Transfer of shares of retail investors via fake demat accounts amounted to unfair trade practice: SC

SEBI’s investigations revealed that shares meant for Retail Individual Investor’s were cornered by the respondent through hundreds of benami/fictitious demat account holders in violation of the provisions of Section 12A (a), (b), (c) of the SEBI Act, 1992, However, SAT set aside order passed by SEBI without mentioning any strong and justifiable reason. Thus, impugned order of SAT was liable to be quashed

Facts:

a) In matter of IPO of two companies, it was brought to the notice of the SEBI that several serious irregularities/illegalities had been committed by respondents so as to corner shares of the said companies by adopting certain unscrupulous, immoral and improper

b) As a result, the respondents got undue benefit. They got the shares transferred from the so called demat holders by way of off market trading at a price which was less than the market price of the shares.

c) SEBI’s investigations revealed that shares meant for Retail Individual Investor’s were cornered by the respondent through hundreds of benami/fictitious demat account holders in violation of the provisions of Section 12A (a), (b), (c) of the SEBI Act, 1992 and Regulations 3 and 4(1) of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Markets) Regulations, 2003

d) However, on appeal, the SAT set aside order passed by SEBI without mentioning any strong and justifiable reason.

SEBI to enable Portfolio Managers to act as Eligible Fund Managers

Introduction

1.0 Following the insertion of Section 9A in the Income-tax Act, 1961 ('Act, 1961') (popularly known as "Safe Harbour Norms"), SEBI has hailed to foreign fund management activity in the country and has come up with a consultation paper seeking comments from public for the amendments to the SEBI (Portfolio Managers) Regulations, 1993 wherein it is proposed that an existing or new SEBI registered Portfolio Manager maybe permitted to act as Eligible Fund Manager ("EFM") to manage Eligible Investment Funds ("EIFs").

Amendment to clause (b) of section 9A

2.0 The said amendment came in the backdrop of the amendment to clause (b) of Section 9A of the Finance Act, 2016 where the scope of the tax relief of funds is widened by including the words"is established or incorporated or registered in a country or a specified territory notified by Central Government in this behalf" which until now was limited to the countries with which India had entered into Double Tax Avoidance Agreement (DTAA) under Section 90 or the agreement between specified associations for double taxation relief under Section 90A (1). After the amendment, the funds established or incorporated or registered in a country or a specified territory notified by the Central Government shall also be treated as EIFs.

Ministry’s Removal of Difficulty Order- Clarifies the position w.r.t appointment of auditors

Introduction

1.0 Under the Companies Act, 2013 ('Act, 2013'), the provisions w.r.t. appointment of auditors had undergone a paradigm shift in comparison with the erstwhile provisions of the Companies Act, 1956. One of the major changes which was introduced w.r.t. auditors was the bar on re-appointment of auditors in certain class of companies specified under Section 139(2) of the Act, 2013, if he had already held: (a) one term of 5 years in case of an individual; or (b) two consecutive terms of 5 years in case of a firm. Once the bar on reappointment applies, there is a mandatory cooling-off period of 5 years.

To comply with the above provision, transition period of 3 years was provided from the date of the commencement of the Act, 2013, i.e., companies shall appoint another auditor till April 01, 2017 which at the first blush would mean that at the upcoming AGM for the FY ended 2016, new auditor needs to be appointed.

However, the auditors are appointed at the AGM of the company and hold office till the conclusion of the next AGM. Therefore, to comply with the 3 years provision, the new auditor must have been appointed in the AGM for FY ended 2017. Hence, there was chaos among the corporates and auditors regarding the contradictory provisions in relation to effective date for appointment of new auditor. In order to clarify this position which was subject to interpretation, the Ministry of Corporate Affairs (MCA) has issued a Companies (Removal of Difficulties) Third Order, 2016, dated June 30, 2016 (hereinafter referred to as "Order").

Non-resident not having PAN get a breather

Permanent AccountNumber (PAN) is an India tax identification number. Over the years, revenue authorities have been using PAN to track high value transactions, curb tax evasion, and thereby increase the tax base. In line with this objective section 206AA of the Income-tax Act, 1961 (Act) was introduced in Finance Act, 2009 with effect from 1 April 2010, which provides that if PAN is not furnished by the payee, the withholding tax would be applicable at the rate specified in the relevant provision of the Act or rate in force or 20%, whichever is higher.

India has tax treaties with various countries which provides for reduced rate of withholding tax for various sources of income like interest, royalties, fees for technical services.

With the introduction of section 206AA, a non-resident payee not having a PAN was caught in the rigour of these provisions and the reduced tax treaty rate got increased to 20% under section 206AA.

This was so because section 206AA starts with a non-obstante clause viz. "notwithstanding anything contained in any other provisions of this Act,..". Considering the wordings of section 206AA of the Act there was a view that it may override the beneficial provisions of the tax treaty.

Concerns were raised whether the provisions of section 206AA overrides the treaty provisions, and whether the non-resident payee will not be eligible to avail benefit of lower rate prescribed under the tax treaty if PAN is not furnished.

The Income Declaration Scheme, 2016: Certain Aspects

1. Last year, it was a one-time compliance window under the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 ('the BM Act') to report the undisclosed offshore assets. Now it is an IncomeDeclaration Scheme, 2016 ('IDS, 2016') to declare undisclosed income from a domestic source. The former scheme received lukewarm response in terms of tax yield, given the high tax rate (60% incl. tax and penalty) and the concept of fair market value for valuing the asset for computing the tax liability. Similar doubts are being raised regarding the latter scheme as it has both these features, i.e., high tax rate (45% incl. tax, surcharge, and penalty) and the fair market value concept to value the asset if the undisclosed income is in the form of investment in any asset. A key argument is often presented that a voluntary disclosure scheme with more generous terms (such as lower tax rate, immunities from various laws) is needed to encourage delinquent taxpayers to pay their due taxes which can be utilised to improve the much-needed infrastructure in the country. In that case, presumably, the counter argument is that such a scheme would be discriminatory against the law-abiding taxpayer (in fact, the VDIS, 1997 could have been struck down by the Supreme Court but for the Government assuring the Court that henceforth they would not come out with such schemes). Thus, the introduction of any such scheme often involves economic efficiency, morality, and constitutionality issues. This article, however, is restricted to certain issues arising from the IDS, 2016.

No garnishee proceedings against service recipient if it didn't owe anything to service provider: HC

Facts:

a. Petitioner, Food Corporation of India (FCI), engaged Kailash Enterprises (KE) for handling wheat cargo. Services provided by KE were exempt from service tax being services in relation to agricultural produce. However, FCI paid service tax under mistaken belief which was not deposited by KE to Government.

b. There were multiple disputes between FCI and KE because of deficiency in service. Therefore, FCI recovered amount of Rs.3.5 crore by invoking bank guarantee. In the meanwhile, department issued notice against KE for recovery of service tax being collected by KE from FCI. It also issued notices under section 87 for recovery of amount due against FCI. The petitioner challenged garnishee proceedings before High Court.

The High Court of Gujarat held as under:

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.