Legal and Procedural Aspects of Management

8/10/2019 Legal and Procedural Aspects of Management

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Legal and Procedural Aspects of Management 1

Legal and Procedural Aspects in

Management

- Prof. Dr. Sameera Raees


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Course Contents:

1. The Information Technology Act, 2000

1.1 Specifies of the Act

1.2 Essence of the Act

1.3 Digital Signature [Authentication of electronic proof]1.4 Electronic Governance

1.5 Regulation of certifying authorities

1.6 Offences

2. Income Tax Act, 1961

2.1Heads of Income and computation of income under different heads

2.2 Carry forward and set off of losses

2.3 Deductions from Gross Total Income

2.4 Incomes which do not form part of total income

2.5 Income tax authorities, appointment, control, jurisdiction and powers

2.6 VATBasic concepts and principles

2.7 Service TaxIntroduction and Key aspects

3. Due Diligence and Corporate compliance Management

3.1 Due DiligenceMeaning, Scope and Objectives, steps in process of due diligence

3.2 Areas of Due DiligenceIPO, ESOP, JVs, M&A

3.3Compliance managementSystems compliance, Establishment of compliance system,

Compliance in letter and spirit

3.4

Account and Audit report and Directors report3.5 Inspection and Investigation

3.6 SEBI regulations w.r.t Corporate governance

4. Indian Stamp Act

4.1 Introduction to Stamp dutyMeaning and Purpose

4.2 Instruments chargeable with stamp duty

4.3 Payment procedure and execution of stamped instruments

4.4 Review of stamp duties applicable to Maharashtra State

4.5 Adjudication of stamp duty

4.6 Prosecution for offence against Stamp Law.

Reference Books:


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1. Students guide to Income Tax- Vinod .K.Sighania.

2. Indian Stamp Act, 1899Bare Act.

3. Companies Act, 1956Bare Act.

4. Information Technology Act, 2000Bare Act.


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Chapter 1 INFORMATION TECHNOLOGY ACT, 2000

New communication systems and digital technology have made dramatic changes in way oftransacting business. Use of computers to create, transmit and store information is increasing.

Computer has many advantages in e-commerce. It is difficult to shift business from paper to

electronic form due to two legal hurdles (a) Requirements as to writing and (b) Signature forlegal recognition. Many legal provisions assume paper based records and documents and

signature on paper.

The General Assembly of the United Nations by resolution dated the 30th January, 1997 adopted

the Model Law on Electronic Commerce and recommended that all States should givefavourable consideration to the Model Law when they enact or revise their laws.

The Information Technology Act has been passed to give effect to the UN resolution and to

promote efficient delivery of Government services by means of reliable electronic records.

As per preamble to the Act, the purpose of Act is (a) to provide legal recognition for transactionscarried out by means of electronic data interchange and other means of electroniccommunication, commonly referred to as "electronic commerce", which involve the use of

alternatives to paper-based methods of communication and storage of information and (b) to

facilitate electronic filing of documents with the Government agencies. The Act came into effect

on 17.10.2000.

The Act does not apply to (a) a negotiable instrument as defined in section 13 of the

Negotiable Instruments Act, except cheque (b) a power-of-attorney as defined in section 1A ofthe Powers-of-Attorney Act (c) a trust as defined in section 3 of the Indian Trusts Act(d) a will as

defined in section 2(h) of the Indian Succession Act, including any other testamentary

disposition by whatever name called (e) any contract for the sale or conveyance of immovableproperty or any interest in such property (f) any such class of documents or transactions as may

be notified by the Central Government in the Official Gazette. - - Broadly, documents which are

required to be stamped are kept out of the provisions of the Act.

Overview of the Act- The Act provides for - * Electronic contracts will be legally valid * Legal

recognition of digital signatures * Digital signature to be effected by use of asymmetric crypto

system and hash function * Security procedure for electronic records and digital signature *Appointment of Certifying Authorities and Controller of Certifying Authorities, including

recognition of foreign Certifying Authorities * Controller to act as repository of all digital

signature certificates * Certifying authorities to get License to issue digital signature certificates

* Various types of computer crimes defined and stringent penalties provided under the Act *Appointment of Adjudicating Officer for holding inquiries under the Act * Establishment of

Cyber Appellate Tribunal under the Act * Appeal from order of Adjudicating Officer to CyberAppellate Tribunal and not to any Civil Court * Appeal from order of Cyber Appellate Tribunal

to High Court * Act to apply for offences or contraventions committed outside India * Network

service providers not to be liable in certain cases * Power of police officers and other officers to


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enter into any public place and search and arrest without warrant * Constitution of Cyber

Regulations Advisory Committee who will advice the Central Government and Controller

1.2 Essence of the Act - The Information Technology Act enables:* Legal recognition to

Electronic Transaction / Record * Facilitate Electronic Communication by means of reliable

electronic record * Acceptance of contract expressed by electronic means * Facilitate ElectronicCommerce and Electronic Data interchange * Electronic Governance * Facilitate electronic

filing of documents * Retention of documents in electronic form * Where the law requires the

signature, digital signature satisfy the requirement * Uniformity of rules, regulations andstandards regarding the authentication and integrity of electronic records or documents *

Publication of official gazette in the electronic form * Interception of any message transmitted in

the electronic or encrypted form * Prevent Computer Crime, forged electronic records,

international alteration of electronic records fraud, forgery or falsification in ElectronicCommerce and electronic transaction.

1.3 DIGITAL SIGNATURE - Any subscriber may authenticate an electronic record by affixing

his digital signature. [section 3(1)]. Subscriber" means a person in whose name the DigitalSignature Certificate is issued. [section 2(1)(zg)]. "Digital Signature Certificate" means a Digital

Signature Certificate issued under section 35(4) [section 2(1)(q)].

"Digital signature" means authentication of any electronic record by a subscriber by means of an

electronic method or procedure in accordance with the provisions of section 3. [section 2(1)(p)].

"Affixing digital signature" with its grammatical variations and cognate expressions means

adoption of any methodology or procedure by a person for the purpose of authenticating anelectronic record by means of digital signature. [section 2(1)(d)].

Objectives

To provide legal recognition for transactions carried out by means of electronic data interchange

and other means of electronic communication, commonly referred to as electronic commerce,

which involve the use of alternatives to paper-based methods of communication and storage of

information

To facilitate electronic filing of documents with the Government agencies

To facilitate electronic storage of data in place of paper- based methods of storage of data.

To provide for matters connected therewith or incidental thereto.

Digital Signature [Sec. 3]

Any subscriber may authenticate an electronic record by affixing his digital signature.

[Section 3(1)]

The authentication of the electronic record shall be effected by the use of asymmetric crypto


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system and hash function which envelop and transform the initial electronic record into another

electronic record. [Section 3(2)]

Hash function means an algorithm mapping or translation of one sequence of bits into another,

generally smaller set known as hash result, the purpose is such that an electronic record yields

to the same hash result every time the algorithm is executed with the same electronic record.

Any person by the use of a public key of the subscriber can verify the electronic record. [Section3(3)]

The private key and the public key are unique to the subscriber and constitute a functioning keypair. [Section3(4)]

Subscriber means a person in whose name the Digital Signature Certificate is issued. [Section

2(1) (zg)]

Digital Signature means authentication of any electronic record by a subscriber by means of an

electronic method.[Sec.2(1)(p)]

1.4 Electronic Governance [Sec. 4 to 10]

Electronic Governance :- Electronic governance is recognition by Government to acceptcommunication, storage of information, acceptance of digital signatures in electronic forms and

retention of electronic records and giving it a legal sanctity.

Following are the provisions related to Electronic Governance provided under IT Act.

Legal recognition of electronic records [Sec. 4]Where there is a requirement by any law that matter shall be in writing or in the type written orprinted form. Sec. 4 says that such requirements shall be fulfilled if such information or matter is

available in an electronic form and can be accessible for a subsequent reference.

Legal recognition of electronic signatures [Sec. 5]Where the law provides that information or any matter shall be authenticated by affixing the

signature or shall be signed or bear the signature of any person, such requirement shall befulfilled if such information or matter is authenticated by means of electronic signature affixed in

such manner as may be prescribed by the Central Government.

Use of electronic records and electronic signaturesin Government and its agencies [Sec. 6]Where the filing of any form, application or other document with any office, authority, body or

agency owned or controlled by the appropriate Government for the issue or grant of any licence,permit, sanction or approval, the receipt or payment of money then such requirement shall be

satisfied if such filing, issue, grant, receipt or payment, is effected by means of such electronic

form as may be prescribed by the appropriate Government.

Delivery of services by service provider [Sec. 6 A] For the efficient delivery of services to the public through electronic means the appropriate

Government may authorize any service provider to set up, maintain and upgrade thecomputerized facilities and perform such other services as may specify by notification in the


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Official Gazette.

The service provider can collect, retain and appropriate such service charges for the purpose of

providing such services, from the person availing such service.

Retention of electronic records [Sec. 7]

Where the documents, records or any information shall be retained for any specific period, such

documents are retained in the electronic form, if

the information contained remains accessible so as to be usable for a subsequent reference,the electronic record is retained in the format in which it was originally generated, sent or

received the details which will facilitate the identification of the origin, destination date and time

of dispatch or receipt of such electronic record are available.

Audit or documents, etc. maintained in electronic form [Sec. 7 A]Where there is a provision for audit of documents, records or information, that provision shall

also be applicable for audit of documents, records or information processed and maintained inthe electronic form.

Publication of rule, regulation, etc. in ElectronicGazette [Sec. 8]

where the law provides that any rule, regulation, order, bye-law, notification or any

other matter shall be published in the Official Gazette, then such requirement shall be

fulfilled if such matter is published in the Official Gazette or Electronic Gazette.

No Right conferred to insist that document shouldbe accepted in electronic form [Sec. 9]

Section 6, 7 and 8 shall not confer a right upon any person to insist any Ministry or

Department of Central or State Government or any body established or controlled by Central

or State Government should accept, issue, create, retain and preserve any document in the

form of electronic records or effect any monetary transaction in the electronic form.

Power to make rules by Central Government inrespect of Electronic Signatures [Sec. 10]The Central Government may prescribe

the type of electronic signature;the manner and format in which the electronic signature shall be affixed;

the manner or procedure which facilitates identification of the person affixing the electronic

signature;control processes and procedures to ensure integrity, security and confidentiality of

electronic records or payments; andany other matter which is necessary to give legal effect to electronic signatures.

Validity of contracts formed through electronicmeans [Sec. 10-A]

where a contract is made in electronic form, such contract shall not be deemed to be


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unenforceable on the ground that such electronic form or means was used for that purpose.

This means that the contract made in electronic form have the same validity as they are made in

person.

Electronic Records [Sec. 11-13]

Attribution of electronic records [Sec. 11]

An electronic record shall be attributed to the originator-if it was sent by the originator himself,

by the person who had the authority to act on behalf of the originator in respect of that electronic

record;

by an information system programmed by or on behalf of the originator to operate

automatically.

Acknowledgement of receipt [Sec. 12]

Where the originator has not agreed with the addressee that the acknowledgement of receipt of

electronic record be given in a particular form or by a particular method, an acknowledgement

may be given by

any communication by the addressee, automated or otherwise; or

any conduct of the addressee, sufficient to indicate to the originator that the electronic record

has been received.

where the originator has stipulated that the electronic record shall be binding only on receipt of

an acknowledgement of such electronic record by him, then unless acknowledgement has been

so received, the electronic record shall be deemed to have been never sent by the originator.

where the originator has not stipulated that the electronic record shall be binding only on receiptof such acknowledgement, and the acknowledgement has not been received by the originator

within the time specified or agreed or, if no time has been specified or agreed to within a

reasonable time, then the originator may give notice to the addressee stating that no

acknowledgement has been received by him and specifying a reasonable time by which the

acknowledgement must be received by him and if no acknowledgement is received within the

aforesaid time limit he may, after giving notice to the addressee, treat the electronic record as

though it has never been sent.

Time and Place of Dispatch and Receipt of ElectronicRecord [Sec. 13]1) the dispatch of an electronic record occurs when it enters a computer resource

outside the control of the originator.

2) the time of receipt of an electronic record shall be determined as follows :-

a) if the addressee has designated a computer resource for the purpose of receiving records

i) receipt occurs at the time when the electronic record enters the designated computer resource;

ii) if the electronic record is sent to a computer resource of the addressee that is not the


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designated computer resource, receipt occurs at the time when the electronic record isretrieved by the addressee;

b) if the addressee has not designated a computer resource along with specified timings,if any, receipt occurs when the electronic record enters the computer resource of theaddressee.

3)the electronic record is deemed to be dispatched at the place where the originator has hisplace of business, and is deemed to be received at the place where the addressee has his place

of business.

4)The above provisions shall apply notwithstanding that the place where the computer resourceis located may be different from the place where the electronic record is deemed to have beenreceived under (3)

5)If the originator or the addressee has more than one place of business, the principal placeof business shall be the place of business,if the originator or the addressee does not have aplace of business, his usual place of residence shall be deemed to be the place of business.

1.5 Regulation of Certifying Authorities

Appointment of Controller and other officers [Sec.17]

The Central Government by notification in the Official Gazette, appoint a Controller ofCertifying Authorities for the purposes of this Act and may also appoint such number of

DeputyControllers, Assistant Controllers and other officers and employees as it deem fit.

The Controller shall discharge his functions under this Act subject to the general control and

directions of the Central Government.

The Deputy Controllers and Assistant Controllers shall perform the functions assigned to themby the Controller under the general superintendence and control of the Controller.

The qualifications, experience and terms and conditions of service of Controller, DeputyControllers, Assistant Controllers, other officers and employees shall be such as may beprescribed by the Central Government.

The Head Office and Branch Office of the office of the Controller shall be at suchplaces as the Central Government may specify.

There shall be a seal of the Office of the Controller.

Functions of Controller [Sec.18] :

exercising supervision over the activities of the Certifying Authorities, certifying public

keys of the Certifying Authorities,

laying down the standards to be maintained by the Certifying Authorities,

specifying the qualification and experience which employees of the Certifying Authorities

should possess,

specifying the conditions subject to which the Certifying Authorities shall conduct their


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business,

specifying the contents of written, printed or visual materials and advertisements that may

be distributed or used in respect of a Electronic Signature Certificate and the public key,specifying the form and content of a Electronic Signature Certificate and the key,

specifying the form and manner in which accounts shall be maintained by the Certifying

Authorities,

specifying the terms and conditions subject to which auditors may be appointed and theremuneration to be paid to them,

facilitating the establishment of any electronic system by a Certifying Authority either

solely or jointly with other Certifying Authorities and regulation of such system,specifying the manner in which the Certifying Authorities shall conduct their dealings

with the subscribers,

resolving any conflict of interests between the Certifying Authorities and the subscribers,

laying down the duties of the Certifying Authorities,maintaining a database containing the disclosure record of every Certifying Authority

containing such particulars as may be specified by regulations, which shall be accessible

to public.

1.6 Offences

Penalty & Adjudication [Sec. 43-47]

Penalty & Compensation for Damage to Computer,Computer System, etc. [Sec. 43]

A person who without permission of the owner or any other person who is in charge of a

computer, computer system or computer network :-

a)Accesses or secures access to it;

b)Down loads, copies or extracts any data, computer database of information from it, including

information or data held or stored in any removable storage medium;

c)Introduces or causes to be introduced any computer contaminant or computer virus into it;

d) Damages or causes to be damaged any computer, etc. data, computer database or any otherprograms residing in such computer, etc.

e) Disrupts or causes disruption of any computer, etc.

f)Denies or causes the denial of access to any person authorized to access any computer etc.

g) Provides any assistance to any person to facilitate access to a computer, etc. in contraventionof the provisions of this Act;

h) Charges the services availed of by a person to the account of another person by tampering


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with or manipulating any computer, etc.

i)Destroys, deletes or alters any information residing in a computer resource or diminishes itsvalue or utility or affects it injuriously by any means;

j)Steels, conceals, destroys or alters or causes any person to steal, conceal, destroy or alter anycomputer source code used for a computer resource with an intention to cause damage,he shall be liable to pay damages by way of compensation not exceeding 1 crore rupees to the

person so affected.

Penalty for Failure to furnish information, return etc.[Sec. 44]

If any person who is required under this Act, to

a)Furnish any document, return or report to the controller or the Certifying Authority, fails to

furnish the same, he shall be liable to a penalty not exceeding one lakh and fifty thousandfor

each such failure;b)File any return or furnish any information, books or other documents within the specified time

there for, fails to file return or furnish the same within the time specified, he shall be liable to a

penalty not exceeding five thousand rupees for everyday during which such failure continues;

c)Maintain books of accounts or records, fails to maintain the same, he shall be liable to a

penalty not exceeding ten thousand rupees for every day during which the failure continues.

Residuary Penalty [Sec. 45]

whoever contravenes any rules or regulations made under this Act, for the contravention of

which no penalty has been separately provided, shall be liable to pay a compensation not

exceeding rupees twenty five thousand to the person affected by such contravention.

Power to Adjudicate [Sec. 46]For the purpose of adjudicating whether any person has committed a contravention of any of theprovisions of this Act or of any rule, regulation, direction or order made there under, the CentralGovernment shall appoint an officer not below the rank of a Director to the Government ofIndia or an equivalent officer of a state government to be an adjudicating officer for holding andenquiry in the manner prescribed by the Central Government.

the adjudicating officer appointed shall exercise jurisdiction to adjudicate matters in which theclaim for injury or damage does not exceed rupees five crore

provided that the jurisdiction in respect of the claim for injury or damage exceeding rupees

five crore shall vest with the competent Court.

The adjudicating officer shall, after giving the person a reasonable opportunity for making

representation in the matter and if, on such inquiry, he is satisfied that the person has committed

the contravention, he may impose such penalty or award such compensation as he thinks fit in

accordance with the provisions of that section.


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No person shall be appointed as an adjudicating officer unless he possesses such experience

in the field of Information Technology and legal or judicial experience as may be prescribed

by the Central Government.

Questions:-1. Define Digital Signature, Private Key Public Key, Asymmetric crypto system.

Explain digital signature in detail. Under what circumstances digital signature can be

suspended and revoked?

2. What do you understand by Electronic Governance? Explain the provisions related to

electronic governance provided under the Information Technology Act, 2000.

3. What do you understand by Electronic Record? Explain the provisions related to

electronic record provided under the Information Technology Act, 2000.

4.

What are the functions of Certifying Authorities under the Act?


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Chapter 2 INCOME TAX ACT, 1961

There are two types of taxes ie. Direct and indirect. Income tax is one of the type of direct tax.

The provision of Income tax are contained in Income tax Act, 1961. It became applicable from

1st

April 1962. It extends to the whole of India.

Important Definitions

1. Person u/s 2(31) includes,

a. An Individual,

b. Hindu Undivided Family (HUF),c. A Company,

d. A Firm,

e. An Association of Persons(AOP) or Body of Individuals (BOI),f. A Local Authority,

g.

Every other Artificial Juridical Person

2. Assessee u/s 2(7) means a person by whom income-tax or any other sum of money is

payable under the Act. Assessee includes every person in respect of whom any proceeding

under the Act has been taken for the assessment of his income or loss or the amount of refund

due to him. Assessee includes a person who is assessable in respect of income or loss ofanother person or who is deemed to be an assessee, or an assessee in default under any

provision of the Act.

3. Assessment Year u/s 2(9) means, the period of 12 months commencing on the 1stApril

every year. It is the year (just after previous year) in which income is earned is charged totax. The current Assessment is 2012-2013. Assessment year 2012-13 will commenced on

April 1, 2012, will end on March 31, 2013.

4. Previous Year u/s 2(34) means, the year in which income is earned.

5. Gross Total Income (G.T.I) :- The aggregate income under the 5 heads of income (viz.

Salary, House Property, Business or Profession, Capital Gains & Other Sources) is

termed as Gross Total Income.

6. Total Income (T.I) :- Total Income of assessee is gross total income as reduced by the

amount permissible as deduction under sections 80C to 80U.

7. Definition of income [section 2(24)]

Income includes -a)

Profit or gains;

b) Dividend;


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c) Voluntary contribution received by a trust created wholly or partially for charitable or

religious purpose or by an institution established wholly or partially religious purpose or by

certain other specified association or institution;

d) The value of any perquisites or profit in lieu of salary taxable under clause (2)and (3) of

section 17;e)

Export Incentives;

f) Any interest, salary, bonus, commission or remuneration earned by a

partner of a firm such firm;

g)

Any capital gain chargeable under section 45;

h) Profits and gains of business of insurance company or by a cooperative society

i) Profits and gains of any business of banking carried on by a cooperative

society with its members;

j) Winnings from lotteries, crosswords, puzzles, races including horse races

card games and other games of any sort or from gambling or betting of

any form or nature whatsoever;

k) Any sum received by the assessee from his employees towards welfare

fund contribution such as provident fund, superannuation fund etc.

1) Any sum received under a key man insurance policy including the sum

allocated by way of bonus on such policy.

How To Determine Residential Status Of Individual?

We all are aware of the fact that tax is charged on total income and the Individual income is

taxed based on his residential status . Ultimately, Incidence of tax on the income depends uponthe residential status . So, now, let us truly describe the Primary & secondary condition for


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determination of residential status of an Individual.

There are normally two primary classificationsResident and Non- Resident.

Again, Resident is divided into two sub-categories (secondary classification) -Ordinarily and

Not-ordinarily Resident.

Primary Condition:

An Individual is said to be Resident in India, if he satisfies at least one of the basic condition:

1.

He is in India for at least 182 days in the previous year (PY).

2. He is in India for at least 60 days in PY and for 365 days or more during 4 years

immediately preceding PY.

NOTE: Both days i.e. the day when one left and the day on which he came to India is

considered for Number of days of stay in India.

Exceptions:

Condition 2 is not applicable when Indian citizen during PY

Leaves India for employment outside India.

Leaves India as he is a crew member of an Indian ship. Comes to visit India.

Secondary Condition:


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When it is determined that a person is resident, then the further process to determine whether he

is an ordinarily or non-ordinarily resident takes place.

An individual is said to be not-ordinarily residentif he satisfies any one of the following

conditions:

He is a resident in India:

1. For at least 2 years out of 10 previous years preceding the relevant PY.

2. For at least 730 days during 7 years immediately preceding the relevant PY.

Lets understand it with an Example:

Mr. X is an Indian citizen. He went to Canada for employment. He leaves India for first time on

Sep. 26, 2010. During the PY 2011-12 he comes to India for 175 days. Now, we have to

determine his residential status for AY 2011-12 and AY 2012-13.

Determination:

An Individual is said to be resident in India as per primary conditions mentioned above:

In the given example, since Mr. X is an Indian citizen, leaving India for employment, therefore

condition 2 is not operative. But condition 1 will get satisfied if he stays in India for at least 182

days in PY.

Number of days of stay of Mr. in India in the PY 2012-13.

MONTH NO. OF DAYS

APRIL 30

MAY 31

JUNE 30

JULY 31

AUGUST 31

SEPTEMBER 26

TOTAL 179

Since Mr. X stays for less than 182 days (179 days) in India, so he is a Non-Residentin AY

2013-14. Also, in AY 2013-14, he stays for 175 days in India which is less than 182 days, so he

is a non-resident for AY 2012-13 also.


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Tax incidence on an assessee depends on his residential status. For instance, whether an income,

accrued to an individual outside India, is taxable in India depends upon the residential status of

the individual in India. Similarly, whether an income earned by a foreign national in India (or

outside India) is taxable in India depends on the residential status of the individual, rather than

on his citizenship. Therefore, the determination of the residential status of a person is very

significant in order to find out his tax liability.

The following norms one has to keep in mind while deciding the residential status of an assessee:

1. Different taxable entities - All taxable entities are divided in the following categories for the

purpose of determining residential status:

a. An individual;

b. A Hindu undivided family;

c. A firm or an association of persons;

d. A joint stock company; and

e. Every other person.

2. Different residential status - An assessee is either: (a) resident in India, or (b) non-resident in

India.

However, a resident individual or a Hindu undivided family has to be (a) resident and ordinarily

resident, or (b) resident but not ordinarily resident. Therefore, an individual and a Hindu

undivided family can either be:

a. resident and ordinarily resident in India; or

b. resident but not ordinarily resident in India; or

c. non-resident in India

All other assessees (viz., a firm, an association of persons, a joint stock company and every other

person) can either be:

a. resident in India; or

b. non-resident in India.

Category Individual/Hindu undivided family Firm, associationof persons, jointstock company and

every otherperson


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Category 1 Resident in India

Ordinarily resident

Not-ordinarily resident

Resident in India

Category 2 Non-resident in India Non-resident in

India

3. Residential status for each previous year - Residential status of an assessee is

to be determined in respect of each previous year as it may vary from previous year to previous

year.

4. Different residential status for different assessment years - An assessee may enjoy different

residential status for different assessment years. For instance, an individual who has been

regularly assessed as resident and ordinarily resident has to be treated as non-resident in a

particular assessment year if he satisfies none of the conditions of section 6(1).5. Resident in India and abroad - It is not necessary that a person, who is resident in India,

cannot become resident in any other country for the same assessment year. A person may be

resident in two (or more) countries at the same time. It is, therefore, not necessary that a person

who is resident in India will be non-resident in all other countries for the same assessment year.

2.1 Heads of Income and Computation of income under different heads.

All kinds of taxable income of an assessee fall under any of the following five heads ofincome. Those incomes which do not find place under any of the first four heads and are

taxable, fall under the fifth head of income. In order to compute the taxable income under each

head, certain deductions have to be made from gross income of the head. These deductions aredifferent for each head.

There are separate sections in the Income Tax Act for computing the taxable income under

each head, which are as under-

1. Salaries sec. 11 to 17;

2. Income from house property sec. 22 to 27;

3. Profits and gains from business or profession sec. 28 to 44;

4. Capital gains sec. 45 to 55 and

5. Income from other sources sec. 56 to 69.

Computation of income under different heads


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Taxable income is computed under the respective heads after allowing from gross receipts

admissible deductions for cost and expenses. The net income under each of these heads is then

aggregated to arrive at the 'Gross total Income'. Computation of income under individual heads is

explained in paragraphs following.

Salaries

Income from salaries is computed in accordance with the provisions of section 15 to 17 of the

Act. 'Salary' means all remuneration paid or due under the contract of employment. It includes

wages, annuity, pension, gratuity, fees, commission, perquisites, profits in lieu of or in addition

to any salary or wages, any advance of salary, leave salary encashment or any other payment by

the employer for services rendered. The annual accretion to the balance at the credit of an

employee participating in a recognised provident fund in excess of the prescribed limit is

includible in the salary income of the employee. 'Perquisites' mean the benefits or amenities

provided in kind by the employer free of cost or at a concessional rate. The value of these is

regarded as part of salary. Rule 3 of the Income Tax Rules lays down the methods fordetermining the value of certain perquisites. For others, the general rule of valuing the

perquisites in the hands of the employee is to take the cost to the employer in providing the

benefit or amenity. It has been clarified that securities allotted to an employee free of cost or at

concessional rate under ESOP or as sweat equity shares, will not be taxable as perquisite.

In order to be taxable under the head 'Salaries', it is necessary that there is a relationship of

employer and employee between the payer and the receiver. It is for this reason that the

remuneration received as a partner is not taxable as 'salary'.

Income from house property

Income from house property is computed in the hands of the owner in accordance with the

provisions of sections 22 to 27 of the Act. It is determined with reference to its 'annual value', i.e.

the sum for which the property might reasonably be let from year to year. However, where any

property is tenanted and the annual rent received or receivable by the owner is in excess of the

sum for which the property might reasonably be expected to be let from year to year, the actual

annual rent received or receivable is taken as the annual value of the property.

From the annual value of a house property in the occupation of a tenant, taxes levied by any

local authority in respect of the property to the extent such taxes are borne by the owner are

deductible on actual payment basis to arrive at the 'net annual value'.

Where the property consists of a house or a part of a house which is in the occupation of the

owner for his own residence, its annual value is taken as Nil. But if such a property is let out

during any part of the previous year, its annual value is taken proportionately. Further, where the

owner has only one resedential house and the house cannot be actually occupied by reason of the


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fact that owing to his employment, business or profession carried on at any other place, he has to

reside at that other place in a building not belonging to him, its annual value is taken to be Nil

provided the house is not actually let out and no other benefit is derived by the owner from it.

From the net annual value, determined as above deductions on account of annual repairs and

collection expenses (1/4th of the net annual value irrespective of actual expenditure), insurancecharges in respect of property, any annual charge, interest paid on any money borrowed for the

building, ground rent, land revenue, unrealised rent are allowed. All these deductions are not

allowed in respect of the house property in the occupation of the owner for his own residence,

the annual value of which is taken at Nil. In such a case deduction is allowed only for interest

and that too upto Rs. 1,00,000 only provided the house was constructed or acquired after

1.4.1999 but before 1.4.2003.

Under the circumstances mentioned in Sec. 27 of the I.T. Act, a person can be deemed to be the

owner of the house property and in such a case the income from that property is taxable in the

hands of that person.

Where the net result of computation of income from house property is loss and the assessee has

income assessable under any other head of income, he is entitled to have such loss set off against

income under other heads. Any loss remaining unadjusted can be carried forward to the

following assessment year for set- off against income from house property in that years and in

succeeding seven years.

Profits and gains of business or profession

Income from business or profession is computed in accordance with the provisions of sections 28

to 44D of the Act. The expression 'business or profession' includes any trade commerce or

manufacture or vocation. Apart from income from any of these activities the income chargeable

under this head includes the following receipts as well:-

i. Compensation received for the termination or for modifications in terms and conditions

of any managing agency agreement.

ii. Income of trade, professional and similar associations from specific services performed

for its members.

iii. Value of any benefit or perquisite arising from any business or profession.

iv. Profit on sale of a replenishment license, cash assistance or refund of duty drawback

granted to the exporters.


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v. Any interest, salary, bonus, commission or remuneration due to or received by a partner

of a firm from such firm.

vi. Any sum received under a keyman insurance policy including bonus on such policy.

Primarily the business or professional income is computed as per the accepted business andaccounting norms and in accordance with the method of accounting regularly employed by the

tax payer. Thus, whatever constitutes a legitimate outgoing of revenue nature of a business is

allowed as a deduction in computing the business income. However, certain deductions are

allowed in the Act as per the specific provisions made with regard to those deductions and

certain deductions, though business related, are not allowed because of specific bar on their

allowance under the Act.

Capital Gains

Sections 45 to 55A deal with the provisions relating to computation of income from capital

gains. Gains arising from the transfer of a capital asset are either short-term or long-term

depending upon the period for which the assets giving rise to capital gains were held by the tax

payer. A gain is short term if the asset was held for a period upto 36 months. In the case of share

of a company, listed security, unit of Unit Trust of India or of any other specified mutual fund,

this period is 12 months. All other gains i.e. those arising from assets held for more than this

period are called 'Long-term capital gains'.

Capital gain is computed by deducting from the full value of transfer consideration the

following:-

a.

the cost of acquisition (or the written down value) of and cost of improvement in theasset;

b. the amount of expenditure incurred in connection with such transfer.

The resultant amount in case of short term capital gains is taxable in full at the normal rate of

taxation applicable to the tax payer.

Income from other sources

Sections 56 to 59 deal with the provisions for computation of income under the head 'incomefrom other sources'. This is a residuary head covering all incomes which do not specifically fall

.under any of the heads mentioned earliers. Some of the types of income which are assessable

under this head are mentioned below:-

i. Dividends or income from units of mutual fund.


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ii. Interest including 'interest on securities' if it is not taxable under the head 'Profits and

gains of business or profession'.

iii. Income such as -

a. Ground rent or rent received or sub-letting a property.

b. Winning from lotteries, cross-word puzzles, races

including horse races, card games or from gambling or betting etc.

c. Income from hiring of machinery, plant or furniture unless such a hiring is the

business of the taxpayer.

iv. Family pension.

In computing the taxable income under this head, deduction is allowable for expenditure (other

than capital expenditure) which is incurred by the tax payer wholly and exclusively for the

purpose of earning such income. Besides, in assessing dividend income, any remuneration or

commission paid for realising such income is allowed as deduction. In assessing income from

letting the machinery, plant or furniture on hire, the depreciation on the value of such assets

calculated in the same manner as in respect of assets used in a business or profession is allowableas a deduction. No deduction is, however, allowed in respect of

i. any personal expenditure of the tax payer;

ii. any salaries or interest payable outside India from which tax is deductible at source under

the Act but has not been deducted.

2.2 Carry forward and set off of losses

Set off of LossesIn case of computation of income under any of the heads of income results in a loss figure, such

loss can be set off against income under any other head (including capital gains) in the same

year. This, however, does not apply to losses from speculative transactions, losses from owning

and maintaining race horses or to losses under the head 'Capital Gains'. Losses of these excluded

categories can be set off only against income, if any, from activities in the same category in that

year.

Carry Forward of Losses

Losses under the head 'Profits and Gains of business or profession' except those sustained fromspeculative activities which cannot be set off against income under any other head within the

same year can be carried forward to the succeeding eight years and set off only against income

under the same head in those years. In case of amalgamation of company owning industrial

undertaking or a ship with another company; a demerger of a company; a reorganisation of

business resulting in succession of a firm or a proprietory concern by a company; the


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accumulated losses or unabsorbed depreciation of the amalgamating company, demerged

company or the predecessor concern will, subject to fulfillment of certain conditions (sec. 72A),

be treated as losses or depreciation of amalgamated company, resulting company or the

successor concern and will be allowed to be set off and carried forward as their own loss or

depreciation Gains which would not be set off against income of respective nature in any year

can be carried forward for eight succeeding years for set off against income of similar nature, if

any, in those years. Losses in the activity of owning and maintaining race horses can be carried

forward for set off against profits of similar activities in succeeding four years only.

Losses under the head income from house property which could not be set off against income

under any other head can be carried forward for eight succeeding years for set off against income

under this head in those years.

If 51% or more of the voting power changes hands in an unlisted company, the company will not

be able to carry forward losses incurred before such change.

2.3 Deductions from Gross Total Income

All deductions mentioned under section 80C to 80U are taken into consideration while

calculating total income of an assesse.

2.4 Incomes which do not form part of Total Income

Exempted Incomes- Sec. 10

An exempted income is that income on which no tax is chargeable. Some incomes are

not even included in total income and some are included in total income but are exempted

from income tax.

While computing the total income, any income falling within any of the following clauses

shall not be included in total income, and is not taxable-

Agricultural income-section 10(1)

The income defined as agricultural income under section 2(1 A) is

totally exempt from tax. However, agricultural income is taken into account for calculation of

tax liability of non agricultural income.

Receipts by member of HUF- section 10(2)

Amount received by an individual being a member of HUF either out of income of the

family or out of income of estate belonging to the family is exempt from tax.


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Since, HUF is liable to pay tax on income receipts from HUF by the members of HUF

are tax free in order to avoid double taxation.

Share of profit from partnership firm section 10 (2A)

Share of profit received by partners of firm from the firm is not taxable in the hands of partners.

This is also based on the principle of avoidance of double taxation.

Leave Travel Consession in India section 10(5)

The value of leave travel consession and passage money available to Indias as well as foreign

employee is subject to some conditions.

Remuneration Received by Foreign Diplomats and Nationals section 10(6)

Remuneration received by foreign diplomats and nationals is exempt from tax as follows:-

A) Salary of diplomatic personnel

B)

Salary of foreign employees

C) Salary received by a ships crew

D) Remuneration of a foreigh trainee

Note : The above incomes are exempt from tax subject to some conditions.

Gratuity section 10(10)

Gratuity is monetary compensation on leaving the job after certain specified number of years. It

is treated as a retirement benefit. Gratuity received by government employees (central

government employees, state government employees, employees of local authority) is wholly

exempted from tax.Gratuity received from other employers is partly exempt from tax subject to some conditions

Retrenchment Compensation section 10(10B)

Compensation received by a workman at the time of retrenchment is exempt from the tax subject

to some provisions.

Compensation Received section 10(10C)

Compensation received from a public sector company at the time of voluntary retirement.

Exemption of VRS compensation available even if received in installment. The said exemption

would not be available if the employee has already claimed relief u/s 89 from tax on

compensation received at time of voluntary retirement or terminatin of service.

Tax on Perquisite Paid by Employer section 10(10CC)


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If tax is paid by the employer on behalf of an employee, on non monetary perquisities the same

being in the nature of an obligation which but for such payment would have been payable by the

employee, is considered perquisite and is chargeable to tax.

Salary Received from UNO

Salary received from United Nations Organization is not taxable in India.

Payment from Provident Fund section 10(11), 10(12)

Lump sum payment at the time of retirement or termination of service is totally exempt from tax

in case of statutory provident fund. Amount received from recognized provident fund is exempt

in some cases. Amount received on maturity of public provident fund account is totally exempt

from tax. Payment received in respect of employees own contribution is exempt from tax in case

of unrecognized provident fund.

Interest on Security section 10(15)

Interest received on the following securities is exempt from tax:

a) Interest on notified securities, bonds or certificates such as 12 year National Saving

Annuity Certificates, National Defenses Gold Bonds, 1980, Interest on PPF, etc.

b) Interest received by NRI from notified bonds.

c) Interest on 9% Relief Bonds.

d) Interest on Gold Deposit Bonds issued under Gold Deposit Scheme, 1999.

Educational Scholarship section 10(16)Scholarship granted to meet the cost of education is exempt from tax. Such scholarships should

have been financed by the government.

Daily Allowances of Members of Parliament section 10(17)

Daily allowances of members of Parliament and State legislature is totally exempt from tax.

Income of Local Authority section 10(20)

Local authority means municipal corporation, municipalities etc. Income of a local authority

which is chargeable under the head Income from house property, business gains and income

from other sources is exempt from tax.

Income of Scientific Research Association section 10(21)


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Income of an approved Scientific Research association is exempt from tax. Such an institution

must get approved under section 36(1)(II).

Income of Professional Institution section 10(23A)

Any income of professional institution such as Institute of Chartered Accountants of India,

Institute of Cost and Works Accountants of India is exempt from tax.

Income of Khadi and Village Industries section 10(23B)

Income of Khadi and Village industries which is deprived from the business of production sale

or marketing of Khadi and products of village industries is exempt from tax subject to some

conditions.

Income of Mutual Fund section 10(23D)

Any income of the following mutual funds is exempt from tax:

a)

Mutual fund registered under the SEBI act.

b) A notified mutual fund set up by bank or a public financial institution or authorized by

RBI.

Income of Trade Unions section 10(24)

Income of a trade union registered under Trade Union Act, 1926 derived from Income from

house porperty and Income from other sources is exempt from tax.

Income of Minor section 10(32)

If individual includes the income of minor child in terms of section 64(IA), such an individual isentitled to exemption of Rs. 1500/-in respect of each minor child.

Income on Transfer of US64 section 10(33)

Any income arising from the transfer of a unit of the unit scheme, 1964 is exempted from

assessment year 2003-04.

Income from dividend section 10(34)

Any income by way of dividends referred to in section 115-0 declared distributed or paid by a

domestic company or after 1/4/2003 is exempted.

Income from interest on units of mutual fund section 10(35)

Any income by way of interest on units of mutual fund on or after 1/4/2003 is exempted.

Long Term Capital Gains on transfer of listed equity shares section 10(36)


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Long Term Capital Gains arising of transfer of eligible equity shares in a company purchase on

or after 1/3/2003 and before 1/3/2004 and held for a period of 12 months or more is exempt from

AY 2004-05 and onwards.

Capital gain on compulsory acquisition of urban agriculture land section 10(37)

In case of an individual or HUF capital gain arising on transfer by way of compulsory acquisition

of urban agriculture land is not charegeable to tax from the assessment year 2005-06, if such

compensation is received after March 31, 2004 and agricultural land used by the assessee for

agricultural purpose during 2 years immediately prior to transfer.

Long term capital gains on transfer of equity shares/units in cases recovered by securities

transaction tax section 10(38)applicable from assessment year 2005-06

Long term capital gains arising of equity shares or units of equity oriented mutual fund will not

be chargeable to tax from the assessment year 2005-06 if such transaction is covered by

securities transaction tax.

2.5 Income Tax Authorities, Appointment, Control, Jurisdiction and Powers

Who are income tax authorities? (Sec 116)

(a) the Central Board of Direct Taxes.

(b) Directors-General of Income-tax.

(c)Directors of Income-tax or Commissioners of Income-tax.

(d)Deputy Directors of Income-tax or Deputy Commissioners of Income-tax.

(e)Assistant Directors of Income-tax or Assistant Commissioners of Income-tax.

(f)Income-tax Officers.

(g)Tax Recovery Officers.

(h) Inspectors of Income-tax.

(i) Additional Directors of Income tax.

(j) Joint Directors of Income tax and Joint Commissioners.

Since 1 January 1964 the Central Board of Direct Taxes (CBDT) has been charged with

all matters relating to various direct taxes in India and it derives its authority from Central

Board of Revenue Act 1963.


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Powers of CBDT

Instructions to subordinate authorities :

Orders issued by way of relaxation of certain provisions under section 119(2)(a);

Orders giving extension of time limit [Sec. 119(2)(b)];

Orders giving relaxation for claiming deduction [119(2)(c)].

Director General/Chief Commissioner of Income tax

Appointment:

By the central Govt.

Jurisdiction:

Determined by CBDT.

Functions:

CBDT assigns functions by general or special order.

Powers:

-Exercise powers of an assessing officer.

-Appoint income tax authorites below the rank of assisstant commissioner.

-Make enquiries on investigations into concealmentSection 131 (1A).

-Giving instructions to income tax officers Section 119 (2).

-Power of Survey- Section 133A.

-Power to make enquirySection 135.

Commissioners/Directors of Income Tax

Appointment:By central govt.

Jurisdiction:Determined by central board of direct taxes.

Functions :

The Board assigns functions by general or special order.

Powers:- Commissioner may exercise powers of an assessing officer.

- Power to transfer any case from one or more assessing officers to any other assessingofficer.

-Grant approval for an order issued by the assessing officer.

- Prior approval is required for reopening of an assessment.-Power to revise an order passed by an assessing officer.

Deputy Commissioner/Assistant commissioners of income tax.

Appointment:

By central govt.

Jurisdiction:


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Determined by central board of direct taxes.

Functions :

The Board assigns functions by general or special order.

Powers:

Empowered to accord to sanction to levy additional income tax.

Power to exercise powers of an assessing officer.Cancel registration of a firm.

Power to issue instructions to assessing officer.

Joint commissioner

Functions:Detect tax evasions and supervise

subordinate officers.

Powers:

-Accord approval to adopt fair market value as full considerationsection 52.

-Instructions to income tax officerssection 119 (3).

-Exercise powers of income tax officers section 125 a.

- Power to call information section 133.

- Power to inspect registers of companies section 134.

- Power to make any enquiry section 135.

Assisstant Commissioner/ Income tax officer

Jurisdiction:

Determination of CBDT.

Instructions by Director General.

Concurrent jurisdiction .Disputes regarding jurisdiction.

Jurisdiction not to be disputed.

Powers:

-Power of civil court.

-Powers of search and seizure

-Power of assessment.

-Power to call information.

-Power of survey.

-Power to inspect registers of companies.

Income tax officers

Class I service - appointed by central govt.

Class II service - appointed by commissioner of income tax.

Powers, functions and duties of the income tax officer.


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The authorities can exercise these powers when due to the information in their

possession; they have firm reason to believe :

Any person to whom a summon or notice has been or might be served, has failed or

would not produce the books of accounts or other documents as called for.

Any person is in possession of money, bullion, jewellery or such property which has

not been disclosed.

2.6 VAT Basic Concept and Principles :

A value added tax(VAT) is a form ofconsumption tax.From the perspective of the

buyer, it is a tax on the purchase price. From that of the seller, it is a tax only on thevalue

added to a product, material, or service, from an accounting point of view, by this stage

of its manufacture or distribution. The manufacturer remits to the government the

difference between these two amounts, and retains the rest for themselves to offset the

taxes they had previously paid on the inputs.

The purpose of VAT is to generate tax revenues to the government similar to thecorporate income tax or the personal income tax.

The value added to a product by or with a business is the sale price charged to its

customer, minus the cost of materials and other taxable inputs. A VAT is like asales

tax in that ultimately only the end consumer is taxed. It differs from the sales tax in that,

with the latter, the tax is collected and remitted to the government only once, at the point

of purchase by the end consumer. With the VAT, collections, remittances to the

government, and credits for taxes already paid occur each time a business in the supply

chain purchases products.

2.7 Service TaxIntroduction and Key Aspects :

Service tax is a tax levied by the government on service providers on certain service

transactions, but is actually borne by the customers.

Definition: Service tax is a tax levied by the government on service providers on certain

service transactions, but is actually borne by the customers. It is categorized under

Indirect Tax and came into existence under the Finance Act, 1994.

Description:In this case, the service provider pays the tax and recovers it from the

customer. Service Tax was earlier levied on a specified list of services, but in the 2012budget, its scope was increased. Services provided by air-conditioned restaurants and

short term accommodation provided by hotels, inns, etc. were also included in the list of

services.

It is charged to the individual service providers on cash basis, and to companies on
http://en.wikipedia.org/wiki/Consumption_taxhttp://en.wikipedia.org/wiki/Value_addedhttp://en.wikipedia.org/wiki/Value_addedhttp://en.wikipedia.org/wiki/Sales_taxhttp://en.wikipedia.org/wiki/Sales_taxhttp://en.wikipedia.org/wiki/Sales_taxhttp://en.wikipedia.org/wiki/Sales_taxhttp://en.wikipedia.org/wiki/Sales_taxhttp://en.wikipedia.org/wiki/Value_addedhttp://en.wikipedia.org/wiki/Value_addedhttp://en.wikipedia.org/wiki/Value_addedhttp://en.wikipedia.org/wiki/Consumption_tax


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accrual basis. This tax is payable only when the value of services provided in a financial

year is more than Rs 10 lakh. This tax is not applicable in the state of Jammu &

Kashmir.

Levy of Service Tax

As on 1stMay, 2006, 95 services are identified as taxable services in India. Section 64

of the Finance Act, 1994, extends the levy of service tax to the whole of India, except the

State of Jammu & Kashmir.

Generally, the liability to pay service tax has been placed on the service provider.

Service tax is payable @ 12% of the gross amount( in specific cases partial deductions

are allowed, refer section 67 of the Finance Act) charged by the service provider for

providing such taxable service. The Education Cess is payable @2% of the service taxpayable. The liability to pay service tax has been placed on the receiver /recipientof

the service under certain situations.( Refer section 68 of the Finance Act and Rule 2(1)(d)

of Service Tax Rules, 1994)

Example: Suppose the value of taxable service is Rs.100. Service tax @12% will be

Rs.12 and Education Cess @2% of the Service Tax will be Rs.0.24

Procedure for Registration

Fill the Form ST-1 in duplicate. (Form ST-1 is available on the departmental website

(www.cbec.gov.in ) Enclose photocopy of PAN card and proof of address to be

registered.

Copy of PAN card is necessary as a PAN based code (Service Tax Code) is allotted to

every assessee.

These forms are required to be submitted to the jurisdictional Central Excise office ( in

case of six Service Tax Commissionerates, to the jurisdictional Division office. There are

separate service tax commissionerates in Mumbai, Chennai, Delhi, Kolkata, Bangalore

and Ahmedabad as mentioned in the previous chapter).

A person liable to pay service tax should file an application for registration within thirty

days from the date on which the service tax on particular taxable service comes into

effect or within thirty days from the commencement of his activity.

(Refer Rule 4 (1) of Service Tax Rules, 1994)

Where a person, liable for paying service tax on a taxable service,
http://www.cbec.gov.in/http://www.cbec.gov.in/


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(i) provides such service from more than one premises or offices; or

(ii) receives such service in more than one premises or offices; or,

(iii) is having more than one premises or offices, which are engaged in relation to suchservice in any other manner, making such person liable for paying service tax,

and has centralised billing system or centralised accounting system in respect of suchservice, and such centralised billing or centralised accounting systems are located in one

or more premises, he may, at his option, register such premises or offices from where

centralised billing or centralised accounting systems are located.

The registration under sub-rule (2), shall be granted by the Commissioner of Central

Excise in whose jurisdiction the premises or offices, from where centralised billing or

accounting is done, are located:

Provided that nothing contained in this sub-rule shall have any effect on the registration

granted to the premises or offices having such centralised billing or centralised

accounting systems, prior to the 2ndday of November, 2006.

A single registration is sufficient even when an assessee is providing more than one

taxable services. However, he has to mention all the services being provided by him in

the application for registration and the field office shall make suitable

entries/endorsements in the registration certificate.

(Refer Rule 4 (4) of Service Tax Rules, 1994).

An assessee should get the registration certificate (registration number) within 7

days from the date of submission of form S.T.1, under normal circumstances.


A fresh registration is required to be obtained in case of transfer of business to another

person.


Any registered assessee when ceases to provide the taxable service shall surrender

the registration certificate immediately.


In case a registered assessee starts providing any new service from the same premises, he

need not apply for a fresh registration. He can simply fill in the Form S.T.1 for necessary

amendments he desires to make in his existing information. The new form may be

submitted to the jurisdictional Superintendent for necessary endorsement of the new

service category in his Registration certificate.


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Returns

Every assessee is required to submit a half yearly return in form S.T.3 or S.T.3A (in

triplicate) along with copies of T.R.6 challans. For the purpose of filing returns half year

is counted from April to September and October to March. In case the assessee has opted

for provisional payment of service tax he is required to file the service tax return in form

S.T.3A. (Rule 7(1) of Service Tax Rules, 1994).

Date of filing of Returns :The half yearly return is required to be filed by the 25th

of

the month following a particular half year. (Rule 7(2) of Service Tax Rules, 1994).

E-filing of Returns :The department has extended the facility of filing the returns on-line (e-filing of returns). This facility is available for all the categories of service

providers. The assessee who is willing to opt for this facility is required to submit an

application ( at least one month in advance before the due date for filing the return), in

prescribed format (Annexed to Circular No.71/1/2004-ST dated 02.01.2004) to the

jurisdictional Central Excise officer. The department would allot a username and

password in due course of time to such assessee.

Questions:-

1. Define :- Assessee, Assessment Year, Previous Year, Gross Total Income, Total Income,

Income

2.Determine the residential status of an assessee.

3. How would you calculate the Gross Total Income of an individual?

4. Explain the income which do not form part of Total income.

5. What are the deductions which can be made while determining the total income of an

assessee?6. What is the procedure to appoint the Income Tax authorities and explain their powers?

7. Write note on Service Tax and VAT (Value Added Tax)

8. Explain the rules relating to carry forward and set-off of losses.


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Chapter 3 DUE DILIGENCE AND CORPORATE COMPLIANCE MANAGEMENT

Due diligence is the process by which confidential legal, financial and other material information

is exchanged, reviewed and appraised by the parties to a business transaction, which is done

prior to the transaction.

Due diligence is an analysis and risk assessment of an impending business transaction. It is the

careful and methodological investigation of a business or persons, or the performance of an act

with a certain standard of care to ensure that information is accurate, and to uncover information

that may affect the outcome of the transaction.

Due diligence is used to investigate and evaluate a business opportunity. The term due diligence

describes a general duty to exercise care in any transaction.

3.1 Due diligence

Is a risk assessment tool with respect to a business transaction.

Is a Evaluation Mechanism with respect to a business opportunity.

Is a tool that provides insight into hidden facts.

Takes care of present, past and future aspects that effect the business transaction.

Scope of due diligence

Scope of due diligence is transaction-based and is depending on the needs of the people who are

involved in the potential investments, in addressing key uncovered issues, areas of concern and

in identifying additional opportunities.

In general it covers compliances, litigations, uncovered risks, future prospects etc.

Due diligence is generally understood by the legal, financial and business communities investors

to mean the disclosure and assimilation of public and proprietary information related to the assets

and liabilities of the business being acquired. This information includes financial, human

resources, tax, environmental, legal matters, intellectual property matters etc.

The investigation or inspection would cover :-

-Compliance with applicable laws

-Regulatory violations or disciplinary actions

-Litigation and assessment of feasibility of pursuing litigation

-Financial statements

-Assetsreal and intellectual property, brand value etc.

-Unpaid tax liens and/or judgements

-Past business failures and consequential debt


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-Exaggerated credentials/Fraudulent claims

-Misrepresentations or character issues

-Cross-border issuesdouble taxation, foreign exchange fluctuation, sovereign risk, investment

climate, cultural aspects

-Reputation, goodwill and other intangible assets.

Objectives of Due Diligence

Collect material of information from the target company.

Conduct a SWOT analysis to identify the strength and to uncover threats and weaknesses.

Improve the bargaining position depending on SWOT analysis.

Take an informed decision about an investment.

Identification of areas where representations and warranties are required.

Provide a desired comfort level in a transaction.

Ensure complete and accurate disclosure.

Bridge the gap between the existing and expected.

Take smooth/accurate action/decision.

Enhance the confidence of stakeholders.

Due diligence is necessary to allow the investigating party to find out everything that one needs

to know about the subject of the diligence. The objective is to allow the investigator to consider

the following options, considering the facts found in the course of due diligence:

Withdrawal of deal :- if the due diligence uncovers information that disclosed the investment,

loan or participation, a risky or undesirable one and which cannot be adequately resolved then

the investigator may withdraw from the deal.

Adjusting the valuation of the investment: The investigator may revise his valuation of the

company or reassess the price at which it will provide services.

Solving of problems uncovered: it may be possible for a problem uncovered by the due

diligence to be solved before the deal goes ahead.

Process of Due diligence :

A due diligence process can be divided into three stages

Pre diligence, diligence and post diligence

Pre diligence is primarily the activity of management of paper, files and people.

-Signing the letter of intent and the non disclosure agreement letter.

-Receipt of documents from the company and review of the same with the checklist of

documents already supplied to the company.


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-Identifying the issues.

-Organizing the papers required for a diligence.

-Creating a data room.

The first and foremost in a deal for the management of the target company, is that the investor is

to sign a Letter of Intent (LOI) or a term sheet which underlines the various terms on which the

proposed deal is to be concluded. Immediately on receipt of the LOI the investors sign an NDA

with the various agencies conducting a diligence, be it finance, accounting, legal or secretarial

diligence.

The company, would usually receive a checklist from the agency conducting the diligence. The

company may either collate and compile the documents in-house, or outsource this to an external

agency.

As regards the process of diligence, a professional care should be taken to scrutinize every

document that is made available and asking for details and clarifications, though, generally the

time provided to conduct the diligence may not be too long and though things have to be

wrapped up at the earliest. The company may be provided an opportunity to clear the various

issues that may arise out of the diligence.

(ii) Diligence

After the diligence, is conducted, the professionals submit a report, which in common parlance is

called the DD report. These reports can be of various kinds, a summary report; a detailed report

or the like; and the findings mentioned in the report can be very significant, is as much as the

deal is concerned.

There are certain terms used to define the outcome of these reports :-

Deal Breakers : In this report the findings can be very glaring and may expose various non-

compliance that may ariseany criminal proceedings or known liabilities.

Deal Diluters : The findings arising out a diligence may contain violations which may have an

impact in the form of quantifiable penalties and in turn may result in diminishing the value of

company.

Deal Cautioners : It covers those findings in a diligence which may not impact the financials, but

there exist certain non compliances which though rectifiable, require the investor to tread a

cautious path.Deal makers : Which are very hard to come by and may not be a reality in the strict sense, are

those reports wherein the diligence team have not been able to come across any violations,

leading them to submit what is called a clean report.

(iii) Post Diligence


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Post diligence sometimes result in rectification of non-compliances found during the course of

due diligence. There can be interesting assignments arising out of the diligence made by the team

of professionals. It can range from making applications/filing of petition for compounding of

various offences or negotiating the shareholders agreement, since the investors will be on a

strong wicket and may negotiate the price very hard.

3.2 Transactions Requiring Due Diligence

Mergers, Amalgamations and Acquisitions

Due diligence investigations are generally for corporate acquisitions and mergers, i.e.

investigation of the company being acquired or merged. These are also generally the most

thorough types of due diligence investigations. The buyer or transfree company wants to make

sure it knows that what it is buying. Partnerships are another time when parties investigate each

other in conjunction with negotiations. Some other transactions where due diligence is

appropriate could be :

-Strategic Alliances and Joint Ventures

-Strategic Partnerships

-Partnering Agreements

-Business Coalitions

-Outsourcing Arrangements

-Technology and Product Licensing

-Technology Sharing and Cross Licensing Agreements

-Distribution Relationships etc.

As regards the acquirer due diligence is an opportunity to confirm the correct value of the

business transaction, accuracy of the information disclosed by the target company as well as

determines whether there are any potential business concerns that need to be addressed. This

process helps evaluation and plan for the integration of business between the transacting parties.

As regards the target company, it is ascertaining the ability of the acquirer to pay or raise funds

to complete the transaction, of rights that should be retained by the target company,

determination of any obstacles that could delay the closing and aid in the preparation of the

target companys disclosure schedules for the definitive and final transactional document.

Joint venture and collaborations

Before entering into a major commercial agreement like a joint venture or other collaboration

with a company, a collaboration partner will want to carry out a certain amount of due diligence.

This is particularly likely to be the case where a large company is forming a relationship for the


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first time with a relatively small start-up company. The due diligence may not to be as extensive

as in an acquisition, but the larger company will be seeking comfort that its investment will be

secure and the small company has the systems personnel, expertise and resources to perform its

obligations.

Venture Capital Investment

Before making an investment in any company, venture capitalizes will conduct business due

diligence, which generally includes aspects such as a review of the market for the product of the

company, background check on the founders and key management team, competition for the

company, discussions with key customers of the company, analysis of financial projections for

the business, review of any weakness/differences in the management team, minutes and consents

of the board of directors and shareholders, corporate charter and bylaws, documents on

litigations, patents and copyrights, and other intellectual property-related documents etc.

Public Offer

-Public issue due diligence spans the entire public issue process. The steps involved may be-Decisions on public issue

-Business due diligence

-Legal and financial due diligence

-Disclosures in prospectus

-Marketing to investors

-Post issue compliance

Documents To Be Checked In Due Diligence Process

The types of information or documents to be checked, during the process of due diligence are asfollows :

Basic information

Particulars Audit Due diligence

Scope Limited to financial analysis Includes not only analysis of financial

statements, but also business plan,sustainability of business, future aspects,

corporate and management structure,legal issues etc.

Data Based on historical data Covers future growth prospects in

addition to historical data

Mandatory Mandatory Mandatory based on the transaction

Assurance Positive assurance ie, true and

fairness of the financial statements

Negative assurance ie. Identification of

risks if any

Type Post mortem analysis Varies according to the nature of

transaction

Nature Always uniform Varies according to the nature of


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Financial data

Important business agreements

Litigation aspects

IPR details

Marketing information

Internal control system

Taxation aspects

Insurance coverage

Human resources aspects

Environmental impact

Cultural aspects

However, the list mentioned above is not an exhaustive. The purpose of providing this list is to

provide a general idea of documents that are required to be checked in any type of due diligence.

Due Diligence Vs Audit

An audit is concerned with historical financial statements only and provides an opinion as to

whether the financial statements represent a true and fair view of the companys operations.

Due diligence, on the other hand, review not only look the historical financial performance of a

business but also consider the forecast financial performance for the company under the current

business plan. The following table describes the difference between Due Diligence and Audit.

3.3 Compliance Management

Corporate compliance means having internal policies and procedures designed to prevent

and detect violations of applicable law, regulations, rules and ethical standards by

employees, agents and others. It involves legal risk management and internal controls.

Clause 49 of Listing Agreement:

The Board shallperiodically review compliance reports of all laws applicable to the

company, prepared by the company as well as steps taken by the company to rectify

instances of non-compliances.

Compliance of all Laws

transaction

Repetitiveness Recurring event Occasional event


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The Five Step Process

1. Understanding the company

2. Identification

3. Evaluation

4. Assessment

5.

Compliance Structure

Understanding the Company

Companys History and Background

Capital Structure and Evolution

Promoters and Group Companies

Management and Administration buildup

Financial Soundness and Debt Structure

Risk Management and Protection

Licenses and Approvals

Identification Process

General application of laws

Sectoral applications

Industry / Segment applications

Geographical applications

Number of Employees

Product

Profile

Factory

Location

Sector

Segment

Transaction

Employees


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Transaction applications

Evaluation Process

Through Questionnaires

Evaluating the applicable laws after due identification process

Assessment Process

Further improvements

Implication of Compliance System

Effective Usability

Bridging the gap of Compliance In Letter and Compliance In Letter & Spirit

Creation of Compliance Structure

Establishing Controls and Standard

Delegation of Responsibility

Analysis and Assessment

Compliance Reporting

Compliance in Letter

Compliance in Letter and Spirit

Complaint Received Complaint

Resolved

Pending

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3.4 Account and Audit Report and Directors report provided in Clause 49 provisions

3.5 Inspection and Investigation

Section 209A(2)