Payment to Non Residents - Guidelines for furnishing Form 15CA & 15CB in compliance to Section 195

Procedure for furnishing information under sub-section (6) of section 195 of the Income-tax Act, 1961 read with rule 37BB of the Income-tax Rules, 1962.

General

1. Form 15CA should be used for furnishing information of remittances in e-mode in accordance with the provisions of section 195 (6) of the Income-tax Act, 1961. The information should be furnished after obtaining a certificate in Form 15CB from an accountant as defined in the Explanation to section 288 of the Incometax Act, 1961. The print out Form 15CA should be signed and submitted to the Reserve Bank of India/authorized dealer prior to remitting the payment.

2. The Form should be furnished at the website of the Tax Information Network www.tin-nsdl.com.

3. Fields marked with (*) are mandatory.

4. Select the values from the drop down wherever provided.

5. Each transaction detail should be filled in separately.

Guidelines for Part A of Form 15CA:

Remitter:

1. Permanent Account Number (PAN) and Tax Deduction and collection Account Number (TAN) allotted by the Income Tax Department should be mentioned. TAN is mandatory in cases where

a. tax has been deducted or will be deducted at source;

b. the remitter has obtained an order under section 195 (2) of the Income tax Act from the Assessing Officer.

2. In case an invalid PAN and/or TAN is filled in by the remitter, the Form will not be generated.

3. In case the remitter does not have a TAN, it is mandatory to quote PAN of the remitter.

4. PAN of the remitter should invariably be given. However, the same is mandatory if status of entity is Company or Firm. If PAN is not given in such cases, the remitter will not be allowed to generate the Form.

5. Details in at least two address fields for remitter shoule be mentioned.

6. Name of the entity should be mentioned in the “Name of remitter” field.

7. No value is to be provided in Area code, AO type, Range code & AO number. The fields will be entered by the system after validating the PAN and/or TAN.

8. Email id and mobile no., if any, should be provided.

Recipient of remittance:

1. Complete address of recipient of remittance, separated by coma, should be provided.

2. PAN, allotted by the Indian Income Tax Department should be mentioned.

3. If status of entity is “company”, then provide type of company i.e., “domestic” or “other than domestic”.

4. In the field “Principal Place of Business”, the country of tax residence of the recipient of the remittance should be mentioned.

Information for accountant

1. Enter name of the Chartered Accountant in the field “Name of the accountant”.

2. Details in at least two address fields should be mentioned.

3. Date of certificate should not be a future date.

4. Registration no. should be numeric.

5. Details of accountant are not required if point no. 15 is selected i.e. any order u/s 195 (2)/ 195 (3)/ 197 of the Income-tax Act has been obtained from Assessing Officer.

6. Certificate number is an alphanumeric field.

Guidelines for PART B of the Form (Particulars of Remittance and TDS)

1. Provide the values as per the accountant certificate obtained in Form 15CB.

2. In case name of the country is not available in drop down list, select value “other” from the drop down and provide name of the country.

3. In case currency name is not available in drop down then select value ”other” from the drop down and provide name of the currency.

4. Proposed date of remittance should be current date or a future date.

5. Amount of TDS should be less than amount of remittance.

6. Actual amount of remittance after TDS should be less than amount of remittance.

7. BSR code of the bank through which the remittance is made should be mentioned.

8. Rate of TDS as per DTAA (if applicable) should be mentioned upto two decimal places.

9. Amount should be mentioned upto 2 decimal places.

10. Select any one out of fields 12, 13, 14 and 16. One form is to be filled for one type of remittance.

11. Details of “responsible person” should be mentioned for verification.

12. If no tax has been deducted then value “0.00” should be mentioned in “Amount of TDS” field (foreign currency and Indian Rs.)

13. Value for “rate of deduction as per the Income-tax Act” should be “0.00” if no tax has been deducted and “amount of TDS in Indian and foreign currency” should be “0.00”.

Generation of Form 15CA

1. After filling up the information, click “submit”. On submission of details if system shows any errors, rectify and re-submit the form.

2. A confirmation screen with all the data filled by the user will be displayed. The same can be either confirmed or edited.

3. On confirmation, a filled up Form 15CA with an acknowledgement number will be displayed. Print out of the Form should be taken, signed and submitted prior to remitting the payment.

4. Form 15CA can be re-printed by selecting the re-print option. For re-printing, please enter “acknowledgement no.”, “PAN” and/or “TAN” mentioned in the Form.

TDS form 17 & UTN System Deferred

No.402/92/2006-MC (14 of 2009)

Government of India / Ministry of Finance

Department of Revenue

Central Board of Direct Taxes

***

New Delhi dated 30th June 2009

PRESS RELEASE

The Central Board of Direct Taxes have further decided that the Notification No. 31 of 2009 dated 25.3.2009 amending or substituting Rules 30, 31, 31A and 1AA of the Income Tax Rules, 1962 shall be kept in abeyance for the time being.

Taxpayers filing their income tax returns for assessment year (AY) 2009-10, or any other earlier AY, may continue to file their returns without mentioning the Unique Transaction Number (UTN) as required under the said Notification. The filing of such returns shall be treated as valid and in compliance to the requirements under section 139 of the Income Tax Act, 1961.

Further, the date from which the Notification No. 31 / 2009 shall become applicable on tax deducted at source (TDS) or tax collected at source (TCS) and deposited during the current financial year shall be notified by the Central Board of Direct Taxes subsequently.

All deductors / collectors of TDS / TCS may continue to deposit their TDS / TCS and file their quarterly TDS / TCS returns as per procedure existing prior to issuance of Notification No.31 / 2009 dated 25.3.2009.

Source : www.incometaxindia.gov.in

Entry Strategies for Foreign Companies in India

'Entry Strategies for Foreign Companies’

There are several strategies by which a foreign enterprise can set up Indian operations. This Memo aims to set out the various entry options available to a foreign investor for foreign direct investment. Broadly, entry strategies may be classified into two major types:-

1. A foreign investor may directly set up its operations in India through a branch office or liaison office or project office of the foreign Company ; or

2. It may do so through an Indian arm i.e. through a subsidiary company set - up in India under Indian laws;

A Foreign company is one that has been incorporated outside India and conducts business in India. These companies are required to comply with the provisions of the Indian Companies Act, 1956 as far as their Indian operations are concerned. Foreign companies can set up their operations in India through opening of liaison, project and branch offices. This is possible only after taking written permission for this from the Reserve Bank of India. Further, such companies have also to register themselves with the Registrar of Companies (ROC) within thirty days of setting up a place of business in India. This is qualitatively different from a case where the foreign company sets up another distinct le gal incorporated entity in India as a subsidiary which would itself be a domestic company duly registered under the Companies Act, 1956.

There is thus a choice involved in deciding whether the foreign company is itself to operate in India by setting up a local representative office such as a Project/Site or Liasion or Branch office or whether the foreign company is in turn to set up a new different company as a subsidiary incorporated under India’s domestic company law provisions.

In case of the former, the further choice between setting up a Project/Site Office, Liasion Office and Branch Office of the Foreign company itself can be evaluated as under.

I. Liaison Office:

A Liaison Office is in the nature of a representative office set up primarily to explore and understand the business and investment climate. A Liaison Office is not permitted to undertake any commercial / trading / industrial activity, directly or indirectly, and is required to maintain itself out of inward remittances received from abroad through normal banking channels. The role of such offices is, therefore, limited to collecting information about possible market opportunities and providing information about the company and its products to prospective Indian customers.

The opening and operation of such offices is regulated by the Foreign Exchange Management (Establishment of India of Branch or office or other place of business) Regulations, 2000. Approval from the Reserve Bank of India (RBI) , the apex foreign exchange management authority in India, is required for opening such offices.

Permissible Activities:

The Liaison Office is permitted to undertake only the following activities:

§ Representing in India the parent Company / group Companies

§ Promoting export/ import from/ to India

§ Promoting technical / financial collaborations between the parent / group companies and companies in India

§ Acting as a communication channel between the parent company and Indian

companies

Restriction on Activities:

However, there are strict restrictio ns on the activities of the liaison office:

§ No commercial operation can be done by the liaison office (No invoicing)

§ The liaison office must maintain a QA22C account with the bank. This is a special account that only allows inflows from abroad.

§ The liais on office can neither borrow, nor lend money

§ All expenses of the office must be met through inward remittances to the office from abroad (parent company) through the bank. The liaison office is not subject totaxation in India

§ However, the office must file regular returns to the RBI. Such returns must include Audited Annual accounts and an activity report for the year.

Suitability of a Liaison Office

The Liaison Office generally acts as a communication channel between the parent company overseas and its present or prospective customers in India. The Liasion Office can also be set up to establish business contacts or gather market intelligence to promote the products or services of the overseas parent company. The Liasion office is not legally an entity distinct from the foreign parent company.

The Liaison Office cannot undertake any business activity in India nor earn any income in India.

The Liaison Office has to meet its entire expenses from funds received from the parent company through normal banking channels. At the time of closure of the Liasion Office, the RBI grants permission to repatriate the balance in the Indian bank account to the parent company.

Since the Liaison Office is not permitted to earn any income, it should not constitute a taxable entity in India. However, the Liaison Office would be required to withhold tax from certain payments and hence to comply with the requisite tax withholding requirements under the domestic tax law.

To open a Liaison of fice, the foreign company has to apply to the Reserve Bank of India and is normally granted permission within 2 to 4 weeks. Usually the permission is for a period of 3 years, but this can be extended.

1. II. Branch Office:

A branch would mean an establishment carrying on substantially the same activity as its Head Office. The opening and operation of such offices is regulated by the same Foreign Exchange Management (Establishment of India of Branch or office or other place of business) Regulations, 2000. Foreign companies intending to open a Branch Office in India need to obtain prior permission of RBI which would encompass approval to the particular scope of activities that are inte nded to be carried out in India.

Permitted Activities:

As per the guidelines laid down by the RBI, the Branch Office in India is allowed to carry on only the following activities:

§ Export / Import of goods

§ Rendering professional or consultancy services

§ Carrying out research work, in which the parent company is engaged

§ Promoting technical or financial collaboration between Indian companies and parent or overseas group companies

§ Representing the parent company in India and acting as buying / selling agent in India

§ Rendering services in Information Technology and development of software in India

§ Rendering technical support to the products supplied by parent / group companies

A Branch office is considered a part of the foreign company and is not treated as a separate legal entity. The office can undertake import and export, but not manufacturing. Whether or not a Branch Office can carry out trading, even wholesale cash and carry trading, is a controversial matter. An examination of this issue is beyond the scope of this Memo. A Branch office is subject to taxation in India at 48% on income accrued in India. This rate is a little higher than the rate applicable to domestic companies including subsidiaries. Thus a Branch office enjoys a simpler regulatory regime but is subject to a higher tax rate. If there is a double taxation agreement with the country in which the foreign company is incorporated, the tax paid in India can be set off against the total tax payable by the parent company abroad.

In certain cases, where income is deemed to have originated in India and such income includes royalties, fees for technical services, interest and capital gains including capital gains from share of capital in India, Branch offices may repatriate profits to their Head Office

without obtaining prior approval. The procedure for opening a Branch office is that a formal application needs to be made to the Reserve Bank Of India (RBI) for representing the interests of the foreign company. The permission from RBI generally takes about 2 to 4 weeks and is considered on a case-to-case basis. Newly incorporated foreign companies or foreign compa nies with weak track records or inactive backgrounds or non transparent pedigree or special status unknown to Indian law such as an LLC or an S Corporation or an LLP (Limited Liability Partnerships) or a PC (Professional Corporation), can have difficulty getting the necessary approval. The application should cover the following points:

§ Operating history of the company worldwide

§ Proposed activities in India

§ Reasons for wanting to open a branch office

§ Figures of imports and exports of last three years

§ Any foreign exchange implications

Restrictions on operations

The RBI usually imposes the following conditions while granting permission to establish a Branch Office:

§ The Branch Office would not expand its activities or undertake any new trading, commercial or industrial activity other than that is expressly approved by the RBI

§ The entire expenses of the Branch Office in India will be met either out of the funds received from abroad through normal banking channels or through income generated by it in India

§ The Branch Office will not accept any deposits in India;

§ The commission earned by the Branch Office from parties abroad for any agency business will be repatriated to India through normal banking channels.

Repatriation of profits

A Branch Office can remit the profits (net of any withholding tax) generated out of its operations in India on production of the prescribed documents, and on establishing that it has earned a net profit by undertaking the permitted activities. The Branch Office need not retain any profits as reserves in India

1. III. Project office

Foreign companies can establish Project Offices in India specifically for the purpose of execution of specific projects. A Project Office means a place of Business to represent the interests of Foreign Company executing a project in India but excludes a Liaison Office. A Project Office is similar to a branch office but opened for the limited purpose of executing a particular contract. As Project Offices are opened for undertaking a specific activity they cannot perform any other function or undertake any other activity. Generally, companies engaged in turnkey projects or installation projects, set up Project Offices. All expenses of Project Offices must be met through inward foreign currency remittances if the rupee component of the contract, if any, is not sufficient to meet the said expenses. The opening and operation of such offices is regulated by the Foreign Exchange Management (Establishment of India of Branch or office or other place of business) Regulations, 2000. RBI approval is required to open a Project office. Site Offices are opened as part of a Project Office network.

Pre-condition of setting –up a project office:

I. A foreign Company may open a Project office in India provided it has secured from an Indian company, a contract to execute a project in India, and

(a) the project is funded directly by inward remittance from abroad; or

(b) the project is funded by a bilateral or multilateral International Financing Agency; or

(c) the project has been cleared by an appropriate authority; or

(d) a company or entity in India warding the contract has been granted Term Loan by a public Financial Institution or a Bank in India for the project

II. The Foreign Company is required to furnish a report to the concerned Regional Office of Reserve Bank of India under whose jurisdiction the Project Office is set up, giving details as under:

(a) Name and address of the foreign company;

(b) Reference no. and date of letter awarding the contract referred;

(c) Total amount of contract

(d) Address and tenure of project office;

(e) Nature of project undertaken.

Remittance of Surplus:

A Project office in India may remit outside India the surplus of the Project on its completion, net of applicable Indian taxes on production of the following documents and establishing the net surplus:

(a) Certified copy of the final audited project accounts;

(b) A Chartered Accountant’s certificate showing the manner of arriving at the remittable surplus

(c) Income-tax assessment order or either documentary evidence showing payment of income –tax and other applicable taxes, or a chartered Accountant’s certificate stating that sufficient funds have been set aside for meeting all Indian tax liabilities; and

(d) Auditor’s certificate stating that no statutory liabilities in respect of the project are

outstanding. A company executing (or planning to execute) a specific and identifiable contract can open a Project office. An example would be the laying of a gas pipeline or performance of an engineering contract. Typically, these are granted in respect of Government approved projects but this is not a necessary condition. Private sector projects can also be given permission for setting up of Project office and Site offices.

The procedure for opening such an office is to apply to the RBI with details of the project to be executed and the details of the project office to be set up. RBI will accord approvals specific to the project. The project office cannot operate after the completion of the specified project.

2. Wholly owned subsidiary

In case of latter, viz. the establishment of a legally distinct and juristically separate company incorporated under Indian law, in which the foreign company would own shares, all or some, the foreign company and/or its agents act as a promoter of the Indian subsidiary company. The Government has now made it easier than ever before for foreign entities to start wholly owned subsidiaries. In most cases, a company can be incorporated by a foreign company acting itself or through other promoters. This procedure is under the Companies Act, 1956.

Subsequently or as part of the incorporation process itself, shares can be acquired by the foreign company. For this also, in most cases, no other approval is required though there are certain reporting requirements with the RBI. In some cases, prior permission from the FIPB (Foreign Investment Promotion Board) acting for the Government, or the RBI or from an RBI authorized dealer can be required. The circumstances in which this is necessary is, however, beyond the scope of this Memo.

Such subsidiaries whether wholly or only partially owned, are registered with the Registrar of Companies (ROC). These are Indian companies and become subject fully to Indian laws. They have to file all returns to the ROC and to the Income Tax authorities as other Indian companies do. They have to maintain their books of accounts. Except in special permission cases and except in the matter of restrictions if any on repatriation overseas of dividend, Indian law does not treat such companies differently from other companies without any FDI (foreign direct investment). For most purposes but not always, downstream subsidiaries are treated as direct subsidiaries. In case of joint venture subsidiaries, that is to say where the foreign company does not own the entire shareholding, issues of control and management arise. This Memo does not deal with issues arising in such contexts but it should be noted that Indian law contains various deeming provisions that override contractual terms between such JV partners and also that Indian company law contains various provisions that cannot be overridden either by contract or even by special articles of incorporation.

ROC Fees paid for Increase in Authorised Capital is a Capital Expenditure [SC]

[1997] 225 ITR 792 (SC)

SUPREME COURT OF INDIA

Punjab State Industrial Development Corp. Ltd.

v.

Commissioner of Income-tax

A.M. AHMADI, CJ.

AND K. RAMASWAMY AND SUJATA V. MANOHAR, JJ.

TAX REFERENCE CASE NO. 1 OF 1990

DECEMBER 4, 1996

JUDGMENT

The question referred for decision reads as under:

"Whether, in the facts and circumstances of the case, the Tribunal was right in law in holding that the amount of Rs. 1,50,000 paid to the Registrar of Companies, as filing fee for enhancement of capital was not revenue expenditure?"

Since there was a conflict of opinion on this point amongst the various High Courts, it was thought expedient by the ITAT, Chandigarh Bench, to directly refer the question for decision by this court under section 257 of the Income-tax Act, 1961. The factual background in which the question arises for determination is that the applicant, Messrs. Punjab State Industrial Development Corporation Ltd., filed the return of its total income declaring an income of Rs. 13,83,049 on June 30, 1979. In the profit and loss account an amount of Rs. 1,50,000 was claimed as revenue expenditure, the same having been paid to the Registrar of Companies as filing fee for enhancement of capital of the company. The Inspecting Assistant Commissioner of Income-tax (Assessment), Chandigarh, allowed the expenditure but the Commissioner of Income-tax, Patiala, in exercise of the power conferred on him under section 263 of the Income-tax Act revised the order suo motu as in his view the expenditure of Rs. 1,50,000 was wrongly allowed as revenue expenditure. He, therefore, enhanced the income computed by the lower authority by the amount of Rs. 1,50,000 and directed that the assessment be revised accordingly. Feeling aggrieved by the said order, the assessee preferred an appeal before the ITAT. The Tribunal upheld the order of the Commissioner placing reliance on the judgment in GrozBeckert Saboo Ltd. v. CIT [1986] 160 ITR 743 of the Punjab and Haryana High Court. It was thereafter that a reference was sought under section 256(1) of the Income-tax Act, but as stated above, in view of the conflict of opinion amongst the High Courts in the country the question has been directly referred to this court for determination.

The issue has been answered in favour of the assessee and against the Revenue by the High Courts of Madras, Karnataka, Andhra Pradesh and Kerala in the following decisions: CIT v. Kisenchand Chellaram (India) P. Ltd. [1981] 130 ITR 385 (Mad); Warner Hindustan Limited v. CIT [1988] 171 ITR 224 (AP); Hindustan Machine Tools Ltd. (No. 3) v. CIT [1989] 175 ITR 220 (Kar) and Federal Bank Ltd. v. CIT [1989] 180 ITR 241 (Ker). The High Courts of Allahabad, Himachal Pradesh, Delhi, Calcutta, Bombay, Punjab, Gujarat, Andhra Pradesh and Rajasthan have held in favour of the Revenue in the following cases: CIT v. Modi Spinning and Weaving Mills Co. Ltd. [1973] 89 ITR 304 (All); Mohan Meakin Breweries Ltd. v. CIT (No. 2) [1979] 117 ITR 505 (HP); Bharat Carbon and Ribbon Mfg. Co. Ltd. v. CIT [1981] 127 ITR 239 (Delhi); Brooke Bond India Ltd. v. CIT [1983] 140 ITR 272 (Cal); Bombay Burmah Trading Corpn. Ltd. v. CIT [1984] 145 ITR 793 (Bom); Groz-Beckert Saboo Ltd. v. CIT [1986] 160 ITR 743 (P&H); Ahmedabad Mfg. and Calico Pvt. Ltd. v. CIT [1986] 162 ITR 800 (Guj); CIT v. Aditya Mills [1990] 181 ITR 195 (Raj); CIT v. Multi Metals Ltd. [1991] 188 ITR 151 (Raj) and Vazir Sultan Tobacco Co. Ltd. v. CIT [1988] 174 ITR 689 (AP). We may also state that the Calcutta High Court has affirmed this earlier view in three subsequent decisions reported in Kesoram Industries and Cotton Mills Ltd. v. CIT [1992] 196 ITR 845 (Cal); Wood Craft Products Ltd. v. CIT [1993] 204 ITR 545 (Cal) and CIT v. Tungabhadra Industries Ltd. [1994] 207 ITR 553 (Cal) and so also the Gujarat High Court has affirmed its earlier view in Alembic Glass Industries Ltd. v. CIT [1993] 202 ITR 214 (Guj).

We may also indicate that this court laid down the test for determining whether a particular expenditure is revenue or capital expenditure in the case of Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1 (SC). In that decision, this court surveyed the law on the subject in considerable detail and observed at page 10 as under:

"The decided cases have, from time to time, evolved various tests for distinguishing between capital and revenue expenditure but no test is paramount or conclusive. There is no all embracing formula which can provide a ready solution to the problem; no touchstone has been devised. Every case has to be decided on its own facts, keeping in mind the broad picture of the whole operation in respect of which the expenditure has been incurred. But a few tests formulated by the courts may be referred to as they might help to arrive at a correct decision of the controversy between the parties. One celebrated test is that laid down by Lord Cave L.C. in Atherton v. British Insulated and Helsby Cables Ltd. [1925] 10 TC 155, 192 (HL), where the learned Law Lord stated:

‘....when an expenditure is made, not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade, I think that there is very good reason (in the absence of special circumstances leading to an opposite conclusion) for treating such an expenditure as properly attributable not to revenue but to capital’."

This test, as the parenthetical clause shows, must yield where there are special circumstances leading to a contrary conclusion. Briefly put, it is not a strait-jacket formula and the question will have to be determined in the backdrop of facts of each case. The test laid down can at best be a guide for determining whether a particular expenditure forms part of revenue expenditure or capital expenditure. The Madras High Court in Kisenchand Chellaram (India) P. Ltd.’s case [1981] 130 ITR 385 was dealing with a case in which the assessee had paid fees for raising the capital of a company to the Registrar of Companies and had claimed the amount paid as a revenue expenditure. It was held that without capital a company cannot carry on its business and hence the expenses incurred for increasing the capital were bound up with the functioning and financing of the business. Therefore, the assessee’s claim for deduction was allowed. The view taken was that since the amount was wholly and exclusively used for the purpose of the assessee’s business it was allowable as a deduction under section 37(1) of the Income-tax Act. The Karnataka High Court has followed the view taken by the Madras High Court and so also has the Kerala High Court taken the same view. After considering the test laid down by this court in Empire Jute Co.’s case [1980] 124 ITR 1, the Kerala High Court observed as under (see [1989] 180 ITR 241, 246):

"We are of the view that the expenditure incurred for the enhancement of authorised capital is only for the purpose of bettering or improving an established business and cannot be said to be for the purpose of a new business. Viewed in a business sense, the enhancement of the authorised capital is only to broaden the capital base which will be conducive to the better conduct and efficiency and profitability of the business."

In this view the High Court held that the expenditure incurred by the assessee was an item of revenue expenditure. This line of reasoning has not found favour with the other High Courts which have taken a contrary view. The Calcutta High Court in Brooke Bond India Ltd.’s case [1983] 140 ITR 272 held that where the object of incurring an expenditure is to affect the capital structure as a result of which certain incidental advantage flows, the expenditure will be of capital nature. It is not the acquisition of a right of a permanent character alone, the creation of which is a condition for the carrying on of the business, that could be rightly treated as an expenditure on the capital account. Capital expenditure can be incurred after a company is floated or it started business, if it resulted in bringing about capital advantage. The Andhra Pradesh High Court had in Warner Hindustan Ltd.’s case [1988] 171 ITR 224, following the decision of the Madras High Court in Kisenchand Chellaram’s case [1981] 130 ITR 385 held that the expenditure incurred was connected with functioning and financing of the assessee’s business and hence the fees paid could not be treated as on capital account. However, this line of reasoning was departed from in the subsequent decision in Vazir Sultan Tobacco Co. Ltd.’s case [1988] 174 ITR 689 (AP), wherein it was observed that where the object of incurring an expenditure is to effect a capital structure as a result of which certain incidental advantage flows, the expenditure will be of capital nature. In other words, it followed the decision of the Calcutta High Court referred to earlier. It distinguished the earlier decision in Warner Hindustan Ltd.’s case [1988] 171 ITR 224 (AP) holding that it was unable to appreciate the reasoning of the Madras High Court which held it to be a revenue expenditure. It, therefore, refused to extend the ratio of the decision in the earlier case of Warner Hindustan Ltd. [1988] 171 ITR 224 (AP) to expenses incurred directly for the purpose. The Gujarat High Court in Ahmedabad Mfg. and Calico (P.) Ltd.’s case [1986] 162 ITR 800 held that the expenditure incurred being for an enduring benefit in the commercial sense could fall in the capital field. It was held that the shares issued by the company constituted its capital and being an integral part of the permanent structure of the company fell within the realm of capital expenditure. This view was reiterated in the subsequent case of Alembic Glass Industries Ltd. [1993] 202 ITR 214 (Guj). The Bombay High Court in Bombay Burmah Trading Corpn. Ltd.’s case [1984] 145 ITR 793, while dealing with the question whether the fees paid to the Registrar of Companies for enhancement of capital could be described as revenue expenditure or capital expenditure differed with a view taken by the Madras High Court and held that it runs counter to the decision of this court in India Cements Ltd. v. CIT [1966] 60 ITR 52 and In re : Tata Iron and Steel Co. Ltd. [1921] 1 ITC 125 (Bom), wherein it was expressly pointed out that the expenditure incurred for the issue of preference shares could not be said to be solely incurred for the purposes of the company’s business. Briefly put it was held that it was an expenditure incurred directly for the purposes of expansion of the capital asset and was, therefore, of capital nature.

We do not consider it necessary to examine all the decisions in extenso because we are of the opinion that the fee paid to the Registrar for expansion of the capital base of the company was directly related to the capital expenditure incurred by the company and although incidentally that would certainly help in the business of the company and may also help in profit-making, it still retains the character of a capital expenditure since the expenditure was directly related to the expansion of the capital base of the company. We are, therefore, of the opinion that the view taken by the different High Courts in favour of the Revenue in this behalf is the preferable view as compared to the view based on the decision of the Madras High Court in Kisenchand Chellaram’s case [1981] 130 ITR 385. We, therefore, answer the question raised for our determination in the affirmative, i.e., in favour of the Revenue and against the assessee.

The tax reference will stand answered accordingly with no order as to costs.

Quantification of Remuneration in Partnership Deed

In Asstt. CIT v. Suman Construction (2009) 27 (II) ITCL 329 (Pune 'A'-Trib), the assessing officer had noticed that the assessee had claimed salary to partners of Rs. 2,20,000. However, in his opinion as per the partnership deed filed along with the return in the past assessment year, there was no specification of this salary payable to the partners. According to assessing officer, there was neither the quantification of the salary payable to the partners nor it was prescribed the manner in which such quantification would be done. By referring CBDT Circular No. 739, dated 25-3-1996 the assessing officer said that the provisions of payment of salary have been made clear and since there was no specified quantification therefore, assessee was not entitled for claim of deduction under section 40(b) of the Act regarding salary to partners.

It was held that by Finance Act, 1992 with effect from 1-4-1993 an insertion was made in section 40 vide clause (b) which prescribes that in the case of a firm assessable as such any payment of remuneration to any partners who is a working partner, if not authorized by the terms of the partnership deed shall not be entitled for deduction in computing the income chargeable under the head "Profits and gains of business or profession". This section also contains sub-clause (v) which prescribes that any payment of remuneration to any partner who is a working partner who is authorized by and is in accordance with the terms of the partnership deed, then the amount of such payment of partnership should not exceed the aggregate amount as prescribed in this sub-clause. Meaning thereby that section 40, clause (b), sub-clause (ii) and another sub-clause (v) prescribes that a deduction in the case of a firm can be allowed in respect of salary or remuneration to working partners if it is duly authorized by the terms of a partnership deed, however, to the extent of prescribed limit as has also been prescribed in the statute. Therefore, on plain reading of this section, it is understood that the section does not make it mandatory to quantify the amount of salary in one of the clauses of the partnership deed because of the main reason that the monetary limit or ceiling is otherwise prescribed in the statute itself.

The statute has used the term "authorize" and not used the term "quantify". On the other hand, the AO had made the disallowance mainly because of the reason that the amount of salary was not quantified in the clause of the partnership deed and in support he had relied upon CBDT Circular No. 739, dated 25-3-1996. Since the statute has used the term "authorize", therefore, the CBDT had no jurisdiction to substitute the term "authorize" by the term "quantify". While interpreting the clause of a statute there is no scope for importing into the statute some other words which are not there. Such an interpretation, if any, made by any of the authority would amount to an amendment in the statute which is a prerogative of the legislative body, i.e., Hon'ble Members of the Parliament. Even if there be a situation of casus omissus even then the defect can be cured only by a proper legislation and not by any interpretation. There appears no justification to deviate from the general principles of interpretation according to which the intention of the legislature is to be interpreted from the terms used or the words contained in a statute. It is not permissible to add words into a taxing provisions which are not there or exclude words which are there. So, the words contained in a provision must be given a natural meaning as commonly understood in legal parlance.

Care Required to make declaration u/s 58A of Comapnies Act.

CARE REQUIRED IN MAKING DECLARATION UNDER SECTION 58A OF THE COMPANIES ACT, 1956 TO AVOID ADDITION UNDER SECTION 68 OF THE INCOME TAX ACT.

Declaration under section 58A of the Companies Act, 1956:

Section 58A of the Companies Act, 1956 governs acceptance of deposits by companies. Some deposits are exempted, subject to declaration as to own funds. In this write-up we are concerned with declaration made by a depositor who is in case of private company

a) Any Director of private company,

b) Any relative of a Director of private company, (recently added)

c) Any member of the company, ('member' substituted for 'shareholder')

And in case of a limited company is a Director of the company at the time of making the deposit with the company.

The deposits of money made by such persons with the company are not considered as a public deposit, if it is out of own funds and not from borrowing. This is vide exemption granted vide Rule 2 (b) (ix) of the Companies (Acceptance of Deposits) Amendment Rules, 2004 which was recently amended vide Notification dated 12.3.2004 (2004) 120 Company Cases 79 (St.). Vide this amendment; the scope of eligible persons has been extended to a relative of Director of private limited companies. And restriction has been made so as to entitle only 'members', as against any 'shareholder' to be an eligible person in case of private company who can make deposit out of own funds without attracting restrictions applicable to public deposits.

DECLARATION NECESSARY FOR EXEMPTION:

The condition for exemption from being treated is that the eligible person being the director, relative of the director or a member, as the case may be, give declaration in writing, at the time of making deposit to the effect that the amount is not being given out of funds acquired by him by borrowing or accepting (loan or deposit of money) from others.

The restriction is on accepting or borrowing money from others, therefore, money withdrawn from capital account of proprietary concern or partnership firm will not be money received from others hence can be given to the company with a declaration. However, suppose the proprietary concern or partnership firm has already used capital contributions for business purposes, and on the day of withdrawal by the proprietor or the partner the concern borrow money from others, then inference may be drawn that the money deposited by the director, relative of director or member is out of borrowed funds and the proprietary concern or the firm has been used as a tool or conduit to give impression that the money belongs to the depositor.

Similarly money withdrawn from bank account on overdraft facility against fixed deposit made by director, relative of director or member as the case may be cannot be considered as own money as it has been borrowed from the bank against over draft facility. The transaction of making fixed deposit and obtaining loan by way of over draft facility being two different transactions.

Section 68 of the Income-tax Act, 1961:

As per section 68, any sum found credited in the books of account of the assessee can be deemed to be income if the assessee is unable to explain the source and nature of the same satisfactorily. Being well known popular provision, an elaborate discussion is not made for sake of brevity. To establish that any sum found credited in the books of account and credited, as a loan, advance, deposit, or gift from any person is not income, the assessee is required to establish the source and nature of the sum so found credited. For that purpose not only the identity but also capability of the person who made such loan, deposit, advance, or gift is also required to be established to the satisfaction of the Assessing Officer.

A WRONG DECLARATION MAY ATTRACT SECTION 68 OF I.T.ACT:

Suppose, by mistake a declaration as to own fund has been made by the director, relative of director or member, as the case may be then such declaration may go against the assessee and the borrowing may be deemed as income- For instance in case the Assessing Officer of the director, relative or member as the case may be, comes to know that a declaration as to 'own fund' has been given to the company or the company has not treated the amount as public deposit, leading to an inference of own fund, or he obtain copy of declaration and then on scrutiny of books of account he find that the money has been given out of borrowed funds by the director, relative or member. The A.O. may draw the conclusion that the amount of deposit is out of undisclosed income of the declarant and therefore the borrowings shown in his books of account are bogus or the lenders are just name lenders and therefore he may treat the amount of those borrowings as undisclosed cash credit and treat the same as income under Section 68 of the Income Tax Act, 1961 because the assessee himself has admitted or declared that he made deposit out of 'own fund.

Besides such addition under section 68 of the Income-tax Act, 1961 the exempted deposit shall no longer be an exempted one, but will be treated as public deposit. Therefore, the purpose of declaration will fail, and may lead to violation of deposit Rules and the declarant, the company, and any officer including director may be liable to penalty and prosecution under The Companies Act, read with relevant rules for making false declaration, violating deposit rules etc.

CONCLUSION

Care should be taken while giving declaration as to own fund and it should not be taken in a mechanical and routine manner without verifying the exact position in the books of accounts of the declarant. As the case of deposits received by company will be generally in house transaction related with director, relative or member, it would always be advisable to reconfirm from the director, relative or member (in practice from their accountant) to recheck the personal cash book and ensure that the declaration is correct.

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