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    Act RulesIncome Tax
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    Procedure on receipt of application: Board must forward application, call records, hear applicant, and issue certified rulings promptly.
    Clause 384 requires the Board for Advance Rulings to forward an application to the Principal Commissioner/Commissioner, call for relevant records, and, after examining the application and records, either allow or reject the application by order. Mandatory rejection grounds include pending proceedings before tax authorities or tribunal, questions on fair market value, and transactions prima facie for tax avoidance, subject to exceptions. Rejection cannot occur without offering an opportunity to be heard and recording reasons; allowed applications must receive a written ruling within the prescribed timeframe and certified copies are to be transmitted to the applicant and assessing officer.
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    Advance ruling application procedure: removal of copy requirement and fee benchmark increases administrative flexibility for applicants.
    Applications for an advance ruling must be made in the form and manner, and accompanied by the fee, as prescribed, with an applicant permitted to withdraw the application within thirty days; the provision delegates prescription of form, manner and fee to subordinate rules, and the enacted text removes a quadruplicate filing requirement and a fixed monetary benchmark previously stated in the Bill, thereby increasing administrative flexibility while placing compliance dependence on subsequent rules.
    Act RulesIncome Tax
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    Revision of orders prejudicial to revenue empowers Competent Authority to revisit AO/TPO orders and direct fresh assessments.
    The Competent Authority may call for and examine records of any proceeding and, if satisfied an AO or Transfer Pricing Officer's order is erroneous and prejudicial to revenue, may revise that order after giving the assessee an opportunity of being heard and making such inquiry as necessary; revision can enhance, modify, cancel or direct a fresh assessment, extends to AO/TPO functions and matters not decided in appeal, and is subject to a two-year limitation with specified exclusions and an exception to give effect to appellate findings.
    Act RulesIncome Tax
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    Identical question procedure: deferral and preservation of departmental appeals pending a controlling higher court decision.
    The provision creates an administrative mechanism where a Board specified collegium may determine that an identical question of law is pending in another case before a High Court or the Supreme Court and, on that basis, direct restraint from immediate departmental appeal while requiring a prescribed application to preserve the right to appeal later; if the assessee accepts identity the Assessing Officer files the application, otherwise the department proceeds with ordinary appeals, and subsequent appeals may be filed if the higher court decision does not sustain the earlier favourable order.
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    Identity of question of law enables taxpayer to seek application of pending higher-court decision and waive further appeals.
    Section 375 provides an overriding procedure by which an assessee may declare that a question of law in a relevant tax-year is identical to a question pending in another case before specified higher fora; upon a prescribed declaration and, where applicable, a report and hearing involving the Assessing Officer, the assessing or appellate authority may admit or reject the claim by final written order and, if admitted, may dispose of the relevant case and later apply the final decision in the other case by amending earlier orders in conformity.
    Act RulesIncome Tax
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    Appealability to Joint Commissioner (Appeals) expanded to include deductors and collectors, broadening standing to challenge subordinate tax orders.
    Appealability to the Joint Commissioner (Appeals) covers specified subordinate Assessing Officer orders-intimations involving adjustments, assessment, reassessment, recomputation, specified assessment orders, penalties, and amendments thereto-with appeals barred if the impugned order was passed by or with prior approval of an authority above Deputy Commissioner. The enacted text expands standing to include deductors and collectors alongside assessees, clarifies objection language regarding adjustments, provides transfer powers between appellate authorities with a rehearing right on transfer, and permits Central Government schemes and Board exemptions to alter procedural or jurisdictional application.
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    Related-person tests broadened to include relatives' concerns and donor-threshold triggers, expanding scrutiny over non-profit transactions.
    Section 355 defines terms governing registered non-profit organisations and related actors, including anonymous donation, approval, donation, commercial activity, registration, registered non-profit organisation, related person, relative, residual income, specified asset, specified person, specified provision, substantial interest and value. The definitions establish donor-based related-person thresholds, treat fee-for-service activities as commercial activity irrespective of income application, set a twenty-percent threshold for substantial interest in companies and concerns, and attribute specified assets based on acquisition source and timing, with certain carve-outs and cross-references to other Act provisions.
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    Approval for donor deduction requires statutory compliance with eligibility conditions, reporting and timelines, affecting charitable organisations' donor benefits.
    Approval for donations under section 133(1)(b)(ii) requires application by a registered non-profit or specified person and satisfaction of seven conditions concerning charitable purpose, non-discrimination, limits on religious-nature expenditure, asset-use restrictions, regular accounts, prescribed statements and donor certificates. The Principal Commissioner or Commissioner has inquiry powers and fixed decision timelines; approvals have defined validity periods. Key operational elements-definitions, calculation rules for religious expenditure, prescribed forms and Schedule contents-are left to subordinate prescription and are not specified in the text.
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    Taxation of non-profit compliance failures: converts regular income into taxable income and restricts deductible expenditure.
    Section 353 converts a registered non-profit's regular income for a tax year into taxable regular income where the organisation fails book-keeping, audit or return obligations or carries on prohibited commercial activity, permitting reduction only by narrowly specified expenditure incurred in India and subject to exclusions (not from corpus, not from borrowings, no capital expenditure, depreciation and payment restrictions), while additionally subjecting specified and residual incomes not included under that conversion to tax and displacing special-treatment provisions.
    Act RulesIncome Tax
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    Tax on accreted income: exit charge on nonprofit net assets measured by fair market valuation after triggering events.
    Special additional tax levies a one time charge on accreted income of specified persons (principally registered non profits) upon enumerated triggering events, measured as aggregate fair market value of total assets less total liabilities on a specified date, computed in accordance with prescribed valuation methods. Liability extends to the specified person and principal officer or trustee, and transferees may be assessee in default in limited dissolution cases. The earlier bill expressly empowered the Assessing Officer to compute accreted income after a hearing; the enacted text omits that express AO computation/hearing provision, and procedural timing and valuation rules await delegated legislation.
    Act RulesIncome Tax
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    Cancellation of registration for non-profit organisations follows specified violations including misuse of income and impermissible commercial activity.
    Section 351 enumerates specified violations by registered non-profit organisations that may trigger cancellation of registration: misuse of income, impermissible commercial activity, private religious applications lacking public benefit, non-genuine activities or non-compliance with registration conditions, final/undisputed external orders under other laws, and false information in the registration application. The Principal Commissioner/Commissioner may call for documents, hold inquiries, provide a hearing, and issue a written order canceling or not canceling registration, to be communicated to the Assessing Officer and organisation within a six-month timeline from the quarter-end of the first notice.
    Act RulesIncome Tax
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    Return filing obligation for registered non-profit organisations triggered when pre Part income exceeds non taxable threshold; timing cross-reference amended.
    A registered non-profit organisation must furnish a return of income for a tax year if its total income, computed without giving effect to the provisions of this Part, exceeds the maximum amount not chargeable to income-tax; the clause cross-references the general return-filing provisions for timing and procedure, and the enacted text modifies which procedural sub-clause governs the filing deadline.
    Act RulesIncome Tax
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    Restriction on commercial activities requires incidental nexus and segregated accounting for registered non-profits under statutory provision.
    Section 345 prohibits a registered non-profit organisation from carrying out commercial activity unless (a) the activity is incidental to the attainment of the organisation's objectives and (b) separate books of account are maintained for such activities; the Bill originally contained an in-text descriptive exception for organisations advancing objects of general public utility, while the enacted provision replaces that exception with a cross-reference to a statutory category in section 346.
    Act RulesIncome Tax
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    Deemed accumulated income rule limits investment obligation and ties permitted modes to actual investment, changing compliance exposure.
    The provision designates a deemed accumulated income amount calculated as a proportion of regular income after reductions for application of income and amounts accumulated or set apart; that deemed amount is excluded from the accumulated-income regime and, if invested or deposited, must be placed in modes permitted by the applicable investment provision. The enacted text clarifies the reduction base by expressly referencing the application-of-income mechanism and conditions the statutory constraint on investment modes upon an actual investment or deposit.
    Act RulesIncome Tax
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    Application of income: qualifying paid sums and an 85% recognition rule for donations, with corpus treated as nil.
    Clause 341 limits qualifying application of income to sums actually paid during the tax year that are allowable under sections 35(b)(i) and 36(4)-(7), recognises 85% of donations to other registered non-profits as application while treating corpus donations to other registered non-profits as nil, and permits reinvestment of corpus and repayment of borrowings as application only subject to five-year, post-31 March 2021 and compliance conditions, excluding depreciation already claimed and set-off of earlier excess application.
    Act RulesIncome Tax
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    Specified income triggers convert exempt receipts into taxable income when organisational uses or investments breach prescribed conditions and thresholds.
    Clause 337 lists events that convert otherwise exempt receipts of a registered non-profit organisation into specified income and fixes the tax year for taxation. It enumerates categories including anonymous donations (subject to a prescribed threshold and limited exemptions), amounts applied for related persons, overseas applications contrary to the application rule, investments or deposits made in breach of investment restrictions, corpus or accumulated funds used contrary to conditions, and income of business undertakings assessed in excess of books, while delegating computations and some definitions to subordinate rules.
    Act RulesIncome Tax
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    Taxable regular income threshold clarified: application must meet application rules and accumulation must meet accumulation rules for exemption.
    Section 336 prescribes that a registered non-profit's taxable regular income is nil if a prescribed threshold share of regular income for the tax year has been applied for charitable or religious purposes under the Part or accumulated for such purposes under the Part in that year; otherwise taxable regular income equals the prescribed percentage of regular income reduced by amounts so applied or accumulated in that tax year, with the computation anchored to the percentage base before deduction of qualifying amounts.
    Act RulesIncome Tax
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    Regular income classification for nonprofits now covers charitable receipts, investment returns, contributions and permitted commercial gains.
    Regular income for a registered non-profit comprises operational receipts from its registered charitable or religious activities, returns from property/deposit/investments (with a new distinction between wholly and part-held assets), voluntary contributions, and gains of permitted commercial activities; the Act changes terminology from "receipts" to "income," omits an explicit "capital or revenue" label for investment returns, excludes commercial gains from certain investment heads, expands cross-references to related provisions, and requires prescribed computation for commercial gains.
    Act RulesIncome Tax
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    Non-profit registration: eligibility, irrevocable trust requirement, timelines and commissioner's power to enquire and grant or cancel registration.
    Clause 332 sets eligibility and procedure for registration as a registered non-profit organisation: specified applicant categories; requirement of carrying out charitable purposes (per section 2(23)) or public religious purposes; properties held under an irrevocable trust for public benefit; differentiated filing windows, provisional registration, prescribed decision timelines, and validity periods (with extended validity for lower income applicants); Commissioner/Principal Commissioner empowered to enquire into genuineness, call for documents, condone delay for reasonable cause, and reject or cancel registration; uncured delay may attract taxability under the accreted income provision.
    Act RulesIncome Tax
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    Change in constitution of a firm: assessment attaches to the firm as constituted at the time of assessment.
    Where, at the time of making an assessment under sections 270 or 271, a change in the constitution of a firm is found, the assessment shall be made on the firm as constituted at that time; "change in constitution" includes partners ceasing to be partners, admission of new partners provided at least one pre existing partner continues, and changes in partners' shares, with a proviso excluding dissolution on account of a partner's death from the partner cessation limb.

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      Introduction of concept of mediation and Advance Ruling System for Residents to reduce tax litigation and more clarity

      15 September, 2020

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      2020 (9) TMI 496 - Supreme Court

      While decided an issue pertaining to AY 1976-77, honorable Supreme Court has wrote two postscript with the following note:

      We have been persuaded to write two postscripts on account of the backbreaking dockets which are ever increasing and as a move towards a trust between the Tax Department and the assessee, and we hope that both the aspects meet consideration at an appropriate level. [Para 21]

       

      Postscript 1:

      1. The Indian legal system is reeling under a docket explosion.

      The Government and public authorities are active contributories to this deluge. To top it, a number of litigations arise inter se the Government and its bodies and, thus, the only question, as stated in the beginning, is which pocket of the Government will be benefitted?

      2. The aforesaid position resulted in a judicial innovation with the Supreme Court passing orders in Oil and Natural Gas Commission & Anr. v. Collector of Central Excise [1991 (10) TMI 58 - Supreme Court] requiring that such cases must be referred to a Committee to be appointed by the Government to facilitate a resolution of such disputes and that no case should be filed without the approval of this Committee. This system was a failure as is apparent from the facts of the present case, where the SLP filed by the appellant-Corporation was initially dismissed with liberty to revive the same in case the High Powered Committee granted such a permission which was so granted in a meeting held on 14.08.2009. The said Committee discussed the legal ramifications, and in some way opined in favour of the appellant-Corporation, as is apparent from the discussion aforesaid. But the ball was again lobbed back into the Court to adjudicate the said issue rather than a resolution being reached. The result was only the revival of the appeal, and the consequent decision which has seen the light of the day only now.

      3. The aforesaid failure of the system resulted in the Supreme Court recalling its orders in the ONGC cases vide Electronics Corporation of India v. Union of India. [2011 (2) TMI 3 - Supreme Court].

      4. The Central Government and the State authorities have been repeatedly emphasising that they have evolved a litigation policy. Our experience is that it is observed more in breach. The approach is one of bringing everything to the highest level before this Court, so that there is no responsibility in the decision-making process – an unfortunate situation which creates unnecessary burden on the judicial system. This aspect has also been commented upon in a judgment of this Court in Union of India & Ors. v. Pirthwi Singh & Ors., [2018 (4) TMI 1586 - Supreme Court]   albeit between the Government and the private parties, where the question of law had been settled and yet the appeal was filed only to invite a dismissal. The object appears to be that a certificate for dismissal is obtained from the highest court so that a quietus could be put to the matter in the Government Departments. Undoubtedly, this is complete wastage of judicial time and in various orders of this Court it has been categorized as “certificate cases”, i.e., the purpose of which is only to obtain this certificate of dismissal.

      5. The 126th Law Commission of India Report titled ‘Government and Public Sector Undertaking Litigation Policy and Strategies’ debated the Government versus Government matters which weighed heavily on the time of the Courts as well as the public exchequer. This was as far back as in 1988. It was only in the year 2010 that the National Litigation Policy (for short ‘NLP’) was formulated with the aim of reducing litigation and making the Government an efficient and responsible litigant. Five (5) years later it reportedly saw a revision to increase its efficacy, but it has hardly made an impact. In the year 2018, the Central Government gave its approval towards strengthening the resolution of commercial disputes of Central Public Sector Enterprises (for short ‘CPSEs’)/ Port Trusts inter se, as well as between CPSEs and other Government Departments/Organisations. The aim was and is to put in place a mechanism within the Government for promoting a speedy resolution of disputes of this  kind, however it excluded disputes relating to Railways, Income Tax, Customs and Excise Departments. It has now been made applicable to all disputes other than those related to taxation matters. This was pursuant an order passed in The Commissioner of Income Tax (Exemptions) v. National Interest Exchange of India -SLP (C) Diary No. 35567 of 2019 [2020 (3) TMI 1250 - SC ORDER] by a bench of which one of us (Sanjay Kishan Kaul, J.) was a part.

      6. Insofar as non-taxation matters are concerned, the Administrative Mechanism for Resolution of CPSEs Disputes was conceptualised to replace the Permanent Machinery of Arbitration and to promote equity through collective efforts to resolve disputes. It has a two-tiered structure.

      7. At the first level, commercial disputes will be referred to the Committee comprising Secretaries of the Administrative Ministries/Departments to which the disputing parties belong and the Secretary, Department of Legal Affairs. In case the two disputing parties belong to the same Ministry/Department, the Committee will comprise Secretary of Administrative Ministry/Department concerned; the Secretary, Department of Legal Affairs and the Secretary, Department of Public Enterprises. If a dispute is between a CPSE and a State Government Department/Organisation, the Committee will comprise of the Secretary of the Ministry Department of the Union to which the CPSE belongs, the Secretary, Department of Legal Affairs and the Chief Secretary of the State concerned. Such disputes are ideally to be resolved at the first level itself within a time schedule of three (3) months, and in the eventuality of them remaining unresolved, the same may be referred to the Cabinet Secretary at the second level, whose decision will be final and binding on all concerned.

      8. We are of the opinion that one of the main impediments to such a resolution, plainly speaking, is that the bureaucrats are reluctant to accept responsibility of taking such decisions, apprehending that at some future date their decision may be called into question and they may face consequences post retirement. In order to make the system function effectively, it may be appropriate to have a Committee of legal experts presided by a retired Judge to give their imprimatur to  the settlement so that such apprehensions do not come in the way of arriving at a settlement. It is our pious hope that a serious thought would be given to the aspect of dispute resolution amicably, more so in the post-COVID period.

      9. In most countries, mediation has proved to be an efficacious remedy and here we are talking about mediation inter se the Government authorities or Government departments. India is now a signatory to the Singapore Convention on Mediation and we understand that a serious thought is being given to bring forth a comprehensive legislation to institutionalise mediation, in furtherance of this function to which India has committed itself.

      Postscript 2:

      10. We now turn to the issue of matters pertaining to CPSEs and Government authorities insofar as taxation matters are concerned,  because they are consistently sought to be carved out as a separate category of cases. One of the largest areas of litigation for the Government is taxation matters. The petition rate of the tax department before the Supreme Court is at 87%. - See ‘Economic Survey 2017-19 – Volume 1’ by the Department of Economic Affairs, Ministry of Finance, Government of India So, the question is can something be done about it?

      11. In our opinion, a vibrant system of Advance Ruling can go a long way in reducing taxation litigation. This is not only true of these kinds of disputes but even disputes between the taxation department and private persons, who are more than willing to comply with the law of the land but find some ambiguity. Instead of first filing a return and then facing consequences from the Department because of a different perception which the Department may have, an Advance Ruling System can facilitate not only such a resolution, but also avoid the tiers of litigation which such cases go through as in the present case. In fact, before further discussing this Advance Ruling System, we can unhesitatingly say that, at least, for CPSEs and Government authorities, there would be no question of taking this matter further once an Advance Ruling is delivered, and even in case of private persons, the scope of any further challenge is completely narrowed down.

      12. It is as far back as in 1971 that a report was submitted by the Direct Taxes Enquiry Committee under the Chairmanship of Dr. K.N. Wanchoo, recognising the need for providing Advance Ruling System, particularly in cases involving foreign collaboration. The aim was to give advance rulings to taxpayers or prospective taxpayers, which would then considerably reduce the Revenue’s workload and decrease the number of disputes. This finally resulted in a scheme of Advance Ruling being brought into effect in 1993, with the introduction of a new Chapter in the Income Tax Act, 1961 (hereinafter referred to as the ‘IT Act’). A quasi-judicial tribunal was established as the Authority for Advance Rulings (for short ‘AAR’) to provide certainty and avoid litigation related to taxation of transactions involving non- residents. The scope of the transactions on which an advance ruling can be sought from the AAR has gradually increased to now include both residents and non-residents, who can seek the same for issues having a substantial tax impact. Chapter XIX-B of the IT Act deals with advance rulings and it has been defined in Section 245N(a) of the  IT Act. These rulings are binding both on the Income Tax Department and the applicant, and while there is no statutory right to appeal, the Supreme Court has held in Columbia Sportswear Company v. Director of Income Tax Bangalore [2012 (8) TMI 105 - Supreme Court]  that a challenge an advance ruling first lies before the High Court, and subsequently before the Supreme Court. The advance ruling may be reversed in the event a substantial question of general public importance arises or a similar question is already pending before the Supreme Court for adjudication.

      13. The ground level situation is that this methodology has proved to be illusionary because there is an increasing number of applications pending before the AAR due to its low disposal rate and contrary to the expectation that a ruling would be given in six (6) months (as per Section 245R(6) of the IT Act), the average time taken is stated to be reaching around four (4) years!- See Deloitte Report on Advance Rulings in India: Delivering Greater Tax Certainty (Deloitte Tax Policy Paper 5, 2019)  There is obviously lack of adequate numbers of presiding officers to deal with the volume of cases. Interestingly, the primary reason for this is the large number of vacancies and delayed appointments of Members to the AAR. ibid In view of the time taken, the very purpose of AAR is defeated, resulting in the mechanism being used infrequently as is evident from the ever- increasing tax related litigation.

      14. We may notice a significant development in Section 245N of the IT Act. It was through Notification No.11456 dated 3.8.2000 that public sector companies were added to the definition of ‘applicant’, and in 2014, it was made applicable to a resident who had undertaken one or more transactions of the value of ₹ 100 crore or more.

      15. Insofar as a resident is concerned, the limit is so high that it cannot provide any solace to any individual, and we do believe that it is time to reconsider and reduce the ceiling limit, more so in terms of the recent announcement stated to be in furtherance of a tax friendly face-less regime!

      16. We may refer to the international scenario where there has been an incremental shift towards mature tax regimes adopting advance ruling mechanisms. The increase in global trade puts the rulings system at the centre-stage of a robust international tax cooperation regime. The Organisation for Economic Cooperation and Development (for short ‘OECD’) lists advance rulings as one of the indicators to assess trade facilitation policies, making it an aspirational international best practice standard. For example, Australia and New Zealand have a robust system of advance rulings wherein the decisions (which are public rulings affecting a large number of taxpayers) are given teeth by being made binding on the revenue authorities. New Zealand has gone a step further and innovated “status rulings” under which a taxpayer can apply to the Commissioner for a ruling on how a change in the law impacts an existing ruling.

      17. In the United States, there is a mechanism for the Treasury to authorise guidance in the form of revenue rulings, procedures and notices. The mechanism again, has been bolstered by subsequent practice and interpretations of the United States courts, where rulings have indicated that taxpayers may be penalised if they act inconsistently with legal interpretations set out in the revenue rulings, procedures or notices.

      18. Tax transparency has been a hallmark trait of the Swedish legal system. Swedish law requires public disclosure of ex ante tax administration such as advance rulings. Both the taxpayer as well as the Swedish Tax Agency can request an advance tax ruling, these rulings are published without information identifying the taxpayer that requested them. The Skatterättsnämnden, or the Council for Advance Tax Rulings is the Swedish Government agency which is vested with this power. The advance ruling system has played a crucial role in Sweden’s position as a country with one of the highest tax compliance rates in the world.

      19. The aim of any properly framed advance ruling system ought to be a dialogue between taxpayers and revenue authorities to fulfil the mutually beneficial purpose for taxpayers and revenue authorities of bolstering tax compliance and boosting tax morale. This mechanism should not become another stage in the litigation process.

      20. We, thus, consider it appropriate to recommend to the Central Government to consider the efficacy of the advance tax ruling system and make it more comprehensive as a tool for settlement of disputes rather than battling it through different tiers, whether private or public sectors are involved. A council for Advance Tax Ruling based on the Swedish model and the New Zealand system may be a possible way forward.

       


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      2020 (9) TMI 496 - Supreme Court

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