Wednesday, 10 December 2014

CSR activity through our own separate entity [trust / Sec. 8 company]


Corporate Social Responsibility [Companies Act 2013]

Applicability:
For Companies whose:
Net-worth exceeds Rs. 500 Cr OR
Turnover exceeds Rs. 1000 Cr OR
Net Profit exceeds Rs. 5 Cr.

The Co. shall spend minimum 2% of its average net profit during a block of three years. Net profit means Profit before tax

CSR Committee:
A CSR committee to be formed with our present directors as the committee directors.

MCA vide its notification dated 27.02.2014 has permitted CSR Implementation through Trust/Society. As per the notification, the Board of a company may decide to undertake its CSR activities approved by the CSR Committee, through a registered trust or a registered society or a company established by the company or its holding or subsidiary or associate company under section 8 of the Act or otherwise.

Note: (1) The CSR activities shall be undertaken by the company, as per its stated CSR Policy, as projects or programs or activities (either new or ongoing), excluding activities undertaken in pursuance of its normal course of business. (2) The Board of a company may decide to undertake its CSR activities approved by the CSR Committee, through a registered trust or a registered society or a company established by the company or its holding or subsidiary or associate company under section 8 of the Act [Section 25 of old Co.s Act] or otherwise: Provided that- (i) if such trust, society or company is not established by the company or its holding or subsidiary or associate company, it shall have an established track record of three years in undertaking similar programs or projects; (ii) The company has specified the project or programs to be undertaken through these entities, the modalities of utilization of funds on such projects and programs and the monitoring and reporting mechanism. (l) A company nay also collaborate with other companies for undertaking projects or programs or CSR activities in such a manner that the CSR committees of respective companies are in a position to report separately on such projects or programs in accordance with these rules.

FORMAT FOR THE ANNUAL REPORT ON CSR ACTIVITIf,S TO BE INCLUDED IN
THE BOARD'S REPORT:

1. A brief outline of the company's CSR policy, including overview of projects or programs proposed to be undertaken and a reference to the web-link to the CSR policy and projects or programs
2. The Composition of the CSR Committee.
3. Average net profit of the company for last three financial years
4. Prescribed CSR Expenditure (two per cent. Of the amount as in item 3 above)
5. Details of CSR spent during the financial year.
6. (a)Total amount to be spent for the financial year;
(b) Amount un-spent , if any;
(c) Manner in which the amount spent during the financial year is detailed below
The Board of Directors of the company shall, after taking into account the recommendations of CSR Committee, approve the CSR Policy for the company and disclose contents of such policy in its report and the same shall be displayed on the company's website.

Reference used: Relevant paras of: Companies (Corporate Social Responsibility Policy Rules 2014. Rules effective w.e.f 1st Day of April, 2014. Notification in this regard dated 27th Feb 2014.

Tuesday, 11 March 2014

Purchase of Rural agricultural Land and its connection with Sec. 56(2)(vii)(b) - A Neoteric absurdity?

Executive Summary:

This article deals with an untried and untested situation emerging post amendment in Sec. 56(2)(vii)(b) w.e.f. 01.04.2014. The Article explains the taxation point of view with respect to chargeability of notional income calculated u/s 56(2)(vii) for a transaction involving sale of Rural Agricultural Land. The reasoning on non-applicability of procedure given in Sec. 56(2)(vii) [sub-clause (b) specifically] to the transaction of sale of Rural Agricultural Land, in the hands of purchaser is explained.

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Recently with corresponding insertion of Sec. 43CA, section 56(2)(vii) was also amended making it more stricter and stringent. The difference between stamp value of property and the actual transaction value is considered as deemed sale consideration, which is considered in turnover of seller and as income from other sources under sub-clause (b) of Section 56(2)(vii) in hands of purchaser. Prior to such an amendment in Sec. 56(2)(vii)(b), immovable property which was received by any individual or HUF for a consideration which was less than stamp value of that property by amount exceeding Rs. 50,000/- was not taxable. [It was taxable as such before 01.10.2009].

For details about Section 56(2)(vii)(b) – please click here to read my article on this relevant subject.
            There is no doubt that income tax law charges persons dealing in real estate (say lands) on their business income derived from such activity. Also persons for whom the land is an investment (capital asset) capital gain is computed which is either charged at a special rate of 20% or according to normal slab rates depending upon period of holding of that land [i.e. long-term or Short-term]. Thus, about every kind and nature of such income is brought under the garb of income tax. However, agricultural income of persons has been specifically exempted with a view to give some promotion/incentive or benefit. Therefore, rural agricultural land was specifically excluded from the purview of definition of capital asset u/s 2(14), resultantly exempting the capital gain taxation. Rural agricultural land not being a capital asset as per Sec. 2(14), capital receipt on sale of such land is not taxable at all, which supports such legislative intent. The stamp value of such land [Rural Agricultural land] and its actual sale consideration is therefore practically irrelevant for income tax purpose.

            However, as per newly amended section 56(2)(vii)(b), any immovable property purchased whose actual cost is less than stamp value by amount exceeding Rs. 50,000/- is brought to tax in hands of purchaser. This Sec. 56(2)(vii)(b) uses the term ‘any immovable property’ and it has neither differentiated it into capital and non-capital asset nor has defined the term ‘immovable property’ by way of any explanation to this sub-clause (b). As a result, when a rural agricultural land is sold for less than stamp value there is no taxation for difference in stamp value and actual consideration in hands of seller, however this difference is charged to tax in hands of purchaser. It should be noted that this tax charged is on a notional income derived as per calculation given in Sec. 56(2)(vii)(b). Thus, effectively the notional income generated/computed due to sale of Rural agricultural land has been charged to tax. Was such a resultant tax effect on purchase of rural agricultural land intentional? Whether the original legislative intent defeated?

If a strict interpretation of some provision is resulting into an absurd situation by which the legislative intent is defeated, then it becomes necessary to resort to a construction which is reasonable and purposive to make the provision meaningful. [Bajaj Tempo case (1992 AIR 1622)]

            Now if we observe the scheme of all clauses to Sec. 56(2), wherever any clause needs some clarification of any term, a definition by way of an explanation is inserted after that respective clause for it.

·           Section 56(2)(vii)(a) deals with charging to tax any sum of money received (except from any relative).
·           Section 56(2)(vii)(b) deals with receipt of any immovable property for free or for lesser consideration.
·           Section 56(2)(vii)(c) covers the situation of receipt of property for purpose of taxation (except from relative). The term ‘property’ has been defined by way of an explanation. This definition of ‘property’ includes immovable property [Ref: Expl (d)(i)].  The Explanation given after sub-clause (c) to Sec. 56(2)(vii) starts with “For the purposes of this clause,-”. Therefore, it should be noted that this explanation applies to whole clause (vii) of Sec. 56(2), i.e. to sub-clauses (a), (b) and (c) and not only to sub-clause (c). If legislature would have intended to apply this explanation only to sub-clause (c), it would specifically expressed so by starting it by saying “For the purposes of this sub-clause,-”, e.g. as mentioned in Sec. 10(15)(iv)(i), Sec. 2(14), Sec. 17, Sec. 13, etc.

For an immovable property to be qualified as ‘property’ as per definition given in Expl., it should be a capital asset first.

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

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

Provided that where….”

According to me, for a transaction of sale of Rural Agricultural Land, purchaser should not suffer any taxation on the notional income computed as per Sec. 56(2)(vii). Every capital asset is a property first, and then is a capital asset. For an asset like a Rural Agricultural Land which is neither a capital asset nor a Revenue asset, none of the clauses (b) or (c) should apply making it taxation-free in hands of purchaser, thereby falling in line with the original legislative intent. Taxation of Rural Agri. Land in hands of purchaser seems to be an absurd situation by which the legislative intent is defeated. Therefore an interpretation which is reasonable and purposive to make the provision meaningful is necessary to be made.

There may be another reason why Rural Agricultural Land should not suffer from charging provisions of Sec. 56(2)(vii). For all properties [movable or immovable] which are capital assets for purchaser and the valuation of which has suffered an increase u/s 56(2)(vii), a corresponding benefit is given by the Legislature at the time of future sale of these properties. As per 49(4) of the Income Tax Act, for any property the value of which is subjected to income tax u/s 56(2)(vii), the cost of acquisition is deemed to be such value adopted for the purpose of  Sec. 56(2)(vii). But as far as Rural Agricultural Land is concerned, even if it is a capital asset in hands of the purchaser and its value is adjusted as per Sec 56(2)(vii), no benefit as given in Sec. 49(4) can be derived or booked at the time of its future sale, since its entire sale itself is out of the purview of Capital Gains. [Rural Agricultural land not being a capital asset]. Although some may say that such an entire exemption for Rural Agricultural Land is more beneficial than giving a part corresponding relief by increasing the cost of acquisition, however this is a discriminating situation for as far as application of Sec. 49(4) is concerned.

However, the legislature has not chosen to define immovable property by way of any explanation and has used the words ‘any immovable property’. Going by strict interpretation, it may not be correct to extract and create a definition of ‘immovable property’ using the definition of ‘property’, as given in the explanation. Further notional income computed u/s 56(2)(vii)(b) cannot be said to be ‘derived from’ land used for agricultural income, as per definition given in Sec. 2(1A) of the Act, since word ‘derived’ has been given a strict meaning by courts, and has been understood in the restricted sense of a direct derivation and not understood in the broad sense as equivalent to derived directly or indirectly.

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Readers are requested to share their views / critics on this.