Fineprits of The Union Budget: Changes in The Income Tax Act

The finance bill, 2010 as expected has brought about certain changes to the income tax act, 1961. The two important changes vide clause 3 and clause 4 of the finance bill to S.2(15) and S. 9 respectively are discussed in this post.

Definition of “charitable purpose”

S. 2(15) of the IT act defines charitable purpose to include “relief of the poor, education, medical relief, preservation of environment (including watersheds, forests and wildlife) and preservation of monuments or places or objects of artistic or historic interest, and the advancement of any other object of general public utility”. However the proviso to the section stipulates that the “advancement of any other object of general public utility shall not be a charitable purpose, if it involves the carrying on of any activity in the nature of trade, commerce or business, or any activity of rendering any service in relation to any trade, commerce or business, for a cess or fee or any other consideration, irrespective of the nature of use or application, or retention, of the income from such activity”.

Clause 3 of the Finance Bill, 2010 has retrospectively added(applicable from 1st April, 2009) a further proviso stipulating that the first proviso shall not apply if the aggregate value of the receipts from the activities referred to in S. 2(15) is ten lakhs or less in the previous year. The legislative intent seems to be novel as it seeks to remove the hardship on charitable institutions who receive a meager amount for their activities inorder to maintain and provide basic infrastructure. However, clarity needs to sought as to whether the term “receipts” is to understood as per the method of accounting followed by the assesse or whether it is “receipt” in the ordinary sense of the word.

Taxability of Non-Residents

Whereas residents are taxed on their worldwide income as under S 5(1) of the IT act, non –residents are only taxed on income received or deemed to be received or accrues or deemed to accrue in India i.e. the territorial nexus principle as under S. 5(2) of the IT act. Further, S. 9 of the act stipulates income that is deemed to accrue or arise in India. The finance act, 1976 introduced the source rule under S.9 vide the insertion of clause (v), (vi) and (vii) in sub clause 1. The intention of the legislature was to bring to tax interest, royalty and technical fees through a legal fiction created under S.9 of the act, even in cases where the service is provided outside India as long as they are utilized in India. In essence, the source rule stipulates that situs of the rendering of the service is irrelevant. The situs of the payer and the utilization of the service are the relevant ingredients in determining the taxability of the above mentioned services.

However, the supreme court in Ishikawajima-Harima Heavy Industries Ltd., Vs DIT (2007) [158 Taxman 259] held that inspite of the legal fiction created under S. 9 it was decisive to show that there is sufficient territorial nexus between the income and the territory of India. The legislature further attempted to clarify the point on the source rule, hence it introduced an Explanation to sub section (2) of S.9 vide the Finance Act, 2007. However again in a recent decision the Karnataka High Court in Jindal Thermal Power Company Ltd. vs DCIT (TDS), [2009] 182 Taxman 252 held that the Explanation provided as per the Finance Act, 2007 was insufficient in its present form and thereby followed the judgment of the Honorable Supreme Court in Ishikawajima.

Hence, inorder to clarify the legislative intent and overcome the judicial decisions on the point the Finance Bill, 2010 vide clause 4 has introduced a retrospective amendment (w.e.f- 1st June, 1976). The amendment seeks to remove the earlier Explanation as provided by the Finance Act, 2007. Clause 4 of the Finance Bill reads as under:
“ the income of a non-resident shall be deemed to accrue or arise in India under clause (v) or clause (vi) or clause (vii) of sub-section (1) of section 9 and shall be included in his total income, whether or not,
(a) the non-resident has a residence or place of business or business connection in India; or
(b) the non-resident has rendered services in India.”

However the constitutional validity of this clause may be open to challenge as it invalidates the territorial nexus principle.


The author wishes to acknowledge the inputs received from Avantika Govil, 3rd Year Student at School of Law, Christ University.

Interpretation of Contracts: U.S. Context

In my previous post, the interpretation of commercial contract was outlined in light of the decisions of the supreme court of India. Interestingly Steven J Burton in his latest book: Elements of Contract Interpretation discusses the effective tools of contract interpretation in the United States. The author points out three different theories of contract interpretation generally followed in the U.S. The theories are discussed as under:

1. Literalism
This theory is similar to the ‘ordinary meaning test’ in the Indian context. It posits that ambiguous words in the contract are to be assigned their literal meaning i.e. their dictionary meanings. This theory can be criticised on the ground that generally dictionary would assign two or more meanings to a given word; in that case the context has to be perused into inorder to determine the correct literal meaning. Literalism expressly disregards the use of the context and hence, there seems to be an inherent fallacy in this theory.

2. Objectivism
This theory posits that in determining an ambiguous clause in a contract the entire contract should be read as a whole. Under this theory due regard is also given to the relation between the parties, the circumstances prevailing at the time of conclusion of the contract and the entire purpose of the contract. The following observation of the court of appeals in Kass v. Kass is apposite here:

“.......in deciding whether an agreement is ambiguous courts should examine the entire contract and consider the relation of the parties and the circumstances under which it was executed. Particular words should be considered, not as if isolated from the context, but in the light of the obligation as a whole and the intention of the parties manifested thereby. Form should not prevail over substance and a sensible meaning should be sought.”

3. Subjectivism
This theory is akin to the “subjective intent” test under most international commercial agreements such as the Convention on the International Sale of Goods (CISG). This element of contractual interpretation posits that the subjective intent of a party should be taken into consideration if the other party or a reasonable man under the same circumstances could not have been unaware of that intent.

Conclusion:
On a thorough analysis Steve finds “objectivism” as the most preferred tool of contractual interpretation.

Interpretation of Commercial Contracts

In a recent case Novartis Vaccines & Diagnostics Inc. v. Aventis Pharma Limited (dated 11.12.2009), the Bombay High Court has once again enumerated the principle of interpretation of commercial contracts. Justice Mohta while re-affirming his earlier observations in the Reliance Natural Resources Ltd.v. Reliance Industries Limited (2007 (Supp.) Bom. C.R. 925) further laid down the following principles for the interpretation of a commercial contract:

1. Ordinary Meaning: This principle essentially signifies that the words in the contract are to be construed in their ordinary and popular sense. The underlining principle being that parties to a contract, as reasonable men must have intended to use the word in its commonly used sense.

2. Business Like Interpretation: It signifies that a commercial contract must be interpreted in a manner which conforms with sound commercial principles and good business sense. In this regard Lord Diplock's observationin Antaios Cia Navieras SA V Salen Rederierna ((1984) 3 All ER 229) is apposite:
"If a detailed semantic and syntactical analysis of words in a
commercial contract is going to lead to a conclusion that flouts business common
sense, it must be made to yield to business common sense."

3. Commercial Object: This principle is based on a rather well established rule that the "the contract should be read as a whole" in light of the purpose of the contract.

4. Construction to Avoid Unreasonable Results: If the wording of a clause is ambiguous, and one reading produces a fairer result than the alternative, the reasonable interpretation should be adopted. It is to be presumed that the parties, as reasonable men, would have intended to include reasonable stipulation in their contract.

The traces of these principles can also be found in the apex court's recent decision in Vimal Chand Ghevarchand Jain & ors.v. Ramakant Eknath Jajoo (2009 (5) SCALE 59).

Further Relaxation of FDI Norms

In a recent press release the ministry of commerce and industry has further relaxed the norms with regard to foreign direct investment(FDI).
Status Quo:
At present projects which involve a total cost of less than Rs. 600 crore are approved by the Finance Minister. Projects which involve a total cost of more than Rs. 600 is placed before the Cabinet Committee on Economic Affairs (CCEA) for approval.
Change:
The press release mandates that only projects which involve a total cost of more than Rs 1200 will require the prior approval of the CCEA.
The government's further liberalization, the policy is expected to save time and efforts of the FIPB/CCEA and further expedite foreign investment inflow.

Voluntary Guidelines, MCA

Last year December the "corporate week" was conducted by the ministry of corporate affairs(MCA). The "corporate week" was a unique initiative by the MCA to showcase the contribution of the corporate sector in the social and economic development of the country.

Mr. Khursheed while delivering his formal speech on the occasion pointed out the challenges before the country and the global community. As for the country: Mr. Khursheed pointed out that there were urgent development issues like poverty, illiteracy, malnutrition etc. As for the global community: Mr. Khursheed underlined the menace of climate change.

Mr. Khursheed proposed a collaborative solution to the above mentioned challenges. In this regard the following part of the speech is apposite:

"The scale of these challenges warrant a collaborative solution in which the Government, the business sector, the civil society organizations and the common citizens need to partner. The Ministry of Corporate Affairs is addressing these issues by providing an enabling environment in which the corporate sector can not only grow and flourish but also bring more and more sections of the society within its value-generation process. It is with this objective in view that the Ministry has chosen the theme of India Corporate Week , 2009 as 'Corporate Sector and Inclusive Growth'. "

It is in light of this objective, the ministry introduced the voluntary guidelines on corporate governance and voluntary guidelines on corporate social responsibility. In the upcoming posts I shall be discussing both the guidelines in detail.

The entire speech is available here http://www.mca.gov.in/Ministry/Minister.html

About the blog

Hello Readers
I intend to fill this space up with a host of interesting and important issues relating to Indian law or laws which effect India. I assure that the comments posted on this blog would be well researched. The idea is to create awareness about the latest legal developments. Legal materials are mostly hidden under the garb of expensive books and databases. The blog is an attempt towards making legal materials easily accessible.