Scholarship/Stipend received EXEMPT u/s10(16): Dr. Rahul Tugnait v.ITO

CASE LAW DETAILS

Decided by: ITAT, CHANDIGARH BENCH `SME-B’, In The case of: Dr. Rahul Tugnait v.ITO, appeal No. :ITA NO. 197/CHD/2008, Decided on: JUNE 30, 2008

RELEVENT PARAGRAPH

5. Even if this appeal is viewed with angle of section 15 of the Act, which speaks about chargeability of salary. Section 15 of the Act is reproduced- herewith:-

“The following income shall be chargeable to income tax under the head “Salaries”-

a). any salary due from an employer or a former employer to an assessee in the previous year, whether paid or not;

b). any salary paid or allowed to him in the previous year by or on behalf of an employer or a former employer through not due or before it became due to him;

c). any arrears of salary paid or allowed to him in T7Te previous year by or on behalf of an employer or a former employer, if not charged to income tax for any earlier previous year.

[Explanation 1} For the removal of doubts, it is hereby declared that where any salary paid in advance is included in the total income of any person for any previous year it shall not be included again in the total income of the person when thesalary becomes due.

[Explanation 2] Any salary, bonus, commission or remuneration, by whatever name called, due to, or received by, a partner of a firm from the firm shall not be regarded as “salary” for the purposes of this section.

For getting salary normally there must be employee – employer or master – servant/agent relationship. The distinction between a servant or as agent can be summarized as under:-

i. Generally a master can tell his servant what to do and how to do and how to do it.

ii. Generally a principle cannot tell his agent how to carry out his instructions;

iii. A servant is under more complete control than an agent;

i. Generally a master can tell his servant what to do and how to do and how to do it.

ii. Generally a principle cannot tell his agent how to carry out his instructions.

iii. A servant is under more complete control than an agent;

iv. Generally, a servant is a person who not only receives instructions from his master but is subject to his master’s right is control instructions but is generally free to carry out those instructions according to his own direction.

v. Generally a servant qua servant has no authority to make contracts on behalf contracts on behalf of his principal.

vi. Generally an agent is paid commission upon effecting the result which he has been instructed by his principal to achieve.

vii. Generally a servant is paid wages or salary.

For ascertaining whether a person is a servant or an agent, a rough and ready test is whether under the terms of his employment the employer exercises a supervisory control in respect of the work entrusted to the person. Aservant acts under the direct control/supervisory control or supervision of the principal, though he is bound to exercise his authority in accordance with all lawful orders and instructions which may be given to him form time to time by his principal/controller/supervisor. But this test is not universal in its application and does not determine in every case, having regard to the nature of employment, that he is aservant. A person who is engaged to manage a business may be a servant or an agent according to the nature of his service and the authority of his employment. Generally if may be possible to say that the greater the amount of direct control over the person employed, the stronger is the conclusion the possibility of the services rendered being in the nature of principal and agent. It is not possible to lay down any precise rule to distinguish one kind of employment from the other. The nature of the particular business and the nature of the duties of the employee will require to be considered in each case in order to arrive at a conclusion as to whether the person employed is aservant or an agent. In each case the principle for ascertaining remains the same.

Section 16 of the Act speaks about deduction from salaries whereas section 17 speaks about “salary”, “perquisite” and “profits in lieu of salary” etc. A conjoint reading of section, 15, 16 and 17 nowhere includes scholarship/ stipend which have been mentioned in section 10(16) of the Act. Therefore, it can be said that the stipend/scholarship has been specifically precluded from the mischief of sub clause (1) & (2) of section 17 of the Act.

If the aforesaid sections are analyzed by keeping them in juxtaposition, with the terms and conditions used in the bond, it can be said that it is neither asalary /wages nor perquisite. Even the Hon’ble Calcutta High Court in the case of CIT v. Jnan Parkesh Ghosh [62 Taxman 151 (Cal)] went to the extent that the professionals rendering the incidental services are not servants. Our above view is further forttfied by the following decision:-

i. Lakshimnarayana Ram Gopal & Son Ltd vs. State [25 ITR 449 (SC)]

ii. Ramprasad v. CIT [86 ITR 122 (SC)].

iii. Piyare Lal Adishwar Lal v. CIT [40 ITR 70 (SC)]

Therefore, unless and until a master servant relation is brought on record by the revenue, suggesting that the assessee is an employee of the college, the stand of the revenue cannot remain on its legs.

We are also tempting to reproduce some of the relevant portion with regard to section 10(16) from the commentary of Acharya Shuklendra:

“Scholarships granted to meet the cost of education [cl.(16)] – Clause (16) exempts the /scholarships granted to meet the cost of education. Where the assesses receives a trainee stipend from a U.S. Hospital to aim him in his pursuit of study and research and not for Hospital to aid him in his pursuit of study and research and not for services rendered and the services, if any are only incidental to the course of practical training, such a stipend would be ascholarship and would be exempt under cI.(16). In fact, this clause recognizes statutorily the departmental instructions issued in this behalf under the 1922 Act.

(i) Concept of scholarship and extent of exemption – By scholarship as ordinarily understood, we mean anything which makes education free of charge, or at a confessional rate of fees. In section 10(16) however, scholarship is not used in that sense of something in educational opportunity which is given free. The basic postulate of a scholarship in cIause (1.6) is that it is an income receipt. Nevertheless, it is excluded from the total income by being brought under section 10. The view of the Income tax statute of a “Scholarship” , therefore, differs from the popular of dictionary view of a “Scholarship” . Whereas under the popular view, scholarship is education made available gratis, the sense in which the same expression is used in the Income tax Act is positive payment made to a scholar for pursuit of his education. The considerations which make up the concept of a “Scholarship for meeting the cost of education” in s. 10(16} are that the payment is intended to be an income receipt in the hands of the scholar and that whatever is paid is intended to meet the cost of education of the recipient. Since the purpose of the payment is to meet the cost of education, the question whether the quantum of payment is adequate or inadequate, or, is or is not in excess of the requirements are all beside the point. It is enough if the whole object of the payment is to meet the cost of education of a person and no further enquiry is called for in order toe exclude the amount form the taxable income u/s 10(16). If the payment is only for the cost of education the fact that the recipient does not spend the whole of the amount or saves something out of it or utilizes it for other purposes would not detract from the character of the payment being one forscholarship . Circulars issued by the Central Board have also proceeded on a liberal understanding of the provisions of s. 10(16). Accordingly, where a professor of mathematics is granted a grant-in-aid by a foreign university for doing advanced research in the filed of mathematics, the amount of granl-in aid would bescholarship under cl(16), and exempt even if a part or it had been utilized for the purposes of maintaining wife and children. The discretionaryscholarship granted by the employer to the children of employees cannot be treated as a perquisile in the hands of children of employees because no right is created in their favour. Even if such scholarship is regarded as a perquisite, it would be exempt under clause (16) in the hands of the recipient. However, an amount paid to the assessee in the for services as an intern in a medical hospital, where service as an intern is necessary for a person who joins a medical school, cannot be regarded as ascholarship so as to qualify for exemption under this clause”.

(ii) Instances of scholarships: – The following are the instances of scholarships exempt under clause (16) as recognized by the department.

[1] Annual allowance granted to retiring research scientists by CSIR, New Delhi

[2] Stipend of research fellowships for working under the National Commission for the compilation of History of Scientists in India under the auspices of National Institute of Scientists of India

[3] Fulbright grants described as ‘maintenance allowance’ given to Fulbright students.

[4] Fulbright grant described as `maintenance allowance “given to American tutors prosecuting studies in India.

[5] Junior/Senior fellowships awarded by the Department of Atomic Energy.

[6] Financial assistance to teachers in the universities for undertaking research of learned work in science subjects and humanities.

[7] Maintenance allowance granted to foreign trainees under the scheme of the International Association for the exchange of students for Technical Experience.

[8] Research fellowship in engineering, technology, humanities and science subject

[9] Junior and Senior research fellowships awarded by CSIR.

[10] National research fellowship and fellowships to German nationals awarded by the Ministry of Education.

Viewed from aforesaid different angles and facts of the present appeal. It can be said that the scholarship/ stipend received by a student from College/Govt for pursuing higher studies, cannot be termed as salary. Therefore, this appeal of the assessee is allowed.

NGO Formation

This is reproduction of the mail i received from very famous corporate guru and motivational expert Mr.Shiv Kedia

NGO Formation

A Non Governmental Organization is perceived to be an association of persons or a body of individuals. An association of persons with non-profit motive may be registered under any of the following Indian Acts:

As a Charitable Trust

As a Society registered under the Societies Registration Act

As a Company licensed under section 25 of the Companies Act

Procedures of Formation:

Trust: "Trust" is defined as an obligation annexed to the ownership of property, and arising out of a confidence reposed in and accepted by the owner or declared and accepted by him for the benefit of another, or of another and the owner.

A Trust may be created by any language sufficient to know the intention and no technical words are necessary. A trust deed, generally, incorporates the following:

i. The name(s) of the author(s)/settlor(s) of the trust;

ii. The name(s) of the trustee(s);

iii. The name(s) if any, of the beneficiary/ies or whether it shall be the public at large;

iv. The name by which the trust shall be known;

v. The name where its principal and/or other offices shall be situate;

vi. The property that shall devolve upon the trustee(s) under the trust for the benefit of the beneficiary/ies;

vii. An intention to divest the trust property upon the trustee(s);

viii. The objects of the trust;

ix. The procedure for appointment, removal or replacement of a trustee. Their rights, duties and powers etc;

x. The rights and duties of the beneficiary/ies;

xi. The mode and method of determination of the trust.

A charitable trust is not required to obtain registration under the Indian Registration Act.

Society: A society may be defined as a company or an association of persons united together by mutual consent to deliberate, determine and act jointly for same common purpose. Minimum seven persons, eligible to enter into a contract, can form society. When an NGO is constituted as a society, it is required to be registered under the Societies Registration Act, 1860.

The chief advantage of forming a society are that it gives a corporate appearance to the organization, and provides greater flexibility as it is easier to amend the memorandum and bye laws of the society than in case of trust, terms of which are strictly manifested in the trust deed. However, formation of a society requires more procedural formalities than in case of a trust.

A Society for its inception requires:-

I. Memorandum of Association, and

II. Rules and Regulations

For the purpose of registration, following documents are required to be filed with the registrar of Societies:

a) Covering letter requesting for registration stating in the body of the letter various documents annexed to it. The letter is to be signed by all the subscribers to the memorandum or by a person duly authorised by all of them to sign on their behalf.

b) Memorandum of Association, in duplicate neatly typed and pages serially numbered.

c) Rules and Regulations/Bye-Laws, in duplicate, certified by at least three members of the governing body.

d) An affidavit of the president/Secretary of the society, on a non-judicial stamp paper of prescribed value, stating the relationship between the subscribers, duly attested by an oath commissioner, notary public or 1st class magistrate.

e) Documentary proof such as house tax receipt, rent receipt in respect of premises shown as registered office of the society or no objection certificate from the landlord of the premises.

f) An authority duly signed by all members of the managing committee.

g) A declaration by the members of the managing committee that the funds of the society shall be used only for the purpose of furthering the aims and objects of the society.

Company: Under Section 25 of the company's act, an association formed or to be formed:

a) For the purposes of promoting commerce, art, science, religion, charity to any other useful object

b) With intention to apply its profits or other income for promoting its objects, and 

c) Which prohibits payment of any dividend to its members,

Is permitted to be incorporated without addition of the word "Limited" or "Private Limited". Procedure for applying is same as applicable in the case of all companies.

If the registrar is satisfied that all formalities have been complied with, he will issue a certificate of incorporation from which date the company comes into existence.

Note: An association already registered as a company, may also apply for a licence u/s 25.

INCOME TAX EXEMPTION FOR NGO

TRUSTS:

Under section 11(1)(a) to (c), income derived from property held under trust is exempt if the following conditions are satisfied:

a) The property should be held under trust wholly for charitable or religious purposes.

b) Income from such property should be applied to charitable or religious purposes. (Exemption is available to the extent of such application)

c) Income should be applied in India

d) At least 85% of the income derived from property held under trust, should be applied to charitable or religious purposes in the relevant previous year in order to claim full tax exemption.

Note :

The assessee is to apply for registration in Form No. 10A in duplicate before the expiry of 1 year from the creation of trust.

Under Section 11(4) property held under trust includes a business undertaking held under trust.

Any voluntary contribution received by a trust or institution is exempt if (a) the trust is created wholly for charitable purposes and (b) contribution is not made with a specific direction that it shall form part of the corpus of the trust.

SOCIETY:

Societies are taxable in the status of AOP and different rates of tax are applicable to the income of an AOP in different circumstances:

A. Individual shares of members in AOP are not determinate:

i. Where the total income of any member of the AOP is taxable at a rate higher than the maximum marginal rate-Rate of tax is such higher rate. 

ii. Otherwise-30% 

B. Individual shares of members in AOP are determinate:

i. If total income of any member is not higher than Rs 50000/- (excluding share from AOP) and no member is taxable higher than 30%- Rate of tax on total income of AOP is the rate applicable to individuals. 

ii. If total income of any member is higher than Rs 50000/- (excluding share from AOP) and no member is taxable higher than 30%- Rate of tax is 30% 

iii. If any member is taxed higher than 30%, then (a) Tax on the portion of total income of AOP that is relatable to the share of such member is levied at such rate higher than the 30%, (b) tax on the balance total income will be 30%. 

TAX EXEMPTION FOR NOTIFIED CHARITABLE SOCIETIES U/s 10(23C) (iv) and (v)

Any income of any institution established for charitable purposes is exempt. For getting exemption under these clauses, following requirement must be completed:

i. Making an application in Form No. 56 

ii. Applying its income or accumulating it for application, wholly & exclusively to its objects;

iii. Notice of accumulation u/s 11(2) will have to be given to the assessing officer in Form No. 10

Operational Requirements For A Society

An annual list of members of the management committee shall be filed to Registrar of society within 30 days of the AGM. However if no AGM is held for any reason as per society Registration Act 1860, section whatsoever, than an annual list of members of the managing Committee as on 31st December each year shall be submitted to the office of the Registrar of societies. Non submission of the list attracts a financial liability of Rs.50/- for the list of each year

Once in every year a list of the office bearers and members of the Governing Body shall be filled with the Register of Societies, N.C.T of Delhi as required under Section 4 of The Societies Registration Act 1860 and applicable to the National Territory of Delhi.

Minutes

A : Governing Body Meetings

There shall be minimum four meetings of the Governing Body each calendar year, i.e. one meeting in every three calendar months.

B : Annual General Meetings

There shall be minimum one Annual General Meeting (AGM) of all the Members of the Society every year. 

The AGM can be held at any time between April 1 to December 31 after the end of the financial year each year.

1 - Adoption of Annual Accounts.

2 - Admission/Resignation/ other matters of the members of the society.

3 - Investment of funds of the society.

4 - IAppointment of the members of Governing Body on every expiry of its tenure

C : Extra Ordinary Annual General Meetings

For any urgent or emergent matter like Admission/Resignation/Death of the Member / Change of Name/change of address /change of objectives /change of Rules & Regulation or any other major issue of the society.

Notice & Quorum

A Governing Body Notice

Minimum 10 days clear notice or as per Rules & Regulation of the society and the quorum shall be 1/3rd members of the Governing Body or as per Rules & Regulation.

B :Annual General Meetings

Minimum 21 days clear notice or as per Rules & Regulation of the society and the quorum shall be 3/5th members of the General Body or as per Rules & Regulation.

C :Extra Ordinary Annual General Meetings

Minimum 10 days clear notice or as per Rules & Regulation of the society and the quorum shall be 3/5th members of the Governing Body or as per Rules & Regulation.

Register Of Members

The Society shall maintain at its registered office a register or its members and shall enter therein the following particulars:

1 - IThe names & addresses of the members.

2 - IThe date on which the member was admitted.

3 - IThe date on which a member ceased to be a member.

4 - IParticulars of Admission fees received.

5 - IParticulars of Annual Subscription received.

6 - IAny other information required from time to time.

Election

The General Body in its meeting shall elect all the office bearers after Five years or as per Rules & Regulation of the society by show or by secret ballot papers as required. The Quorum of the General Body shall be 2/3rd members of the Governing Body present or as per Rules & Regulation of the society.

Admission To Membership Of The Society:

A member shall fill the membership form to become a member of the society. The Membership shall be initially dealt with in 2 meetings of the Management Committee, One accepting it and the second confirming it, all the members of the society added/left during the year are to be discussed in the AGM also. A Register of member of the society has also to be maintained.

Calender Year:

The financial year of the Society shall start from the 1st day of April and end on the 31st day of March in the following year.

Financial Year

The accounts of the Society shall be audited at least once in a year by a qualified firm of Chartered Accountant appointed by the Governing Body.

Amendment

Any amendment in the Memorandum of Association and rules and regulation will be carried out in accordance with the section 12 & 12A of the Societies of Registration Act, 1860, as applicable to the National Capital Territory of Delhi.

Documents for amendments

Amended Copy of MOA & R.R of the Society in duplicate.

Copies of Special Resolution in duplicate (General Body).

Copies of Notice in duplicate.

Copies of Minute of Society Governing Body).

List of Governing Body. f. Copy of Comparative List of Amendment.

Copy of Election proceedings with Notice. h. Proof of Notice received.

Copies of application form for new membership.

Copies of resignation letter. k. Annual List of Governing Body (Sec.4).

N.O.C. from owner of the new registered office of the Society.

Ownership proof of new registered office of the Society. n. 'No Dispute' affidavit from President.

Reasons for setting up Business in India

Why India

Setting up of operations in India by Overseas Company/ Non-Resident
A foreign company or a non-resident planning to set up business operations in India can do so in the following manner:

As a foreign company through a Liaison Office/ Representative Office, Project Office or a Branch Office; As an Indian company through a Joint Venture or a Wholly Owned Subsidiary.

A foreign company is one that has been incorporated outside India and conducts business in India. These companies are required to comply with the provisions of Co Act.

Liaison Office/ Representative Office
A liaison office is not allowed to undertake any business activity in India and earn any income in India. The role of liaison office is limited to collecting information about possible market opportunities and providing information about the company and its products to prospective Indian customers.

The Foreign Exchange Management Act (“FEMA”) regulates the opening and operation of liaison offices. Prior approval of Reserve Bank of India (“RBI”) is required for opening of such offices. Permission for such offices is typically granted for a period of three years initially and may be extended from time to time. These offices have to ensure compliance with the following conditions :

Expenses are met entirely through inward remittances of foreign exchange from Head Office abroad. These offices do not undertake any trading or commercial activities. Activities should be limited to collecting and transmitting information between overseas Head Office and potential Indian customers. Such offices should not charge any commission or receive other income from Indian customers for provision of liaison services.

A person resident outside India permitted by RBI to establish a liaison office in Indiamay carry out the following activities :

Represent in India the parent company/ group companies. Promote export import from/ to India. Promote technical/ financial collaborations between parent/ group companies and companies in India. Act as a communication channel between the parent company and the Indian companies.

Further, liaison/ representative offices are required to furnish an annual compliance certificate, from their auditors, with the RBI.

Project Office
Foreign companies planning to execute specific projects in India can set up temporary project/ site offices in India. Under the earlier provisions of FEMA, specific approval was required to be obtained from RBI for establishment of a Project Office. Recently, the RBI has accorded general permission to foreign companies for establishment of Project Offices in India subject to following conditions:

It has secured from an Indian company a contract to execute a project in India; The project is funded by inward remittance from abroad or bilateral/ multilateral International Finance Agency or the project has been cleared by an appropriate authority or the contracting entity has been granted term loan by a Public Financial Institution or a bank in India for the project. Intimation is required to be filed with the regional office of RBI in the prescribed manner. Further, until recently an approval from the RBI was required for: opening of foreign currency accounts by Project Offices in India; and/ or Intermittent remittances to be made by such Project Offices.

In order to further liberalize the procedure for Project Offices, the Authorized Dealers (bankers) have been empowered to open foreign currency accounts for the Project Offices as well as permit intermittent remittances by Project Offices without an approval from the RBI, subject to fulfillment of certain conditions.

Branch Office
Foreign companies may set up Branch Offices in India, with prior permission of RBI, for the following purposes:

To represent parent company/ other foreign companies in various matters inIndia e.g. acting as buying/ selling agents in India. To conduct research work in the area in which parent company is engaged. To undertake export and import. To promote possible technical and financial collaborations between Indian companies and parent/ overseas group companies. To render professional or consultancy services. To render services in Information Technology and development of software in India. To render technical support to products supplied by the parent/ overseas group companies.

A Branch Office is not permitted to carry out manufacturing activities on its own. A Branch Office is required to file an annual compliance letter, from their auditors, with the RBI. Remittance of profits of the Branch Office is permissible by furnishing requisite documents with an authorized dealer.

Further, RBI has granted general permission to foreign companies to establish Branch Offices/ units in SEZs to undertake manufacturing/ service activities subject to the following conditions :

Such units function in those sectors where 100 percent FDI is permitted; Such units comply with prescribed requirements of the Co Act. Such units function on a stand-alone basis. In the event of winding-up of business and for remittance of winding-up proceeds the branch/ unit shall approach an Authorized Dealer with the prescribed documents.

As an Indian Company
A foreign company can commence operations in India through incorporation of a company under the provisions of Co Act. Foreign equity in such Indian companies can be up to 100 percent depending upon the business plan of the foreign investor, prevailing foreign investment policies of the Government and receipt of requisite approvals.

Joint Venture with an Indian Partner
Foreign companies can set up their operations in India by forming strategic alliances with Indian partners. Setting up of operations through Joint Venture may entail the following advantages to a foreign investor:

Already established distribution/ marketing set up of the Indian partner. Available financial resources of the Indian partner. Already established contacts of the Indian partner that help smoothen the process of setting up operations.

Foreign investments are approved through two routes as under :

Automatic Route: Approvals for foreign equity up to 26 percent, 50 percent, 51 percent, 74 percent and 100 percent are given on an automatic basis subject to fulfillment of prescribed parameters in certain industries as specified by the Government. RBI accords automatic approval to all such cases. Government Approval: Approval in all other cases where the proposed foreign equity exceeds 26 percent, 50 percent, 51 percent or 74 percent in the specified industries or if the industry is not in the specified list, it requires prior specific approval from Foreign Investment Promotion Board (“FIPB”).

This is reproduction of the mail i received from very famous corporate guru and motivational expert Mr.Shiv Kedia

Basics of LLP

LLP formation

Formation

Pre-requisites for registering a LLP

Minimum 2 Partners (Individual or body corporate) Minimum 2 Designated Partners who are individuals and at least one of them should be resident in India. Digital Signature Certificate LLP Name LLP Agreement Registered Office

Pre-requisites for registering a LLP
An LLP should have minimum 2 partners. In case any Body Corporate is a partner, then it will be required to nominate any person (natural) as its nominee for the purpose of the LLP.

Partner of LLP can be consisted of

Companies incorporated in and outside India LLP incorporated in and outside India Individuals Resident in and outside India

Partners of LLP
Every LLP should have minimum 2 designated partners who are individuals and at least one of them should be resident in India.

A person or nominee of a body corporate, intending to be appointed as who is appointed as designated partner of LLP should hold a Designated Partner Identification Number (DPIN) allotted by the Ministry of Corporate Affairs.

DPIN can be obtained by submitting application along with address proof and identity proof of the individuals.

Digital Signature Certificate 
All forms for registration of LLP shall be filed online after signing digitally and for this purpose, one of the designated partners shall take digital signature certificate.

LLP Name
Selection of business name is crucial for the image of your venture. You select a name which reflects the business you plan. Ensure selected name satisfy LLP Name Guidelines of Ministry of Corporate Affairs.

LLP Agreement
Like partnership, partners of LLP can frame agreement for defining their terms, profit sharing ratio etc. The basic contents of Agreement are, Name of LLP, Name of Partners and Designated Partners, and Form of contribution, Profit Sharing ratio and Rights and Duties of Partners.

In case no agreement is entered into, the rights & duties as prescribed under Schedule I to the LLP Act shall be applicable. It is possible to amend the LLP Agreement but every change made in the said agreement must be intimated to the Registrar of Companies.

Registered Office
The Registered office of the LLP is the place where all correspondence related with the LLP would take place, though the LLP can also prescribe any other for the same. A registered office is required for following purposes. At the time of incorporation, it is necessary to submit proof of ownership or right to use the office as its registered office with the Registrar of Companies.

LIMITED LIABILITY PARTNERSHIP FORMATION STAGES

Stage I - Partners
To form a LLP, there Minimum two partners and at least two shall be designated partners having DIPN. In case of body corporate as partners, their nominee can be act as designated partners. Out of two designated partners, one must be resident in India. (Who has stayed in India for a period of not less than one hundred and eighty two days during the immediately preceding financial year)

Stage II - Obtaining DPIN & Digital Signature
DPIN can be obtained by making an application online with�www.llp.gov.in�After submitting the online application, signed physical copy of Form 7 has to be submitted to Ministry of Corporate Affairs along with certified copies of address proof and Identity proof of the applicant.

Digital Signature can be obtained from any of the Certifying Authorities in India.

Stage III - Name filing
After finalization of name, an application of name availability has to be filed in form 1 with�www.llp.gov.in�for approval. Please note that selection of name is subject to Guidelines issued by MCA.

Stage IV - Agreement
LLP agreement has to be drafted line with LLP Act. It is not mandatory to file LLP agreement at the time of registration and same can be file with in 30 days. If no agreement is framed, provisions of Schedule I of the LLP Act shall be applicable.

Stage V - Filing of Incorporation Documents
The following documents along with required attachments has to be filed withwww.llp.gov.in

Form 2 :	Details of partners, registered office etc Subscription Sheet: All partners are required to subscribe their names along with signatures to the subscription sheet, which shall be witnessed by any chartered Accountant/Company Secretary/Advocate in practice.
Form 4 :	Consent of Partners - Consent of each partner to become a partner of Liability Partnership
Form 3 :	LLP agreement - this can be filed with in 30 days from the date of registration

Above said documents are required to be filed after signing digitally. After verification, registrar will register all documents and issue Certificate of Incorporation.

Limited Liability Partnership Formation Services

CompaniesInn, the first LLP online registration portal offers following LLP Services.

Name Reservation Service
LLP Act 2008 provides special provisions for the Intellectual Property for Foreign Companies/LLP. Foreign Companies/LLP interested in establishing LLP in India can reserve its existing name by which it is registered in the country of its regulation or incorporation for forming an LLP in future on payment of fees of�INR 10,000. No LLP will be formed with the reserved name during the course of reservation. The reservation is for a period of three years and can be renewed on fresh application with fees of�INR.5,000.

LLP Agreement Drafting Service
LLP is governed by LLP Act, 2008 and the LLP agreement. Our experienced team of legal professionals can help you to draft LLp Agreement taking into account of requirements and applicable law. A well drafted agreement will help smooth running of your LLP.

Annual Filing Services
Under LLP act, it is mandatory to file accounts and annual return with Registrar of LLP. CompaniesInn can help you in filing returns in time and thus avoid penalty.

Induction of New Partners and changes thereof
In terms of LLP law, induction of partners and changes there of has to be intimated to Registrar by filing specified returns. Our LLP law experts can assist you in inducting new partners and effect the changes in partners.

Other LLP Services
Companies offers following LLP Services as well.

Conversion of Firms / Companies to LLP Conversion of LLP to Company (under Part IX of the Companies Act,1956 Compromise, Arrangement or Reconstruction of Limited Liability Partnerships

I want to make it clear that i have received a copy of the recent Judgement from Taxman and I am just reproducing the same AO not permissible to place himself in the position of the management of the assessee to decide about reasonable expenditure for a particular business purpouse

Business Expenditure : An obligation incurred, while entering into a commercial contract, has to be taken as a business expenditure within the meaning of section 37(1) unless it is shown that the contract itself was a sham document and was made with an ulterior motive.

                  

• It is not permissible for the Assessing Officer to place himself in the position of the management of the assessee and take it upon himself to decide how much would be a reasonable expenditure for a particular business purpose.

HIGH COURT OF DELHI

CIT

v.

Micromatic Machine Tools P.Ltd.

ITA 587/2010

May 19, 2010

FACTS

 

While dismissing the appeal filed by the Revenue, it was noted by the Tribunal that nothing had been brought on record, by the Assessing Officer, to suggest that the expenditure was not incurred for the business purpose of the assessee. In the opinion of the Tribunal, if somebody, other than the assessee, benefited from the expenditure incurred by it, that would not be a relevant factor if the expenditure was incurred wholly and exclusively for the business of the assessee.

HELD

 

Section 37(1) of the Income Tax Act, to the extent it is relevant, provides that any expenditure, not being in the nature of capital expenditure or personal expenses of the assessee, laid out or expended wholly or exclusively for the purpose of the business or profession would be allowed in computing the income chargeable under the head “Profit and Gains of the Business or Profession.”

In the case before us, there is no dispute that the assessee company had actually incurred the expenses claimed by it for participating in the exhibition. The only question, which the Assessing Officer could examine, was whether the expenditure had been incurred solely for the purpose of business of the assessee-company or not. Admittedly, the assessee-company was the sole Selling and Servicing Agent for the products being manufactured by its Principals. The assessee-company was also engaged in selling the spare parts of the machinery being manufactured by its Principals. As noted by both, the Commissioner of Income Tax (Appeals) and the Income Tax Appellate Tribunal, the agreement, between the assessee company and its Principals, obliged the assessee-company to contribute 50% of the expenditure incurred on participation in the exhibition, though during the year in question, the assessee-company contributed only 31.6% of that expenditure, the balance having been contributed by its Principals. Therefore, the assessee-company was under a contractual obligation to contribute half of the expenses incurred on participation in the exhibition. It would be difficult to say that the expenses incurred in performance of the contractual obligation of the assessee-company would not be expenditure for the business of the assessee-company. An obligation incurred, while entering into a commercial contract, has to be taken as a business expenditure within the meaning of Section 37 (1) of the Act unless it is shown that the contract itself was a sham document and was made with an ulterior motive. What is required to be established is a nexus between the expenditure incurred and the business purpose of the assessee. It is not permissible for the Assessing Officer to place himself in the position of the management of the assessee and take it upon himself to decide how much would be a reasonable expenditure for a particular business purpose. The matter has to be seen purely from the viewpoint of the management of the assessee, taking its commercial interests into consideration.

JUDGMENT

V.K. JAIN, J. (ORAL)

1. This is an appeal impugning the order dated 30.01.2009, passed by the Income Tax Appellate Tribunal, whereby it dismissed the appeal filed by the Revenue, being ITA No.1253/Del/2007, against the order passed by the Commissioner of Income Tax (Appeals), allowing the appeal filed by the assessee, against the assessment order for the Assessment Year 1998-99.

                         

2. The assessee-company is engaged in the business of marketing machine tools for certain manufacturers. During the year in question, the assessee incurred expenses, amounting to Rs 20.42 lakhs for participating in the exhibition IMTEX-1998. The vouchers in respect of the aforesaid expenditure were produced before the Assessing Officer, who noticed that the expenditure incurred on the exhibition during the Assessment Year 1997-98 being only Rs 2,67,162/- there was an eight fold increase in the expenditure, though the commission income earned from the sale had decreased to Rs 2.15 crore in the Assessment Year 1998-99, as against Rs 2.43 crores earned in the Assessment Year 1997-98. The Assessing Officer, therefore, added back Rs. 18 lakhs out of the aforesaid expenditure, to the income of the assessee company. In the appeal filed by the assessee, the Commissioner of Income Tax (Appeals) confirmed the disallowance only to the extent of Rs 9 lakhs.

3. Cross appeals against the order of the Commissioner of Income Tax (Appeals) were filed by the Revenue and the assessee. The Tribunal restored the issue back to the CIT (Appeals), taking the view that the basic question, which needed to be addressed, was whether the expenditures were wholly for the business purposes or not. It was held that if the expenses were found to be incurred exclusively and wholly for the business of the assessee, it would be irrelevant that they have increased eight times.

4. During the course of hearing before the Commissioner of Income Tax (Appeals), after the matter had been remanded by the Tribunal, it was submitted on behalf of the assessee that as per the agreement of the assessee-company with its Principals, whose products were being marketed and serviced by it, the assessee-company had incurred expenditure on technical exhibition, to promote the products of the Principal Companies and part of the expenditure was to be borne by the assessee-company. It was pointed out that the assessee company had borne only 31.6% of the expenses incurred on the exhibition and there was increase in the sale of the products, on account of sale promotion activities such as participation in the exhibitions. The eight fold increase in the expenses was attributed to the exhibition being held every three years. It was pointed out that in the past also, there was increase in the expenditure during Assessment Years 1992-93 and 1995-96, when exhibitions were held.

5. It was noted by the Commissioner of Income Tax (Appeals) that as per the agreement between the assessee and its Principals, the assessee was required to meet 50% of the expenditure incurred on exhibition, whereas it had contributed only 31.6% of the same, the balance having been contributed by the Principals. It was also noted that the IMTEX exhibition was held every three years and there was steep increase in the exhibition expenditure. He was of the view that since there was a direct co-relation between the commission earned by the assessee and the sale of the products of the Principals, any expenditure for the purpose of increasing sale would be a valid business expenditure in the hands of the assessee.

6. While dismissing the appeal filed by the Revenue, it was noted by the Tribunal that nothing had been brought on record, by the Assessing Officer, to suggest that the expenditure was not incurred for the business purpose of the assessee. In the opinion of the Tribunal, if somebody, other than the assessee, benefited from the expenditure incurred by it, that would not be a relevant factor if the expenditure was incurred wholly and exclusively for the business of the assessee.

                         

7. Section 37(1) of the Income Tax Act, to the extent it is relevant, provides that any expenditure, not being in the nature of capital expenditure or personal expenses of the assessee, laid out or expended wholly or exclusively for the purpose of the business or profession would be allowed in computing the income chargeable under the head “Profit and Gains of the Business or Profession.”

8. In the case before us, there is no dispute that the assessee company had actually incurred the expenses claimed by it for participating in the exhibition. The only question, which the Assessing Officer could examine, was whether the expenditure had been incurred solely for the purpose of business of the assessee-company or not. Admittedly, the assessee-company was the sole Selling and Servicing Agent for the products being manufactured by its Principals. The assessee-company was also engaged in selling the spare parts of the machinery being manufactured by its Principals. As noted by both, the Commissioner of Income Tax (Appeals) and the Income Tax Appellate Tribunal, the agreement, between the assessee company and its Principals, obliged the assessee-company to contribute 50% of the expenditure incurred on participation in the exhibition, though during the year in question, the assessee-company contributed only 31.6% of that expenditure, the balance having been contributed by its Principals. Therefore, the assessee-company was under a contractual obligation to contribute half of the expenses incurred on participation in the exhibition. It would be difficult to say that the expenses incurred in performance of the contractual obligation of the assessee-company would not be expenditure for the business of the assessee-company. An obligation incurred, while entering into a commercial contract, has to be taken as a business expenditure within the meaning of Section 37 (1) of the Act unless it is shown that the contract itself was a sham document and was made with an ulterior motive. What is required to be established is a nexus between the expenditure incurred and the business purpose of the assessee. It is not permissible for the Assessing Officer to place himself in the position of the management of the assessee and take it upon himself to decide how much would be a reasonable expenditure for a particular business purpose. The matter has to be seen purely from the viewpoint of the management of the assessee, taking its commercial interests into consideration.

9. In the case before us, the genuineness of the contract between the assessee-company and its Principals for sharing the expenditure incurred on participation has not been disputed by the Assessing Officer. In any case, since the assessee-company was the sole agency appointed for marketing and servicing, etc. of the machines manufactured by its Principals, participation in the exhibition was likely to be beneficial to the assessee-company, since increase in the sale of the product on account of promotional activities undertaken during the exhibition is to result in proportionate increase in the commission, being paid to the assessee company, by its Principals. So long as the participation in the exhibition ensued to the benefit of the assessee-company in the form of increased commission on the products sold and serviced by it, it would be immaterial that part of the benefit on account of promotional activities undertaken during the exhibition would also accrue to the manufacturers of the machines being sold and serviced by the assessee-company. In any case, in the case before us, the Principals of the assessee company have contributed more than 68% of the expenditure incurred on participation in the exhibition.

                         

10. In CIT vs. Chandulal Keshavlal & Co.: 38 ITR 601, the assessee, which was the Managing Agent, getting commission under an agreement with the managed company, had waived aportion of the commission payable to it. Upholding the partwaiver of the commission, it was held by the SupremeCourt that if the payment or the expenditure is incurred for the purpose of the trade of the assessee, it does not matter that the payment may inure to the benefit of a third party. The Court was of the view that a sum of money expended, not of necessity and with a view to a direct and immediate benefit to the trade, but voluntarily and on the grounds of commercial expediency and in order indirectly to facilitate the carrying on of the business may yet be expended wholly and exclusively for the purpose of the trade.

11. In Sassoon J. David and Co. Pvt. Ltd., vs. CIT, Bombay: 118 ITR 261, the Supreme Court observed that ordinarily it is for the assessee to decide whether any expenditure should be incurred in the course of its business and that such expenditure may be incurred voluntarily and without any necessity. The Court was of the view that if the expenditure is incurred for promoting the business and to earn profits, the assessee can claim deduction even though there was no compelling necessity to incur such expenditure. Relying upon its decision in the case of Chandulal Keshavlal & Co. (supra), it was held that the fact that somebody, other than the assessee, also benefited by the expenditure should not come in the way the expenditure being allowed by way of a deduction. The case of the assessee before us stands on a stronger footing since, besides the expenditure being in the business interest of the assessee-company, it was also a contractual obligation incurred by it under the agreement it had with its Principals

12. For the reasons given in the preceding paragraphs, we find no reason to interfere with the view taken by the Income Tax Appellate Tribunal. No substantial question of law arises for our consideration.

The appeal is accordingly dismissed.

Evolution of ‘beneficial ownership'

Despite the historical existence of ‘beneficial ownership', very little jurisprudence is available on the meaning of the term.

Aseem Chawla
Surabhi Singhi
The concept of ownership is of both legal and social interest.
The meaning of the term is seen as an instrument of judicial policy that has assumed political significance. Historically, Salmond noted that “ownership in its most comprehensive signification denotes the relation between a person and any right that is vested in him. That which a man owns in this sense is in all cases a right.” Therefore, analytically ownership is said to consist of bundle of claims, liberties powers and immunities.
Modern developments in the context of severance of control from ownership signify that now it is the person's position and role that determines the relation with things and not vice versa as it used be.
Tax systems, in the light of severance of the concept of control and ownership, have pronounced a new order by qualifying the term “ownership”, and requiring it to be “beneficial” in nature.
The reference to the concept of beneficial ownership was incorporated in various significant articles in the Organization for Economic Co-operation and Development (OECD) Model Tax Convention on Income and Capital in 1977 without providing an unequivocal meaning thereof.
Reference to beneficial ownership is found in the Commentary on Articles 10, 11 and 12 of the OECD Model. Further, it is provided in Articles 10 to 12 of the OECD Model that the limitation of tax in the State of source on dividends, interest and royalties would be denied if the conduit company is not its “beneficial owner”, which can be said to be the defining moment giving universality to the term “beneficial ownership” in international tax.
However, this was not really the first appearance of the term “beneficial ownership” in the arena of international tax. The term draws background from various treaties on inheritance tax; to exemplify; Article III of the 1945 UK/US treaty on the estates of deceased persons refers to “shares or stock held by a nominee where the beneficial ownership is evidenced by scrip certificates or otherwise”. However, no further guidance has been provided to the term.
Prior to 1977, the use of the term was also found when in the supplementary protocol in 1966 in the US/UK treaty when the term “subject to tax” requirement in dividends, interest and royalty articles was substituted.
Amongst myriad illustrations, other examples of the use of beneficial ownership in pre-1977 treaties include the 1968 UK/Netherlands, the 1969 Australia/Japan, the 1975 UK/Spain and the 1968 Ireland/France treaties, and the 1968 protocol amending the 1947 UK/Antigua treaty.
Despite its historical existence and the important role of beneficial ownership, being incorporated in the significant articles of the OECD Model as stated above, very little jurisprudence is available on the meaning of the term “beneficial ownership”.
International practices
Though there is little legislative or administrative guidance on the concept, there has been significant development on the interpretation of the term by the judicial forums and authorities worldwide.

The concept of “beneficial ownership” is not new for the domestic tax laws in many overseas jurisdictions.
The French General Tax Code has included the term in two provisions involving anti-abuse directions. Moreover, various EC directives have included beneficial ownership condition in relation to interest, royalties and dividends.
The term also finds its relevance in the various tax treaties of numerous countries when dealing with dividends, interests, royalties and other income clauses. However, the term has not been exhaustively defined anywhere in the statute books, leaving the heinous task at the behest of the judiciary.
The recent interpretations to the term have demonstrated the meaning and helped understand the true nature of the term. The Indonesian Tax Court in the P. T.Transportasi Gas Indonesia vs Direktur Jenderal Pajak case has observed that to determine the beneficial ownership of certain income, the facts of the case should be examined so as to determine if the person could freely enjoy such income and if the country of residence had taxed such income.


Furthermore, in the celebrated case of Prevost Car, the court concluded that the `beneficial owner' of dividends is the person who receives the dividends for his/her own use and enjoyment and assumes the risk and control of the dividend he or she received. Further, the Indonesian Directorate General of Taxation issued two key regulations dated November 5, 2009, laying down the conditions for income recipients to enjoy the treaty benefits include that the company is not established in the jurisdiction of the relevant treaty's counterparty merely to obtain the treaty benefits, and the transaction itself is not structured solely to take advantage of the treaty benefits. Therefore, the recent evolution in this regard reveals that the approach taken for determination of the meaning of the term "beneficial ownership" is based on the substance over form doctrine allowing the authorities to examine the transaction despite the legal situation created by the parties. Furthermore, countries such as Vietnam are seeking to disregard the legal entity set up for determination of the euphemistically known practice "abusive transfers" and impose the corporations income-tax on such transfers, thereby giving the term "beneficial ownership" a new dimension to explore. Also, over recent months, the authorities in various jurisdictions have brought in several significant circulars and regulations introducing additional prerequisites for persons seeking to claim tax treaty benefits. The significant developments in this regard in China are as under: Guoshuihan (2009 No. 601 "Circular 601 ") deals with the requirement in tax treaties that the recipient of interest, dividends and royalties sourced in People's Republic of China should have "beneficial ownership" over the income in order to qualify for any protection under the treaty. The circular, inter alia, requires that a beneficial owner must have substantive operating activities and should not be an agent or a "conduit". The Circular further identifies the various "adverse factors" which may be reviewed by the tax authorities to conclude that a recipient of income should not qualify as the beneficial owner. Guoshuihan (2009 No. 698 "Circular 698") deals with "indirect offshore share disposals" undertaken by investors. Such disposals may be required to be disclosed to the tax authorities and may potentially be subject to taxation in the country where they are considered to be motivated by tax-avoidance purposes. Therefore, it can be seen that the recent judicial and legislative mandate worldwide is hovering around taxation of transactions disregarding the legal standing of the parties and determination of the true nature and the beneficial owner of the income at hand.
(The authors are Partner and Associate, respectively, Amarchand & Mangaldas & Suresh A. Shroff & Co.)

Thought of the Dy

The only way of finding the limits of the possible is by going beyond them into the impossible.

 
Arthur C. Clarke