Halfhearted approach in proposing the Income Declaration Scheme, 2016

The Finance Minister in his Budget Speech on 29^th February, 2016 surprised all by introducing the Income Declaration Scheme, 2016 which is proposed to come into effect from 1^st June, 2016. For persons who have not paid full taxes in the past, the Scheme provides a one-time window to come forward and declare the undisclosed income of any financial year upto 2015-16 and pay tax, surcharge and penalty aggregating to 45% of such undisclosed income declared. The FM has indicated in his Budget Speech that the window will be open from 1st June till 30th September, 2016 with an option to pay amount due within two months of declaration. Post Budget the FM has mentioned that the four-month compliance window for domestic black money holders is not a VDIS (Voluntary Disclosure of Income Scheme) and it is not an amnesty scheme. Interestingly the FM has used the phrase 'past trangressions' recognising the past wrongdoings of tax evaders and offer them an exit door on payment of 45% of undisclosed income. Such persons would further enjoy immunity from prosecution under Income Tax Act, Wealth Tax Act, and Benami Transaction (Prohibition) Act, 1988. As per our FM, the Government is fully committed to remove black money from the economy. The Scheme as mentioned in clauses 178 to 196 of the Finance Bill, 2016 (in short referred as the 'Bill') is analysed hereunder:

1. Backdrop and comparison of present Scheme with some aspects of VDIS, 1997:

It would be relevant to mention that the prime reason for accumulation of black money has been the fact that our country had the maximum tax rate of 97.75% (tax @ 85% plus surcharge @ 15%) in seventies. That means a person declaring income of Rs. 10 Lakhs in those years was required to pay tax of almost Rs. 9,77,500/- only (if we ignore the initial exemption limit). In addition to that one was required to pay wealth tax. Now the maximum rate of tax is 30% plus education cess of 3% plus surcharge in some cases which is much reasonable to the tax rates in 1970's. The present Income Disclosure Scheme, 2016 announced in Budget, 2016 has some positive aspects as well as some not so positive aspects if we compare with the Voluntary Disclosure of Income Scheme, 1997 (VDIS) declared for Indian tax payers. The rate of tax payable under the present scheme is 45 per cent (tax @ 30% plus surcharge 7.5% plus penalty 7.5%) which is 1.5 times of the tax payable under VDIS, 1997. It may be noted there was no penalty in case of VDIS.

Capital gain on sale of property situated in Sri Lanka is taxable only in Sri Lanka

Facts:

a) The case of assessee was selected for scrutiny by revenue under CASS. She had earned capital gains on sale of property situated in Sri Lanka.

b) Assessee submitted that such capital gains were taxable only in Sri Lanka as per Article 13 of India-Sri Lanka DTAA.

c) The AO and the CIT(A) rejected the contentions of assessee and taxed such long-term capital gains. The aggrieved-assessee filed the instant appeal.

The Tribunal held as under:

1) As per Article 13(1) read with Article 13(6) of the India-Sri Lanka DTAA, the capital gain arisen to the assessee from sale of immovable property situated in Sri-Lanka is taxable in Sri-Lanka as the Government of Sri-Lanka has right to tax the same because the immovable property is situated in Sri-Lanka. The Government of India cannot brought the same to tax under the provisions of the Act as the provisions of DTAA will prevail being beneficial to the assessee over the provisions of the Act.

2) Even though the word ‘may be taxed’ is used in Article 13(1) of DTAA between India and Sri- Lanka as the same is to be read in a manner that it takes away the power of the other Contracting State to tax the same income, of which power to tax is vested by virtue of DTAA in the Contracting State in which the immovable property is situated.

Cash deposits in bank can't be held as undisclosed income without verifying source of deposits

Facts:

1) The assessee was found to be maintaining a savings bank account in which it had made cash deposits. He did not file any return of income.

2) To verify the source of the said cash deposit, an inquiry letter was written to the assessee by the AO. However, as there was no response to the inquiry letter, the AO formed the belief that income of the assessee had escaped assessment.

3) The AO completed assessment by making additions on account of undisclosed cash deposit in the bank account of the assessee and also addition on account of undisclosed interest income. The CIT(A) confirmed addition. Aggrieved-assessee filed the instant appeal.

The Tribunal held in favour of assessee as under:

A comparative analysis of new income declaration scheme and settlement scheme

Amongst the various new schemes and changes brought about by the Budget, 2016, one of the most talked about and significant change is Income Declaration Scheme, 2016 (" herein after referred to as "the Scheme" or "New Scheme" or "Disclosure Scheme, 2016" in the context in which it is required) . The Scheme which has come into effect from 1st June, 2016 vide notification dated 19th May, 2016 is expected to bring about a change in the manner of disclosure/declaration of undisclosed/undeclared income. The Scheme has been introduced as a separate chapter, Chapter IX, to Finance Act, 2016.Further, the government has notified the Income Declaration Rules, 2016(hereinafter referred as the Rules)to give effect to various provisions of the Scheme.

Presently, the penal consequences of not disclosing income (technically speaking concealment or furnishing of inaccurate particulars of income) are so harsh and rigid that they may act as a deterrence for the assessee, who might wish to disclose the income, though there may be various others reasons for not disclosing the true income. In view of this, introduction of new Scheme of Disclosure of Income is a welcome change.

Income Declaration Scheme, 2016 – Effective Rate of Tax?

Introduction

1. The Government has introduced Income Declaration Scheme, 2016 which has come into force from 1st June, 2016. The scheme provides an opportunity to persons who have not paid full taxes in the past to come forward and declare the undisclosed income and pay tax, surcharge and penalty totaling in all to 45% of such undisclosed income declared. Further, as per scheme, declaration of undisclosed income in the form of assets is to be made at Fair Market Value of such assets as on 1st June, 2016.

It is felt everywhere that the total impact of tax in case of declaration of undisclosed income under the scheme is quite high and, therefore, the initial response of the taxpayers regarding the scheme is not encouraging one.

Clarifications issued by CBDT

2. The CBDT has issued three sets of Frequently Asked Questions (FAQs) containing 36 clarifications relating to various controversial aspects clarifying doubts regarding the operation of the scheme. One clarification has been issued by the CBDT by way of Circular No. 25/2016, dated 30th June, 2016 addressing question no. 5 which is reproduced as under:—

No disallowance u/s 40(a)(ia) when taxpayer is claiming exemption under sec. 11

The issue before the ITAT was

Whether the provisions of section 40(a)(ia) are applicable when income is computed under sections 11, 12 and 13?

The ITAT held as under:

1) Sections 11, 12 and 13 deal with income from property held for charitable or religious purposes and the mode of computation of income subject to certain conditions. Accordingly, income of any charitable trust or society is exempt from tax if such conditions are fulfilled. Section 40(a)(ia) falls under chapter IV-D which deals with computation of profits and gains from business or profession.

2) Therefore, the provisions of section 40(a)(ia) are relevant if income is computed under the head 'profits and gains of business or profession". The concept of computation of income under section 11 is real income concept which is computed on the principles of real income generated from property held under trust and not notional income under other provisions of the Act.

Service Tax Default or Evasion –Relevant Aspects of Penalty under section 76

1. Section 76 of Finance Act,1994 : Penalty under section 76 of the Finance Act, 1994, as amended by the Finance Act,2015, w.e.f.14.05.2015, is to be levied in following circumstances where:

(a)			Service tax has not been levied or paid, or has been short-levied or short-paid, or erroneously refunded,
(b)			Such non-levy, non-payment, short-levy, short-payment or erroneous refund has occurred for any reason, other than the reason of fraud or collusion or wilful misstatement or suppression of facts or contravention of any of the provisions of the Act or of the rules made thereunder with the intent to evade payment of service tax, and
(c)			The person has been served a notice under section 73 (1).

2. Maximum amount of penalty:-

A person who has been served a notice under section 73(1) would be liable to pay penalty under section 76, not excluding 10% of such amount as mentioned in notice .The penalty is in addition to service tax and interest thereon as specified in the notice. Further, the Adjudicating Authority may at his discretion to impose even lesser amount of penalty depending on the timing of the payment of service tax and interest and such lesser amount may be from nil to 25%as follows:

Shipping Co. earning income from slot charter is also entitled to benefits of 'Tonnage Tax Scheme'

Facts:

a. The assessee owned a qualifying ship and the income generated from the said qualifying ship was exigible to tax as per ‘Tonnage Tax Scheme. However, it also had 'slot charter' arrangements in other ships. The assessee had also included the income from such slot charter arrangements for the purpose of computation thereof under ‘Tonnage Tax Scheme’.

b) The AO was of the view that the income earned under slot charter arrangement did not qualify under ‘Tonnage Tax Scheme’ as this income was not generated by the assessee from its own ship, i.e., it is neither from the ship owned by the assessee nor from the entire ship chartered by the assessee.

c) He was of the view that in order to avail the benefit of ‘Tonnage Tax Scheme, the assessee was supposed to show that the ship operated by it was qualifying ship and for this purpose itwas incumbent upon the assessee to produce a 'valid certificate indicating its net tonnage' as provided in Section 115VX(1)(b).

d) The order of the AO was upheld by the CIT(A) and the ITAT. However, the High Court held in favour of assessee. Aggrieved revenue filed the instant appeal.

The Supreme Court held in favour of assessee as under:

Calcutta HC quashes Rs 1.5 cr. service tax demand on Sourav Ganguly

Facts

a. Assessee (Sourav Ganguly) was former captain of the Indian Cricket Team. He participated in the IPL Cricket tournament as a member of the Kolkata Knight Rider’s Team. He also acted as brand ambassador for various products and anchor in television shows.

b. He received amounts under following heads:

Writing Articles in Magazines ;

Anchoring TV Shows ;

Brand Endorsement ; and

Playing Cricket in IPL.

Department raised demand of service tax of Rs. 1.5 crores under ‘Business Auxiliary Service’ or ‘Business Support Service’ and invoked extended period. The assessee filed writ petition and challenged the demand.

The Calcutta High Court held as under :

1. Writing articles for newspapers or sports magazines or for any other form of media cannot by any stretch of imagination be said to be amounting to rendering business auxiliary service or business support service. Hence, the remuneration received by the assessee for writing articles would not attract service tax. 

2. Television shows are meant for entertainment of the viewers. The remuneration received by the assessee for anchoring TV shows cannot be brought within the service tax net under business auxiliary service or business support services.

Transfer of shares under scheme of amalgamation wouldn’t come under pre-emption clause of Articles – An Analysis

The Bombay High Court has held in the matter of Shakti Insulated Wires (P) Ltd. v. Great View Properties (P) Ltd. [2016] 135 SCL 80/68 taxmann.com 169 that the transfer of shares under the Scheme of Amalgamation sanctioned by the Court is not a transfer of shares but is transmission by operation of law which would not come within the pre-emptive clause of the Articles of Association of the company. This article highlights the nuances in determining the pre-emption clause in the Articles of Association and clarifies the difference between transfer of shares under the Scheme of amalgamation and transfer of shares covered under the pre-emption clause of the Articles of Association of the Company.

AN ANALYSIS

1. Introduction

Section 58(2) of the Companies Act, 2013 provides that any contract or arrangement between two or more persons in respect of transfer of securities should be enforceable as a contract. This section has clarified the major issue of enforceability of pre-emption rights and options being exercised by the shareholders. This article highlights the nuances in determining the pre-emption clause in the Articles of Association and clarifies the difference between transfer of shares under the Scheme of amalgamation and transfer of shares covered under the pre-emption clause of the Articles of Association of the Company. The same has been explained by a landmark judgment dated 1^st March, 2016 of the Bombay High Court in the matter of Shakti Insulated Wires (P) Ltd (supra)