E-PAYMENT OF INCOME TAX - CONCEPT AND PROCEDURE

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E-payment of tax is a facility provided to the tax payers to make tax

payments through internet using net-banking facility.

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E-PAYMENT OF INCOME TAX

Non-furnishing of “all documents” does not violate principles of natural justice

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Kanwar Natwar Singh
vs.
Directorate of Enforcement

Natwar Singh & Jagat Singh (“Natwar Singh”) were alleged to have dealt in and acquired Foreign Exchange totaling US $ 8,98,027 in respect of some Iraq oil contracts in contravention of FEMA. A notice was issued asking Natwar Singh to show-cause why an inquiry should not be held against them. In response, Natwar Singh demanded that the Adjudicating Authority furnish “copies of all documents in … possession in respect of the instant case, including the 83000 documents allegedly procured by one Virender Dayal“.

The Adjudicating Authority furnished copies of the documents as were relied upon by it but declined to furnish copies of other documents and decided to hold an inquiry in accordance with FEMA. This non-furnishing of “all documents” was challenged by Natwar Singh in the Delhi High Court which dismissed the challenge. Natwar Singh challenged the decision of the High Court in the Supreme Court. HELD, dismissing the appeal:

(i) The extent of applicability of principles of natural justice depends upon the nature of inquiry, the consequences that may visit a person after such inquiry from out of the decision pursuant to such inquiry. The right to fair hearing is a guaranteed right. Every person before an Authority exercising the adjudicatory powers has a right to know the evidence to be used against him. Dhakeswari Cotton Mills Ltd. vs. CIT 26 ITR 775 (SC) followed;

(ii) However, the principles of natural justice do not require supply of documents upon which no reliance has been placed by the Authority to set the law into motion. Supply of relied on documents based on which the law has been set into motion would meet the requirements of principles of natural justice;

(iii) The concept of fairness is not a one way street. The principles of natural justice are not intended to operate as roadblocks to obstruct statutory inquiries. Duty of adequate disclosure is only an additional procedural safeguard in order to ensure the attainment of the fairness and it has its own limitations. The extent of its applicability depends upon the statutory framework;

(iv) The only object of Natwar Singh’s unreasonable insistence for supply of all documents was obviously to obstruct the proceedings and he has been able to achieve that object as is evident from the fact that the inquiry initiated as early as in the year 2006 still did not even commence;

(v) Also: Observations of Courts are not to be read as Euclid’s theorems nor as provisions of the statute. The observations must be read in the context in which they appear. A line or a word in a judgment cannot be read in isolation or as if interpreting a statutory provision to impute a different meaning to the observations.

Provident Fund Payments u/s. 43B

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PF Payments Under Section 43B

1. Issue for Consideration :

1.1 S.43B of the Income-Tax Act provides that certain expenditures, which would otherwise have been allowable as deductions in computing the total income under the Income-tax Act, shall be allowed as deduction only in the year of actual payment of such items by the assessee notwithstanding the method of accounting followed by the assessee. These expenditures are listed in clauses (a) to (f) of the said Section Clause (b) of the said Section refers to the sums payable by an employer by way of contribution to any Provident Fund, Superannuation Fund, Gratuity Fund, or any other fund for the welfare of employees (‘welfare dues’). Accordingly, the deduction of welfare dues is allowed only where payment of such expenditure is actually made.

1.2 Till assessment year 2003-04, the second proviso to S.43B provided that no deduction of welfare dues covered by the said clause (b) would be allowed unless such sum had actually been paid on or before the due date as defined in the Explanation to S.36(1)(va), i.e., the due date for payment of such welfare dues under the relevant applicable law. From assessment year 2004-05, the second proviso to S.43B has been omitted, and welfaredues covered by clause (b) were brought into the purview of the first proviso, which provides that the disallowance would not operate if the sums are paid on or before the due date of filing of the Income-tax return of the year in which the liability to pay such sum was incurred, and proof of such payment was furnished along with the return.

1.3 A dispute has arisen as to whether this amendment was applicable to all pending matters, and therefore applied retrospectively, or whether it applied prospectively from assessment year 2004-05 onwards. While the Bombay High Court has held that the amendment would apply prospectively, the Delhi and Madras High Courts have taken the view that the amendment applied retrospectively.

2. Godaveri (Mannar) Sahakari Sakhar Karkhana’s case :

2.1 The issue came up before the Bombay High Court in the case of CIT vs. Godaveri (Mannar) Sahakari Sakhar Karkhana Ltd. 298 ITR 149.

2.2 In this case, pertaining to assessment years 1991-92 and 1994-95, the assessee had made payments of provident fund dues before the due date of filing of its return of income, but beyond the due date stipulated under the Provident Fund Act. The amounts had been disallowed by the Assessing Officer, but the assessee’s appeal against such disallowance had been allowed by the Commissioner (Appeals). The Tribunal had also upheld the order of the Commissioner (Appeals).

2.3 Before the Bombay High Court, it was argued on behalf of the Revenue that the deletion of the second proviso to S.43B with effect from 1st April 2004 only meant that the relaxation in S.43B, insofar as employer’s contribution was concerned, would be governed by the first proviso to S.43B from 1st April 2004 only.

2.4 On behalf of the assessee, it was submitted that the amendment was curative and was resorted to for the purpose of removing the hardship caused by the second proviso. A similar amendment had been made in relation to clause (a) relating to tax, duty, cess and fees earlier, and in relation to such amendment, the Supreme Court, in the case of Allied Motors (P) Ltd. vs. CIT 224 ITR 677, had held the amendment to be curative and retrospective. It was argued that the proviso which was inserted to remedy the unintended consequences and to make the provision workable, the proviso which supplied an obvious omission in the Section and was required to be read into the Section to give the Section a reasonable interpretation, was required to be treated as retrospective in operation, so that a reasonable interpretation could be given to the Section as a whole.

2.5 The Bombay High Court went through the history of S.43B and the amendments carried out to it from time to time. It analysed the decision of the Supreme Court in Allied Motors case. It noted that when the two provisos to S.43 B were added, payments under clause (b) and payments under other clauses of S.43B were treated as two different classes. TheFinance Act, 1989 substituted the second proviso, noting certain hardships that were being occasioned by the operation of that proviso. The BombayHigh Court noted that, in its wisdom, the Parliament chose not to delete the second proviso but substituted it, and therefore intended that S.43B(b) should be treated as a class by itself distinct from the other sub-Sections. The second proviso was omitted based on the recommendations of the Kelkar Committee Report, which responded to representation by trade and industry that the delayed payment of statutory liability related to labour should be accorded the same treatment as the delayed payment of taxes and interest.

2.6 The Bombay High Court noted the decision of the Madras High Court in CIT vs. Synergy Financial Exchange Ltd., 288 ITR 366, where the MadrasHigh Court held that the amendment was not retrospective, on the basis that fiscal legislation imposing liability is generally governed by normal presumption that it is not retrospective and that in interpreting the statute, the Courts, in the first instance, have to consider the plain written language of the statute. If on so reading, it is not possible to give effect to the intent of the Parliament, then the Courts resort to purposeful interpretation to give effect to that intent. The Bombay High Court also (inadvertently) noted thedecision of the Assam High Court in George Williamson (Assam) Ltd. vs. CIT, 284 ITR 619 as rejecting the contention that the amendment should be read as retrospective, though the Assam High Court in that case upheld the contention of the assessee for allowing deduction for the payments on or before the due date of filing of the return of income.

2.7 The Bombay High Court noted that the amendment was madeapplicable from the assessment year 2004-05. It observed that in interpreting statutory provisions, the Court also considered the mischief rule, namely, what was the state of law before the act or the amendment, and what was the mischief that the Act or the amendment sought to avoid. From the normal aids to construction, the Court observed that the only mischief that the amendment if at all sought to obviate was the need to eliminate the procedural complexities, reduce paperwork, simplify tax administration and to enhance efficiency and also integrate such tax proposals as the system could at present absorb, and acceptance of the representations made by trade and industry that they should not be denied the benefit of deductions on account of delayed payment of taxes and interest.

2.8 According to the Bombay High Court, the law as it stood earlier was that in relation to the employer’s contribution to provident fund, if it was not paid within the due date, was not eligible for deduction. According to theHigh Court, this position had been remedied, and the remedial measure had been made applicable from assessment year 2004-05. The Bombay High Court therefore took the view that it could not be said that the amendment was retrospective.

2.9 Subsequent to this decision of the Bombay High Court, the decision of the Assam High Court in George Williamson’s case went up to theSupreme Court in a special leave petition as CIT vs. Vinay Cement Ltd. 213 CTR 268. In a short five-line order, the Supreme Court noted that they were concerned with the law as it stood prior to the amendment of Section 43 B, that in the circumstances the assessee was entitled to claim the benefit under Section 43 B for that period, particularly in view of the fact that he had contributed to Provident Fund before filing of the return, and dismissed the special leave petition.

2.10 Subsequent to this decision of the Supreme Court, the matter again came up before the Bombay High Court in the case of CIT vs. Pamwi Tissues Ltd. 215 CTR 150, relating to assessment year 1990-91. In this case, when the attention of the Bombay High Court was drawn to the dismissal of the special leave petition by the Supreme Court in Vinay Cement’s case, it observed that the dismissal of the special leave petition by the Supreme Court cannot be said to be the law decided. According to the Bombay High Court, for a judgment to be a precedent, it must contain the three basic postulates — a finding of material facts, direct and inferential, statements of the principles of law applicable to the legal problems disclosed by the facts, and judgment based on the individual effect of the above. The Bombay High Court therefore followed its earlierdecision in the case of Godaveri (Mannar) Sahakari Sakhar Karkhana, holding that Provident Fund payment made after the due date under the PF Act but before the due date of filing of the return of income, were not allowable.

3. Nexus Computer’s case :

3.1 The issue again recently came up before the Madras High Court in the case of CIT vs. Nexus Computer (P) Ltd., 177 Taxman 202.

3.2 In this case pertaining to assessment year 2000-01, the attention of the Madras High Court was drawn by the Revenue to its earlier decision in the case of Synergy Financial Exchange (Supra), wherein it had held that the amendment was not retrospective, and by the assessee, to the decision of the Assam High Court in George Williamson’s case and the dismissal of the special leave petition by the Supreme Court in Vinay Cement’s case.

3.3 The Madras High Court in that case (Nexus Computers)noted that the order of the Supreme Court in Vinay Cement’s case was a speaking order, which gave reasons for rejecting the special leave petition, and that the reasoning given in the dismissal of the special leave petition in that case would be binding on it as the law declared by the Apex Court under article 141 of the Constitution. Therefore, the Madras High Court held that the Provident Fund payments would be allowable under Section 43 B.

3.4 The issue also came up before the Delhi High Court in the case of CIT vs. Dharmendra Sharma, 297 ITR 320, in relation to assessment year 2001-02, and in CIT vs. P.M. Electronics Ltd., 177 Taxman 1. The Delhi High Court took note of the decisions of the Madras High Court in Synergy Financial Exchange, the Bombay High Court in Pamwi Tissues, the Supreme Court in dismissing the special leave petition in Vinay Cement’s case, and the Madras High Court in Nexus Computer’s case. The Delhi High Court also observed that judicial discipline required it to follow the view of the Supreme Court in Vinay Cement’s case, and hold the amendment to be retrospective. The Delhi High Court therefore disagreed with the approach adopted by the Bombay High Court in Pamwi Tissues case.

4. Observations :

4.1 The issue of whether the amendment is retrospective in operation or not can be for the time being concluded on examination of the true effect of the Supreme Court order in Vinay Cement’s case, delivered while dismissing the special leave petition. As observed by the Bombay High Court, the question is whether it was a dismissal on merits, laying down a binding precedent. If the decision of the Supreme Court is held to have been delivered on merits, it would be the law of the land and be binding on the Courts; if not, the Courts would be empowered to examine the issue independently.

4.2 As observed by the Supreme Court in the case of Kunhayammed vs. State of Kerala, 119 STC 505 :

“If the order refusing leave to appeal is a speaking order, i.e., gives reasons for refusing the grant of leave, then the order has two implications. Firstly, the statement of law contained in the order is a declaration of law by the Supreme Court within the meaning of article 141 of the Constitution. Secondly, other than a declaration of law, whatever is stated in the order are the findings recorded by the Supreme Court which would bind the parties thereto and also the Court, Tribunal or authority in any proceeding subsequent thereto by way of judicial discipline, the Supreme Court being the Apex Court of the country. But, this does not amount to saying that the order of the Court, Tribunal or authority below has stood merged in the order of the Supreme Court rejecting special leave petition or that the order of the Supreme Court is the only order binding as res judicata in subsequent proceedings between the parties.”

4.3 Reading the order of the Supreme Court in Vinay Cement’s case certainly gives the impression that though the order is short, the Supreme Court has applied its mind to the issue at stake while dismissing the petition, and dismissed it on merits, and not merely on technical grounds or as not maintainable. The order therefore seems to set a binding precedent, which all High Courts ought to have followed.

4.4 Further, it is no doubt true that the operation of the proviso gave rise to absurd situations where large amounts were disallowed on account of trivial delays of a few days, even when there was reasonable cause for making delayed payments of labour welfare dues. It does seem rather harsh to take the view that such disallowance was always intended by the Legislature.

4.5 The better view of the matter is therefore the view of the Delhi and Madras High Courts that the omission of the second proviso to S.43B is retrospective in operation, and applied to all pending matters as on the date of the amendment.

BSE, NSE launches special pre-open trading session

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The country’s two premier bourses – National Stock Exchange andBombay Stock Exchange – on Monday introduced the 15-minute special pre-open trading session, a mechanism under which investorscan bid for stocks before themarket opens.

The mechanism, known as ‘pre-open session call auction’, lasted for 15 minutes (from 9:00-9:15 am). While, this system has been started to reduce the quantum of volatility – typically visible in the first few minutes of trade – but going by the first day’s action this special session was more volatile than the normal trading session.

In the first 15 minutes, investors can place orders for eight minutes on the basis of which the exchanges will determine the rates at which trading will happen.

As per the ‘pre-open session call auction trend’, the National Stock ExchangeNifty was signaling a firm market but when bourses started the normal trading the benchmark indices swung into the red.

Besides, the movement of Bombay Stock Exchange benchmark Sensex and the NSE barometer Nifty was not in tandem. Usually, in normal session, these two indices move in tandem with each other.

“Currently market players in India are not very familiar with this system and it will take some time to get stabilised. It is a very good attempt in Indian markets, as it ensures the integration with international markets,” SMC Global Securities Strategist Jagannadham Thunuguntla said.

At 11:25 am, the Sensex was quoting at 19,916.66, down by 208.39 points. The wide-based Nifty too was in the red and was trading at 5,999.20, down by 1.05 per cent.

Market experts believe that the introduction of pre-open session assumes special significance, especially, in situations when there is any major event or announcement comes overnight before market opens.

Such special events may be such as merger and acquisition announcements, open offers, delistings, debt-restructurings, credit-rating downgrades or any rumours regarding any of such events, they said.

On a normal day with no major event before 9:00 AM, this pre-open session may appear to be a non-event and a routine exercise.

However, on a day when there is any major outcome before the market hours this mechanism assumes special significance, Thunuguntla said.

Capital market regulator Securities and Exchange Board of India had given its green signal for the introduction of pre- open session call auction on the bourses in July this year.

In a call auction practice, participants indicate their willingness to buy or sell units of a security by placing an order for a number of units at the prevailing pricebefore the opening of trade.

The introduction of pre-open session with a call auction mechanism is expected to reduce the quantum of volatility, typically visible in the first few minutes of trade, analysts said.

Initially the call auction session will be applicable for those stocks, which are the part of Sensex and Nifty. Sensex, the benchmark index of BSE, comprises of 30 blue-chip stocks, while Nifty – the NSE barometer- lists 50 scrips.

Infrastructure bonds an attractive option for tax gains

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Infrastructure bonds are the latest avenue for investors looking to park funds in debt instruments. A number of companies have announced plans to raise money through this route. While IFCI has already raised Rs 100 crore, this is the first time after additional tax breaks for investments in infrastructure bonds were announced that an amount over Rs 4,000 crore is being raised.

While IDFC and L&T Infrastructure issues are open for subscription, PFC and LIC are the next in line. Here’s a snapshot of what these issues have in store for investors.

QUICK FACTS
	IDFC	L&T Infra
Coupon (%)	7.5, 8	7.5,7.75
Duration (years)	10	10
Buyback/call option	yes*	yes
Listing	NSE & BSE	NSE
Issue size (Rs Crores)	3400	700
Tax benefit	Yes	Yes
Lock in period (years)	5	5
Loans against bonds	NA	NA
*Series3 and 4 bonds only

EVENLY MATCHED
Investor tax slab	Yield to investors on maturity*
(In %)	IDFC	L&T Infra
10.3	8.67	8.68
20.6	10.01	10.02
30.9	11.55	11.56
* 7.5% 10 yr cumulative bonds

Tax Benefits

Under Section 80CCF, any individual or Hindu undivided family can invest up to Rs 20,000 in infrastructure bonds and avail of tax benefits. This will be over the Rs 1-lakh deduction allowed under Section 80C. So, an investor in the tax bracket of 30 per cent can save an additional Rs 6,000, while those in the lower tax bracket can save Rs 2,000. Moreover, infrastructure bonds offer stability of fixed returns and are reasonably safe.

How they Compare

Other high yielding instruments which help save tax, include employee provident fund (returning 9.5 per cent for financial year 2011), public provident funds (8 per cent) and five-year fixed deposits. PPF gives higher returns that are non-taxable although liquidity is not as good as the bond or a fixed deposit. Unlike PPF and EPF, interest income is taxable for infrastructure bonds.

A debt mutual fund gives good returns, don’t get any tax breaks and are more risky. According to Value Research, a mutual fund rating agency, debt-oriented hybrid funds have returned 10.68 per cent in the last one year. While the returns on EPF and PPF are higher, infrastructure bonds score over instruments likepost office schemes which give similar returns but don’t have tax benefits. The key benefits for the investors in infrastructure bonds are breaks on the Rs 20,000 additional investment, higher yields and good liquidity.

Liquidity

The infrastructure bonds have a maturity of 10 years but a lock-in period of five years. The investor can ask the issuer to buy back his/her bonds after the lock-in period. Alternatively, the investor can choose to trade these in stock exchanges. According to Dwijendra Srivastava, head, fixed income, Sundaram BNP Paribas AMC, “Listing is more to do with being more tradeable on exchanges and there may not be any listing gains.

Historically, retail bonds trade at par on exchanges. Trading done on exchanges will not be eligible for tax benefits as it will not meet the five-year lock-in requirement. However, investors looking to clock some gains can subscribe to bonds in addition to Rs 20,000 and trade in such excess units. Historically, volumes have been thin in retail bonds trading and we don’t expect much trading activity in these bonds”.

Frequent default of cheques can lead to closure of your account

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Those writing cheques without adequate funds in their account risk having theiraccount blocked, a measurethat will further tighten the regime around bounced cheques.

India’s largest lender, the StateBank of India , has decided to close the accounts of those customers who default on their cheques too frequently, a lead other banks are sure to follow.

An internal circular of the bank has asked officials to close the accounts of those customers whose cheques have bounced four times or more in a financial year.

The new norm will be applicable for those who do not maintain enough balances to meet their standing instructions for electronic clearing services where the bank is authorised to debit regular payments directly to their accounts.

Other banks, both public and private, may soon follow as the issue has been informally discussed amongst public sector banks, said a senior person in the Indian Banking Association (IBA).

“Banks are expected to enforce financial discipline amongst its customers,” he said, adding that a month’s notice will be issued, giving customers ample time.

The SBI directive reinforces the central bank’s attempts to penalise the deliberate default by the cheque issuer. An email sent to the bank remained unanswered until the time of filing this story.

If the information on such closed accounts is shared among banks, or with the institutions that maintain credit scores of individuals, defaulters would find it difficult to access financial services or the costs of such services will go up for them sharply.

RBI rules allow banks to stop issuing new cheque books to those customers that have had their four cheques of Rs 1 crore, or more, dishonoured for want of sufficient funds in the account.

The central bank has also issued guidelines on how much a bank can charge for bounced cheques. Private sector lender, ICICI charges `100 for every cheque returned for financial reason if deposited by the customer. The penalty amount goes up to `350 if it is issued by the customer.

There are over 30 lakh cheque bounce cases pending in the court. Cheque bouncing was made a penal offence in 1989. In a May, the Supreme Court had also said any delay in settling cheque bouncing case will cost the defaulter up to 20% of the cheque amount.

As of now, if an offence is committed by a company for dishonouring cheque under Section 138 of the Negotiable Instruments Act, all those who were directors of the company, except those exempt by the law, are held responsible.

Is life insurance wealth-building?

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All of us need life insurance; it’s one of the priority investments to make. Life insurance protects the income generator, and only when income generation is secured can one build wealth.

But don’t make the cardinal mistake that, millions of investors commit – confusing life insurance with wealth-building investment.

Keep the two separate. Buy the maximum insurance that you need at the cheapest rates by selecting only term policies. By doing so, you will save big on premium; now add the premium money saved to your wealth-building investment pool.

This way you achieve a double benefit – you can get a higher insurance cover – and have money left over to invest profitably.

It is always better to keep insurance and investments separate. A term insurance plan has no cash payout at the end of the term. This means if the policy holder were to pass away during the term of the policy, his family will get the sum assured.

Take for instance car insurance. You pay the insurance premium, year in year out, to protect yourself against the financial damage an accident can cause. If you are a safe driver and manage not to bang your car during the year, the premium paid is wasted – you don’t get anything out of it.

And you are perfectly happy to have done so, so long as you and your car are safe. Or take medical insurance. Again, premium is paid to defray any costs of medical emergencies or hospitalisation.

However, if you remain fit and fine the premium paid on the medical insurance is lost. But then again, you do not mind this, do you?

Then why should life insurance be any different? But it is. It always has been.

The reason for this is mainly because life insurance premiums come bundled with the pure premium part combined with the part that gets invested on your behalf.

The policy is sold more as an investment avenue where the insurance just comes along. However, know that insurance never comes along for free, it always has to be paid for. In the case of life insurance, the premium is known as mortality premium.

This mortality premium is applicable for all polices, year after year, without any exception, till such time that the life is insured. Even in the case of single premium plans, or policies where the premium is payable only for part of thepolicy term, the mortality premium keeps getting deducted every year from the fund value. Thus, insurance never just comes along for free, you actually buy it year after year.

Let us take an example to understand this concept in depth. Take the case of a 30 year old person who desires to buy an insurance cover of Rs 10 lakh. Were he to buy an endowment plan, the annual premium that he would pay is around Rs 39,000.

However, a term plan would just cost Rs 3,800 per annum for the same amount of risk cover of Rs 10 lakh. In other words, should the insured person expire prematurely, his legatees will get Rs 10 lakh if he was covered by an Endowmentor a Term policy. Endowment premium is Rs 39,000 and that of term is Rs 3,800.

Agreed, the Endowment (or any other policy) would give a little more to either the legatee or the insured person if he survives the term, but the returns are very poor.

Of course and understandably the agents earn a far greater commission if they sell you polices other than term cover.

And the logical sounding argument given against buying a term cover is – why opt for it when you do not get anything back in the end? But now hopefully you know better.

One can always look at an option of ‘Buy term and invest the difference’.