BUDGET-2012
PROVISIONS INCORPORATED TO CURTAIL MONEY LAUNDERING
AN-
OVERVIEW
By CA. Ishant Rathor
Email: rathor89@gmail.com
Now
a days it is common practice amidst private players to introduce the unaccounted
black money in the books of accounts by showing them in the guise of Share
Application Money. These companies in collusion with the shareholders execute
these transactions and thereby accelerating money Laundering Business.
Several
cases have been fixed and reopened of these companies by the Assessing Officers
by invoking section 68 (Cash Credits) of Income Tax Act but were of no use as
the maximum number of cases were disposed off by relying on the judgement of
Hon’ble SC in the case of CIT Versus Lovely Exports (P) Limited wherein it was
held as under”
“the Share Application Money received cannot be regarded as
undisclosed income of the Assessee company. Where the Assessee Company had
given details of the subscribing share applicants and the department alleged
that applicants were bogus, it was free to proceed against the applicants by
opening their individual assessments in accordance with Law”
And
till now Money Laundering Business is on Full swings. Budget 2012 has
introduced some stringent provisions to curb these transactions and to unearth
the unaccounted money introduced by virtue of showing them as Share Application
Money or issuing shares at premium. These provisions are summarized as under:
- SHARE PREMIUM IN EXCESS OF THE FAIR MARKET VALUE TO BE TREATED AS
INCOME
Section 56(2) provides for the specific category of
incomes that shall be chargeable to income-tax under the head “Income
from other sources”.
It is proposed to insert a new clause in section
56(2). The new clause will apply where a company, not being a company in which
the public are substantially interested, receives, in any previous year, from
any person being a resident, any consideration for issue of shares. In such a
case if the consideration received for issue of shares exceeds the face value
of such shares, the aggregate consideration received for such shares as exceeds
the fair market value of the shares shall be chargeable to income- tax under
the head “Income from other sources. However, this provision shall not apply where
the consideration for issue of shares is received by a venture capital
undertaking from a venture capital company or a venture capital fund.
Further, it is also proposed to provide the company
an opportunity to substantiate its claim regarding the fair market value.
Accordingly, it is proposed that the fair market value of the shares shall be
the higher of the value—
(i) as may be determined in accordance with the
method as may be prescribed; or
(ii) as may be substantiated by the company to the
satisfaction of the Assessing Officer, based on the value of its assets,
including intangible assets, being goodwill, know-how, patents,
copyrights, trademarks, licences, franchises or any other business or
commercial rights of similar nature.
This amendment will take effect from
1st April, 2013 and will, accordingly, apply in relation to the assessment year
2013-14 and subsequent assessment years.
Consequent
to incorporation of these provisions, it seems that the decision of Hon’ble SC
in the case of CIT Versus Lovely Exports (P) Limited is of no use.
- TAXATION OF CASH CREDITS, UNEXPLAINED MONEY, INVESTMENTS ETC.
Under the existing provisions of the
Income-tax Act, certain unexplained amounts are deemed as income under section
68, section 69, section 69A, section 69B, section 69C and section 69D of the
Act and are subject to tax as per the tax rate applicable to the
assessee. In case of individuals, HUF, etc., no tax is levied up to the
basic exemption limit. Therefore, in these cases, no tax can be levied on
these deemed income if the amount of such deemed income is less than the amount
of basic exemption limit and even if it is higher, it is levied at the lower
slab rate.
In order to curb the practice of laundering of
unaccounted money by taking advantage of basic exemption limit, it is proposed
to tax the unexplained credits, money, investment, expenditure, etc., which has
been deemed as income under section 68, section 69, section 69A, section 69B,
section 69C or section 69D, at the rate of 30% (plus surcharge and cess as
applicable). It is also proposed to provide that no deduction in
respect of any expenditure or allowance shall be allowed to the assessee under
any provision of the Act in computing deemed income under the said sections.
This amendment will take effect from 1st
April, 2013 and will, accordingly, apply in relation to the assessment year
2013-14 and subsequent assessment years.
- CASH CREDITS UNDER SECTION 68 OF THE ACT
Section 68 of the Act provides that if any sum is
found credited in the books of an assessee and such assessee either
(i) does not offer any explanation about nature and
source of money; or
(ii) the explanation offered by the assessee is found
to be not satisfactory by the Assessing Officer, then, such amount can be taxed
as income of the assessee.
The onus of satisfactorily explaining such credits
remains on the person in whose books such sum is credited. If such person fails
to offer an explanation or the explanation is not found to be satisfactory then
the sum is added to the total income of the person. Certain judicial
pronouncements have created doubts about the onus of proof and the requirements
of this section, particularly, in cases where the sum which is credited as
share capital, share premium etc.
Judicial pronouncements, while recognizing that the
pernicious practice of conversion of unaccounted money through masquerade of
investment in the share capital of a company needs to be prevented, have
advised a balance to be maintained regarding onus of proof to be placed
on the company. The Courts have drawn a distinction and emphasized that in case
of private placement of shares the legal regime should be different from that
which is followed in case of a company seeking share capital from the public at
large.
In the case of closely held companies, investments
are made by known persons. Therefore, a higher onus is required to be placed on
such companies besides the general onus to establish identity and credit
worthiness of creditor and genuineness of transaction. This additional onus
needs to be placed on such companies to also prove the source of money in the
hands of such shareholder or persons making payment towards issue of
shares before such sum is accepted as genuine credit. If the company fails to
discharge the additional onus, the sum shall be treated as income of the
company and added to its income.
It is, therefore, proposed to amend section 68 of the
Act to provide that the nature and source of any sum credited, as share
capital, share premium etc., in the books of a closely held company shall be
treated as explained only if the source of funds is also explained by the
assessee company in the hands of the resident shareholder. However, even in the
case of closely held companies, it is proposed that this additional onus of satisfactorily
explaining the source in the hands of the shareholder, would not apply if the
shareholder is a well regulated entity, i.e. a Venture Capital Fund, Venture
Capital Company registered with the Securities Exchange Board of India
(SEBI).
This amendment will take effect from 1st
April, 2013 and will, accordingly, apply in relation to the assessment year
2013-14 and subsequent years.
CONCLUSION
Although provisions have been
incorporated under section 56 by treating the Share Application Money in excess
of FMV of Unquoted shares or the value as substantiated by Assessee to the
Assessing Officer, as the case may be, as gifts in the hands of the Recipient
Company, Money Laundering transactions would be executed without any hassle by
those companies who are having huge reserves and their value/share will always
be high. The value/share shall be calculated as per the Rule 11UA of Income Tax
Rules which has prescribed the method for calculating the Fair Value of
Unquoted Shares. However, the method prescribed under Rule 11UA seems redundant
in view of the other methods like Discounting Cash Flow Method and Fair Market
Value Method where the value per share will always be high. These rules need to
be revisited. I hope I will well acquaint the readers about these provisions by
virtue of this article. Queries/Suggestions are invited.
