, Delhi National Capital Region (limited to Delhi, Noida, Greater Noida, Ghaziabad, Gurugram, Faridabad), Hyderabad, Kolkata and Mumbai (whole of Mumbai Metropolitan Region); or
(ii) two thousand square metres, where such project is located in any other place;
(e) the project is the only housing project on the plot of land as specified in clause (d);
(f) the carpet area of the residential unit comprised in the housing project does not exceed—
(i) sixty square metres, where such project is located within the metropolitan cities of Bengaluru, Chennai, Delhi National Capital Region (limited to Delhi, Noida, Greater Noida, Ghaziabad, Gurugram, Faridabad), Hyderabad, Kolkata and Mumbai (whole of Mumbai Metropolitan Region); or
(ii) ninety square metres, where such project is located in any other place;
(g) the stamp duty value of a residential unit in the housing project does not exceed forty-five lakh rupees;
(h) where a residential unit in the housing project is allotted to an individual, no other residential unit in the housing project shall be allotted to the individual or the spouse or the minor children of such individual;
(i) the project utilises—
(I) not less than ninety per cent. of the floor area ratio permissible in respect of the plot of land under the rules to be made by the Central Government or the State Government or the local authority, as the case may be, where such project is located within the metropolitan cities of Bengaluru, Chennai, Delhi National Capital Region (limited to Delhi, Noida, Greater Noida, Ghaziabad, Gurugram, Faridabad), Hyderabad, Kolkata and Mumbai (whole of Mumbai Metropolitan Region); or
(II) not less than eighty per cent. of such floor area ratio where such project is located in any place other than the place referred to in sub-clause (I); and
(j) the assessee maintains separate books of account in respect of the housing project.”.’; (B) in sub-section (6), after clause (e), the following clause shall be inserted, namely:—
‘(f) “stamp duty value” means the value adopted or assessed or assessable by any authority of the Central Government or a State Government for the purpose of payment of stamp duty in respect of an immovable property.’.
14.9 Section 92BA: From F.Y . 2016-2017 onwards no compliance with respect to Specified Domestic Transfer Pricing Provisions shall be required to be made by the developer in respect of the following expenditure paid/ payable to related parties on
• Purchase of construction material.
• Remuneration to directors.
• Interest on loan to related parties.
• Reimbursement of services to related parties.
• Transfer of projects from holding company to SPV. for private equity funding.
• Project management, marketing fees paid by SVP to developer
• Compensation to related party in an internal arrangement .
• Brokerage to related party.
14.10.Section 94 B : Thin capitalization norms for Associated Enterprise as contemplated in Base Erosion and Profit Sharing (BEPS) – is introduce to prevent excessive interest deductions by Indian companies. Its effect is on foreign debt raised by real estate companies by issuance of NCDs to Foreign Portfolio Investor (FPI) .
Real Estate Sector is highly capital incentive and therefore infusion of funds in the form of NCD/ FCCD from oversea investors is a normal practice . Section 94 B restricts interest deductibility which would adversely impact raising low cost funds by developers .FPIs are permitted to invest in listed or unlisted Non Convertible Debentures “ NCD” issued by Indian company in D- mat form.
An Indian company will not be eligible to claim deduction for interest paid to associated enterprise that exceeds 30% of Earning Before Interest, Taxes , Depreciation and Amortization. “EBITDA” of the borrowing company. Interest payment below Rs. 1 CR per anum are exempt.
Ambit of “Associated enterprises” is wide to cover SPV of developer set up by an offshore PE Fund largely formed by equity and large debt in the form of compulsory convertible debentures. Offshore private equity investor or FPI will also qualify as associated enterprise. Interest paid in excess of 30% is permitted to be carry forward for period of 8 years. Thin capitalization norms come in to effect from FY 2017-2018. The provision would apply where debt is availed from foreign entities but will not apply to borrowings made from nationalized banks and FI in India.
14.11 Section 194IB:Individuals and HUF (other than those liable for tax audit u/s 44 AB) responsible for paying to a resident rental income exceeding Rs 50,000/- per month or part of month during the previous year shall deduct an amount equal to 5 % as TDS. Explanation to section 194 IB states “Rent” means any payment , by whatever name called, under any lease , sublease, tenancy or any other agreement or arrangement for use of any land or building or both. Section 194 I and 194 IB will not be applicable where rent is directly paid by developer for procuring temporary alternate accommodation in a redevelopment project since rent is not paid by developer to member or tenant for use of any land or building. However when the society member or tenant pays rent directly to the owner for use of temporary alternate accommodation he shall be liable to deduct TDS u/s 194 IB where monthly rental exceeds RS 50,000/- ,Requirement to obtain Tan is dispensed with.
14.12. Section 194LD: NCD issued by Indian Real Estate Company to FPI and complying with requisite condition are characterized as Rupee Denominated Corporate Bond. Interest on NCD payable to FPI were earlier taxed at the rate of 20% is reduced to 5 %. Further there is reduction in withholding tax to 5% on interest payable to non-resident on NCDs. There is also exemption of Capital Gains on transfer of Rupee Denominated Corporate Bonds “Masala Bonds” u/s 194 LC.
16. Black Money Undisclosed Foreign Income and Asset Act:
Black Money (Undisclosed Foreign Income & Assets) &Imposition Of Tax Act 2015 – reported in 2015 375 ITR (St) 1 came in to effect from 26 may 2015. The object of the act was to bring in the economy foreign undisclosed income and assets. It has no application to income and asset situated or generated in India. The act has 7 chapters and 85 sections.
Section 2(11) – undisclosed asset located outside India means an asset including financial interest in any entity located outside India held by the assessee in his own name or of which he is beneficial owner and for which no explanation about the source of investment is explained by him.
Undisclosed foreign income and foreign asset is defined in section 2(12) to mean total amount of undisclosed income of an assessee from a source located outside India. Section 5 gives the scope of total undisclosed foreign income and asset.
It is further provided that if any person being resident as defined in section 6 (6) of the IT Act who has furnished his return but has failed to furnished information or furnishes inaccurate particulars relating to any asset including financial interest in any entity located outside India held by him as beneficiary owner or otherwise relating to any income from a source located outside India not disclosed shall pay penalty of RS. 10 Lakhs. There is also prosecution in circumstances like failure to disclose, willful attempt to evade, making false verification .
The act provides an open window to exit with penalty without prosecution as contemplated in sections 59 to 62. Government notified 30th September 2015 as the last date for making the declaration It is pertinent to note that under VDIS 1997 an undertaking was given by the government to the Supreme Court and a promise that the government will not come out in future in any other schemes of VDIS or Amnesty. However this act is “Open Window Scheme “and provides levy of penalty of 30% and 30% tax, distinguishing that in amnesty that there is no provision for levying penalties . Last date for depositing tax was 31 December 2015. All claims processed by cells rather than assessing officer and also assurance of uniformity in approach and no harassment.
CBDT has framed detail rules as also for declaration and for providing details of undisclosed foreign assets , shares, immoveable property, artwork bank accounts and jewelry which would be valued at fair – market value. The declarant can revise his declaration within 15 days. The scheme is in the nature of amnesty though CDT does not specify the same. Those who have not taken benefit of the scheme would be required to disclose in their returns form 1st April 2016.
The motive of the law is not to generate revenue but is a one-time compliance window to declare unaccounted foreign wealth , asset and income and to deter future tax evasion . The idea of the government is that funds kept abroad be utilized for development of the economy and the government as per its promises accepted all declarations and at the same time did not disclose identity of those who made the disclosure. It may be further appreciated that the values declared were also accepted and the evidences presented in the declaration were taken into consideration also where declarations were made by husband, wife and minor child they were not clubbed together .This scheme was an extremely attractive offer for disclosure of unaccounted black money and assets thrashed abroad.
Editorial: The Finance Bill (No 2) 2019 (2019) 415 ITR 1(St) (86), Clauses 195 of the Bill proposes to amend definition of the assessee under S. 2 of the Black Money Act. Now the assessee would also include a non resident or not ordinary resident when notice is issued , if he was resident in the year in which either the foreign income was earned or the foreign asset was acquired . Clause 196 of the Bill seeks to make clarificatory amendment to section 10 of the Black Money Act so as to include the expressions “ re-assess “ and “ reassessment” in sub section (3) and (4) of the said section. These amendments will take effect retrospectively from Ist July , 2015 . Clause 197, proposed certain amendments to Section 17 ie .power to vary order to enhance or reduce such penalty . In S.17(1)(b) – “ Such order “ to be replaced by “ or vary such order either to enhance or reduce penalty with effect from the 1st day of September, 2019 .
Clause 198, proposed certain amendment to Section 84 of the Act . In the principal Act in section 84 for figures “138” the figures and letter “138, 144A “ shall be substituted with effect from the 1st day of September, 2019
16. PARADISE AND PANAMA PAPERS :
The Panama Papers contains over 11 million documents on 2 lakh companies globally the government has ordered a multi agency group – MAG to investigate in Paradise Papers. It involves the latest set of names of persons and entities with presence of foreign tax havens . The presumption is that unearned income have been thrashed as exposed by ICIJ International Consortium OF Investigative Journalist which had last year released Panama Papers in Panama Papers 426 Indians were named, while In paradise papers 714 Indians have been named.
It may be noted it is not illegal to have overseas subsidiaries or companies but the income and assets should be disclosed and the transaction should be as per the prescribed domestic law . MAG will examine the details of the returns that have been filed of these individuals and tally the details with the tax returns and in case where it is not matching the details will be sought for . At present criminal prosecution against five Indians in panama papers have been launched , this is an attempt by the Government to crack down undisclosed overseas Income and assets.
17.MAT, PARTICIPATORY NOTES – MONEY LAUNDERING AND BLACKMONEY:
AAR has upheld In re. ZD (2012) 348 ITR 351 (AAR) that levy of MAT u/s 115 JB makes no distinction between a resident company and a non resident company. It may be noted that the issue whether MAT is leviable on FII is pending before Hon’ble Supreme Court in Castleton Investment Limited IN re.
Government came out with a clarification that it will not retrospectively impose Minimum Alternate Tax – MAT on capital gains made by Foreign Institutional Investors FII and Foreign Portfolio Investor FPI . CBDT came out with a circular clarifying MAT provisions will not be applicable for FII & FPI who were not having a place of business / permanent establishment in India prior to 01/04/2015.
Special Investigation Team – SIT went in to the question of black money in India and abroad it stated in its report :
“ 3.22 Investments are made in the secondary share markets with a view to capturing gains. In this market, out of nearly 8,000 listed companies several scripts are not traded regularly . With the collusion of promoters, some brokers arrange for price with purchase of such scripts at nominal cost and sales at exorbitant prices , with a view to receiving money on sale as “Capital Gains” when the long term gains is subject to a “nil” or nominal rate of tax . The advantage for manipulative taxpayer is that he can launder such sales and receipt through payment of no tax.”
SIT has stated that there is manipulation of stock prices of taking advantage of long term capital gains and recommended prosecution under section 12 A and section 24 of SEBI Act and also to invoke provisions of Money Laundering Act.
In connection with Participatory Notes for money laundering it stated that outstanding value of Offshore Derivative Instrument – ODI and top 5 locations were Caymen Islands ,USA,UK , Mauritius and Bermuda contributed heavily on ODI front . It also pointed out information on beneficial ownership of P notes and the misuse . P notes are transferable in nature and this makes tracing the true beneficial owner more difficult since there are layers of transaction making the entire chain complex. Tax- sharing arrangements and information is now entered by India with Switzerland and other European offshore hubs and even with Singapore and Indonesia . G20 and OECD countries have become more vigilante and 51 countries have signed agreement for sharing information about tax evasion .
18.BASE EROSION & PROFIT SHIFTING – BEPS :
BEPS connotes foreign companies tax avoidance methods that reduce the tax base.
It introduces a three- tier documentation under transfer pricing, covering deals by MNCs with related parties. Rules are issued for country-by-country reporting – CBCR a three – tier documentasion requirement under transfer pricing where MNCs must provide information on economic activity , inter- company pricing and global allocation of income.
India is a party to the Multinational Agreement on BEPS and have to abide by international conventions . OECD in its BEPS project pointed out requirement for international cooperation on taxation and for effective process involving G20 and OECD countries .
OECD action plan to prevent shifting of manufacturing base from high cost to low cost locations is effective . Multinational enterprises try to shift their profits across borders to avoid/ reduce tax this is called Base Erosion and profit sharing and induces distortion . It describes how double – non – taxation or less than single taxation is planed by companies which relate to arrangements by shifting profits from jurisdiction where activities creating profits take place.
This also highlights income from cross-border activities which may go untaxed . Excessive deductions like interest payments and other financial charges affect taxation both in inbound and outbound investment . Hence interest deduction ought to be restricted . Further treaty abuse has to be prevented , because treaties are not intended to be used so as to avoid taxation a major issue is “transfer pricing” and enforcement of “arm’s length pricing. Transfer pricing outcomes should be in line with value creation . The use of intangibles also assumes importance . It is necessary to frame rules to prevent BEPS by transferring risk allocating excessive capital to group members and ensure transparency.
An attempt is made by Finance Act 2015 amending section 6 w.e.f. 01/04/2016 AY 2016-2017 and inserting concept of “ place of effective management” The explanation to section 6 defines place of effective management to mean a place where key management and commercial decisions are made . CBDT has explained this position in circular no 19 of 2015 dated 26/11/2015 reported in 379 ITR (St) 19 the relevant portion is contained in para 7.3 to 7.7 . It takes in to consideration OECD commentary on modern convention which provides definition of place of effective management to mean place where key management and commercial decisions that are necessary for the conduct of the entities’ business as a whole are in substance are made the condition of residence is also subject to modification and alignment in DTAA in accordance with international standards . An attempt is also made to deal with shell companies outside India but are controlled and managed from India.
Round – tripping of Capital , where money flows to a foreign country and returns back to India is ought to be overcome by concept of POEM – Place of Effective Management which has been widened to include structures devoid of real substance in the overseas jurisdiction which can be brought to tax in India.
Section 9 has also been amended to bring in clarity on indirect transfer. The guidelines define “Active and Passive” income . Any subsidiary has a passive income outside India would be taxed in India. Under the guidelines, Subsidiaries may be considered to be engaged in active business outside India and hence liable to be taxed in India. The place of effective management will ordinarily be the place where most senior person or group of person that is Board of directors make its decision . An entity may have more than one place of management but it can have only one place of effective management.
19.GAAR –TAX TREATY ABUSE :
Many entities are created abroad to take advantage of low or nil tax on income and assets .
Countries are taking steps to prevent abuse by amending domestic tax provisions or by joining hands with global organizations. In India , general anti- avoidance rule – GAAR provisions come in to effect from 1st April 2017 empowering IT Authorities to deal with improper tax – avoidance arrangements .
GAAR emphasises “substance over and above the legal form” of the transaction . GAAR would over ride the tax treaties . Many progressive steps have been taken by the government like withdrawal of capital gains exemption by renegotiating treaties with Mauritius , Cyprus and Singapore .
20 WHETHER SIT UNDER RTI : TWO CASES DISCUSSED :
SIT was set up by the Supreme Court in 2014 and thereafter through government notification on 20th May 2014 . Its main object is to suggest methods and action plan to curb black money in the economy. SIT was headed by former Supreme court judge. SIT is responsible for investigating cases of black money situated abroad coordinating with various agencies likes RBI, Intelligence Bureau, Enforcement Directorate, CBDT ,Financial Intelligence Unit ,RAW Research and Analysis Wing and Directorate Of Revenue Intelligence .
1. An RTI application was moved seeking information on seven points including photocopy letter written by former employee of Geneva branch of HSBC to the SIT. RTI however, was forwarded by finance ministry to CBDT . CBDT refused to give information .
A complaint was filed after 140 days before Central Information Commission – CIC not seeking any information but to decide whether SIT is “Public Authority” under RTI Act ? . SIT being a multi-member body as per governments notification, SIT was “Body” and therefore capable of being recognized as public authority” u/s 2(h)(d) of RTI Act .
CIC decided that the SC appointed SIT on black money is public authority and therefore it falls under the ambit of RTI Act. CIC pointed out that every action of the Government must be seen in the context of public interest and in larger public good . In the CIC order it was observed “When a public authority is largely funded by the government and performs the duty of bringing back unaccounted money unlawfully kept in bank accounts abroad, it was essentially performing a public duty and thus every citizen has every right to know about certain information within the framework of the RTI Act 2005.
The issue on privacy more particularly when in India privacy is recognized as a fundamental right . The nine – Judge SC bench gave a historic judgment responding to the question of Aadhar card. The SC however observed that state can circumscribe privacy for specific social goals , Identified national security , prevention of crime, protection of revenue and social welfare benefits could be circumscribed over privacy . The validity of law is based on the framework of proportionality and reasonableness .
2. Another application was moved under RTI to RBI seeking information on printing defects of new legal tender of Rs 500 and RS 2000 RBI. declined to give information citing “economic Interest” and as falling under ambit of section 8 1(a) which states that “Information, disclosure of which would prejudicially affect the sovereignty and integrity of India , the security strategic , scientific or economic interest of the State , relation with foreign state which leads to incitement of an offence”.
21. SHELL FIRMS AND ACTIVE INC 22 FORM – COMPANIES ACT .
The use of shell companies is normally made for making bogus claims. There have been various instances of fraudulent claims, identity thefts and bogus entries. The normal modus operandi is that a company is set up which gets in to non- existent contracts with other entities that have virtually no real business are all inter related and inter connected with one another .
Further the name of the directors are either fictitious or names of drivers, gardeners or slum dwellers are also found to be given .Based on these transaction the companies claim fraudulently tax credit. Further these transactions and income are not reflected in their IT Returns, even the bank accounts which are opened with fictitious and ostensible ownership. This is also done for GST evasion.
Statistics show that 35,000 Shell Companies deposited Rs.17000 crores post demonetization and withdrew the same giving rise to suspicion of wrong doing. In many cases company with negative opening balance had crores of Rupees deposited in their accounts. The finance ministry has submitted details of 2134 accounts to enforcement authorities, CBDT and Financial Intelligence Unit.
Companies have also been identified for inquiry/ inspection / investigation under the Companies Act 2013. The government de-registered over 2 lakh companies that were inactive for two years or more and had not filled statutory reports. Several bank accounts of such companies have been freezed/ attached. In such cases provision of section 447 of the companies act is invoked which defines fraud, stringent punishment including imprisonment up to 10 years is stipulated. Also provisions of Prevention of Money Laundering Act are invoked.
Also on focus are shell companies’ properties, since land records are computerized inquiries would be made with district authorities concerning properties. It is the duty of district administration to prevent any transfer of such properties and exercise due diligence on information to be shared with corporate affairs ministry. It is necessary appropriate mechanism concerning registration of properties. After the names of companies are struck off from the register of companies any transaction linked to properties owned by directors or authorized signatories on behalf of the firms would be considered void.
Attention is also invited to recent judgment dated 27/05/2019 of Supreme Court which overruled the Bombay High Court judgment which granted pre- arrest bail to CGST violators on the ground that there was no FIR as warranted under CrPC . The Supreme Court held that GST violators can be arrested even without filing of FIR. The court further held that CrPC provisions are not required to be followed by CGST officers, and upheld that Telangana High Court judgment upholding power and authority of CGST commissioners to arrest defaulters . It was further observed that CGST officers were not police and hence not required to follow the provisions of Criminal Procedure Code which mandates FIR prior to arrest. The apex court has thus sent strong signals not to grant anticipatory bail to GST defaulters.
The government has recently for the first time started matching income tax and GST returns. This is done to avoid over statement of GST claims and understatement of income under IT returns further some parties have shown inflated imports and remitted funds from overseas much beyond their requirement and export claims. Shell companies are used as a medium for making bogus claim. Data analytics is the core focus in analyzing mismatch and mis reporting between GST and IT Returns. This is the step against tax evasion and money laundering with a view to detect overstated goods and services claims that do not match with the income Tax return.
In the light of various steps taken by the government attention is drawn to the recent circular on compounding being the revised guidelines issued on 17/06/2019.
The government has also made its intent clear to crack down on shell companies. A new regulatory mandate requires a company to give its location accurately in India. It is called ACTIVE – Active Company Tagging Identities and Verification. It was introduced in February 2019 by corporate affairs ministry to crack down shell companies and to check financial irregularities.
It is now mandatory for e- filling, Company’s, particulars including details of registered office and location with latitude and longitude.
The provision under the Companies (incorporation) Amendment Rules 2019 also called INC – 22 form requires to upload a photograph of the Company’s registered office with director or key management person photo inside and outside premises . Thus companies are required to upload photograph of director outside and inside the registered office for e- Filling.
The deadline to file ACTIVE e form without any fee was April 25,2019 which was extended to June 15th 2019 and thereafter a fee of Rs .10,000/- would be payable . It is pertinent to know that non – filing of the form would make the company “ Active non – compliant” and would affect certain corporate actions like increase in authorized or paid up capital or merger or acquisition may get blocked.
22. COMPOUNDING OF OFFENCES – RECENT CIRCULAR DATED 17/06/2019 (www.itatonlone .org)
Revised guidelines were issued on “Compounding of offences under direct tax laws” on 14th June 2019 by CBDT. These guidelines supersede the earlier guidelines for compounding of offences which were issued in December 2014. The earlier guidelines permitted compounding of offences relating to undisclosed foreign bank accounts and overseas assets, This has been done away with.
Compounding shall not be available
1) Where a tax payer has enabled others to evade tax through various entities.
2) Cases of money laundering.
3) Where tax payer generated bogus invoices of purchase or sale or provided accommodation entries.
4) Offences under Benami Transaction Prohibition Act.
5) Compounding is not permitted under Anti – Black Money Act & offences relating to undisclosed foreign bank accounts or assessts.
The guidelines have now classified offences in to 2 categories :
Category A Defaults : which carry lower compounding fee and relates to offences such as failure to deposit TDS or failure to file IT Return for TDS offences the compounding fee has been reduce from 3% to 2 % per month.
Category B includes offence connected with evasion of tax, failure to produce books of accounts or falsification of books.
Compounding of offences will now be available only under stringent conditions and would not be permitted in cases of undisclosed foreign bank accounts and assets, Benami transactions and money laundering through accommodation entries and bogus invoices.
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