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INCOME TAX

Basis of charge under the Income Tax Act,1961

Prosecution under the Income Tax Act

Is Octroi Constitutional ?

Manipulating Taxes

Payment of tax under the Central Sales Tax Act, 1956

 
Basis of charge under the Income Tax Act,1961          Top

The earlier Income Tax Act of 1922 was the subject of several amendments. Therefore the Governemnt of India with a vies to simplify the law of Income tax referred the Act to the Law Commission in the year 1956. A Special Committee of the Central Board of Revenue examined the recommendations of the Law Commission and the Direct Taxes Administration Enquiry Committee and the present enactment is an outcome of this endeavor.

Charge of Income Tax:

Where income tax is to be charged for any assessment year at any rate/s, income tax at such rate/s would be charged in respect of the total income of the previous year of every person. Previous year under this Act is the financial year immediately preceding the assessment year. However this would not apply where the provisions of the Act expressly provide for the charge of income tax in respect of any year other than the previous year. Income tax chargeable under the Act would be deducted at the source or paid in advance.

Scope of Total Income:

In the case of a resident, total income of any previous year includes all income from whatever source derived which is:

  1. received or deemed to be received in India by such person or any other person on his behalf; or

  2. accrues or arises or is deemed to accrue or arise to such person in India during such year; or

  3. accrues or arises to him outside India during such year. In the case of a person who is not ordinarily resident in India, the income which accrues or arises to him outside India would not be included unless it is derived from a business or profession set up in India.

The total income of a person who is non-resident includes all income from whatever source derived which:

  1. is received or deemed to be received in India by such person or any other person on his behalf; or

  2. accrues or arises or is deemed to accrue or arise to him in India during such year.

Income accruing or arising outside India would not be deemed to be received in India only due to the fact that it was taken into account in a balance sheet prepared in India. Further income which has been included in the total income of a person on the ground that it had accrued or arisen or is deemed to have accrued or arisen, shall not be included again as received or deemed to be received in India.

Residence in India:

For the purposes of this Act the following would be resident:

  1. an individual,if he is in India in such year for a period/s in all amounting to 182 days;

  2. an individual, if within the 4 years preceding such year, he had been in India for a period/s in all amounting to 365 days or more and in that year for a period of 60 days or more;

  3. a citizen who leaves India for employment outside, if such person has been in India in all amounting to 365 days in the four preceding such year and in that year for a period of 182 days or more;

  4. person of Indian origin who comes on a visit to India, , if such person has been in India in all amounting to 365 days in the four preceding such year and in that year for a period of 182 days or more;

  5. Hindu undivided family, firm or associations, except where the control an management of its affairs is situated outside India during such year;

  6. every other person, except where the control an management of his affairs is situated outside India during such year;

  7. a company, if it is an Indian Company or during such year the control and management of its affairs was situated wholly in India;

If any person is resident in India in a previous year relevant to an assessment year in respect of any source of income, he would be deemed to be resident in such previous year relevant to the assessment year in respect of his other sources of income.

Not ordinarily resident:
A person is not ordinarily resident in India if such person is:

  1. an individual who has not been resident in India in 9 out of 10 years preceding such year, or has not been in India during the 7 previous years preceding such year for a period/s in all amounting to 730 days or more; or

  2. a Hindu undivided family whose manager has not been resident in India in 9 out of 10 years preceding such year, or has not been in India during the 7 previous years preceding such year for a period/s in all amounting to 730 days or more.

Prosecution under the Income Tax Act                         TOP

The most dreaded part of the income-tax code is Chapter XXII, which lays down the procedure for launching prosecution for various types of defaults. The Finance Act, 1997 provided for prosecution even in cases where a person fails to pay to the credit of the Central Government tax payable by him as required under Sec. 115-0(2) or the proviso to Sec. 194B. The offence is complete when tax deducted at source is not deposited in time. Delayed deposit does not absolve the accused. It was for this reason that the Central Board of Direct Taxes (CBDT) came up with an amnesty scheme extending immunity in respect of defaults under Sec. 276B if tax was deposited with interest within the specified dates. In all these cases of failure to pay the tax deducted at source to the credit of the Central Government, there is no need to prove mens rea. The offence under Sec. 276B is a continuing offence which will terminate only when the tax is deposited. (Jagannath Prasad Jhalani 168 ITR 341 (Del)).

Tax evasion

The tax law draws a distinction between tax evasion per se and evasion of payment of tax. It prescribes different punishments for the two offences. But the burden is squarely on the prosecution to prove wilful attempt to evade tax. The courts have laid down stringent guidelines with regard to launching of prosecution for tax evasion. The provisions of the Code of Criminal Procedure have to be followed (M. S. Bhavani 209 ITR 600 Mds).

The courts also take into account the mental harassment caused by protracted litigation and frown upon continued prosecution for a long period of time. For sometime, the Department itself considered the age of the accused, but of late this is considered inconsequential. The Punjab & Haryana High Court took the view that there can be no prosecution when the return disclosed only loss. This was in the case of Nuchem Ltd 206 ITR 446. The standard of proof required for conviction is quite high and is different from the proof required in proceedings for levy of penalty for concealment. The courts still follow the maxim that every man is presumed innocent unless the contrary is proved. (Kalyan Rice & General Mills 180 ITR 41).

Quashing the complaint before trial

Is it possible to approach the High Court for a remedy against a complaint for prosecution at the initial stage itself? Sec. 482 of the Code of Criminal Procedure or Article 226 of the Constitution can certainly be invoked for this purpose, though courts are generally reluctant to interfere.

Often, penalty proceedings are simultaneously initiated along with the launching of prosecution under Sec. 276C. It is well known that penalty proceedings are not criminal in nature. At best they may be considered quasi-criminal. The standard of proof is not as rigorous in penalty proceedings as in the case of a prosecution for an offence.

Prosecution may be launched even before the assessment is completed. The assessing officer (AO) need not wait for the completion of the assessment proceedings to launch prosecution. It may happen that from the facts of the case it is possible to infer an attempt to evade tax (refer Tiptop Plastic Industries (P) Ltd 274-ITR-778). If re-assessment proceedings are initiated again, it is not necessary to await the completion of such proceedings. The institution of criminal proceedings even during the pendency of the assessment will not amount to abuse of the process of the court. This was the law laid down by the Supreme Court in the leading case of Jeyappan 149 ITR 696.

I-T appeals and prosecution

If prosecution is launched even when assessment or appeal proceedings are pending, will the finalisation of the assessment/appeal affect the prosecution proceedings under the I- T law? The criminal court has to arrive at its own conclusion after giving due weight to the orders passed under the I-T Act. It is easy to take the view that the final result of the assessment/appeal proceedings may be brought to the notice of the concerned criminal court for obtaining suitable relief. But, this is a time-consuming process. The writ jurisdiction under Article 226 or the inherent powers conferred on the court under Sec. 482 of the Code of Criminal Procedure can be successfully invoked to quash the criminal proceedings pending at the lower court if the assessee has obtained relief in the appeal before the Income-Tax Appellate Authority (ITAA). Courts had taken the view initially that the result of proceedings under the I-T law will not be binding on the criminal court but there has been a change in the attitude of the courts and it is now possible to get the prosecution quashed if the assessee has succeeded in the appeal proceedings.

Wherever penalties under Sec. 271(1)(c) of the I-T Act are cancelled in appeal, the corresponding prosecution launched for violation of Sec.s 271(1)(c) and 277 was held not proper (Warren Tea Ltd vs Dy CIT (1996) Tax LR 190 (Cal)). Continuation of criminal proceedings in the light of finding of facts regarding loss sustained will amount to abuse of the process of the court (Managing Director Ramesh Chandra Barar vs CIT 129 Taxation 51 Punjab & Haryana).

However, the Kerala High Court, in the Upasana Hospitals case (217 ITR 555), was of the view that the complaint cannot be quashed automatically the moment the Appellate Authority cancels the penalty order. The Madras view was that finding of facts by the Tribunal will be binding on the criminal court (Mohammed Unjawala vs Asst. CIT 213 ITR 190). This view was also followed by the Madhya Pradesh High Court in Badri Prasad vs Union of India (143 Taxation 133) and by the Andhra Pradesh High Court in ACIT vs Thirumal Agencies (143 Taxation 73). However, the Andhra Pradesh High Court chose to stay the prosecution proceedings till the appeal was decided by the Income-tax Appellate Tribunal in M. A. Quddus vs ITO (143 Taxation 11).

The Supreme Court's view

While the Supreme Court authorised the filing of the complaint even before completion of the assessment, it has also upheld the view that a criminal complaint should be quashed if the appellate order in the relevant I-T assessment proved favourable to the accused. Thus, in Uttam Chand vs ITO (133 ITR 909), the AO doubted the genuineness of the partnership firm and initiated prosecution of the partners. However, in the relevant I-T appeal, the Tribunal found the firm was genuine. Authorising the quashing of the criminal complaint, the apex court observed that in the light of the finding about the firm's genuineness, there can be no question of prosecuting the firm for filing false return. The matter was clinched by the court in G. L. Didwania vs ITO (1995 Supple. 2 SCC 724 - 224 ITR 687). The apex court in para 4 of its order considered whether prosecution can be sustained in view of the order passed by the Tribunal in favour of the assessee. While the Assessing Authority held that the assessee had made a false statement in respect of the income of the transport company, the Tribunal chose to believe the assessee's version. The court held that criminal proceedings cannot be sustained.

Thus, wherever a criminal complaint is filed, it is necessary for the affected party to pursue relief in the relevant tax appeal and to take action as soon as the appeal is allowed with regard to the vital fact concerning the criminal complaint. It is no longer necessary to await the results of the protracted trials in the criminal court. Speedy justice can be obtained by approaching the High Court with a prayer for quashing the complaint on the basis of the favourable appellate order.

In fact, quite apart from the findings in appeal, as prosecution involves a number of technical formalities, it is necessary for the party concerned to closely scrutinise whether all these formalities under the law have been properly observed. Thus, Sec. 279 of the I-T Act requires sanction by the authority concerned, namely, the CIT. This cannot be in the form of a mere show-cause notice to the assessee requiring him to show cause why a criminal complaint cannot be launched against him. A mere show-cause notice cannot be treated as an order according sanction. The complaint seeking prosecution has to be accompanied by an order in writing, sanctioning the same. Otherwise, the prosecution itself can be quashed for want of sanction

 

Is Octroi Constitutional ?                                                TOP

What was common in the British, American and French revolutions of 1688, 1776 and 1789 respectively? They all brought in their wake governments based on the principle 'No taxation without representation'. This cardinal principle of all representative governments has been adopted in the Indian Constitution too, though by a quirk of official (mis)interpretation its operation with respect to local governments has been dispensed with.

The principle has its roots in the fact that there cannot be a government without taxation. Hence, true democracies are only those in which imposition of and expenditure from taxes, right from the estimates called budgets, are made according to laws passed by the directly elected representatives of the people. That is because representatives who will have to go before the people for their votes again in the next elections, cannot be expected to burden the people with oppressive taxes that are beyond their capacity to pay. In keeping with their status of republican citizens, Indians can be taxed only by their representatives. But as far as accountability to the people is concerned the resourceful Indian mind has found a way out by which people can be taxed beyond their capacity and yet, the same people will vote for the same representatives who have imposed unbearable taxes. It is the resort to indirect taxation that keeps the people in utter ignorance of the taxes that they pay.

Almost 90% of the Indian tax revenue comes from the levy of indirect taxes of which proceeds from Customs and Excises go to the Central Government, from Sales Tax to the State Governments and from octroi to the local governments. But while the customs, excise and sales tax have the sanction of the Constitution, taxes of the sort of octroi are expressly prohibited. Part XIII of the Constitution titled 'Trade Commerce and Intercourse within the Territory of India' restricts legislative competence to create barriers to situations in which overriding public interest makes such barriers imperative. Otherwise there cannot be any fetters including taxes on inter-territorial trade, commerce and intercourse.

Part XIII is only an expanded form of the freedoms guaranteed under Article 19(1)(d), (e) and (g). An Indian citizen is, subject to reasonable restrictions, free to reside or move about in any part of the country and to carry on any business, trade or profession. A tax on the movement of citizens or their goods from one part of the country to another is not a reasonable restriction and, to boot, is prohibited by Part XIII.

So, the Octroi has been an aberration on the Indian Constitution. It has no champion in any of the Articles of the Constitution except 305 by which alone it has survived as a British legacy, a remnant of the colonial past. Article 305 saves the laws that existed on January 26, 1950, keeping them in force even if their continuing in force violates Articles 301 and 303, the substantive prohibitory articles of Part XIII.

Entry 52 of the State List, VII Schedule, which specifies tax on the entry of goods into a local area, the octroi, is also a remnant of the government of India Act, 1935. It cannot have any effective application against the provisions in Part XIII of the Constitution. The entries in the VII Schedule by themselves do not create any legislative competence. They only specify the fields in which that competence is to operate in accordance with the provisions of the Constitution.

Since such a tax as octroi is expressly disapproved by those provisions, the Entry is rendered ineffective in toto. Were it not so, from the Entry alone, 77 of List I, Parliament would have the power even to abolish the Supreme Court. That Entry has only partial efficacy.

Another such entry is Entry 81 of the Union List specifying 'inter-state migration'. had an entry any effectiveness against the provisions of the Constitution, an Indian citizen would have been required under this entry to hold permit, passport or visa, and immigration clearance certificates for crossing the state borders in the Indian Republic itself.

Since Article 305 relates only to laws that existed before January 26, 1950, octroi imposed after that date is obviously unconstitutional. Since the laws are saved against the flow of the Constitution, the term 'existing law' should have been in that context very strictly defined. Such laws cannot be given the status of parallel constitutions by which actions under those laws after January 26, 1950 can be tested for their constitutional validity. The Supreme Court erred when it upheld a change in favour of octroi in the Bangalore Corporation case in 1962. But the application of Article 305 by the court signifies that prohibition in Article 301 applies to octroi.

Continuance of such laws was envisaged as a temporary arrangement and, therefore, the President was empowered to withdraw such laws regard-less of their being in the Union or the State List. In the forty years of the Constitution, the President has never acted on his own to abolish octroi. It should be noted that a state legislature does not need assent of the President to do away with octroi, itself being fully competent to do so.

What applies to octroi, applies with double vigour to entry tax. Octroi has some justification as an independent source of revenue for local governments. Entry tax cannot be justified on any ground whatsoever. It is nothing but import duty in disguise, just as the Central Sales Tax is export duty, vis-a-vis the States. The unity and integrity of the Republic is equally put in jeopardy by both the taxes.

While the European nations are preparing to forget about their sovereign power and eliminate customs barriers to bring about economic fusion of their countries, we amend the Constitution to put the noose called consignment tax round the economic unity and integrity of the Republic. And that just for one reason, political shyness in approaching the voter directly for the pound of his flesh called tax.

 

Manipulating Taxes                                                           TOP

Citizens the world over are known to manipulate finances to avoid or save on the tax payable by them. At  home we often find the government `manipulating' the laws to wrest an advantage, rather a disadvantage, from the citizens. One instance of such manipulation is the application of tax laws with retrospective effect especially in the face of adverse court rulings.This practice only lowers the prestige of the court as an effective instrument for protecting the rights of the citizen. Another instant is provided in the Paper on Direct Tax Laws, wherein certain firms are proposed to be taxed at the highest marginal rate of tax applicable to an INDIVIDUAL.

Partnerships are an economic necessity. They are formed essentially for the convenience of the constituents in carrying out their concerted effort for achieving the agreed objectives. there may be sleeping partners. But what the government is concerned with is that a share has been genuinely offered and accepted. To believe that firms are brought about by tax payers only to avoid and save on the tax, is to make out a tax dodger where none exists. It does not augur well for a republican government to impute motives to citizens who otherwise are acting according to the law.

The Hindu Undivided Families have been subjected to higher rates of tax than those applicable to an individual and that too for the income of their members in which they have no right, title or interest. In the current political jargon, such treatment may be described as injustice or tyranny. But since our elected government cannot be attributed such undemocratic motives, it may best be described sheer nonsense. Now this nonsense is proposed to be extended to firms also. If the proposal becomes law, the specified firms will have to pay more tax than others for no income of their own.

The situation, in which a group of individuals pay more tax than an Individual does for the same income, could have existed under the British rule (plenary powers?); it cannot exist in India under the constitutional guarantee of equality before the law. If it does, we must be practising perverse equality. And, therefore, the proposal to tax firms, families or Associations of Persons at the highest marginal rate of tax for an individual, is manifestly unconstitutional. Penalties and taxes are not interchangeable and must remain so. Citizens who fail to do proper paper work, euphemistically known as tax planning, should not be penalised in the name of tax.

One glaring shortcoming of the Indian Income Tax Law has persisted rather too long. But it shows the disinterestedness of the concerned -the law makers, the tax practitioners, and, of course, the courts, who have tolerated this shortcoming. This shortcoming refers to the total absence of allowance for dependents. Exemptions are based on the condition of the money involved and not on that of the tax payer. So it happens that a man without any dependents to care for and, therefore, having spare money to invest in tax exempted channels, pays less tax than the one having several dependents and, therefore, unable to save and invest in those channels. Exemptions must primarily be based on the needs of the taxpayers and not on the needs of the State, which are taken care of by the tax itself.

If dependents are given a status and recognition in the tax laws, the proliferation of firms will certainly halt. In the absence of any recognition, it is these dependents that are taken as partners. But then they are genuine partners making up genuine firms and having genuine interest.

Classification into two broad categories of all tax payers should sufficiently serve the purposes of the government. These should be 1) the Companies, and 2)Individuals. The income of any group of individuals other than a company, whether a firm, family or A. O. P., should first be reduced to the constituent individual's level and then only taxed. Where the shares of the members are indeterminate, though this is most unlikely, these should be deemed to be equal for all. In the case of an H. U. F., the shares of members applicable on partition should be taken to divide the income into Individual shares for tax purposes.

The proposal to allow salary to a partner is against the concept of partnership. An employer-employee relationship cannot be deemed between a firm and its constituent. The folly that was committed in de-recognising the familial relationship in the H. U. F., inducing the members -fathers, sons, brothers etc.- to perforce adopt the unnatural but statutorily advantageous status of a firm, is proposed to be repeated in the case of the firm itself

 

Payment of tax under the Central Sales Tax Act, 1956

The Central Sales Tax Act of 1956 was passed to formulate principles to provide for levy, collection and distribution of taxes in the course of inter-state trade and commerce. It also formulates principles for determining when a sale or purchase takes place in the course of inter-state trade or commerce, outside the state and in the course of import or export, into/from India. Certain goods are declared under this Act to be of special importance in inter-state trade or commerce and the Act also subjects State Laws imposing taxes on sale/purchase of such goods, to certain restrictions and conditions.

Inter-state Trade or Commerce:

Under this Act the sale or purchase of goods shall be deemed to take place in the course of inter-state trade or commerce if such sale/purchase:

  1. occasions the movement of goods from one State to another; or

  2. is effected by a transfer of documents of title to the goods during their movement from one State to another.

In case of goods delivered to a carrier/bailee for transmission, the movement of such goods would be deemed to commence at the time of delivery and would terminate at the time when delivery is taken from the carrier/bailee. Further if the movement of goods commences and terminates in the same State, it would not be deemed to be movement from one State to another only because in the course of such transmission, the goods pass through the territory of any other State.

Sale or purchase of goods within the State: Under Section 4 of this Act, a sale or purchase of goods would be deemed to take place inside a State if the goods are within the State:

  1. where such goods are specific/ascertained goods, at the time when the contract of sale is made; and

  2. where such goods are unascertained/future goods, at the time of their appropriation tot he contract of sale by the seller or buyer, whether the assent of the other party is prior/subsequent to such appropriation.

In case of a single contract of sale/purchase of goods that are situated in more than one place, then the above provision would apply as if there were separate contracts at each of such places. Where a sale or purchase takes place within a State as described above, it would be deemed to have taken place outside all other States.

Sale or purchase of goods in the course of import or export:
A sale/purchase of goods would be deemed to take place in the course of export of goods out of Indian territory if:

  1. sale or purchase of such goods occasions such export; or

  2. if sale/purchase is effected by a transfer of documents of title to goods, after goods have crossed the customs frontiers of India.

A sale/purchase of goods would be deemed to take place in the course of import of goods into Indian territory if:

  1. the sale or purchase either occasions such import; or

  2. if such sale or purchase is effected by transfer of documents of title to the goods, before the goods have crossed customs frontiers of India.

Where there is any sale/purchase of any goods after such sale /purchase, occasioning the export of goods out of Indian territory as described above, such subsequent sale/purchase, would also be deemed to be in the course of such export, if it was entered into for purposes of complying with the agreement or order, for or in relation to such export.

A dealer would not be liable to pay sales tax on any goods which is a sale in the course of export of goods out of Indian territory.

Every dealer under this Act would be liable to any tax on all sales of goods other than electrical energy, in the course of Inter-state trade/commerce during any year, from the date notified by the Central Government. Such dealer would be liable to pay tax, even if the sale of goods effected by him would not have been liable to tax under the Sales Tax law of the appropriate State, if such sale had taken place within the State.

In the course of inter-state trade/commerce, where a sale of goods has been effected by a transfer of documents of title during their movement from one State to another or has occasioned the movement of such goods from one State to another, any subsequent sale during such movement, effected by the transfer of documents of title to such goods, to the Government or to a registered dealer other than the Government, would be exempt from tax, if such goods fit the description referred to in Section 8 (3)of the Act.

 

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