FM likely to retain EET (exempt-exempt-tax) principle proposed in the Direct Tax Code
Dec 4, 2009 direct tax code
The finance ministry is likely to retain the EET (exempt-exempt-tax) principle proposed in the Direct Tax Code on the lump sum amount a salaried taxpayer will receive from his investment in savings schemes such as the Public Provident Fund and other superannuation funds. This means while the contribution and accumulation are tax-free, withdrawal will be taxed at the marginal rate of income tax.
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Tags: common man, disposable income, draft code, finance ministry, income bracket, indian express, lump sum, marginal rate, ministry officials, public provident fund, superannuation funds, tax liability, tax planners, tax regime
Retirement savings will become taxable on withdrawal in new direct tax code
Aug 16, 2009 Income Tax, direct tax code
The Direct Tax Code is a bit of a mixed bag for individuals, particularly the salaried class. Prima facie, the tax liability will reduce significantly as the draft code proposes to tax incomes up to Rs 10 lakh at 10%, that between Rs 10 lakh and Rs 25 lakh at 20% and sum in excess of that at 30%. Thus, an individual with taxable gross income of Rs 10 lakh will pay tax of Rs 84,000 as opposed to about Rs 2.11 lakh he pays this fiscal year.
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Tags: government employee, gratuity, gross salary, home loans, investment instrument, marginal rate, pension system, private sector employee, provident funds, purpose of taxation, retirement fund, retirement savings, superannuation funds, Tax Exemption, tax liability, taxable gross income
Direct Tax code will benefit more to people in higher income group
Aug 14, 2009 Income Tax
From April 1, 2011, finance minister Pranab Mukherjee has proposed to simplify the income-tax regime by reducing the tax rates on incomes above Rs1.6 lakh per annum (Rs1.9 lakh for women, and Rs2.4 lakh for senior citizens), but the reduced rates will come with few of the current exemptions.
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Tags: capital losses, deductible amount, education loans, fixed deposits, housing loans, income tax act, income tax act 1961, long term capital gains, marginal rate, pranab mukherjee, provident funds, senior citizens, stock investors, tax regime, transaction tax
Returns from annuity plans may not be taxed fully
Jun 5, 2009 Income Tax
Individuals, who invest their savings in annuity plans offered by insurance firm, could see a drop in their tax burden.
Insurance regulator IRDA is in talks with the government to make annuity-plans more tax-efficient. If the proposal is accepted in the coming budget, it will augment returns for retired employees and help insurers market these plans better. An annuity is a contract issued by an insurer to make regular payments to a policyholder for the rest of his life after retirement. The frequency of payment depends on the way the policy is structured.
Going by the existing income-tax law, an individual can claim a tax deduction of up to Rs 1 lakh on the premium (or the principal contribution) paid for the annuity plan. But the payments received by the individual, annuitant in technical parlance, are fully taxed. The tax rate depends on the slab in which the taxpayer falls, with the maximum marginal rate at 30%.
The insurance regulator has asked the finance ministry to consider bifurcating the principal and the interest component in payments made to annuitants. “We have asked the government to consider making the principal component tax-free,” J Hari Narayan, chairman, Insurance Regulatory Development Authority, told ET.
The rationale for a tax exemption on the principal component is the amount has already been taxed. In fact, many countries do not levy a tax on the original contribution in an annuity plan. Revenue officials, however, contend that the payment received by the annuitant is treated as his income, and hence, fully taxed.
But the regulator reckons that the tax burden could be a dampener for investments in annuity plans. “Annuity plans need to be made more tax-efficient to promote long-term savings which can be used for infrastructure investments, ” said R Kannan, member actuary, IRDA.
The regulator’s proposal will enhance returns for investors, said the chief financial officer of a private insurance company. An employee, for instance, then is taxed only partially on the money he receives from an approved superannuation fund, according to Divya Baweja, partner, BMR & Associates.
The regulator has also sought more avenues for investments in long-dated government securities to help insurers in their asset-liability management, said Mr Narayan.
IRDA’s budget wishlist also includes easing the service tax burden on unit-linked insurance plans that offer protection in terms of life cover and flexibility in investments to the policyholder. Currently, insurers have to pay service tax on the charges they collect for managing Ulip investments.
Mutual funds, on the other hand, pay service tax only on the asset management charge. The regulator wants a similar dispensation in Ulips. The global economic meltdown has impacted investments in ULIPs, which contribute to around 70% of the new business for insurers.
Tags: annuities, annuity plan, Budget, Deduction, infrastructure investments, insurance firm, insurance regulator, insurance regulatory development authority, marginal rate, private insurance company, retirement
Section 164 attracted when the shares of beneficiaries are unknown
May 25, 2009 General Info
SUMMARY OF CASE LAW
Section 164 gets attracted only when the shares of the beneficiaries are unknown, which is manifest from the marginal heading of that section itself; so long as the trust deed gives the details of the beneficiaries and the description of the person who is to be benefited, the beneficiaries cannot be said to be uncertain, merely because wife/children cannot be known until the marriage and begetting of children by the stated beneficiaries.
CASE LAW DETAILS
Decided by: HIGH COURT OF MADRAS, In The case of: CIT v P. Sekar Trust , Appeal No. : T. C. (APPEALS) NOS. 866 TO 870,929 TO 932 OF 2004 AND 454 TO 459 OF 2005, Decided on: APRIL 15, 2009.
RELEVENT PARAGRAPH
17. Section 164 of the Act gets attracts only when the shares of the beneficiaries are unknown, which is manifest from the marginal heading of that section itself, viz., Charge of tax where the share of the beneficiaries unknown. That section comes into play only where any income or any part thereof is not specifically receivable on behalf of or for the benefit of any one person or where the individual shares of the persons on whose behalf or for whose benefit such income or such part thereof is receivable are indeterminate or unknown, and in such case, the relevant income, or part of the relevant income shall be charged at the maximum marginal rate.
18. From this, it is clear that in order to attract section 164(1) of the Act, the beneficiaries on whose benefit, such income or such part thereof is receivable are indeterminate and unknown.
19. Coming to the facts of the case, as stated earlier, the beneficiaries are five in number for the period from 01.04.1986 to 31.03.1989 and the respective share of each beneficiary is in different percentage as stated in the deed itself. From 01.04.1989 onwards the beneficiaries are seven in number and their shares in the income is equal. The shares in respect of 6th and 7th beneficiaries are equal in the status of individual till the date of their marriage and separately in the status of the individual and Hindu Undivided Family consisting of themselves and their respective wife from the date of marriage. As per clause 3(b)(i) as and when Badri and Prabhakar are married, their spouses would automatically become beneficiaries along with the other continuing beneficiaries in the said accounting year and subsequent accounting years and equally divide the beneficial interest in income of the aforesaid beneficiaries. Likewise, as and when any child or children is/are born to the said Badri and Prabhakar the child or children so born shall automatically become a beneficiary/ beneficiaries along with the other continuing beneficiaries in the said accounting year and subsequent accounting years and equally divide the beneficial interest in income of the aforesaid beneficiaries. From the above, it is clear that the shares of the beneficiaries is equal and as and when the two stated beneficiaries get married, they become HUF and on the birth of child/children, it or they also become the beneficiaries. With the increase of numbers, the share of each person gets reduced. So, the share income is determinate.
22 From the facts of the present case and from the terms of the trust deed, we find that the intention of the author of the trust cannot be said to be uncertain. The shares of the beneficiaries are stated to be equal and in case the unmarried beneficiaries get married and begetting children, they would also become the beneficiaries and with the increase in the number, shares of each person can be reduced. So long as the trust deed gives the details of the beneficiaries and the description of the person who is to be benefitted, the beneficiaries cannot be said to be uncertain, merely because wife/children cannot be known until the marriage and begetting of children by the stated beneficiaries. The deed also provided that in the event of death of a beneficiary what should be done. The above view of us is fortified by the decision of this Court in the case reported in 147 ITR 500 referred to supra.
26. Hence, having regard to the terms of the trust deed, which clearly prescribes the beneficiaries and the shares they are entitled to and other terms relevant to the share of interest in the corpus on determination or termination of the trust, we are of the considered view that section 164 of the Act is not attracted.
Tags: beneficiaries, beneficiary, benefit, case law, heading, high court of madras, marginal rate, marriage, paragraph 17, relevant income, sekar, Trust Deed
HIGHER TDS IF PAN NO. NOT DISLOSED TO DEDUCTOR
Jul 23, 2008 Income Tax
The move is being viewed as an effort by the government to expand the taxpayer base and ramp up revenue collections
Companies and individuals who do not reveal their Permanent Account Number (PAN) while receiving income from any source will be liable to pay tax deducted at source (TDS) at the maximum marginal rate of 30 per cent (plus surcharge and education cess).
Under the Income Tax Act, 1961, any income payable to the assessee is liable for TDS by the person or entity making the payment. TDS rate ranges from 1 per cent to 30 per cent depending on the nature of income. The Central Board of Direct Taxes is considering changes to the Act to this effect.
For example, if a payment is made to a professional like an engineer or a doctor, TDS is deducted at a rate of 10 per cent. If the engineer or doctor fails to provide PAN number, tax will be deducted at the rate of 30 per cent. Similarly, if a contractor does not provide PAN, he will suffer a TDS at the higher rate of 30 per cent instead of 2 per cent now.
“In many situations, contractors or sub-contractors pay the normal TDS but still do not file return of income. By taxing at maximum marginal rate, they will be induced to disclose PAN and file tax return also,” said Amitabh Singh, partner, Ernst & Young.
The move is being viewed as an effort by the government to expand the taxpayer base and ramp up revenue collections in view of the huge resource requirement to fund subsidies.
Many assessees do not reveal their PAN to evade taxes and get away with the normal TDS payment. Due to lack of PAN, taxes were often pocketed by deductors also. This creates difficulty in processing tax refunds as well.
PAN quoting has been made mandatory in the e-TDS returns being filed by firms and companies from last year. The tax deductors were facing some difficulty due to reluctant of assessees to prove PAN. The higher TDS rate will force the assessees to reveal the number. Near 100 per cent PAN quoting in TDS returns is important for moving towards dematerialisation of TDS certificates by 2010, the revised deadline set in Budget 2008.
The move is aimed at increasing the effectiveness of TDS provisions to expand the taxpayer base and improve collections. TDS collections constituted 34 per cent of the total Rs 3,14,000 crore direct tax collected in 2007-08. TDS collections are expected to grow by 55 per cent to Rs 1,65,385 crore in 2008-09, or 45 per cent of the Budget estimate of Rs 3,65,000 crore for 2008-09.
Tags: Budget, education cess, marginal rate, PAN, pan number, Refund, revenue collections, surcharge, tax deducted at source, tax refunds, tax return, TDS
If in law income has to be taxed in hands of AOP
Dec 24, 2007 Others
If in law income has to be taxed in hands of AOP, it has to be taxed as such, and mere fact that the income is taxed in hands of individual members of AOP, does not bar Assessing Officer from taxing AOP-ITAT
In a recent case of Pradeep Agencies-v.- Income-tax Officer Delhi Tribunal held that even if the income is taxed in hands of individual members of AOP, does not bar Assessing Officer from taxing AOP.
The assessee, an association of persons (AOP), was constituted by joint venture agreement entered into by five different entities on 30-3-2002. It was constituted for carrying on the business of procuring orders on behalf of a party for supply of acid. In the relevant previous year, the assessee earned commission amounting to Rs. 2,40,61,937 and after meeting expenses, apportioned the net profit of Rs. 2,37,55,912 amongst its members according to their profit sharing ratio. For the relevant assessment year, the members of AOP filed returns of income declaring share of profit received from the assessee and the Assessing Officer assessed the said members under the provisions of section 67A and, accordingly, completed their assessments. Further, for the relevant assessment year, the assessee filed the return of income declaring the income at nil. The Assessing Officer required the assessee to explain as to why its income of Rs. 2,37,55,912 should not be charged to tax in the status of AOP under the provisions of section 167B(2). In reply, the assessee submitted that since there was a deed defining the share of profit of each member of the AOP and when the individual shares of all such members were determined and known, the provisions of section 167B(2) would not be applicable. The Assessing Officer did not accept the plea of the assessee. He held that since the total income of all the members of the AOP was admittedly exceeding, the maximum amount which was not chargeable to tax, tax had to be charged on the total income of the AOP at the Maximum Marginal Rate (MMR) as per section 167B(2). The Assessing Officer, therefore, assessed the entire income of Rs. 2,37,55,912 in the hands of the assessee under section 167B(2). In doing so, he followed the judgment of the Supreme Court in the case of ITO v. Ch. Atchaiah [1996] 218 ITR 239/84 Taxman 630.
Before the Commissioner (Appeals), the assessee contended that since the entire income of the AOP was subjected to tax in the hands of the members, the said income again could not be subjected to tax in the hands of AOP. The Commissioner (Appeals) however, rejected said contention. Aggrieved by the said order, the assessee filed the instant appeal before the Tribunal, wherein the matter was referred to the Special Bench for the decision.
Prior to the pronouncement of decision by the Supreme Court in the case of Ch. Atchaiah (supra), a legal controversy was prevailing on the issue as to whether the Assessing Officer has option either to
assess AOP or its members under th 1961 Act, or as it was thereunder the 1922 Act as held by the Supreme Court in the case of CIT v. Murlidhar Jhawar & Purna Ginning & Pressing Factory [1966] 60 ITR 95. Some High Courts have held that position under the 1961 Act is the same and some High Courts have held that the position under 1961 Act is different as under the 1961 Act no such option is
available to the Assessing Officer. The legal position in this regard has been set at rest by the Supreme Court in the case of Ch. Atchaiah (supra). As per the decision of the Supreme Court in the case of Ch. Atchaiah (supra), it is very much clear that there is a marked difference in the provisions relating to assessability of AOP and its members as contained in the 1922 Act and as contained in the 1961 Act. Under the 1961 Act, there is no option available to the Assessing Officer to assess the members of AOP and the assessment of members of AOP cannot stand in the way of assessment to be made on AOP. In accordance with law declared by the Supreme Court, the `right person’ assessable under the 1961 Act is AOP in place of its members. Referring to the decision, in the case of Murlidhar Jhawar & Purna Ginning & Pressing Factory (supra) and also the decision in the case of CIT v. Kanpur Coal Syndicate [1964] 53 ITR 225 (SC), it was observed that these decisions were rendered under the 1922 Act. It was further observed that in the decisions of various High Courts in which it was held that the position of law in this respect is same under the 1961 Act as it was under the 1922 Act, due weight was not given to the marked difference in the language of the relevant provisions in the two enactments. Therefore, the contention of the assessee that there was no material change in the provisions of the 1961 Act as compared to similar provisions contained in the 1922 Act with respect to chargeability of tax relating to AOP and its members, was liable to be rejected. Further, the contention of the assessee that the assessment of AOP after the assessment of similar income in the hands of its members would make it a case of double taxation and, therefore, also assessment on the AOP was bad in law, was also liable to be rejected since as held by the Supreme Court in the case of Ch. Atchaiah (supra), that merely because a `wrong person’ has been assessed, the Assessing Officer is not precluded from taxing the `right person’ and `wrong person’ cannot seek remedy as available under law. Therefore, if in law, income in question has to be taxed in hands of AOP, it has to be taxed as such, and mere fact that said income was taxed in hands of individual members of AOP, does not bar Assessing Officer from taxing AOP. So on the ground of double taxation also, assessment on AOP, which was the right person, could not be held to be invalid.
Further, as share of income falling to the shares of respective members of AOP in all cases was above the exemption limit, the Commissioner (Appeals) was right in confirming the finding of Assessing Officer that tax on AOP should be levied at MMR. [Para 60].
Thus, the appeal filed by the assessee was to be dismissed.
Tags: AOP, joint venture agreement, marginal rate, net profit, taxman
Board circulars are binding on the Department, even if they are wrong or against decisions of the Supreme Court
Oct 10, 2007 Income Tax
NEW DELHI, OCT 09, 2007 :IT is now an axiomatic law that Board circulars are binding on the Department, even if they are wrong or against decisions of the Supreme Court. But our Boards do not have the habit of tracking down the multitude of circulars they issue and considering whether they are relevant after the Law has been amended and the Apex Court had already ruled on the issue. In the Dhiren Chemicals case (2002-TIOL-83- SC-CX), the Supreme Court had held that if there was a Board Circular which was not in tune with the views of the Supreme Court, the Board Circular would prevail. The whole idea is that the Department should not be seen arguing that the Board was wrong – even if it is wrong, the Departmental officers should be bound by it.
So when the Law is amended or when the Revenue gets a favourable order from the Supreme Court, they should verify whether there is a contradictory circular and track it down and withdraw it. But the Board can’t be expected to do this kind of hard work. So more litigation, as this case would show.
The Special Bench was constituted for deciding the question, “Whether, the assessment made on the AOP is invalid, in the light of the Board’s circular dated 24th August, 1966 or is valid in the light of the judgment of the Supreme Court in Achtaiah’s case and/or statutory amendments of the Income Tax Act?” and also to decide the appeal of the assessee on the following grounds:-
That on the facts and circumstances of the case the learned CIT (A) erred in fact and in law in confirming the finding of the Assessing Officer that
1. the commission income of Rs.2,37,55,912/ – was taxable in the hands of the appellant in the status of AOP and not in the hands of the respective members of the Joint Venture.
2. the tax should be levied at the Maximum Marginal Rate.3. even though the Assessing Officer acted in contravention of the Board’s instructions which are binding on him (the Assessing Officer).”
Facts: The assessee is an Association of Persons (AOP) constituted by joint Venture agreement entered into by five different entities on 30.03.2002. The association was constituted for carrying on the business of procuring orders on behalf of M/s. Reliance Industries Ltd (RIL) for supply of Purified Terephthalic Acid (PTA) to M/s. Indo Rama Synthetics India Ltd. During the year under consideration the AOP has earned commission of Rs. 2,40,61,937/ – and after meeting expenses, net profit at Rs. 2,37,55,912/ – is shown by the assessee which has been apportioned amongst the members of JV according to their profit sharing ratio. During the year under consideration all the members of AOP have income above the exemption limit. The tax amounting to Rs. 13,63,810/- was deducted at source from the payment of the said commission made to the assessee. A return of income was filed at Nil on 31.12.2003 claiming therein the refund of TDS. The return was first processed u/s 143(1) and later on notice was issued u/s 143(2) in pursuance to which present assessment has been framed. During the course of assessment proceedings the assessee was required to explain as to why its income of Rs. 2,37,55,912/ – should not be charged to tax in the status of AOP under the provisions of section 167 B(2) of Income Tax Act, 1961. In reply, it was submitted that the AOP has distributed the profit amongst its members as per their respective shares which are determined and defined in the JV agreement dated 30.3.2002 and some of the members have already been assessed for their share in the AOP under the provisions of section 67 A of the Act. It was submitted that since there is a deed defining the share of profit of each member of the AOP and the individual shares of all such members were determined and known, the provisions of section 167 B(2) will not be applicable . The AO did not accept such plea of the assessee, According to the AO, since the total income of all the members of the AOP was admittedly exceeding the maximum amount which is not chargeable to tax, tax has to be charged on its total income at the Maximum Marginal Rate (MMR) as per Section 167B (2).
On appeal, the assessee failed with the Commissioner (Appeals) and so the present appeal to the Tribunal. Tax on AOP and binding Board Circular?The Circular was issued on 24.8.1966. After the date of issue of the circular, two important events happened.1. the judgment of the Supreme Court in the case of ITO v. Ch. Atchaiah came to be delivered on 11th December, 1995 propounding that the position of law regarding chargeability of tax on the AOP and its member is different under 1961 Act as compared to the provisions of 1922 Act. (The old and new Income Tax Acts)2. Section 167 B regulating “charge of tax where shares of members in the AOP or BOI unknown etc.” was introduced in the statute by the Direct Tax Laws (Amendment)Act, 1989, w.e.f. 1.4.1989. Sub-section (2) of section 167 B governs the case of the assessee. This Section has given a clear mandate that the tax is chargeable in the hands of AOP alone and it has been brought in the statute subsequent to the issue of above mentioned circular of the CBDT.
Can a Board circular be still valid against a Supreme Court order and amended provisions of the Act?The Special bench of the ITAT observed,
1. There cannot be any dispute to the proposition that Income Tax authorities are bound to follow the circulars issued by CBDT u/s 119 of the Act.
2. At the same time, it is also well settled that it is not irrelevant for the judicial forum to examine the circumstances/ context as well as the prevailing conditions under which such circular came to be issued.
3. A close look at the circular will reveal that the basis of issue of circular is the decision of the Supreme Court in the case of CIT v. MurlidharJhawarAndP urna Ginning & Pressing Factory (supra), which was then available on the date of issue of circular. Considering the said decision, a view was expressed by the CBDT that the position as described in the said decision will continue to apply to the provisions of 1961 Act.
4. The law is well established that the circular cannot over-write, modify or amend the provisions of the Act or judicial decision.
5. In other words, working within the ambits of section 119 of 1961 Act, CBDT (Board) does not have power either to over-write, modify and amend the provisions of law or to over-come over a judicial pronouncement either of a High Court or of an Apex Court.
6. Under sec. 119, the Board is empowered to issue orders, instructions and directions to other Income Tax authorities which are deemed fit by it for proper administration of the Act.7. This power is meant only for working within the four corners of the Act.The Special Bench considered several judgements of the Supreme Court, High Courts and the ITAT, including the famous excise cases of Dhiren Chemicals and IOCL and observed,
1. It is thus clear that mandate of law is that effect cannot be given to a circular in preference to the view expressed by the court, and this being so, we are of the view that the AO cannot be said to be bound to follow the aforementioned circular in preference to the decision of Hon’ble Supreme Court in the case of ITO Vs. Atchaiah.
2. On the contrary, he was bound to follow the proposition as propounded by the Apex Court in the case of ITO Vs. Atchaiah, which was directly applicable in the present case.
3. Thus, the AO did not commit any mistake in not following the said circular and rather he was right in framing the asse
ssment on the AOP applying the law as declared by the Hon’ble Supreme Court in the case of ITO Vs. Atchaiah.
ssment on the AOP applying the law as declared by the Hon’ble Supreme Court in the case of ITO Vs. Atchaiah.
Is the Circular binding on Tribunal?
The Supreme Court in the case of KeshavjiRavji & Co. held that the Tribunal is not an Income Tax Authority under the Act, therefore, circulars do not bind it. Though the benefits of such circulars to the assessee have been held to be permissible even though the circulars might have departed from the strict tenor of the statutory provisions and mitigate the rigor of law. But that is not the same thing as saying that such circulars would either have a binding effect in the interpretation of the provision itself or that the Tribunal and the High Court are supposed to interpret the law in the light of the circular.
So the ITAT opined that
1. powers of CBDT exercised U/S 119 are not wide enough to travel beyond the scope of the Act.
2. Its powers are same as are the powers of the Rule making Authority Moreover, it has already been pointed out that in any case the circular had lost its validity as per law declared by the Apex Court by way of the decision in the case of ITO Vs. Atchaiah when the controversy prevailing on the issue was resolved and it was interpreted that under 1961 Act no option was vested with the ITO to either assess the AOP or its members.
3. Such option though was available under 1922 Act but was not provided in 1961 Act as there was a difference in the language of both the Acts.
4. It has also been pointed out in this order that there was subsequent change in the legislation when Section 167B was introduced.
5. Thus relying on the circular it cannot be held that AO had no jurisdiction to assessee the AOP (assessee) as he had already assessed its members.
So the Tribunal held that assessment made by AO on AOP is valid in the light of the judgment of Hon’ble Supreme Court in the case of ITO v. Ch. Atchaiah and also in the light of the statutory amendments brought in the statute. For the reasons discussed above Board’s circular dated 24.8.1966 cannot be relied upon to hold that the assessment on AOP is invalid. The said circular had lost its validity.
And so the assessee’s appeal is dismissed.
Tags: apex, Assessment, CBDT, CIT, Deduction, DEEDS, department, establishments, Excise, income tax act, Income Tax Circulars, itat, marginal rate, Shares, TDS