RCoM to offer free talktime on March 28

Source: PTI Mar 27 2010 , New Delhi

Telecom major Reliance Communications (RCom) will offer free local and STD calling on its

network on March 28 as it celebrates the 100-million subscriber base.

As part of the offer, RCom customers would be able to avail 24 hours of free local and STD calling across the Reliance network on March 28, RCom said in a statement today.

The one-day offer will be available to all new and existing Reliance customers across CDMA, GSM and Hello (fixed wireless) services, it added.

"We are truly humbled by the trust conferred on us by our customers. This is a small gesture to appreciate and express our gratitude to our 100 million customers -- the biggest such offering ever made available anywhere in the world," RCom President Mahesh Prasad said.

Earlier this month, RCom became India's second operator and the fourth operator globally to serve over 100 million customers in a single country.

The company has set a target to achieve the next 100 million customers on its wireless network in 1,000 days.

RCom-Polycom launch wireless video conferencing

 

Source:BS Reporter / Mumbai March 18, 2010, 0:57 IST
Reliance Communications announced today that it 

was partnering with Polycom, a global leader in 

tele-presence and video conferencing services. 

This partnership would introduce high-resolution

wireless video-conferencing services, to be marketed 

by Reliance Webstore, the retail arm of the 

Anil Dhirubhai Ambani Group.



The service would be commercially rolled out in over 40 cities
immediately and reach 60 cities in four months.

Reliance Webstore plans to expand it to 100 cities
by the end of the year.

Reliance Webstore already sells wired video conferencing
services to over 1,500 companies. It does so through
a network of 200 video conferencing suites.
 
Polycom’s technology, coupled with its broadband
services, reduces the cost of their wireless service.

Reliance plans to extend this service to small and
medium-sized enterprises, as well as individual consumers.

The new offering comes with Polycom’s QDX6000 video
conferencing system, with dedicated virtual private network
connectivity through the Reliance Netconnect Broadband,
with a wireless broadband data card.

The entire equipment comes for Rs 2 lakh and has a connectivity
plan of Rs 1,500 per month for a usage of 10 GB.
On a pay-per-use basis, a managed video conferencing service
costs Rs 1,500 for every half-hour.

“This service will serve small and medium-sized enterprises.
We have brought it down to retail for walk-in customers who need
it for social gatherings and education purposes,” said
Sarup Chowdhary, director and CEO, Reliance Webstore.

Reliance services 200-300 video conferences a day and 20,000 video
conferencing hours a month. It hopes this market would expand with
their new service and expects a revenue upside of Rs 400 crore over five years for Reliance Webstore.

Polycom’s system has been altered to meet the requirements of this low-cost
offering to India. Their system enables CD-quality audio along with high-resolution
video, even at a bandwidth of 256 kbps.

“India ranks among the top eight markets for video conferencing,” says
Hansjoerg Wagner, MD, Polycom Asia Pacific.




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New Companies Bill will equate CS with CEO and CFO of Company

Mar 14, 2010

The new Companies Bill to be adopted by Parliament

would simplify the law and equate company secretary 

(CS) with the chief executive (CEO) and chief financial 

officer (CFO) of a company, said Vinayak S Khanvalkar,

president, Institute of Company Secretaries of India (ICSI),

here on Saturday. At least two out of the 10 secretarial standards

specified by ICSI would find place in the new legislation, he added.

Against the backdrop of the Satyam Computer Services
episode, Khanvalkar said ICSI had constituted a core
group to examine the aspect of corporate governance
and made 25 recommendations to the Ministry of Corporate
Affairs. According to him, the institute investigated the role
of the CS in the Satyam fraud case and found that “there was
nothing against him”. He said the same CS, G Jayaraman, was
continuing with the new management of Satyam.

ICSI would introduce two more Post Membership
Qualification (PMQ) courses in competition law and,
corporate insolvency and restructuring as a part of its
efforts for capacity building of company secretaries in new
and emerging areas, said Khanvalkar.

The courses, already approved by the institute’s council,
would be launched within a year, he added. ICSI has
already a PMQ course on corporate governance.

Apart from these two courses, he said, ICSI would
organise short-term courses and collaborative programme
to provide exposure to its members in diversified areas.

ICSI also conducted four training programmes for the
independent directors of Life Insurance Corporation
of India (LIC), Punjab National Bank (PNB) and Bank of India
(BoI). The institute would conduct more such programmes to
make independent directors aware of their liabilities and responsibilities, he said.

Khanvalkar said a core group of experts was
working on ICSI’s Vision 2020 plan. The institute’s
future plan includes strengthening of regional councils,
going in for foreign collaborations and attracting more
students into the CS professional fold.

ICSI past president Datla Hanumantha Raju said the
institute was setting up an education research centre in
Hyderabad over an area 1.26 acres. The project was
estimated to cost about Rs 5 crore. ICSI
also constituted a student welfare fund for which the institute’s
annual contribution was Rs 25 lakh.
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Power of the commissioner to revise under section 263 when the Assessing Officer took a possible view, while passing an order of assessment

Mar 14, 2010

CIT revised the order u/s 263 to include the sum of Rs.1,75,32,600/- 
in the total income of the assessee under Sec.41(1) of the Income Tax Act on the ground that there had been a complete cessation of liability in regard to this amount in the previous year relevant to the assessment year 1982-83 – ITAT confirmed the order – held that – when the Assessing Officer took a possible view, while passing an order of assessment, the Commissioner exceeded his jurisdiction in seeking recourse to his power under Section 263. At the least, it must be held that the question as to whether the liability of the assessee had ceased in the previous year relevant to the Assessment Year 1982-83, was an issue on which a possible view was that there was no final or irrevocable remission or cessation of liability, within the meaning of Section 41(1) of the Act, during Assessment Year 1982-83 – order of CIT and ITAT reversed.

CASE LAW DETAILS

Decided by:, HIGH COURT OF BOMBAY,  
In The case of: Grasim Industries Ltd. v. CIT,  
Appeal No.:, ITR No. 113 of 1990,
Decided on: February 1, 2010,

RELEVANT PARAGRAPH

11. Section 263 of the Income Tax Act, 1961 empowers the Commissioner to call for and examine the record of any proceedings under the Act and, if he considers that any order passed therein, by the Assessing Officer is erroneous in so far as it is prejudicial to the interests of the Revenue, to pass an order upon hearing the assessee and after an enquiry as is necessary, enhancing or modifying theassessment or cancelling the assessment and directing a fresh assessment.

The key words that are used by Section 263 are that the order must be considered by the Commissioner to be “erroneous in so far as it is prejudicial to the interests of the Revenue “.

This provision has been interpreted by the Supreme Court in several judgments to which it is now necessary to turn. In Malabar Industrial Co. Ltd. vs. CIT, 1 the Supreme Court held that the provision “cannot be invoked to correct each and every type of mistake or error committed by the Assessing Officer ” and “it is only when an order is erroneous that the Section will be attracted” The Supreme Court held that an incorrect assumption of fact or an incorrect application of law, will satisfy the requirement of the order being erroneous. An order passed in violation of the principles of natural justice or without application of mind, would be an order falling in that category. The expression “prejudicial to the interests
of the Revenue “, the Supreme Court held, it is of wide import and is not confined to a loss of tax. What is prejudicial to the interest of the Revenue is explained in the judgment of theSupreme Court:

“The phrase “prejudicial to the interests of the Revenue ” has to be read in conjunction with an erroneous order passed by the Assessing Officer. Every loss of revenue as a consequence of an order of the Assessing Officer cannot be treated as prejudicial to the interests of the Revenue. For example, when an Income ­tax Officer adopted one of the courses permissible and the Income ­tax Officer has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the Revenue, unless the view taken by the Income ­taxOfficer is unsustainable in law.”

The principle which has been laid down in Malabar Industrial Co. Ltd. (supra) has been followed and explained in a subsequent judgment of theSupreme Court in Commissioner of Income Tax vs Max India Ltd . 2 While interpreting the provisions of Section 80HHC(3), the Supreme Court noted that the statutory provision had been amended eleven times and different views existed on the
day when the Commissioner passed his order under Section 263.

The Court observed that “the mechanics of the section have become so complicated over the years that two views were inherently possible.” Consequently, the subsequent amendment to the statutory provision, even though it was retrospective, would not attract the provisions of Section 263 particularly when the provision of law, as it stood, on the date when the Commissioner passedthe order under Section 263, would have to be taken into account.

12. In Commissioner of Income Tax vs. Gabriel India Ltd.,3 a Division Bench of this Court observed that Section 263 does not confer an arbitrary or uncharted power on the Commissioner. In considering as to whether an order is erroneous in so far as it is prejudicial to the interests of the Revenue, the Commissioner must be guided by the material on the record.

The power of suo motu revision under Section 263(1), is in the nature of supervisory jurisdiction. Two circumstances must exist in order to enable the Commissioner to exercise the power, namely, (i)the order must be erroneous; and (ii) by virtue of the order being erroneous, prejudice must have been caused to the interests of the Revenue.

Section 263 does not empower the Commissioner to substitute his judgment for that of the Assessing Officer, unless the decision is held to be erroneous. Both the conditions for the exercise of the power must be fulfilled. The order, in other words, sought to be revised, must be erroneous and must be prejudicial to the interests of the Revenue.

13 .The question as to whether the Commissioner has acted within the fold of his jurisdiction under Section 263 or outside it, in the present case, must be decided with reference to the principles which have been laid down by theSupreme Court and by this Court. Section 41(1) provides that where an allowance or deduction has been made in the assessment for any year in respect of a loss, expenditure or trading liability incurred by the assessee and subsequently during any previous year, the assessee obtained whether in cash or in any other manner, any amount in respect of such loss or expenditure or some benefit in respect of such tradingliability by way of remission or cessation thereof, the amount obtains or the value of the benefit accruing shall be deemed to be profits and gains of business or profession and would accordingly be chargeable to income as the income of that previous year.


The State Legislature enacted the Kerala Forest Produce (Fixation of Selling Price) Act, 1978. Section 3(1) empowers the Government to fix the selling price of forest produce for the following financial year. Section 5 stipulated that after the publication of the notification under Section 3, no forest produce shall be sold by the Government at a price which is less than the notified selling price.

On 9th March 1979, the Government of Kerala issued notifications in exercise of its power underthe Act of 1978 for the period ending 31st March 1981 and also for the period commencing from 1st April 1981, being the previous year relevant to Assessment Year 1982 ­83. The assessee had been allowed a deduction of an amount of Rs.1.75 crores during the Assessment Years 1980 ­81, 1981 ­82 and 1982 ­83.

The notifications that were issued by the State Government were challenged by the assessee before the KeralaHigh Court. By its judgment dated 15th April 1981, the High Court struck down the notifications in so far as they related to eucalyptus, on the ground that in fixing the prices for eucalyptus, the State Government had not followed the procedure prescribed bythe Act.

The Kerala High Court held that matters which were required to be considered had not been placed before the Committee which was statutorily to be constituted under the provisions ofthe Act and the Committee had failed to consider relevant material before making its recommendations, in regard to the price of eucalyptus.

The judgment of the Kerala High Court, therefore, set aside the notifications on the ground that the mandate of the Act in fixing the price of forest produce had not been followed and that relevant consideration had not been borne in mind by the Committee. The liability of the assessee to pay arose by virtue of the provisions of Section 5 of the Act , under which, no forest produce could be sold by the Government at a price, which was less than the selling price; the selling price being de1` 1fined to mean that the price of forest produce fixed by the Government under Section 3.

The judgment of the KeralaHigh Court did not prohibit the government from issuing a fresh notification. After the decision of the Kerala High Court , the Expert Committee constituted under the provisions of Section 4, convened for the purposes of deciding afresh, the selling price of eucalyptus upto 31st March 1982.

The Committee held its meeting on 25th March 1982, which was six days before the end of therelevant period here, and recommended the fixation of the selling price of eucalyptus between Rs.328/­ to Rs.384/­ per metric ton between 1978 and 1981. The Special Secretary to the State Government in the Forest and Minor Irrigation Department recorded in a note dated 27th March 1982 that the Kerala Forest Produce (Fixation of Selling Price) Rules, 1978 had been amended on 28th May 1981.

Some doubt was expressed as to whether these Rules could fasten aliability with retrospective effect in the absence of an amendment to the parent legislation. The State Government, in pursuance of the judgment of the KeralaHigh Court proceeded to issue fresh notifications on 31st March 1981, 29th April 1981 and 29th May 1981.

By the notification dated 29th May 1981, the Government refixed the selling price in the year 1981 ­82 with effect from 1st June 1981. On 31st March 1982, selling prices were notified for the period from 1st April 1982.

These notifications were once again challenged by the assessee in a Writ Petition before the KeralaHigh Court. The Petition was allowed by the Division Bench of the Kerala High Court on 28th May 1994 and the notifications were set aside with a declaration that the prices fixed of bamboo, reed and eucalyptus were not payable by the Petitioner. The judgment of the KeralaHigh Court did not conclude the proceedings.

Special Leave Petitions were filed before the Supreme Court in which, while granting leave, interim orders were passed by the Supreme Court , directing the assessee to pay the price of forest produce at 60% of the rate fixed in the notification issued by the State Government under Section 3(e) ofthe Act , less the price already paid.

The Bank Guarantees furnished by the assessee were allowed to be encashed to the aforesaid extent.

TheSupreme Court expressed the hope that the parties would be able to arrive at a settlement which may be “beneficial to all concerned, having regard to the checkered history of the litigation with its attendant uncertainties, and to avoid further long drawn out litigation.”

Eventually, a settlement was arrived at between the Government of Kerala and the assessee on 27th October 1988. By the settlement, a series of matters set out in the schedule, came to be settled and parties agreed that no payment will be due by either party to the other in respect of any of the matters mentioned in the schedule.

14. The narration of facts would thus show that the liability of the assessee in respect of the payment due for the supply of forest produce, under the Kerala Forest Produce (Fixation of Selling Price) Act, 1978, was not concluded by the judgment of the Kerala High Court dated 15th April 1981.

The notifications fixing the price of eucalyptus were set aside by the Kerala High Court, on the ground that the Committee statutorily constituted under the Act, had not applied its mind to the relevant material.

The liability of the assessee to pay at the price notified, arose under the Act, for the supplies of forest produce effected by the State Government to the assessee .

The liability arose as a result of the supply of forest produce the quantification of liability was liable to be made by the instrument of the notifications issued in accordance with the provisions of the Act. The view that there was no remission or cessation of the liability during the previous year, relevant to Assessment Year 1982- 83, was a possible view having regard to the circumstances, which transpired after the judgment of the Kerala High Court.

These circumstances included the following:

(i) The recommendations made by the Expert Committee on 25th March 1982 for the refixation of prices of forest produce six days before the end of the financial year;

(ii) The issuance of fresh notifications by the State Government; (iii) The challenge by the assessee to the fresh notifications;

(iv) The judgment of the Kerala High Court dated 28th May 1984, setting aside the second set of notifications;

(v) The filing of Special Leave Petitions before the Supreme Court challenging the judgment of the Kerala High Court in the second round; and

(vi) The interim order passed by the Supreme Court requiring the assessee to pay at the rate of 60% of the prices/notification s and allowing encashment of Bank Guarantees for that purpose;

and (vii) The eventual resolution of the dispute by a settlement of 27th October 1988.

15. In these circumstances, when the Assessing Officer took a possible view, while passing an order of assessment, the Commissioner exceeded his jurisdiction in seeking recourse to his power under Section 263. At the least, it must be held that the question as to whether the liability of the assessee had ceased in the previous year relevant to the Assessment Year 1982 ­83, was an

issue on which a possible view was that there was no final or irrevocable remission or cessation of liability, within the meaning of Section 41(1) of the Act, during Assessment Year 1982 ­83.

This view could not, by any stretch of logic, be regarded as being insustainable in law. The condition precedent to the exercise of jurisdiction under Section 263, is that the order sought to be revised must be erroneous in so far as it is prejudicial to the interests of the Revenue.

Following the judgments of the Supreme Court in Malabar Industrial Co. and Max India Ltd. (supra), it is now a settled principle that where the Assessing Officer has adopted one of the courses permissible in law or where two views are possible and the Assessing Officer has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the Revenue unless the view taken by the Assessing Officer is unsustainable in law. In the present case, two views were inherently possible and the assessee therefore, cannot be subjected to the exercise of the jurisdiction under Section 263.

The Tribunal, with respect, has adopted a rather simplistic view of the matter, in coming to the conclusion that the liability had ceased to exist, consequent upon the judgment of the Kerala High Court, dated 15th Apri1981.

This clearly overlooks the checkered history of the litigation. The fact that the litigation had a checkered history was noted in the interim order of the Supreme Court, which also referred to the “attendant uncertainties ” and to the possibility of a “further long drawn out litigation “.



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Passports under the Tatkal

 

Mar 12, 2010

Applications for issue of passports under the
Tatkal scheme are accepted if a verification 
certificate is submitted in the prescribed performa,
duly signed by a designated officer of the Central/State
Governments, or on submission of three prescribed documents. 

Two lists containing designated officers and prescribed 
documents are enclosed at Annexure A and B.

Generally, Passport Offices have adhered to the time-target of issuing passports under the Tatkal scheme. Under the scheme, fresh passports are issued within the time-target of 1-7 days and re-issued passports within three working days, subject to no adverse information being found in the system during the processing of the applications. The Government has elaborated a public grievances redressal mechanism to attend to all grievances, including those under the Tatkal scheme, at every passport office as well as at Consular, Passport, and Visa Division of the Ministry.

ANNEXURE-A

List of 14 documents:

a)   Electors Photo Identity Card (EPIC)

b)  Service Identity Cards issued by State/Central Government, Public Sector Undertakings,  Local bodies or Public Limited Companies

c )  SC/ST/OBC Certificates

d)   Freedom Fighter Identity Cards

e)   Arms Licenses

f)  Property Documents such as Pattas, Registered Deeds etc

g)  Ration Cards

h)  Pension Documents such as Ex-Servicemen’s Pension book/Pension   Payment Order, Ex-  Servicemen’s Widow/Dependent Certificates, Old Age Pension Order, Widow Pension Order

i)   Railway Identification Cards

j)   Income Tax Identity(PAN) cards

k)  Bank/Kisan/Post Office Passbooks

l)   Student Identity Cards issued by recognized educational institutions

m) Driving Licenses

n) Birth Certificates issued under the Registrar of Births & Deaths (RBD) Act

Note: At least one of the three documents submitted should be a photo identity document and at least one should be, out of those listed at ‘a’ to ‘i’ above.

ANNEXURE-B

The List of authorities competent to issue Verification Certificates (VCs)

a) An Under Secretary /Deputy Secretary/Director/Joint Secretary/Special Secretary/Secretary/Cabinet Secretary in the Government of India;

b) A Director/Joint Secretary/Additional Secretary/Special Secretary/Chief Secretary in a State Government

c) A Sub-Divisional Magistrate/First Class Judicial Magistrate/Additional DM/District Magistrate  of the District  of residence of the applicant

d) A District Superintendent of Police, DIG/IG/DGP of District  of residence of the applicant

e) A Major and above in the army, Lt. Commander  and above in the Navy and Sq. Leader and above in the Air Force

f) General Manger of a Public Sector  Undertaking

g)  A member of an All India Service or Central Service, who is equivalent to or above the rank of an Under Secretary to the Government i.e. in the pay scale of Rs. 10,000-15,200 or above

h)  Resident Commissioners/Additional Residential Commissioners of all State Governments based in Delhi

i)   Concerned Tehsildars or concerned SHO for an applicant staying in the area under his/her jurisdiction.

j)  Chairman/Chairperson of Apex  Business Organizations such as Federation of Indian Chambers of Commerce and Industry (FICCI), Confederation of Indian Industries (CII) and Associated Chambers of Commerce and Industry (ASSOCHAM) in respect of owners,, partners or directors of the companies that are members of the concerned Chamber.

This information was given by Dr. Shashi Tharoor, Minister of State of External Affairs in reply to a question by Shri Gireesh Kumar Sanghi in Rajya Sabha today.


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Budget 2010: Deemed gifts under the Income Tax Act

 
Mar 12, 2010

1. Existing Provision

Clause (vii) has been inserted in section 56(2) by the Finance (No. 2) Act, 2009. Under this clause if an individual or a HUF receives on or after October 1, 2009 a gift (which falls in any of the following five categories), it is chargeable to tax in the hands of the recipients under the head “Income from other sources”.

A gift is chargeable to tax under section 56(2)(vii) if it satisfies the following conditions —

• It is received by an individual or a HUF.

• It is received on or after October 1, 2009.

• The gift falls in any of the following five categories.

• The gift does not fall in the exempted category. The five categories are as under:

• Any sum of money (gift in cash or by cheque or draft).

• Immovable property without consideration

• Immovable property for a consideration which is less than the stamp duty value

• Movable property without consideration

• Movable property for a consideration which is less than fair market value

While calculating the above monetary limit of Rs. 50,000 in any of the five categories, any sum of money or property received from the following shall not be considered—

• Money/property received from a relative.

• Money/property received on the occasion of the marriage of the individual.

• Money/property received by way of will/inheritance.

• Money/property received in contemplation of death of the payer.

• Money/property received from a local authority.

• Money/property received from any fund, foundation, university, other educational institution, hospital, medical institution, any trust or institution referred to in section 10(23C ).

• Money received from a charitable institute registered under section 12AA

2. Proposed amendments


(i) Amendment of section 2

3. In section 2 of the Income-tax Act,—

(b) in clause (24), in sub-clause (xv), after the words, brackets and figures “value of property referred to in clause (vii)”, the words, brackets, figures and letter “or clause (viia)” shall be inserted with effect from the 1st day of June, 2010.

From Notes on Clauses:

The existing provision contained in sub-clause (xv) of clause (24) of the aforesaid section provides that any sum of money or value of property referred to in clause (vii) of sub-section (2) of section 56 will fall within the definition of “income”.

Sub-clause (b) proposes to amend sub-clause (xv) to also make a reference therein to value of property referred to in the proposed clause (viia) to sub-section (2) of section 56. This amendment is consequential to the amendment made vide sub-clause (b) of clause 21 of the Bill.

This amendment will take effect from 1st June, 2010 and will, accordingly, apply in relation to the assessment year 2011-2012 and subsequent years.

(ii) Amendment of section 49

In section 49 of the Income-tax Act,—

(b) in sub-section (4), after the word, brackets and figures “clause (vii)”, at both the places where they occur, the words, brackets, figures and letter “or clause (viia)” shall be inserted with effect from the 1st day of June, 2010.

From Notes on Clauses:

Under the existing provision contained in sub-section (4) of section 49, where the capital gain arises from the transfer of a property, the value of which has been subject to income-tax under clause (vii) of sub-section (2) of section 56, the cost of acquisition of such property shall be deemed to be the value which has been taken into account for the purposes of the saidclause (vii).

Sub-clause (b) proposes to amend the aforesaid sub-section so as to provide that the cost of acquisition of such property shall be deemed to be the value which has been taken into account for the purpose ofclause (viia) of sub-section (2) of section 56 also.

This amendment is consequential to the amendment made vide sub-clause (b) of clause 21 of the Bill and will take effect from 1st June, 2010 and will, accordingly, apply to the assessment year 2011-2012 and subsequent years.

(iii) Amendment of section 56

In section 56 of the Income-tax Act, in sub-section (2),—

(a) in clause (vii),—

(i) for sub-clause (b), the following sub-clause shall be substituted and shall be deemed to have been substituted with effect from the 1st day of October, 2009, namely:—

(b) any immovable property, without consideration, the stamp duty value of which exceeds fifty thousand rupees, the stamp duty value of such property;”;

(ii) in the Explanation, in clause (d),—

(a) in the opening portion, for the word “means—”, the words “means the following capital asset of the assessee, namely:—” shall be substituted and shall be deemed to have been substituted with effect from the 1st day of October, 2009;

(b) in sub-clause (vii), the word “or” shall be omitted with effect from the 1st day of June, 2010;

(c) in sub-clause (viii), the word “or” shall be inserted at the end with effect from the 1st day of June, 2010;

(d) after sub-clause (viii), the following sub-clause shall be inserted with effect from the 1st day of June, 2010, namely:—

“(ix) bullion;”;

(b) after clause (vii), the following shall be inserted with effect from the 1st day of June, 2010, namely:—

(viia) where a firm or a company not being a company in which the public are substantially interested, receives, in any previous year, from any person or persons, on or after the 1st day of June, 2010, any property, being shares of a company not being a company in which the public are substantially interested,—

(i) without consideration, the aggregate fair market value of which exceeds fifty thousand rupees, the whole of the aggregate fair market value of such property;

(ii) for a consideration which is less than the aggregate fair market value of the property by an amount exceeding fifty thousand rupees, the aggregate fair market value of such property as exceeds such consideration:

Provided that this clause shall not apply to any such property received by way of a transaction not regarded as transfer under clause (via) or clause (vic) or clause (vicb) or clause (vid) or clause (vii) of section 47.

Explanation.—For the purposes of this clause, “fair market value” of a property, being shares of a company not being a company in which the public are substantially interested, shall have the meaning assigned to it in theExplanationtoclause (vii)

From Notes on Clauses:

Clause 21 of the Bill seeks to amend section 56 of the Income-tax Act relating to income from other sources.

Under the existing provisions contained in sub-clause (b) of clause (vii) of sub-section (2) of the aforesaid section, if an assessee being an individual or a Hindu undivided family receives any immovable property without consideration or for inadequate consideration, the value of the said property shall be treated as income in the hands of assessee and shall be liable to tax.

It is proposed to substitute the aforesaid sub-clause (b) of clause (vii) of sub-section (2) of the aforesaid section so as to provide that clause (vii) of sub-section (2) of section 56 would apply only if the immovable property is received without any consideration and to remove the stipulation as regards inadequate consideration.

This amendment will take effect retrospectively from 1st October, 2009, and will, accordingly, apply in relation to the assessment year 2010-2011 and subsequent years.

Under the existing provisions contained in clause (d) of the Explanation to clause (vii) of sub-section (2) of the aforesaid section, certain properties have been enumerated within the definition of “property”.

It is proposed to amend the aforesaid clause (d) of the Explanation to clause (vii) of sub-section (2) so as to specify that clause (vii) of sub-section (2) of the aforesaid section will have application to “property” which is in the nature of capital asset of the assessee.

This amendment will take effect retrospectively from 1st October, 2009, and will, accordingly, apply in relation to the assessment year 2010-2011 and subsequent years.

It is also proposed to amend clause (d) of the said Explanation to insert a new sub-clause (ix) so as to include “bullion” within the specified categories of property.

This amendment will take effect from 1st June, 2010, and will, accordingly, apply in relation to the assessment year 2011-2012 and subsequent years.

Under the existing provisions contained in clause (vii) of sub-section (2) of the aforesaid section, if an assessee who is an individual or a Hindu undivided family receives specified property without consideration or for inadequate consideration from persons other than relatives defined in the said section, the value of the said property shall be treated as income in the hand of assessee and shall be taxed.

It is proposed to insert a new clause (viia) in sub-section (2) of the aforesaid section so as to include the transactions undertaken in shares of a company not being a company in which the public are substantially interested where the recipient is a firm or a company not being a company in which the public are substantially interested.

This amendment will take effect from 1st June, 2010, and will, accordingly, apply in relation to the assessment year 2011-2012 and subsequent years.

(iv) Amendment of section 142A

In section 142A of the Income-tax Act, in sub-section (1), for the words, figures and letter “section 69B is required to be made”, the words, figures, letter and brackets “section 69B or fair market value of any property referred to in sub-section (2) of section 56 is required to be made” shall be substituted with effect from the 1st day of July, 2010.

From Notes on Clauses:

Clause 33 of the Bill seeks to amend section 142A of the Income-tax Act relating to estimate by Valuation Officer in certain cases.

The existing provisions contained in sub-section (1) of the aforesaid section provide that where an estimate of the value of any investment referred to in section 69 or section 69B or the value of any bullion, jewellery or other valuable article referred to in section 69A or section 69B is required for the purpose of making an assessment or re-assessment under the Act, the Assessing Officer may require the Valuation Officer to make an estimate of such value and report the same to him.

It is proposed to amend the said sub-section (1) so as to also enable the Assessing Officer to make reference to the Valuation Officer for making an estimate of fair market value of any property referred to in sub-section (2) of section 56 of the Act.

This amendment will take effect from 1st July, 2010.

3. From Explanatory Memorandum

Taxation of certain transactions without consideration or for inadequate consideration

Under the existing provisions of section 56(2)(vii), any sum of money or any property in kind which is received without consideration or for inadequate consideration (in excess of the prescribed limit of Rs. 5 0,000/-) by an individual or an HUF is chargeable to income tax in the hands of recipient under the head ‘income from other sources’. However, receipts from relatives or on the occasion of marriage or under a will are outside the scope of this provision.

The existing definition of property for the purposes of section 56(2)(vii) includes immovable property being land or building or both, shares and securities, jewellery, archeological collection, drawings, paintings, sculpture or any work of art.

A. These are anti-abuse provisions which are currently applicable only if an individual or an HUF is the recipient. Therefore, transfer of shares of a company to a firm or a company, instead of an individual or an HUF, without consideration or at a price lower than the fair market value does not attract the anti-abuse provision

In order to prevent the practice of transferring unlisted shares at prices much below their fair market value, it is proposed to amend section 56 to also include within its ambit transactions undertaken in shares of a company (not being a company in which public are substantially interested) either for inadequate consideration or without consideration where the recipient is a firm or a company (not  being a company in which public are substantially interested). Section 2(18) provides the definition of a company in which the public are substantially interested.

It is also proposed to exclude the transactions undertaken for business reorganization, amalgamation and demerger which are not regarded as transfer under clauses (via), (vic), (vicb), (vid) and (vii) of section 47 of the Act.

Consequential amendments are proposed in—

(i) section 2(24), to include the value of such shares in the definition of income;

(ii) section 49, to provide that the cost of acquisition of such shares will be the value which has been taken into account and has been subjected to tax under the provisions of section 56 (2).

These amendments are proposed to take effect from 1st June 2010 and will, accordingly, apply in relation to the assessment year 2011-12 and subsequent years.

B. The provisions of section 56(2)(vii) were introduced as a counter evasion mechanism to prevent laundering of unaccounted income under the garb of gifts, particularly after abolition of the Gift Tax Act. The provisions were intended to extend the tax net to such transactions in kind. The intent is not to tax the transactions entered into in the normal course of business or trade, the profits of which are taxable under specific head of income. It is, therefore, proposed to amend the definition of property so as to provide that section 56(2)(vii) will have application to the ‘property’ which is in the nature of a capital asset of the recipient and therefore would not apply to stock-in-trade, raw material and consumable stores of any business of such recipient.

C. In several cases of immovable property transactions, there is a time gap between the booking of a property and the receipt of such property on registration, which results in a taxable differential. It is, therefore, proposed to amend clause (vii) of section 56(2) so as to provide that it would apply only if the immovable property is received without any consideration and to remove the stipulation regarding transactions involving cases of inadequate consideration in respect of immovable property.

These amendments are proposed to take effect retrospectively from 1st October, 2009 and will, accordingly, apply in relation to the assessment year 2010-11 and subsequent years.

D. It is proposed to amend the definition of ‘property’ as provided under section 56 so as to include transactions in respect of ‘bullion’.

This amendment is proposed to take effect from 1st June, 2010 and will, accordingly, apply in relation to the assessment year 2011-12 and subsequent years.

E. It is proposed to amend section 142A(1) to allow the Assessing Officer to make a reference to the Valuation Officer for an estimate of the value of property for the purposes of section 5 6(2).

This amendment is proposed to take effect from 1st July, 2010.

4. Highlights of the amendment

• A new clause (viia) is inserted in Section 5 6(2) to include within its ambit transactions undertaken in shares of a closely held company either for inadequate consideration or without consideration where the recipient is a firm or a closely held company.

• If the property received by way of gift constitutes stock in trade of the recipient, it shall not be liable to tax. (w.r.e.f. 01.10.09)

• The deemed gift concept introduced by the Finance (No.2) Act, 2009 in case of immovable

properties purchased at less than the stamp duty value has been removed w.r.e.f. 01.10.09.

• W.e.f. 01.06.10, even gift of bullion is liable to tax as income u/s. 56(2)(vii).

• Assessing Officer has been conferred with the power to make reference to the Valuation Officer u/s. 142A for the purpose of ascertaining fair market value for taxability of gifts u/s. 56(2)(vii).


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Procedure for Conversion of partnership firm into company

 

Procedure for Conversion of partnership firm into

company and provision of Companies Act, 

1956 and the Income Tax Act, 1961
Mar 12, 2010 Company Law

REORGANISATION OF A FIRM INTO A COMPANY:

Corporatisation is the need of the hour. The entire world is
gradually drifting towards one global market without any
trade barriers between the countries. A small organisation
led by few partners cannot think of growth on large scale
without corporatising itself. Corporatisation have their own
advantages such as Limited Liability, Perpetual Succession,
Transferability of shares, Expansion etc.

Conversion of a partnership firm to a company shall be
studied under the provisions of the Companies Act, 1956 and the Income Tax Act, 1961.

COMPANIES ACT, 1956:

There would be 2 options available to a partnership firm for
continuing the business in the form of a company:

    * To dissolve the firm and incorporate a new company
under the Companies Act, 1956; or
    * Incorporate a company which can legally take over
the business of the firm and continue the same business under
Part IX of the Companies Act, 1956

The firm may be converted into a company by following the
provisions of Part IX of the Companies Act, 1956 since
there are many benefits which both the company and the firm stand to enjoy.

Sections 565 to 581 prescribes the law and procedure for
Companies authorised to register under Part IX of the Companies Act, 1956.

Section 565 of the Companies Act, 1956 provides
that any company formed in pursuance of any Act of
Parliament or any other Indian Law other than the Companies
Act, 1956; consisting of seven or more members may at any
time register itself under this Act, either as an unlimited company
or as a company limited by shares or limited by guarantee.

Circular No. 5/99 dated 19-5 -99 and Press Release dated
5/8/99, clarified that, the Registrar of Companies will
continue to register Partnership Firms under Part IX of the
Companies Act as Joint Stock Companies on satisfying the
procedure and conditions. Accordingly, an existing Partnership
Firm can be registered under the Companies Act.

Joint Stock Companies has been specifically defined for the purposes
of Part IX under section 566 of the Companies Act, 1956.

STEPS FOR INCORPORATION OF COMPANY UNDER PART IX:

Step 1: Hold a meeting of the partners to transact the following:

- Assent of majority of its members as are present in person or
where proxies are allowed, by proxy, at a general meeting summoned
for the purpose of registeringthe firm under Part IX of the Companies Act,
1956. The majority required to assent as aforesaid shall consist of not less
than 3/4 of the members as are present in person or where proxies are
allowed, by proxy.

-          To authorize one or more partners to take all steps necessary
and to execute all papers, deeds, documents etc. pursuant to
egistration ofthe firm as a Company.

-          To execute a supplementary Partnership Deed to align it
with the requirements as under:

    * There must be atleast 7 partners in the partnership firm;
    * The firm may be registered with the Registrar of Firms;
    * There must be a fixed capital divided into units;
    * There must be provision of converting a firm into company;
    * There must be an agreement by the partners to convert
the partnership to a company. This can be done by a contrac
t in writing to this effect to which the partner’s resolution for
conversion can be attached as annexure.

-          Execute a settlement deed.

Step 2 : Application for Director’s Identification Number
And Digital Signaturers Certificate

Step 3 : Name approval:

Under the Part IX route, one of the major advantages is that the
business can be run under the same name as that of the firm
except that in addition to the name of the firm the words
‘limited’ or ‘private limited’ has to be added. However
, if there is a company already in existence, the name
would not be available. In that case, the following steps need to be taken.

Ø An application in Form No. 1A needs to be filed with the Registrar of
Companies (ROC) with the following details stating the fact that
the partnership firm proposed to be converted under part IX of the Companies Act.

    * Certified true copy of Partnership Deed.
    * Certified true copy of the latest balance sheet of the partnership firm.
    * Certified true copy of the latest income tax assessment order/return.
          o Consent of all the partners stating that they have agreed to register
the partnership firm as a Company .
          o Certified True Copy of the resolution passed by the firm in this regard .

Ø      The application is required to be digitally signed by one of the promoters.

Ø      The details to be stated in the said application are as follows :

   1. Maximum Six alternative names for the proposed company. (in order of preference)
   2. Names , Father’s/ Husband’s Name, Permanent
Residential Addresses, Present Residential Address,
Occupation, Name of the Companies in which the
Promoter is Director/Promoter , Date of Birth , DIN of the Promoters.
   3. Authorised Capital of the proposed Company.
   4. Main objects of the proposed company.
   5. State of Registered Office of Company

Note:

   1. As per the Companies Act, 1956, a Private Company should
have a minimum Paid up Capital of Rupees One Lac.
   2. As per the Companies Act, 1956 there should be at least two
promoters in a Private Limited Company.
   3. The Registrar of Companies will ordinarily inform within a period
of seven days from the date of submission of the application whether any of the names applied for
is available.
   4. If the name is not made available, the Registrar of Companies
may reject the application and if it happens, new names to be provided for approval.

Step 4 : Registration of Company:

• On obtaining the approval of name , file the following documents
with the registrar of Companies within 60 days from the date
of name approval:

a. Two sets of Memorandum and Articles of Association
of the Company. One set shall be duly stamped. These will be
similar in all respects to a normal Memorandum and Articles of
Association except that it incorporates therein terms of the settlement deed

b. The Memorandum and Articles of Association is to be
stamped as per the Indian Stamp Act.

c. Thereafter these documents are required to be executed
by the promoters in their own hand after the date of Stamping
of Memorandum & Article of Association in duplicate stating
their full name, father’s name, residential address, occupation,
number of shares subscribed for & Signature etc.

d. However, if any director is foreigner and not present in India,
his signature should be attested in Indian Embassy located
in his home country.

e. Form No. 1 - This is a declaration to be executed on a
non-judicial stamp paper by one of the directors of the
proposed company or other specified persons such as
Chartered Accountants, Company Secretaries, Advocates,
etc. stating that all the requirements of the incorporation have
been complied with.

f. Form No. 18 - This is a form to be filed by one of the directors
of the company informing the ROC the registered office of the proposed company.

g. Form No. 32 - This is a form stating the fact of appointment of
the proposed directors on the board of directors from the date
of incorporation of the proposed company and is signed by one
of the proposed directors.

h. Power of Attorney signed by all the subscribers to MOA
authorizing 2` 1one of the subscribers or any other person to
act on their behalf for the purpose of incorporation and
accepting the certificate of incorporation.

i. Form No. 37 – This form is an application by an existing
Joint Stock Company for registration as a limited / an unlimited company.

j. Declaration by two partners verifying the particulars
set forth in the above mentioned documents.

k. Consent letters from Directors

l. Filing fees as may be applicable.

m. Other information to be submitted:

i) A list showing the names, addresses and occupations of
all persons who on a day named in the list, not being more
than 6 clear days before the date of registration were members
of the company, with the addition of the shares or stock held by
them respectively, distinguishing, in cases where the shares are
numbered, each share by its number.

ii) If the company is intended to be registered as a
limited company, a statement specifying the following particulars :-

a)    the nominal share capital of the company and the
number of shares into which it is divided or the amount
of stock of which it consists

b)   the number of shares taken and the amount paid
of each share c) the name of the company, with the addition
of the word “Limited” or “Private Limited” as the case may
be, as the last word / words, in case the company is being
registered with limited liability.

Step 5 : On completion of the formalities, the registrar
shall register the Company under Part IX of the Act and issue
a certificate of incorporation.

Steps for Incorporation of a public limited company:

First Five stages are almost same for incorporation of
a public limited company except there should be at least
seven subscribers, three directors and the minimum paid up capital of Rs. 5 lacs.

After completion of first three stages a private limited
company may commence its business but a public limited
company is required to obtain certificate for commencement
of business from Registrar of Companies.

For obtaining the Certificate for commencement of its business,
the Company is required to 
submit following documents with Registrar of Companies:

    * Form 20 to be executed on a non-judicial stamp paper

    * Statement in lieu of Prospectus

    * Affidavit from each directors stating that the Company
has not commenced its Business

    * Details of Preliminary expenses

    * Board Resolution for approval of preliminary expenses.

    * Board resolution for appointment of first Auditors

    * Consent letter from the Auditors for acting as Statutory Auditors.

Registrar of Companies thereafter shall process the documents
and if all the documents are in order then he will issue a Certificate
for commencement of Business.

Steps after incorporation of private company:

    * Once the new company is formed, the takeover agreement
would be entered between the Partnership Firm and the newly
incorporated company.
    * Convene a Board Meeting after giving notice to all the
directors of the newly incorporated company immediately after
incorporation as per section 286 of the Companies Act, 1956 to
adopt the agreement entered into by the company and the partner
of the firm for the acquisition of business of the firm.
    * In such a situation, the entire business of the firm along with
all its assets and liabilities is transferred to the company.
    * The company may issue shares or other securities to the
Partner of the firm.

Steps after incorporation of public company:

    * Once the new company is formed, the takeover
agreement would be entered between the Partnership
firm and the newly incorporated company
    * Convene a Board Meeting after giving notice to all
the directors of the newly incorporated company immediately
after incorporation as per section 286 of the Companies Act,
1956 to adopt the agreement entered into by the company.
    * In the above Board Meeting also fix up the date, time , place
and agenda for calling a General Meeting to pass a Special
Resolution under section 81(1A) of the Companies Act,
1956 giving powers to the Board of Directors to issue
and allot equity shares to Partners of the firm.

Effect of Registration under part IX:

    * Vesting of Property : All property, movable as well as
immovable, including actionable claims belonging to or vested
in the firm at the time of registration shall, on such registration
pass to and vest in the company as incorporated under Part IX. [Section 575].
    * The registration of a company under Part IX shall not
in any manner affect its rights or liabilities in respect of any
debt or obligation incurred or any contract entered into, by, to,
with or on behalf of the firm before registration. [Section 576].
    * All suits and other legal proceedings taken by or against
the company or any public officer or member thereof which
where pending at the time of registration may be continued in
the same manner as if registration had not taken place.

However, no execution can be done against the property
or person of any individual member of the company on any
decree or order obtained in such suit or proceeding. If the property
of the company is inadequate to satisfy the decree or order, an
order for winding up the company may be obtained. [Section 577].
    * All provisions of any Indian law or other instrument
constituting or regulating the company shall apply to the
registered company in the same manner as if the company had
been formed under the Companies Act, 1956 and those conditions
were required to be contained and were contained in its
Memorandum and Articles of Association. [Section 578].
    * As per section 383A of the Companies Act, if the paid up
capital of the Company is Rs. 200 lacs or more than the company
is required to appoint a full time Company Secretary.
    * As per section 269 of the Companies Act, 1956 if the paid up
capital of the company is Rs. 500 lacs or more than the
Company is required to appoint either Managing
Director or Whole Time Director or Manager.
    * Debts and liabilities are not automatically transferred to the
new company and therefore a novation agreement will have to be
entered into by the company with its debtors and creditors.
    * It is advisable for the firm to obtain an indemnity from the
company to the partnership firm for all acts, deeds and things
done after the registration under Part IX and also vice versa.
This is required as the liability of the firm is unlimited and extends to
the personal assets of the partners.
    * It is also to be noted that the rights, liabilities, debts and obligations
or any contracts entered into by the firm shall remain unaffected as it
existed prior to the registration of the company under Part IX of the Companies Act, 1956.
    * Comply with all the relevant provisions of the Companies Act, 1956 i.e. call
requisite meetings, register charges, comply with section 5 8A if necessary, etc


INCOME TAX ACT 1961:

Chapter IV E of the Act contains provisions relating to
“Capital Gains”. Under section 45(1) of the Act, profits
and gains arising from the transfer of a capital asset effected
in the previous year is chargeable to tax under the head
“Capital gains”. The terms “transfer” and “capital asset” have
been defined in section 2(47) and section 2(14) respectively.

Section 2(47) of the Act, defines the term “transfer” as follows.

“transfer, in relation to a capital asset, includes,—

(i) the sale, exchange or relinquishment of the asset ; or

(ii) the extinguishment of any rights therein ; or

(iii) the compulsory acquisition thereof under any law ; or

(iv) in a case where the asset is converted by the owner
thereof into, or is treated by him as, stock-in-trade of a
business carried on by him, such conversion or treatment ; or

(iva) the maturity or redemption of a zero coupon bond; or

(v) any transaction involving the allowing of the possession
of any immovable property to be taken or retained in part
performance of a contract of the nature referred to in section
53A of the Transfer of Property Act, 1882 (4 of 1882) ; or

(vi) any transaction (whether by way of becoming a member
of, or acquiring shares in, a co-operative society, company
or other association of persons or by way of any agreement
or any arrangement or in any other manner whatsoever) which
has the effect of transferring, or enabling the enjoyment of, any
immovable property.

Explanation.—For the purposes of sub-clauses (v) and (vi),
“immovable property” shall have the same meaning as in clause
(d) of section 269UA;”

Under section 2(14) of the Act, the term “Capital asset” is
defined as follows:

“ “capital asset” means property of any kind held by
an assessee,
whether or not connected with his business or
profession, but does not include …………”

As per section 45(1), profits and gains arising from the
transfer of a capital asset effected in the previous year is
chargeable to tax. The term “effected” as used in
section 45(1) has a special meaning.

Existence of the party (transferor) and the Counter
party (transferee) is necessary for the applicability of section 45(1).

A recent decision of the Bombay High Court in CIT v Texspin Engineering
and Manufacturing Co. (2003) 263 ITR 345 (Bom)
has held that such conversion of firm into company
by following the route under Part-IX of the Companies
Act, 1956, does not occasion capital gains, since there is
no transfer involved in such a case.

The High Court after considering the provisions of
Companies Act, provisions of income tax relating to
capital gains and relying on the ratio of Malbar Fisheries
Company v CIT (1979) 120 ITR 49 (SC),
CIT Vs. George Henderson & Co Ltd (1967) 66 ITR 622 (SC),
CIT Vs. Gillanders Arbuthnot & Co (1973) 87 ITR 407 (SC),
held that, when a firm is registered as a company, as per
the procedure prescribed under Part IX of the
Companies Act, no capital gains arise to the firm.
When a partnership firm is treated as limited company,
under Part IX of the Companies Act, the properties of the
erstwhile firm vests in the limited company as they exist.
There is no dissolution of the firm. Hence section 45 (1)
of the Income Tax Act is not applicable. When shares
of the Company are allotted to partners in consideration
of capital standing in their accounts in the firm, there is
no transfer of capital assets as contemplated under
section 2(47)(iii) of the Income Tax Act
(i.e. compulsory acquisition, thereof under any law),
as partners are getting their own right to share Capital.

In Well Pack Packaging Vs. Dy. CIT (2003) 78 TTJ (Ahd.) 448,
also the same view was taken that, corporatisation of the firm
under the part IX route did not attract liability to Capital Gains
in the hands of the firm.

In Vali Pattabhiram Roa v Shri Ramanuja Ginnning &Rice Factory (P) Ltd.
(1986) 60 Comp cas 568 (AP), the Court has held
that there is no transfer under general law if the constitution
of the firm is changed to that of a company by registering
it under Part IX of the Companies Act, as there shall be
statutory vesting of title of all the properties of the firm in
the newly incorporated company without any need for a
separate conveyance.

A partnership firm consisting of at least seven partners
may be registered as an unlimited Company or as a
company limited by shares or as a company limited by
guarantee under Part IX of the companies Act.

On conversion and registration of the partnership firm
into a Company under Part IX, all the properties movable
and immovable (including actionable claim), of the partnership
firm would pass to and vest in the company as incorporated
under the provisions of the Companies Act, 1956.

The registration of the partnership firm as a company under the
provisions of Part IX of the Companies Act would be an
unilateral act of the firm de hors the existence of the other
person. On such registration, the partnership firm existed
before such registration would now be considered as
a Company. The erstwhile entity would shed its garb of a
firm and assume the mantle of a company. All the property
hitherto owned by the partnership firm would be statutorily
vested in the company on such registration without the act
of any agency. Thus, the requirement of a transfer being
effected would not be satisfied. As a consequence,
conversion into and registration of the partnership firm as
a Company under Part IX would not be considered as a
transfer under section 45(1) of the Income Tax Act, 1961.

For the sake of argument if it is considered that the Part IX conversion
of the firm into a Company should be regarded as a transfer under
section 45(1), even then there would be no liability to tax under
the head “Capital gains”. This is because, the
existence of “full value of the consideration”
is indispensable for the computation of capital gains.
There would no full value of consideration when the
partnership firm gets converted and registered as a Company
under Part IX of the Act. As stated earlier, the market value
of the assets vested in the Company cannot be considered
as the full value of the consideration.

The value at which the shares are allotted to the partners
who become shareholders on conversion, also cannot be
construed as the full value of the consideration.
Such allotment of shares would not be in connection
with the vesting of the property.

The allotment of shares would be in pursuance of the
requirement of the provisions of Part IX of the Act.
Thus, even if it is considered that the conversion of the
firm under Part IX amounts to a transfer, in the absence
of the full value of the consideration, the method of
computation of capital gains as provided in section 48 cannot
be given effect as a result, no income would be chargeable to
tax in the hands of the Partnership firm under the head “Capital Gains”.

The next question for our consideration is whether conversion
of a partnership firm into a Company under Part IX of the
Companies Act, 1956 attracts section 45(4) of the Income Tax Act, 1961?

Section 45(4) is as follows:

“The profits or gains arising from the transfer of a capital
asset by way of distribution of capital assets on the dissolution
of a firm or other association of persons or body of individuals
(not being a company or a co-operative society) or otherwise,
shall be chargeable to tax as the income of the firm, association
or body, of the previous year in which the said transfer takes
place and, for the purposes of section 48, the fair market value
of the asset on the date of such transfer shall be deemed to be
the full value of the consideration received or accruing as a result of the transfer.”

On conversion of the firm into a Company under Part IX,
all the property of the firm would vest in the Company.
The vesting would be buy operation of the law. There
would be no distribution of the assets. There would be no
choice for the erstwhile firm not to vest the property into the
Company. The vesting of the property would not be at the
sweet will of the Partnership firm. Thus, there would be no
distribution of the capital assets by the firm in Part IX conversion of the firm.

The Bombay High Court in CIT v Texspin Engineering and
Manufacturing Co. (supra) pointed out that for the deeming
provision of section 45(4) to be attracted treating gains on
transfer of dissolution to be capital gains, two conditions are
to satisfied. There has to be transfer by way of distribution of
capital assets. Secondly, such transfer should be on dissolution of the firm or otherwise.

If these conditions are complied with, the market value
of such assets on the date of transfer is deemed to be
the full value of consideration for the transfer. The Court held
that these conditions were not attracted. The assets merely
vested in the company without there being any distribution at all,
as legally understood. The Court pointed out that vesting of
property in the company is different from distribution which
was necessary to attract section 45(4). Distribution is
something totally different. Since the first condition itself was
not attracted, section 45(4) was not applicable.

The Court also negated another argument.

It was contended that there was extinguishment of right,
title and interest in the capital asset qua the firm and hence
this was a transfer since the definition of transfer included
such extinguishment. The Court held that for a transfer,
there had to be two parties. Also, there had to be
consideration flowing to the transferor.

The Court stated that there was no transfer at all
from one party to other. To quote the Honourable Court,
“There is a difference between vesting of the property,
in this case, in the limited company and distribution of the property.

On vesting in the limited company under Part IX of the
Companies Act, the properties vest in the company as
they exist. On the other hand, distribution on dissolution
presupposes division, realization, encashment of assets and
appropriation of the realized amount as per the priority like
payment of taxes to the government, BMC, etc.,
payment to unsecured creditors, etc.

This difference is very important.
In the present case, therefore,
section 45(4) is not attracted as the very first condition of transfer by
way of distribution of capital assets is not
satisfied. In the circumstances, the later part of section 45(4),
which refers to computation of capital gains under
section 48 by treating fair market value of the asset on the date of transfer, does not arise”

In the present case, when the partnership firm gets converted
into and registered as a Company under Part IX of the Act,
all the property of the firm would statutorily vest in the Company.
The entity hitherto known as “Partnership firm” would now become
a “Company”. There would be no distribution of capital assets to
the partners or any other person on registration of a firm as a
Company under Part IX of the Act. Thus, section 45(4) would
not be applicable in such circumstances.

In the following cases, it has been held that Conversion
of a firm into a Company under Part IX of the Companies
Act, 1956 does not attract section 45(1) / 45(4) and fall
outside the scope of section 45 of the Act.

    * CIT v. Texspin Engineering & Manufacturing Works (2003) 263 ITR 345 (Bom);
    * Well Pack Packaging v. Dy. CIT (2003) 078 TTJ (AHD-) 0448;
    * Krishna Electrical Industries v. Dy. CIT (2004) 082 TTJ (DEL) 0575;
    * Sachdeva & Sons (E. O. U) v. Dy. CIT (2004) 082 TTJ (ASR) 0847;
    * Chetak Enterprises (P) Ltd v. Asstt. CIT (2005) 092 TTJ (JOD) 0611;
    * Tech Books Electronics Services (P) Ltd. v. Additional Commissioner of Income-tax (2006) 100 ITD 0125 (DEL);
    * ACIT vs Unity Care and Health Services (2007) 106 TTJ (BANGALORE) 1086.

EXEMPTION UNDER SECTION 47(xiii):

The Expert group, in the draft Income Tax Bill,
has recognised the need to encourage business
reorganisation when they are in consonance with the
objective of economic development and are not merely
devices to secure tax advantage.
The Bill proposed to allow tax benefits in case
of business reorganisations.

To give effect to the above the Finance (No 2) Act, 1998,
inserted section 47(xiii) with effect from assessment year 1999-2000.

Clause (xiii) of section 47 provides that section 45 of the
Income Tax Act would not apply to transfer of any building,
machinery, plant, furniture or intangible asset (ie capital assets)
to the company where a firm is succeeded by the company
in the business carried on by it subject to certain conditions.

These conditions are:

(i)                  that the transfer should be of business as
a going concern with all assets and liabilities,

(ii)                that the consideration for the transfer should
be solely by issue of shares to the extent of partners’ capital in the firm,

(iii)               the partners of the firm do not receive any
consideration or benefit, directly or indirectly, in any form
or manner, other than by way of allotment of shares in the company and

(iv)              the interest of the partners in the paid-up
capital of the company should continue and be retained
at least to a minimum extent of 50 percent for the next five years.

Section 47(xiii) confers an exemption to encourage
business reorganisation and, therefore, should be
interpreted in a manner that promotes the objective
to be achieved and not frustrated. (Bajaj Tempo Ltd. v CIT, 196 ITR 188).

Even prior to the conditional relief under section. 47(xiii) of the Act,
as detailed above, it has been considered
possible to avoid capital gains by registering
the firm itself as a company. Since the firm in
law is treated as an unincorporated company
entitled to registration, it has been considered
possible to register the same under section 565 of the Companies
Act by bringing the firm’s constitution in line with the basic
principles of company law by having fixed capital and
proportionate interest with reference to such capital.
It is also possible to register the firm without meeting
such requirement, but as a company with unlimited liability
and thereafter convert itself into a company with limited
liability by following the procedure under section 32 of the
Companies Act, 1956.

In either case, it has been considered that there is no transfer
because Sec. 575 of the Companies Act provides that all
properties, movable and immovable (including actionable claims),
belonging to the firm at the time of registration will be vested
in the company. It was in this context, even with reference to
the provisions under the Transfer of Property Act, it has
been held that such conversion does not amount to a
conveyance when the assets of the firm are recognised
by operation of law as the assets of the company as
held in Ramasundari Ray v Syamendra Lal Ray 1 LR
(1974) 2 Cal 1 and in
Vali Pattabirama Rao v Sri Ramanuja Ginning and Rice Factory
(1966) 60 Comp.Cas. 568 (AP).

The decision of the Bombay High Court, regarding
conversion of a firm to a company through the Part IX route,
rendered in favour of the assessee was prior to the insertion
of the exemption under section 47(xiii). This means that
even after the introduction of clause (xiii), there
would be no liability as regards capital gains even if the
conditions specified in the above mentioned clause are
not adhered to. It is, therefore, advisable that Part IX route
is followed, wherever feasible, while taking care to adhere
to the conditions under section 47(xiii) of the Income-tax Act,
 as a matter of abundant caution and additional shelter.

Section 47 (xiii) provides for exemption for capital gains
tax on transfer of capital assets from the firm to the company
subject to the conditions listed in the proviso.

But the threshold condition is that, the transfer
should have arisen as a result of succession of the firm by a company.

Succession ordinarily means, that the business passes
as a going concern. It, however, does not mean that all
the assets of the firm should be transferred, because it
is possible, that succession of the firm is in respect of
business alone and where there is more than one
business in respect of any one of the businesses.

Section 47A: Withdrawal of Exemption:

The conditions to be satisfied to claim exemption from
capital gains is laid down in the proviso to
clause (xiii) of section 47.

The conditions inter alia are:

   1. all the assets and liabilities of the firm
      relating to the business immediately before the
      succession become the assets and liabilities
      of the company;
   2. all the partners of the firm immediately before
       the succession become the shareholders of the company
       in the same proportion in which their capital accounts
      stood in the books of the firm on the date of succession;
   3. the partners of the firm did not receive any consideration
      or benefit, directly or indirectly, in any form or manner,
      other than by way of allotment of shares in the company; and
   4. the aggregate of the shareholding in the company
       of the partners of the firm is not less than fifty percent
       of the total voting power in the company and their
       shareholding continues to be as such for a period
       of five years from the date of succession.

Where any of the conditions laid down in the aforesaid
proviso are not complied with, the amount of profits or
gains arising from the transfer of such capital asset or
intangible asset not charged under section 45 shall be
deemed to be the profits and gains chargeable to tax of
the successor company for the year in which infringement
takes place. The benefit availed by the firm shall be taxed
in the hands of the successor company.

Section 72A(6): Set Off and Carry Forward:

Where there has been reorganisation of business
and a firm is succeeded to by a company fulfilling
the conditions laid down in the proviso to clause (xiii)
of section 47, then, the accumulated loss and the unabsorbed
depreciation of the predecessor firm, shall be deemed to
be the loss or allowance for depreciation of the successor
company for the purpose of previous year in which
business reorganisation was effected.

If any of the conditions laid down in the proviso to
clause (xiii) to section 47 are not complied with,
the set-off of loss or allowance of depreciation
made in any previous year in the hands of the successor
company, shall be deemed to be the income of the company
chargeable to tax in the year in which such conditions are not complied with.

Conclusion :
There are various ways of converting a firm to a company,
viz; slump sale, itemized sale, admitting the company as
a partner, dissolution thereof and on dissolution, business
being taken over by the company etc.,. Being a topic with
a very vast ambit an attempt has been made hereinabove
to briefly discuss two alternatives.
In view of the choices available.
Conversion should be made in a manner
appropriate to a particular situation and in a
way which is most beneficial.
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Drug patents worth $60bn to expire in 4 years

T K Rohit, , Mar 12, 2010, 12.23am IST

CHENNAI: Nearly $60 billion worth of patents
for drugs is set to expire in the next four years
across the world and Indian pharmaceutical companies
 are now in a position to take a major share of this pie,
industry members said.

Already, India is the No. 1 exporter of generic
 drugs in the world with exports to the tune of $8 billion
in 2008-09.

"The Indian pharma industry is the third largest in
 the world with strength in the value chain and constitutes 40% of
 the world's exports of bulk drugs," said S V Veerramani,
 vice-president, Indian Drug Manufacturers' Association.

Veerramani said the Indian pharma industry was expected
to reach $30 billion by 2020.

"Out of every fifth generic drug produced in the world,
three are from Indian companies. While we are not too much
into new drug inventions, we are quite strong in manufacturing
formulations and bulk drugs. When the $60 billion worth of patents
 expire in the next three to four years, Indian companies will
be able to capture a major chunk of the market with our strength
in generic drug manufacturing," said J Jayaseelan, honarary secretary,
Indian Pharmaceutical Association (IPA).
The IPA is organising a three-day convention
 in Chennai between March 12 and 14 that will
discuss India's 'surge forward as
the global pharma destination'.

"Many Indian companies are concentrating on manufacturing generic drugs.
The US, Europe and Japan continue to be lucrative markets as they are the
largest spenders in healthcare. Any company with good integration, can surely
 move up the chain," Raghavendra Rao, chairman and managing director,
Orchid Chemicals, told TOI.

There are over 9,000 formulations companies in India in the small,
 medium and large sectors, and they export to over 200
countries. "Companies like Pfizer, AstraZeneca have set up operations
 in India as the cost is low. New drug development
is also happening along with a growing focus on R&D," Jayaseelan said.
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Mukesh Ambani, Lakshmi Mittal among world's 5 wealthiest

12 Mar 2010, 0710 hrs IST, Sruthijith KK, ET Bureau


NEW DELHI: Indians are doing rather well in that most envied
 league of individuals who are spectacularly successful
 in the pursuit, preservation 
and perpetuation of wealth. Two Indians — Mukesh Ambani 
and Lakshmi Mittal — rank among the five wealthiest individuals
 in the world in the annual billionaire rankings by Forbes magazine. 


Fifty two-year-old Ambani, with an estimated fortune of $29 billion,
 and 59-year-old Mittal, with a net worth of $28.7 billion, rank four 
and five, respectively, in a list of 1,011 billionaires with an average net 
worth of $3.5 billion. A net worth of at least $1 billion, or Rs 4,561 crore
 at current exchange rates, gains you entry into the ‘rich list’. 


Ambani and Mittal have made a habit of making it to the rich list, and most Indians have been there before. But the ones fielding the most congratulatory calls this morning will be the new entrants such as the Mehtas of Torrent and the Piramals. There are college dropouts in the rankings, too. 







Fourth is the highest Mukesh Ambani has ranked on the Forbes list, 
even though for a brief period in 2007, he was estimated to be the
 world’s wealthiest individual. Ambani and Mittal have both added 
nearly $10 billion over their fortunes last year, when they were
 estimated to be worth $19.5 billion and $19.3 billion.

 Neither are still close to the 2008 peak, when Mittal 
was ranked fourth with a fortune of $45 billion and 
Ambani fifth with $43 billion. 

Mexican telecom tycoon Carlos Slim Helu, whose interests are
 gradually crossing Latin American boundaries, is the world’s
 richest man with a net worth of $53.5 billion.
 He upstages the American domination of the top spot,
where Microsoft founder Bill Gates stayed uninterrupted for
13 years before his friend and investor Warren Buffet took
 it in 2008. Gates was back on top in 2009 and Helu,
 who has ranked second and third in recent years,
 won the musical chairs this year.

This year, India is home to 49 billionaires, up from 24 last year,
 but a few shy of the 53 billionaires the year before.
 The swings in fortune are aligned with that of the markets.
 Last year, there were only 793 billionaires, while in 2008,
there were 1,125, the highest ever. India's billionaires come
from a myriad of sectors, and while the usual suspects and legacy
 billionaires feature prominently, there are many names that you probably
 haven't heard of.

Take India's youngest billionaire, for instance: Shahid Balwa. 
Just 36 years old. And a college dropout. 

“India still remains a good manufacturing economy and that reflects in the
 presence of billionaires from the core sectors in the list,” said Gita Piramal,
business historian and author of Business Maharajas.
“This notion that India is good only at services needs to
be revisited. Like the phoenix, the old sectors such as
cement and infrastructure are back. There are quite a few
 first generation entrepreneurs and that is heartening.
Next year, we are going to see more billionaires from the core sectors.”

India has the most number of billionaires after the US, China, Russia
and Germany. The US is home to 40% of the world's billionaires,
but it is declining. Last year, it was 45%. China has 89 billionaires.
 Pakistan just got its first billionaire — Mian Muhammad Mansha
of the Nishat Group, who has interests in textiles and banking

Mukesh Ambani, Lakshmi Mittal among world's 5 wealthiest
Apart from Ambani and Mittal, only four Indians rank in the top 50.
With a fortune of $17 billion, Wipro’s Azim Premji, who on Wednesday said his

Ambani’s estranged younger brother Anil Ambani, who is
locked in a bitter fued over gas prices with his richer sibling,
ranks 36 with a fortune of $13.7 billion. Essar Group's Shashi
 and Ravi Ruia, who are preparing for an $8 billion listing on the
London Stock Exchange, are worth $13 billion, while OP Jindal’s
 widow and non-executive chairman of Jindal Steel, Savitri Jindal,
ranks 44 with a fortune of $12.2 billion.

Three more Indians figure in the top 100. DLF Ltd’s Kushal Pal Singh,
 who ranked 8th in 2008, slumped to 74 with a fortune of $9 billion,
 partly reflecting the state of the real estate industry. Aditya Birla Group’s
Kumar Mangalam Birla ranks 86 with a fortune of $7.9 billion and Bharti Airtel's
Sunil Bharti Mittal, who is busy convincing shareholders that an African alliance
 with Zain will be good for it, ranks 87 with $7.8 billion.

India’s 49 billionaires have a combined wealth of $222.1 billion-about
17% of India’s GDP. They have an average net worth of $4.5 billion.

India’s per capita GDP is about Rs 46,000. Mukesh Ambani and
 Lakshmi Mittal account for 25% of the total Indian
billionaire wealth of $222.1 billion.

In India, like in politics, your chances of success at wealth
creation seem to rise with age. There are only 3 billionaires
 in their 30s and four in their 40s. The average age is 58.6 years.

It must say something about India's pharma industry
that six of the 10 new billionaires made their fortune
 in making drugs. Sudhir and Samir Mehta of Torrent
 (who also have interests in power), Cipla’s Yusuf Hamied,
 Zydus Cadila's Pankaj Patel, Lupin's Desh Bandhu Gupta,
 Dr Reddy’s K Anji Reddy and Piramal Healthcare’s Ajay
Piramal are the new entrants into the rich list from the pharma
world. Shree Cement’s Benu Gopal Bangur debuts on the rich
 list at 78 years. Only two Indian billionaires are
older — Jaypee Group’s Jaiprakash Gaur (79) and
RPG Group’s RP Goenka (80).

IRB Infrastructure's Virendra Mhaiskar, who joined
 the family business at 19, is among the youngest Indian
 billionaires at 38 and is a first timer on the list.

DB Realty’s Vinod Goenka and Shahid Balwa, both c
ollege dropouts, make the list for the first time.
They have partnered UAE's Etisalat for a telecom business.

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