The Hindu Business Line : And Shyam spilled out in a Prem search

ON SEPTEMBER 1, 2002, Prem & Sons were searched. During the search, papers belonging to a close friend, Mr Shyam, indicating concealed income, have been found. How should the AO proceed in such a situation under the Act?

Where the AO is satisfied that any undisclosed income belongs to any person other than the person subjected to Section 132 search proceedings or whose books or documents or assets were requisitioned under Section 132A, then, the relevant books, records or assets seized or requisitioned shall be handed over to the AO having jurisdiction over such other person and that AO shall proceed against such other person in accordance with the provisions of Chapter XV of the I-T Act.

Return duty

ON WHOM and when does Section 139(4C) cast responsibility to file a return of income.

What will be the consequence of failure to comply with the provisions of this section?

Solution: Returns by certain associations/institutions — Section 139(4C):

The following entities shall furnish their return of income if the total income, before giving effect to the exemption under Section10, exceeds the basic exemption limit:

i) scientific-research associations covered under Section 10(21); ii) news agencies (Section 10(22B)); iii) association or institution referred to in Section 10(23A)/(23B); iv) funds/institutions, universities/other educational institutions or hospitals/other medical institution referred to in Sections 10(23C)(iv)/(v)/(vi)/(via); and v) trade unions/associations (Section 10(24)).

In respect of these entities, the assessing officer (AO) may intimate the Central Government or the prescribed authority about the contravention of the relevant provisions. If any such intimation has been sent, no order shall be passed making an assessment without giving effect to Section 10, unless the approval granted to the entity has been withdrawn or rescinded.

In all such cases, the period commencing from the date of intimation by the AO and ending with the date of withdrawal or rescinding shall be excluded in computing the time limit under Section 153 for completion of assessment.

Any person failing to furnish in due time returns as specified under Section 139(4C) will be levied penalty equal to Rs 100 for everyday of default.

Situation analysis

DISCUSS the liability for tax deduction at source in the following cases for the assessment year (AY) 2003-2004:

i) Mr Anand has been running a sole proprietary business whose accounts are audited under Section 44AB of I-T Act, 1961. He pays a monthly rent of Rs 15,000 for the office premises to Mr R, the owner of the building and an individual. Besides, he also pays service charges of Rs 10,000 per month to Mr R towards the use of furniture, fixtures and vacant land appurtenant thereto.

Solution: i) Where the payer is an individual or HUF whose accounts are required to be audited as per the provisions of Section 44AB of the I-T Act in the immediately preceding year they shall be required to deduct tax at source. Therefore, in the given case, Mr Anand, even though an individual, shall be responsible to deduct tax at source in respect of rent where it exceeds Rs 1,20,000 per annum under Section 194-I at 15 per cent plus surcharge of 5 per cent.

According to Section 194I, `Rent' means any payment under any lease, sub-lease, tenancy or any other agreement or arrangement for the use of any land or any building (including factory building) together with furniture, fittings and the land apparent thereto, whether or not such building is owned by the payee. Therefore, in the given case, apart from monthly rent of Rs 15,000 p.m. service charge of Rs 10,000 per month is also within the purview of TDS. Consequently, Mr Anand should deduct tax on Rs 3,00,000 at 15.75 per cent a sum of Rs 47,250 (including surcharge) for the year.

ii) By virtue of an agreement with a nationalised bank, a catering organisation receives Rs 50,000 per month towards supply of food, water, snacks, and so on, during office hours to the employees of bank.

Solution: According to Section 194C, any payment made in pursuance of any contract for a consideration of more than Rs 20,000 is subject to tax deduction at source.

For the purpose of this section, the expression "work" shall also include catering. Therefore, in the given case, tax deductible under Section 194C is Rs 12,600 being 2.1 per cent on Rs 6,00,000.

iii) An Indian company pays gross salary, including allowances and monetary perquisites, amounting to Rs 4,80,000 to its general manager on which the tax liability works out to Rs 1,17,600 for the accounting year 2002-03. Besides, the company provides non-monetary perquisites to him in the same period whose value is estimated at Rs 1,20,000.

Solution: According to Section 192(1A), where the employer has exercised option to pay tax in respect of non-monetary perquisites, then to that extent tax need not be deducted at source. Therefore, in the given case, the amount of income-tax attributable to the value of the non-monetary perquisites provided to the employee is not subject to tax deduction under Section 192 in case the company has exercised such option. The balance amount of tax of Rs 1,17,600 needs to be deducted from the salary of the employee on an average basis.

iv) A foreign company, which has made prescribed arrangements for the declaration and payment of dividends within India, pays Rs 10,000 towards dividends on equity shares to a shareholder and Rs 2,200 towards dividends on preference shares held by another shareholder.

Solution: According to Section 194, the principal officer of an Indian company or a company which has made the prescribed arrangements for the declaration and payment of dividends, including dividends on preference shares within India, shall, before making any payment in cash or before issuing any cheque or warrant in respect of any dividend, deduct tax at source.

Therefore, even foreign companies which have made arrangements for the declaration and payment of dividends within India are liable to tax deduction under Section 194.

However, Section 194 does not apply in case the company satisfies the following conditions: i) dividend is paid by an account-payee cheque; and ii) the amount of such dividend distributed or paid during the financial year does not exceed Rs 2,500.

Therefore, in the given case, Rs 10,000 paid to equity shareholder is subject to tax deduction at 10.5 per cent amounting to Rs 1,050.

The need to deduct tax on the payment of Rs 2,200 paid to preference shareholders shall depend on the payment not being made by account-payee cheque.

Book capturing

DURING the course of survey operations under Section 133A, carried on March 5, 2003, the I-T authority, impounded the books of account and other documents inspected by him, relating to the assessee and retained in his custody. Is the action of the officer justified under law?

Solution: An income-tax authority cannot remove any assets during survey operations. However, an I-T authority is empowered to impound and retain in his custody any books of account or other document inspected by him.

Such power can be exercised only after recording reasons. The books and documents so impounded can be retained beyond 15 working days only after obtaining the approval of the Chief Commissioner or Director-General or Commissioner or Director.

Transaction international

WHEN shall a transaction be considered international?

In what circumstances shall a transaction entered into with a person other than an associated enterprise be deemed to be one between two associated enterprises?

An `international transaction' is one which satisfies the following criteria:

One between two or more associated enterprises, either or both of whom are non-residents. In other words, if both or all the enterprises executing the transaction are residents, then it is not an `international transaction' for the purpose of these provisions;

It is in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, lending/borrowing money or any other transaction having a bearing on the profits, income, losses or assets of such enterprises;

It includes a transaction in the nature of a mutual agreement, or arrangement between two or more associated enterprises for the allocation or apportionment of any contribution, cost or expense incurred (or to be incurred) in connection with a benefit, service or facility provided (or to be provided) to any one or more of such enterprises.

A transaction entered into by an enterprise with any person other than an associated enterprise shall be deemed to be a transaction entered into between two associated enterprises if there exists a prior agreement between them in relation to the relevant transaction.

Or where the terms of the relevant transaction are determined in substance between such other person and the associated enterprise.

Party income

THE books of account maintained by a national political party registered with the Election Commission (EC) for the year ended March 31, 2003, disclose receipts as shown in Table 7.

Compute the total income of the political party with reasons for inclusion or otherwise.

Solution: Political parties registered with the EC are exempt under Section 13A from payment of tax in respect of their income from house property, other sources and income by way of voluntary contributions. However, to be eligible for exemption, they have to satisfy the following three conditions:

The political party keeps and maintains such books of account and other documents as would enable the AO to properly deduce its income there from;

The political party keeps and maintains a record of each such voluntary contribution in excess of Rs 10,000 and the name and address of the person who has made such contribution; and

The accounts of the political party should be audited.

A reading of Section 13A indicate that these three conditions are cumulative in nature and non-fulfilment of even one of these would result in denial of exemption.

In the given case, the political party has violated the second condition and is, therefore, not eligible for exemption under Section 13A.

Accordingly, the total income of the party for the AY 2003-04 will be as shown in Table 8.

Note: It is open to the political party to contend that only Rs 11 lakh is taxable apart from the business income of Rs 3 lakh on account of violation of second condition and not the entire amount.

Rectified, rejected

IN AN order of assessment for the AY 2002-03, the assessee noticed a mistake for which application under Section 154 was moved and the order was rectified. Subsequently, the assessee moved further application for rectification under Section 154, which was rejected by the AO on the ground that the order once rectified cannot be rectified again. Is the contention of the AO correct?

Solution: The order referred to under Section 154 does not necessarily mean the original order. It could be even a rectified or amended one. Four years' time limit is to be reckoned with reference to order sought to be rectified (Hind Wire Industries Ltd vs. CIT — 1995 212 ITR 639 SC). Therefore, in the given case, the action of the AO is not correct.

Non-cash perquisites

DOES the tax borne by employer on behalf of employee in respect of provision of non-monetary perquisites constitute income in the hands of employee with reference to the AY 2003-04 ? What are the tax implications?

Solution: According to Section 10(10CC), the amount of tax borne by the employer at his option with reference to the non-monetary perquisites provided to the employee shall be exempt in the hands of the employee. Such tax borne by the employer on behalf of the employee shall be disallowed in the hands of the employer while computing the taxable business income by virtue of Section 40(a).

(To be concluded)

(Suggested answers to May 2003 CA (Final) paper on direct tax laws.

Courtesy: Snow White Publications Pvt. Ltd, Mumbai.)

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