This week, the author suggests that a Anna Hazare style crusader is needed to explain to the CBDT the irrationality of its stand that the monetary limits for filing appeals will apply only to fresh appeals and not to pending appeals. Also, on the issue whether software income is assesable as “royalty”, the CBDT should abandon its ostrich-like stance and take a firm stand one way or the other like its Australian counterpart says the author

Legislature Proposes; Judiciary Disposes

Old timers will recollect the excitement that the judgement of the Tribunal in Pranav Constructions 61 TTJ (Mum) 145 had created. The Tribunal had done the unthinkabale. It held that the hafta or protection money paid by the assessee to local politicians and goons could be claimed as “business expenditure” on the footing that without such payments, business could not be conducted. Till then, unsavoury issues like hafta were meant to be confined to a fiction writer’s imagination without official cognizance.

The judgement obviously upset somebody high up in the department because in the very next Budget a retrospective amendment “for the removal of doubts” was inserted in the form of Explanation to s. 37(1) to provide that a payment for a purpose which is an offence or which is prohibited by law was not incurred for business purposes. In the Memorandum as well in the Explanatory Circular it was made clear that “The amendment will result in disallowance of the claim made by certain tax payers of payments on account of protection money, extortion, hafta, bribes, etc. as business expenditure“. The amendment was made effective from the date of commencement of the Act, 1.4.1962 to ensure that all traces of Pranav Construction was removed.

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The author trains his guns again on the proposed National Tax Tribunal and makes out a compelling case on why it should never be implemented. Instead, a different approach is required to solve the problems of delay and cost in justice delivery says the author. The ten-point agenda formulated by the author will, if implemented in true earnest, deliver us the Nirvana of “Sulabh Nyay Satvar Nyay” (Simple justice, Speedy justice) assures the author

The Constitution of India is the Supreme Law of the Land. One of the most important provisions of the Constitution of India is Article 265, which provides that “No tax shall be levied or collected except by authority of law”.

In the year 1998-99, the total pendency of tax appeals before the Income Tax Appellate Tribunal were 3,00,597 it took six to seven years to hear the appeal before the Tribunal, and in High Courts the matters were heard after 10 to 15 years. Shri Palkhivala in his article “The Maddening Instability of Income Tax Law” (Income Tax Review – August-Sept, 1996 P. 57 has stated as under “A telling example of the total absence of a sense of time in our tax administration is afforded by Supreme Court’s decision rendered last November in the case of Sutlej Cotton Mills Ltd. vs. CIT (1990) 2 SCALE 931. It was a case under Business Profits Tax, 1947. The accounting period was 1946-47. The amount involved was paltry sum of a few lakhs of rupees. The High Court’s order was rendered in 1965. The Supreme Court sent the matter back to the Income Tax Appellate Tribunal to re- hear the appeal 44 years after the close of the accounting period. Is there any other civilized country where a tax payer would not know the quantum of his liability for 44 years?”.

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The author adds his voice of reason to the strident debate on the pros and cons of the Lokpal bill. The author argues that while the proposal to bring the judiciary under the scrutiny of the Lokpal is well-intentioned, it will adversely affect the fearlessness and independence of the judiciary and have disastrous consequences. Instead, the author suggests measures to curb corruption in the judiciary.

In India common citizens have full faith in the Judiciary, but their objection is against the Judiciary is delay in justice delivery system. Therefore, one need to take remedial measures to reduce the pendency of cases before various Courts. Mere introduction of Lokpal Bill may not have much impact on the present system. According to me, the legislature alone is responsible for delay in justice delivery system, because they have not increased the strength of judges and have also not been filling up the vacancy of Judges.

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The author lashes out at the proposal of the Government to enact a new law to regulate lawyers, claiming that it will be an immense waste of public money. Instead, if the Government is really serious of protecting the interests of the public, then there is a series of steps it can take under the existing legislation to promote the rule of law and enhance standards in the profession, says the author. The author identifies 10 such steps which he claims will reform the legal sector.

The Government of India is proposing to introduce “Legal Practitioners (Regulations and Maintenance of Standards in Profession, Protecting the Interest of Clients and Promoting the Rule of law) Act, 2010“, and has requested for suggestions from the stake holders i.e., Public in General, Legal Fraternity, Educationalist, etc. Under Clause 35 of the proposed Act, until competent regulatory bodies are established by the Central Government or State Government as the case may be. The Legal Services Board shall function as the regulator for the regulatory objectives under this act for legal professionals other than those covered by the Advocates Act, 1961 as enumerated in Schedule I i.e.

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Despite vehement protests by the legal fraternity, service-tax on legal consultancy services has become a reality of life w.e.f 1.5.2011. The author, an eminent expert in service-tax law, has prepared this Guide to assist lawyers in complying with their newly-imposed service-tax obligation. A pdf copy of the Guide (revised) is available for download

Service tax was first introduced on Legal Consultancy Service from 01.09.2009 by the Finance (No. 2) Act, 2009 by inserting cl. (zzzzm) in S. 65 (105) of the Finance Act, 1994. The coverage of taxable service was limited to service provided by a business entity to any other business entity. Further, the taxable service was restricted to advise, consultancy or technical assistance in any branch of law, in any manner, but not appearance before any court, tribunal or an authority. Thus, service provided by an individual to any person and service received by the individual from any person was not liable to tax.

The Finance Act, 2011 (enacted on 8th April, 2011) has substantially increased the scope of the levy which is explained in this article. This amendment comes into force from 01.05.2011.

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The author argues that the verdict of the Special Bench in Tata Communications vs. DCIT that stay of demand can be extended by the Tribunal beyond 365 days is the result of inept handling by the department. He calls the situation a “fiasco” for the department and dishes out advice on what can be done to remedy the situation

The judgement of the Special Bench in Tata Communications vs. DCIT that the Tribunal has the power to extend stay beyond 365 days despite the clear language of the Third Proviso to s. 254(2) of the Act must have come as a big surprise to even the most optimistic tax-payer. Certainly, the decision caught battle-hardened tax professionals by surprise.

The blame for the fiasco lie squarely with the department for their inept handling of the matter. Of course, it is another matter that the provision of law is itself grossly misconceived.

The Tribunal’s power to grant stay of demand was recognized by the Supreme Court as early as in the year 1969 in ITO vs. M.K. Mohammed Kunhi 71 ITR 815 where it was held that the power to give final relief in the appeal included the power to grant interim relief to stay the demand.

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The author is indignant at the proposal in the Finance Bill 2011 to levy service tax on lawyers. The practitioners of the noble profession are “Officers of Court” and not providers of a crass commercial service, argues the author. To levy the tax on “accrual” basis is deplorable and adds insult to injury claims the author pointing out that the proponents of the World’s second-oldest profession have been following the “receipt” system since time immemorial. The author implores Parliament to introspect carefully before giving sanction and warns that this ill-conceived provision stands a serious risk of being declared unconstitutional

When Service Tax was levied on Chartered Accountants, the levy of Service Tax on Chartered Accountants were challenged by the Federation in association with Bombay Chartered Accountant’s Society and The Chamber of Tax Consultants. The Apex Court up held the constitutional validity [All India Federation of tax Practitioners vs. UOI (2007) 293 ITR 406 (SC)] on the ground that the Chartered Accountants, Cost Accountants and Architects render service by giving advice on tax planning, auditing, costing, etc. which attracts value addition as in the case of manufacturer. The Court also observed that in the said petition there was no challenge to Article 268A and entry 92C of list 1 which was inserted by Constitution of India (Eighty-eighth Amendment) Act, 2003. Possibly, the All India Federation of Tax Practitioners along with other associations may have to once again knock the doors of the judiciary to challenge the levy of Service Tax on legal services including Article 268A of the Constitution of India.

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The author is aghast that the Government is contemplating yet another scheme to offer amnesty to tax evaders. The author calls such schemes a “fraud on the honest tax payer and the nation” and reminds the Government of its solemn promise made to the Court that it would not introduce any more amnesty schemes. Amnesty schemes should not be used as a measure to raise revenue says the author and offers a number of practical suggestions to help the Government deal with the menace of tax evasion and increase revenue. Amnesty schemes will not curb tax evasion but will encourage it is the chilling warning given by the author

Recent newspaper reports suggest that the Government has constituted a committee to study the channel to bring back the black money lying in various banks abroad. The Federation supports all efforts to eradicate black money, however, the Federation is strongly against an Amnesty Scheme for achieving this objective, as any such scheme would really constitute a premium for dishonesty.
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The author expresses concern over the rampant use of rough-neck techniques by the Department for recovery of tax dues. Despite severe reprimand by Courts, there is no improvement in the Department’s behaviour due to lack of accountability muses the author. The author advises the department to adopt Chanakya’s techniques for recovery and assures that this will benefit the department in the long run

1. Sections 222 to 232 of the Income Tax Act, 1961 and schedules II and III, thereto and the Income Tax (Certificate Proceedings) Rules, 1962, together constitute a self contained code prescribing the various modes for the recovery and arrears of tax under the Act. These provisions are also applicable to Wealth Tax Act.

2. The Tax Practitioners have the duty to advice the assessees to pay the tax what is rightfully due to Government, neither less nor more. The law of recovery is based on Civil Procedure Code, 1908. In Krishna Prasad Singh vs. TRO (1996) 221 ITR 720 (Cal.), it has been held that the provisions of Schedule II to the Income tax Act are analogous and similar to those in Civil procedure Code and therefore, the decisions relating to the CPC would be applicable for interpreting similar provisions in Schedule II to the Act.

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The DTC 2010 has had its fair share of criticism. Before DTC 2010 is steam-rolled into Law, its detractors have a last chance to voice their grievances before a Select Committee which promises to look into all issues objectively. The author urges all tax payers to make the most of this opportunity and starts off by listing his litany of woes

1. Direct Taxes Code Bill 2010 which was introduced in the Parliament on 30th August 2010, has been referred to Parliament “Standing Committee on Finance” headed by Shri Yashwant Sinha Former Finance Minister. The code will come into force on the 1st day of April 2012. As per the advertisement published in DNA DT 13-11-2010, the Government of India has invited the suggestions from various individuals/experts /institutions etc and the suggestions are required to be forwarded to the committee within 20 days of the publication of the advertisement. My past experience with the parliament standing committee is very much encouraging because they consider the suggestions objectively without any political bias hence, I am of the considered opinion that the professionals and organizations must put forward their views without any fear or favour taking into consideration, the interest of nation and honest tax payers of our country. I have made an attempt to discuss certain conceptual issues which may be considered and if found fit may be forwarded to the committee along with other important issues which you may feel requires consideration.

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