Income Tax Act

Interest paid by Debtors on late payment shall be included in profit :

The Gujarat High court held that while computing the special deduction under Section 80-I,
interest received from trade debtors towards late payment of sale consideration is to be
included in the profits of the industrial undertaking.

Nirma Industries Limited vs. Deputy Commissioner of Income-Tax (Gujarat – HC) 283 ITR 402

Levying penalty is justified when loss declared in return reduced in assessment

The High Court of Delhi held that the levy of penalty for concealment of income was justified
in the case of amount of loss declared in return reduced in assessment. The total income in
clause (a) of Explanation 4 to Section 271 (1) (c) includes both positive figure and negative
figure.

Commissioner of Income-Tax vs. Aditya Chemicals Ltd. And Others (Delhi – HC)

Exemption u/s 54(1) in respect of Foreign property:

In the above mentioned case, to the question of law that, whether the exemption
contemplated under Section 54 (1) could be extended to a property purchased in a foreign
country after selling the property situated in India., the Mumbai Appellate Tribunal Bench held
that Section 54 did not exclude the right of the assessee to claim the benefits of the Section in
relation to property purchased in a foreign country, if all other conditions laid down in the
Section were satisfied, merely because the property acquired was in a foreign country.

Mrs. Prema P. Shah vs. Income-Tax Officer (Mumbai – ITAT)

Biometrics for PAN

The Income Tax department uses Permanent Account Number (PAN) to identify its taxpayers
and it is also used as a common business number by several departments of the central
government. Till date the Income Tax department has issued around 46 million PANs and around
500,000 new PANs are allotted every month. The interface with PAN applicants is managed by
two service providers, viz. M/s National Securities Depository Limited and M/s UTI Technology
Services Limited, who operate approximately 2000 front offices for PAN services across the
country.

The Income Tax department proposes to use biometric features, such as finger prints, iris or
retina images, before allotting PAN so as to prevent allotment of more than one PAN to any one
person.

Organizations engaged in the business of providing biometric solutions for identification

purposes and having requisite experience may submit a synopsis of their organization and
expertise and experience in this field along with details of work executed in this area in the
recent past. They should also indicate the availability of secure portable devices for capturing
biometric information. The proposed solution should be cost effective and should not lead to
long queues of applicants at the front offices.

The synopsis may be mailed to the Directorate General of Income Tax(Systems), ARA Center,
Ground Floor, E-2, Jhandewalan Extension, New Delhi – 110 055 or emailed to
rkbajaj@incometaxindia.gov.in so as to reach before 6 August 2006.
The Taxation Laws (Amendment) Act, 2006

The Amendment Bill has been passed by both Houses of Parliament and has been enacted on
July 14, 2006, after receiving the assent of the President of India, as the Taxation Laws
(Amendment) Act, 2006.

The salient features of the changes made in the IT Act are as follows:

Tax benefits for Software Technology Park Units / Export Oriented Units etc.

Tax benefit available to these units is dependent on the export proceeds, in convertible foreign
exchange, being received / brought into India within specified time frame. In cases where
deduction has been denied earlier to the assessee, for failure to receive / bring foreign
exchange into India within the stipulated time frame and subsequently the sale proceeds / part
thereof is received / brought into India with the requisite approvals , the Amendment Act has
now empowered the assessing officer to amend the assessment and allow deduction for the
same. This amendment in the assessment order can be effectuated by the assessing officer
within four years from the end of the year in which sale proceeds are received / brought into
India. The amendment is effective from July 14, 2006 .

Tax Withholding

The definition of ‘rent’ has been widened to include payments for the use of plant, machinery
and equipment. Further, tax withholding will apply whether or not land, building, machinery,
plant, equipment, furniture or fixture are rented separately or together. Further, tax
withholding requirement has also been extended to payments made for ‘royalty’, non-compete
/ negative covenant fee. The term ‘royalty’ includes
the use or right to use industrial, commercial or scientific equipment. The amendment is
effective from July 14, 2006.

Business Deductions

The Amendment Act provide for the disallowance where an expenditure exceeding INR 20,000
is made otherwise than by an account payee cheque or an account payee bank draft.
The scope of provisions relating to disallowance of expenditure on account of non deduction of
tax at source, has been widened to include payment / credit of rent to a resident, where tax
has not been withheld, and payment / credit of ‘royalty’ to a resident where tax has not been
withheld. This has been stated to be effective assessment year 2006-07.

Receipts of Gifts

The provisions as it stood before the amendment by the Amendment Act, provide d for charging
to tax any sum of money exceeding INR 25,000 received without consideration by an individual
or a Hindu Undivided Family [H.U.F] from any person. The provision has been amended to
provide that effective financial year 2006-07 and onwards, any sum of money, in excess of INR
50,000 in aggregate (other than from specified persons or under specified circumstances),
received by an Individual or H.U.F. during a tax year shall be subject to income tax.
Accordingly, the amount subject to tax shall be computed with reference to the aggregate of
such receipts during a financial year and not based on amount of individual receipts.
Further, any sum of money received without consideration by an individual or a H.U.F. from
certain tax exempt entities such as any local authority or a charitable / not for profit
Organization is not chargeable to tax.

Deduction pertaining to contributions for scientific research and other approved

schemes /projects
It has been provided that the deduction available to an assessee in respect of sums paid to:
 • An approved/notified scientific research association, university, college or other
institution
• A national laboratory, University , Indian Institute of technology or a specified person
for the approved programme
• Public sector company/ local authority/association or institution for carrying out a
eligible project or programme
• Association or institutions for carrying out rural development programmes

shall not be disallowed on the ground that subsequent to payment being made to the specified
entity, the approval of such entity or notification concerning eligible project, scheme or
programme has been withdrawn. The amendment will take effect from assessment year 2006-
07.

Penalty proceedings

Under Amendment Act, the tax authorities have now been empowered to modify their orders
imposing / enhancing / reducing / canceling penalty or dropping the penalty proceedings upon
receipt of appellate or other orders of the higher authorities, Tribunal or judiciary, revising the
assessment. Such orders need to be passed within six months of receiving the aforesaid orders.
The order imposing or enhancing penalty shall be appealable. The amendment will take effect
from July 14, 2006.

Streamlining approval and monitoring process of charitable and not for profit
organizations

Significant changes have been made concerning:

• Validity period of notification / approval
• Time frame during which application for notification /approval is to be disposed of
• Compulsory audit of accounts in certain cases
• Compulsory filing of return of income
• Empowering tax authorities to examine activities with reference to guidelines /
conditions of approval and recommending withdrawal of approval in certain cases

Tax Administration
The Tax Recovery Officer has also been empowered to exercise or perform such powers and
functions which are conferred on or assigned to an assessing officer under
the Act and which may be prescribed.
The amendment is effective from July 14, 2006.

Rounding off of amount payable or refund

The amount payable or refundable under the Act shall be rounded off to nearest INR 10 instead
of INR 1 at present. The amendment is effective from July 14, 2006

Sales Tax

Stand of sewing machine whether part & parcel of sewing machine?

In the below mentioned case, in reference to the question whether “stand of sewing machine is
a part and parcel of sewing machine so as to tax the stand at the same rate which is applicable
to sewing machine”, the Madhya Pradesh High Court held that, it is not in dispute that the
stand so manufactured is only meant for sewing machine and nothing else. In other words, the
structure of stand manufactured is such that it is only used or one may say can be used for
running the sewing machine. It can also not be disputed that in order to run the sewing
machine comfortably, one needs the stand and hence the same has to be taxed at the rate
which is applicable to the sewing machine. This decision is useful in contending that the
computer works station should be treated as part of computer and can be bought against Form
C.

Commissioner of Sales Tax, Indore vs. Emar Industries (MP-HC)

VAT update
Different departments of government cannot adopt policies contrary and inconsistent
with each other

Two different departments of the Government cannot adopt policies which are contrary to and
inconsistent with each other. Therefore, if the Government has promised exemptions/
concessions to the units as per the industrial policy, the sales tax legislation cannot thereafter
take away the benefits allowed there under. It is for the Courts to decide, based on the facts of
each case, whether the principal of public policy overrides the principle of promissory
estoppel.

The Gauhati High Court, in Shree Sanyeeji Ispat Pvt. Ltd Vs. State of Assam [(2006) 147 STC 146]

Central Excise
Assessee can claim Refund of unutilised credits

The Central Government has issued a corrigendum to Notification No. 5/2006 clarifying the
position that an assessee can claim the refund of unutilized credits against exports of both
goods or taxable services.
M.F.(D.R.) Corrigendum F. No. 268/4/2005- CX.8 dt. 2/6/06

Served from India Scheme – Exemption to goods supplied to service provider

The hotel industry covered under the ‘Served from India Scheme Certificate’ can get certain
goods from the domestic market, without excise duty by using the scrips obtained, subject to
the following conditions, viz;

i) that the said certificate has been issued to a service provider by the Regional Authority and it
is produced before the jurisdictional Central Excise Officer at the time of clearance for debit
of the duties leviable on the goods, but for this exemption

ii) that the said certificate and goods cleared against it shall not be transferred or sold;

iii) that a certificate is produced from the jurisdictional Deputy Commissioner of Central Excise
or the Assistant Commissioner of Central Excise confirming installation and use of the goods in
the factory or premises of the holder of the said certificate, within six months from the date of
clearance
Notification No.34/2006-C.E., dated 14.6.2006

No denial of CENVAT credit on the ground that capital goods is not put to use

CENVAT credit on capital goods, available at 50% in the second year, cannot be denied merely
on the ground that the capital goods had not been put to use as yet.

Ispat Industries Ltd. Vs. CCE (2006 (199) ELT 509)

Revised frequency of Excise tax Audit:

The Finance Ministry has changed the criterion of selection of central excise assessees for the
purpose of audit. It has also revised the threshold norms for frequency of audit of central
excise and service tax assessees. (New Delhi, July 10)

Excise Duty

• Units making annual payments (in cash plus cenvat credit) of more than Rs 3 (Hitherto,
units paying duty of more than Rs 1 crore a year in cash ) – to be audited every year.
• Units making annual payments between Rs 1 crore and Rs 3 crore - "once every two
years."
• Units paying between Rs 50 lakh and Rs 1 crore - "once every five years."
• In the case of units paying below Rs 50 lakh, 10 per cent of the units would be audited
every year.

EOUs

As regards export-oriented units (EOU), the Central Board of Excise and Customs has decided
that about 500 EOUs should be audited mandatorily all over the country. The selection of these
units would be made as per the criteria circulated by Director-General (Audit). EOUs
manufacturing non-excisable goods (such as primary produce or software) need not be audited
mandatorily. Hitherto, all EOUs were required to be audited mandatorily every year.

Customs
National Automotive Testing and Research and Development Infrastructure Project
(NATRIP)-Exemption to imports therefore – Amendment to Notification No.21/2002-Cus

All items of equipment for NATRIP are exempted subject to condition that the importer, at the
time of import, produces to the Deputy Commissioner of Customs or the Assistant Commissioner
of Customs, as the case may be, a certificate from an officer not below the rank of Deputy
Secretary to the Government of India in the Ministry of Heavy industries and Public
Enterprises, certifying that the imported goods are intended for use in the NATRIP. 2006 (198)
ELT – N 7

Notification No.47/2006-Cus., dated 24.5.2006

]

Power projects – Exemption to goods for setting up of Mega Power Project –

Amendment to Notification No.21/2002-Cus.

Goods required for setting up of mega power project were exempted if the project is an inter
state thermal power plant of a capacity of 1000MW or more, or interstate hidal power plant of
a capacity of 500MW or more. Now for the States of J & K, Sikkim, Arunachal Pradesh, Assam,
Meghalaya, Manipur, Mizoram, Nagaland and Tripura, the capacity is reduced to 700 MW and
350MW respectively, making projects of relatively less capacity in these states eligible for the
exemption. 2006 (198) ELT – N 12
Notification No.49/2006- Cus., dated 26.5.2006

New Drawback Rates

Finance Minister has notified new All Industry Rates of Duty Drawback. New rates shall come
into force with effect from 15.7.2006. New Drawback Schedule includes 84 new items
including cotton bags, leather caps, aluminium artware, suit cases & handbags of plastics,
tractor parts, compressors, table tennis tables and various other sports equipment/accessories.
The drawback rates have been hiked on most of the products.

Notification No.81/2006-Cus (NT) dated 13th July,2006

SERVICE TAX
Money Orders not liable to Service Tax

PIB dated 04.07.2006: The Central Government notifies vide the above press information
bureau press release that vide Circular No. 83/1/2006-ST dated 4th July, 2006, issued under F.
No. 354/59/2006-TRU that services such as transfer of money through money orders, operation
of savings accounts, issue of postal orders which are in the nature of "banking and other
financial services" defined under section 65(12) read with section 65(105)(zm) of the Finance
Act, 1994 provided by the Department of Posts will not be liable to service tax. As per section
65(105)(zm) read with section 65(12) of the Finance Act, 1994, Banking and other financial
services provided by a banking company or a financial institution or a non-banking financial
company or any other service provider similar to a bank or a financial institution are liable to
service tax.

Revised frequency of Service tax Audit:

• Units making annual payment (cash plus cenvat credit) of more than Rs 50 lakh - To be
audited every year.
• Service tax assessees paying between Rs 25 lakh and Rs 50 lakh - "once in two years."
• For taxpayers paying between Rs 10 lakh and Rs 25 lakh - "once in five years."
• For those paying service tax of less than Rs 10 lakh, about 2 per cent of the total
number would be brought under audit every year.

Labour Laws

Employment to widows/dependants of deceased employees:

The appellant in the present appeal is a public undertaking fully owned by the Central
Government. Several workers of the unit died in harness leaving behind the widows and
families. The IDPL Workers' Union took up their cause and demanded that the
widows/dependants of deceased employees should be given employment in the plant. The
respondents were appointed as contractors from time to time by the appellant company which
was later terminated. The industrial dispute was referred to the Labour Court which gave the
award against the appellant-company on the ground that the said respondents were the
workmen and they were entitled to be regularized. Aggrieved by the said order, the appellant-
company filed the present appeal to the Honourable Supreme Court. In support of the appeal,
the appellants submitted that the appellant is a sick company and there is no rule or scheme
for providing appointment on compassionate grounds.

The Supreme Court after considering the contentions of both the parties held that the Labour
Court and High Court completely lost sight of the financial condition of the appellant company
in that no production has been going on in the company since 1994. Also there was no material
before the Labour Court to conclude that the contract was not a job contract and in fact
employment had been given. The Apex Court therefore allowed the appeal setting aside the
award of the Labour Court and the judgment of the High Court
 Indian Drugs and Pharmaceuticals Ltd. Vs. Devki Devi and Ors.

Industrial Disputes Act:

Bombay High court

The respondent, working as casual labourer from 22/05/1984 to 28/02/1985 in the appellant-
company, sought reinstatement with back wages, as he was terminated without any notice or
payment of wages of one month in lieu of notice. The first labour court dismissed the industrial
dispute raised by the respondent-workman. But in writ petition, the Single Judge directed
reinstatement with continuity of service and back wages. This Order is assailed in this present
letters patent appeal.

The High Court considering the fact that the respondent-worker has in fact abandoned his
service and made no grievance about the alleged termination for a period of about 8-9 years
held that he was not entitled for reinstatement. The Court further observed that a daily wager
does not hold a post unless he is appointed in terms of the Act and the rules framed
thereunder. He does not derive any legal right in relation thereto. Further, the respondent-
worker does not derive any legal right to be regularised in service only because he had been
working for more than 240 days. The respondent-worker had not acquired the status of
temporary worker as he was only a casual worker and was not appointed against a vacant post
so as to claim status of even a temporary employee. So the appellant was not under statutory
obligation in this case to issue notice of termination to respondent worker and follow the
procedure as laid down under Section 25F of the I.D. Act. The appeal was allowed.

Bharat Sanchar Nigam Ltd. through General ManagerVs. Balasaheb Maruti Poojari and Shri P.S.
Narkar, Presiding Officer, First Labour Court

Workmen's Compensation Act, 1923

S.3(1)-Employer's liability for compensation-Death due to heart attack at the work spot-No
scope of any stress or strain in his duties-No connection between death of workman and his
employment-Not entitled to compensation.

Jyothi Ademma Petitioner versus Plant Engineer, Nellore & Anr. Respondents (Date of Decision :
11-7-2006)

Industrial Policy and Promotion

Enhancement of Foreign Direct Investment ceiling from 49% to 74% in Telecom Sector -
Amendment to Press Note 5 (2005 Series)

The Government vide the below press note notifies that for the benefit of investors the
Government has decided to further extend the time period for the telecom service provider
companies to comply with the conditions set out in Press Note 5 (2005 Series) by three months
w.e.f. 3rd July 2006 up to 2nd October, 2006.

Press Note No. 6 (2006 Series) Dated 03.07.2006

Consumer Disputes
National Consumer Disputes Redressal Commission

The respondent filed a complaint on the ground that there was deficiency in service provided
by the petitioner as his request to shift the mobile connection was not allowed by the
petitioner-company. The petitioner also filed fake affidavit stating that the connection was
shifted as per the request. The District Forum passed the order against the petitioner. The
present appeal was preferred against the order of State Commission, which affirmed the order
of District Forum in which direction was given to the petitioner to shift the mobile telephone of
the complainant from Chandigarh to Kurukshetra region and to pay a sum of Rs. 10,000/- as
compensation for deficiency in service.

The National Commission held that for filing false and incorrect affidavit before the Consumer
Forum, appropriate action was required to be taken against the petitioner. For false affidavits
or misleading statements in a pending proceedings deponents are required to be dealt
appropriately by imposing punitive damages so that in future they or others may not indulge in
such practice. Further held that as serious negligence and deficiency in service was evident
punitive damages was required to be enhanced so that in future neither the officers of the
petitioner nor officers of other such big companies indulge in such practices. The petitioner
was directed to pay Rs. 1,50,000 as punitive damages

Reliance India Mobile Ltd. Vs. Hari Chand Gupta S/o Shri Sharvan Kumar

RBI

Issue of Encashment Certificate (EC) on security paper:

The Reserve Bank of India vide the above circular notifies the issue of directions regarding
encashment certificates. According to provisions of the ECM Volume I (Exchange Control
Manual), Authorised Dealers and their exchange bureaux are required to issue Encashment
Certificates (EC) in form ECF in all cases of purchase of foreign exchange from the public. The
certificate is required to be issued on security paper, if the amount of foreign currency
encashed exceeds Rs.15,000/- in value and in other cases, on the letter-head of the authorised
dealer/exchange bureaux. RBI through the above circular notifies that it has been decided to
dispense with the requirement of issue of Encashment Certificate on security paper.
Accordingly, when requested by the customer, Encashment Certificate in form ECF, duly signed
by authorised officials, should be issued by Authorised Dealers Category I on their letter-head
(with their logo printed on it), irrespective of the amount.

Circular No. A. P. (DIR Series) Circular No. 02 Dated 17.07.2006: