Supreme Court stays order of Delhi High Court stopping Centre from recovering Service Tax on Renting of Immovable Property for commercial use.

A BREAKING NEWS:

Supreme Court stays order of Delhi High Court stopping Centre from recovering Service Tax on Renting of Immovable Property for commercial use.

Service Tax Audit Norms

Dear Professional Colleague,

Please find attached norms of audits for service tax assessees.

QUOTE
Frequency Norms of Audit for Service Tax Assessees
Director General of Audit, New Delhi has published Service Tax Audit Manual, 2010. As per the guidelines, tax payers whose annual service tax payment (including cash and CENVAT) was Rs.3 crore or more in the preceding financial year may be subjected to mandatory audit each year. It is preferable that Audit of all such Units is done by using Computer Assisted Audit Program (CAAP) techniques. The frequency of audit for other taxpayers would be as per following norms:-
i. Taxpayers with Service Tax payment above Rs.3 crores (Cash + CENVAT) (MANDATORY UNITS) – to be audited every year.



ii. Taxpayers with Service Tax payment between Rs.1 crore and Rs.3 crores (Cash + CENVAT) – to be audited once every two years.



iii. Taxpayers with Service Tax payment between Rs.25 lakhs and Rs.1 crore (Cash + CENVAT) – to be audited once every five years.



iv. Taxpayers with Service Tax payment upto Rs.25 lakhs (Cash + CENVAT) – 2% of taxpayers to be audited every year.



The Audit selection guidelines, therefore, would apply to the non-mandatory taxpayers, forming part of the discretionary workload. These taxpayers should be selected on the basis of assessment of the risk potential to revenue. This process, which is an essential feature of audit selection, is known as Risk Assessment. It involves the ranking of taxpayers according to a quantitative indicator of risk known as a “risk parameter”. It is also suggested that the taxpayers whose returns were selected for detailed scrutiny, may not be taken up for Audit that year, to avoid duplication of work. Similarly, the taxpayers who have been selected for Audit, may not be taken up for detailed scrutiny of their ST-3 Returns during that year.

Family Members Investments Qualified Under Section 80C

Family Members Investments Qualified Under Section 80C
There has always been misunderstanding in the mind of us toward claiming the deduction under section 80c for investment made on behalf of the family members. In this article, we will talk about all circumstances, where an individual can get the benefit of deduction u/s 80C for payment on behalf of his/her family members. Every person should plan his investments and plan his taxes. Section 80C of Income tax is one of the parts for tax planning. This article seeks to explain the various common questions arise in the mind of a layman like -
• Can I get the deduction u/s 80C for payment on behalf of my wife ?
• Whether making payment of LIC premium to policy of major child will be eligible for claim under section 80C?
• Whether payment of LIC premium of my independent and major child will be eligible for deduction u/s 80C?
An individual can avail the benefit of deduction under section 80C for payment of investments on behalf of his/her family members (Individual/Spouse/Children) up to Rs. 1,00,000.
1. Annuity plans
2. Life Insurance Premium
3. Public Provident Fund
4. ULIP
Life Insurance Premium
In case of an individual policy should be taken on his own life, of the spouse or any child.
Annuity Plan
Annuity plan should be taken in the name of the individual, his wife/her husband on any child of such individual.
Public Provident Fund (PPF)
An individual can open public provident fund account in his own name or in the name of minor of whom he is the guardian. One can get the deduction u/s 80c, deposit in his own account, or his/her spouse or in the account of his /her children.
• Important Note: Under Public Provident Fund (PPF) the maximum contribution is Rs. 70,000/-.
ULIP
ULIP should be taken on his own life, life of the spouse or any child.
Important Notes:
• Hindu Undivided Family (HUF) can also avail the deduction u/s 80C for investment on the name of any member of the family.
Child may be
• Dependent/independent,
• Male/female,
• Minor/major,
• Married/unmarried
Example for life insurance Premium paid for family members
Compute the eligible deduction u/s 80C for payment by a on behalf of his family members as following
1. LIP (Life Insurance Premium) on his own life – Rs. 20000/-
2. LIP on the life of his wife – Rs. 30000/-
3. LIP on the life of his major son (Not Dependent on A) – Rs. 40000/-
4. LIP on the life of his dependent brother – Rs. 5000/-
Amount eligible for deduction u/s 80C will be Rs. 90000 (20000+30000+40000) except LIP on the life of his dependent brother.

How to read CIN(Corporate Identification Number) of a company?

CIN IS OF 21 DIGIT NO.
1st digit Listing status
Next 5 digit Industry code
Next 2 digit State code
Next 4 digit Year of incorporation
Next 3 digit Ownership
Last 6 digit ROC reg.

Stay Petitions: Recovery of outstanding tax demands

FULL TEXT OF IMPORTANT INSTRUCTIONS

Recovery of outstanding tax demands
[Instruction No. 1914 F. No. 404/72/93 ITCC dated 2-12-1993 from CBDT]

The Board has felt the need for a comprehensive instruction on the subject of recovery of tax demand in order to streamline recovery procedures. This instruction is accordingly being issued in supersession of all earlier instructions on the subject and reiterates the existing Circulars on the subject.


The Board is of the view that, as a matter of principle, every demand should be recovered as soon as it becomes due. Demand may be kept in abeyance for valid reasons only in accordance with the guidelines given below :

Responsibility:

It shall be the responsibility of the Assessing Officer and the TRO to collect every demand that has been raised, except the following : (a) Demand which has not fallen due;(b) Demand which has been stayed by a Court or ITAT or Settlement Commission;(c) Demand for which a proper proposal for write-off has been submitted;(d) Demand stayed in accordance with paras B & C below.

Where demand in respect of which a recovery certificate has been issued or a statement has been drawn, the primary responsibility for the collection of tax shall rest with the TRO.

It would be the responsibility of the supervisory authorities to ensure that the Assessing Officers and the TROs take all such measures as are necessary to collect the demand. It must be understood that mere issue of a show cause notice with no follow-up is not to be regarded as adequate effort to recover taxes.

Stay Petitions:
Stay petitions filed with the Assessing Officers must be disposed of within two weeks of the filing of petition by the tax- payer. The assessee must be intimated of the decision without delay.
Where stay petitions are made to the authorities higher than the Assessing Officer (DC/CIT/CC), it is the responsibility of the higher authorities to dispose of the petitions without any delay, and in any event within two weeks of the receipt of the petition. Such a decision should be communicated to the assessee and the Assessing Officer immediately.
The decision in the matter of stay of demand should normally be taken by Assessing Officer/TRO and his immediate superior. A higher superior authority should interfere with the decision of the AO/TRO only in exceptional circumstances; e.g., where the assessment order appears to be unreasonably high-pitched or where genuine hardship is likely to be caused to the assessee. The higher authorities should discourage the assessee from filing review petitions before them as a matter of routine or in a frivolous manner to gain time for withholding payment of taxes.
Guidelines for staying demand:
A demand will be stayed only if there are valid reasons for doing so. Mere filing an appeal against the assessment order will not be a sufficient reason to stay the recovery of demand. A few illustrative situations where stay could be granted are:
It is clarified that in these situations also, stay may be granted only in respect of the amount attributable to such disputed points. Further where it is subsequently found that the assessee has not co-operated in the early disposal of appeal or where a subsequent pronouncement by a higher appellate authority or court alters the above situation, the stay order may be reviewed and modified. The above illustrations are, of course, not exhaustive.
In granting stay, the Assessing Officer may impose such conditions as he may think fit. Thus he may — a. require the assessee to offer suitable security to safeguard the interest of revenue;b. require the assessee to pay towards the disputed taxes a reasonable amount in lump sum or in instalments;c. require an undertaking from the assessee that he will co-operate in the early disposal of appeal failing which the stay order will be cancelled.d. reserve the right to review the order passed after expiry of a reasonable period, say up to 6 months, or if the assessee has not co-operated in the early disposal of appeal, or where a subsequent pronouncement by a higher appellate authority or court alters the above situations;e. reserve a right to adjust refunds arising, if any, against the demand.
Payment by instalments may be liberally allowed so as to collect the entire demand within a reasonable period not exceeding 18 months.
Since the phrase "stay of demand" does not occur in section 220(6) of the Income-tax Act, the Assessing Officer should always use in any order passed under section 220(6) [or under section 220(3) or section 220(7)], the expression that occurs in the section viz., that he agrees to treat the assessee as not being default in respect of the amount specified, subject to such conditions as he deems fit to impose.
While considering an application under section 220(6), the Assessing Officer should consider all relevant factors having a bearing on the demand raised and communicate his decision in the form of a speaking order.
Miscellaneous:
Even where recovery of demand has been stayed, the Assessing Officer will continue to review the situation to ensure that the conditions imposed are fulfilled by the assessee failing which the stay order would need to be withdrawn.
Where the assessee seeks stay of demand from the Tribunal, it should be strongly opposed. If the assessee presses his application, the CIT should direct the departmental representative to request that the appeal be posted within a month so that Tribunal’s order on the appeal can be known within two months.
Appeal effects will have to be given within 2 weeks from the receipt of the appellate order. Similarly, rectification application should be decided within 2 weeks of the receipt t hereof. Instances where there is undue delay in giving effect to appellate orders, or in deciding rectification applications, should be dealt with very strictly by the CCITs/CITs.
The Board desires that appropriate action is taken in the matter of recovery in accordance with the above procedure. The Assessing Officer or the TRO, as the case may be, and his immediate superior officer shall be held responsible for ensuring compliance with these instructions.
This procedure would apply mutatis mutandis to demands created under other Direct Taxes enactments also.
Part payment of outstanding demand — Clarification regarding adjustment thereof
[Instruction No. 1936 - F. No. 404/62/95-ITCC dated 21-3-1996 from CBDT]
A question has been referred to the Board seeking clarification that :

"If the tax paid by the assessee is not sufficient to cover the total demand then should it first be adjusted against the interest."

The Board have been informed that the Assessing Officers are not following any uniform procedure in this regard. While one set of Assessing Officers are first adjusting the part payment received from the assessee against the tax due, the others are adjusting the part payments towards the outstanding interest due under section 220(2). The matter was referred to the Ministry of Law for their opinion and they have also observed that both the views are possible.

For the sake of uniformity the Board have decided that part payment received from assessee should first be adjusted towards the tax due and not the interest calculated under section 220(2) of the Income-tax Act.

The aforesaid instruction may be brought to the notice all officers working under your charge.

Clarification regarding charging of interest u/ss. 201(1A) and 220(2) of Income-tax Act
[Instruction No. 1944 — F. No. 275/14/97-IT(B) dated 27-8-1997 issued by CBDT]
The Central Board of Direct Taxes have received several representations seeking clarification about the simultaneous charging of interest u/s. 201(1A) and u/s. 220(2) of the Income-tax
Act, 1961.

After due consideration, it is hereby clarified that for non-deduction of tax at source or failure to pay the tax after deducting the same, interest u/s. 201(1A) is chargeable. If the tax and/or interest is not paid within the stipulated time, then interest u/s. 220(2) also becomes chargeable.

Clarification regarding charging of interest u/ss. 201(1A) and 220(2) of Income-tax Act

Clarification regarding charging of interest u/ss. 201(1A) and 220(2) of Income-tax Act
[Instruction No. 1944 — F. No. 275/14/97-IT(B) dated 27-8-1997 issued by CBDT]
The Central Board of Direct Taxes have received several representations seeking clarification about the simultaneous charging of interest u/s. 201(1A) and u/s. 220(2) of the Income-tax
Act, 1961.

After due consideration, it is hereby clarified that for non-deduction of tax at source or failure to pay the tax after deducting the same, interest u/s. 201(1A) is chargeable. If the tax and/or interest is not paid within the stipulated time, then interest u/s. 220(2) also becomes chargeable.

SOCIETY / NGO / TRUST - Registration Methods

NGO Registration Methods - 1
1. Trust 2. Society, and 3. Non profit Company

In India non profit / public charitable organisations can be registered as trusts, societies, or a private limited non profit company, under section-25 companies. Non-profit organisations in India (a) exist independently of the state; (b) are self-governed by a board of trustees or ‘managing committee’/ governing council, comprising individuals who generally serve in a fiduciary capacity; (c) produce benefits for others, generally outside the membership of the organisation; and (d), are ‘non-profit-making’, in as much as they are prohibited from distributing a monetary residual to their own members.

Section 2(15) of the Income Tax Act – which is applicable uniformly throughout the Republic of India – defines ‘charitable purpose’ to include ‘relief of the poor, education, medical relief and the advancement of any other object of general public utility’. A purpose that relates exclusively to religious teaching or worship is not considered as charitable. Thus, in ascertaining whether a purpose is public or private, one has to see if the class to be benefited, or from which the beneficiaries are to be selected, constitute a substantial body of the public. A public charitable purpose has to benefit a sufficiently large section of the public as distinguished from specified individuals. Organisations which lack the public element – such as trusts for the benefit of workmen or employees of a company, however numerous – have not been held to be charitable. As long as the beneficiaries of the organisation comprise an uncertain and fluctuating body of the public answering a particular description, the fact that the beneficiaries may belong to a certain religious faith, or a sect of persons of a certain religious persuasion, would not affect the organisation’s ‘public’ character.

Whether a trust, society or section-25 company, the Income Tax Act gives all categories equal treatment, in terms of exempting their income and granting 80G certificates, whereby donors to non-profit organisations may claim a rebate against donations made. Foreign contributions to non-profits are governed by FC(R)A regulations and the Home Ministry.
CAF would like to clarify that this material provides only broad guidelines and it is recommended that legal and or financial experts be consulted before taking any important legal or financial decision or arriving at any conclusion.

Formation and Registration of a Non -Profit organisations in India
1) Trust
2) Society
3) Section-25 Company
Additional Licensing/ Registration

I. Trusts
A public charitable trust is usually floated when there is property involved, especially in terms of land and building.

Legislation : Different states in India have different Trusts Acts in force, which govern the trusts in the state; in the absence of a Trusts Act in any particular state or territory the general principles of the Indian Trusts Act 1882 are applied.

Main Instrument : The main instrument of any public charitable trust is the trust deed, wherein the aims and objects and mode of management (of the trust) should be enshrined. In every trust deed, the minimum and maximum number of trustees has to be specified. The trust deed should clearly spell out the aims and objects of the trust, how the trust should be managed, how other trustees may be appointed or removed, etc. The trust deed should be signed by both the settlor/s and trustee/s in the presence of two witnesses. The trust deed should be executed on non-judicial stamp paper, the value of which would depend on the valuation of the trust property.
Trustees : A trust needs a minimum of two trustees; there is no upper limit to the number of trustees. The Board of Management comprises the trustees.

Application for Registration :
The application for registration should be made to the official having jurisdiction over the region in which the trust is sought to be registered.

After providing details (in the form) regarding designation by which the public trust shall be known, names of trustees, mode of succession, etc., the applicant has to affix a court fee stamp of Rs.2/- to the form and pay a very nominal registration fee which may range from Rs.3/- to Rs.25/-, depending on the value of the trust property.

The application form should be signed by the applicant before the regional officer or superintendent of the regional office of the charity commissioner or a notary. The application form should be submitted, together with a copy of the trust deed.

Two other documents which should be submitted at the time of making an application for registration are affidavit and consent letter.

II. Society
According to section 20 of the Societies Registration Act, 1860, the following societies can be registered under the Act: ‘charitable societies, military orphan funds or societies established at the several presidencies of India, societies established for the promotion of science, literature, or the fine arts, for instruction, the diffusion of useful knowledge, the diffusion of political education, the foundation or maintenance of libraries or reading rooms for general use among the members or open to the public, or public museums and galleries of paintings and other works of art, collection of natural history, mechanical and philosophical inventions, instruments or designs.’

Legislation : Societies are registered under the Societies Registration Act, 1860, which is a federal act. In certain states, which have a charity commissioner, the society must not only be registered under the Societies Registration Act, but also, additionally, under the Bombay Public Trusts Act.
Main Instrument : The main instrument of any society is the memorandum of association and rules and regulations (no stamp paper required), wherein the aims and objects and mode of management (of the society) should be enshrined.

Trustees : A Society needs a minimum of seven managing committee members; there is no upper limit to the number managing committee members. The Board of Management is in the form of a governing body or council or a managing or executive committee

Application for Registration :
Registration can be done either at the state level (i.e., in the office of the Registrar of Societies) or at the district level (in the office of the District Magistrate or the local office of the Registrar of Societies).(2)

The procedure varies from state to state. However generally the application should be submitted together with: (a) memorandum of association and rules and regulations; (b) consent letters of all the members of the managing committee; (c) authority letter duly signed by all the members of the managing committee; (d) an affidavit sworn by the president or secretary of the society on non-judicial stamp paper of Rs.20-/, together with a court fee stamp; and (e) a declaration by the members of the managing committee that the funds of the society will be used only for the purpose of furthering the aims and objects of the society.

All the aforesaid documents which are required for the application for registration should be submitted in duplicate, together with the required registration fee. Unlike the trust deed, the memorandum of association and rules and regulations need not be executed on stamp paper.

III. Section-25 Company
According to section 25(1)(a) and (b) of the Indian Companies Act, 1956, a section-25 company can be established ‘for promoting commerce, art, science, religion, charity or any other useful object’, provided the profits, if any, or other income is applied for promoting only the objects of the company and no dividend is paid to its members.

Legislation : Section-25 companies are registered under section-25 of the Indian Companies Act. 1956.

Main Instrument : For a section-25 company, the main instrument is a Memorandum and articles of association (no stamp paper required)

Trustees : A section-25 Company needs a minimum of three trustees; there is no upper limit to the number of trustees. The Board of Management is in the form of a Board of directors or managing committee.

Application for Registration :
1.An application has to be made for availability of name to the registrar of companies, which must be made in the prescribed form no. 1A, together with a fee of Rs.500/-. It is advisable to suggest a choice of three other names by which the company will be called, in case the first name which is proposed is not found acceptable by the registrar.

2.Once the availability of name is confirmed, an application should be made in writing to the regional director of the company law board. The application should be accompanied by the following documents:
Three printed or typewritten copies of the memorandum and articles of association of the proposed company, duly signed by all the promoters with full name, address and occupation.

A declaration by an advocate or a chartered accountant that the memorandum and articles of association have been drawn up in conformity with the provisions of the Act and that all the requirements of the Act and the rules made thereunder have been duly complied with, in respect of registration or matters incidental or supplementary thereto.

Three copies of a list of the names, addresses and occupations of the promoters (and where a firm is a promoter, of each partner in the firm), as well as of the members of the proposed board of directors, together with the names of companies, associations and other institutions in which such promoters, partners and members of the proposed board of directors are directors or hold responsible positions, if any, with description of the positions so held.

A statement showing in detail the assets (with the estimated values thereof) and the liabilities of the association, as on the date of the application or within seven days of that date.
An estimate of the future annual income and expenditure of the proposed company, specifying the sources of the income and the objects of the expenditure.

A statement giving a brief description of the work, if any, already done by the association and of the work proposed to be done by it after registration, in pursuance of section-25.

A statement specifying briefly the grounds on which the application is made.

A declaration by each of the persons making the application that he/she is of sound mind, not an undischarged insolvent, not convicted by a court for any offence and does not stand disqualified under section 203 of the Companies Act 1956, for appointment as a director.

3.The applicants must also furnish to the registrar of companies (of the state in which the registered office of the proposed company is to be, or is situate) a copy of the application and each of the other documents that had been filed before the regional director of the company law board.

4.The applicants should also, within a week from the date of making the application to the regional director of the company law board, publish a notice in the prescribed manner at least once in a newspaper in a principal language of the district in which the registered office of the proposed company is to be situated or is situated and circulating in that district, and at least once in an English newspaper circulating in that district.

5.The regional director may, after considering the objections, if any, received within 30 days from the date of publication of the notice in the newspapers, and after consulting any authority, department or ministry, as he may, in his discretion, decide, determine whether the licence should or should not be granted.

6.The regional director may also direct the company to insert in its memorandum, or in its articles, or in both, such conditions of the licence as may be specified by him in this behalf.

IV. Special Licensing
In addition to registration, a non-profit engaged in certain activities might also require special license/permission. Some of these include (but are not limited to):

A place of work in a restricted area (like a tribal area or a border area requires a special permit – the Inner Line Permit – usually issues either by the Ministry of Home Affairs or by the relevant local authority (i.e., district magistrate).

To open an office and employ people, the NGO should be registered under the Shop and Establishment Act.

To employ foreign staff, an Indian non-profit needs to be registered as a trust/society/company, have FCRA registration and also obtain a No Objection Certificate. The intended employee also needs a work visa.

A foreign non-profit setting up an office in India and wanting staff from abroad needs to be registered as a trust/society/company, needs permission from the Reserve Bank of India and also a No Objection Certificate from the Ministry of External Affairs.

An analysis of provisions of section 10(23C)(vi) of Income-tax Act

TAXATION OF CHARITABLE TRUSTS
An analysis of provisions of section 10(23C)(vi) of Income-tax Act Governing Exemption of Income of Educational Institutions

This write-up makes an analysis of provisions of section 10(23C)(vi) of the Income-tax Act, 1961 governing exemption of income of educational institutions.

Introduction
1. Recently, it is being observed that department is rejecting/ withdrawing approvals of educational institutions/hospitals which are required under section 10(23C)(vi)/(via) of the Income-tax Act, 1961 (‘the Act’). This is generally being done on the ground that these institutions are being run for profit. Though it may be true that in some of the cases view of the department may be correct, yet in most of the cases rejection of approval is not correct and is creating hardship. Keeping in view this background, an attempt is being made herein to analyse the provisions of the Act and the case law. The analysis is being done with reference to the provisions applicable to educational institutions. The legal position is same in respect of hospitals/medical institutions also.
2. An Analysis of Legal provisions
- Section 2(15) of the Act defines the term ‘charitable purpose’ and it, inter alia, includes education.
- Up to the assessment year 1998-99, section 10(22), was providing exemption from taxability of income of an educational institution. It was providing that income was exempt of an educational institution if it was existing solely for the educational purposes and not for the purposes of profit. Section 10(22) was providing no condition at all for granting exemption to an educational institution. In other words, there was no condition of spending of amount. There was no monitoring by any Government authority. Not even return of income was required to be filed. Even the income derived from any other source by an educational institution was exempt and same was required to be spent for educational purposes. Conditions provided in sections 11 and 13 of the Act were also having no application. Reference in this regard can be made to circulars of CBDT Nos. 712, dated July 25, 1995, 372, dated December 28, 1983 and 772, dated December 23, 1998.
- Section 10(23C) was amended with effect from April 1, 1999 simultaneously to omission of section 10(22) sub-clauses (iiiab) and (iiiad) of section 10(23C), however, provided exemption to educational institutions in the same manner as was available earlier under section 10(22). Above sub-clauses were applicable to educational institutions substantially financed by the Government and to educational institutions having annual receipts up to Rs. 1 crore. In respect of other educational institutions, however, exemption was available under sub-clause (vi) of section 10(23C). With reference to above sub-clause, certain conditions were provided with a view to monitor activities of such educational institutions. Second proviso to above section specifically provided for power of the Central Government to call for any information in order to satisfy itself about the genuineness of the activities of the educational institution. In this regard, reference can be made to circular of CBDT No. 779, dated September 14, 1999. With a view to keep monitoring, it was required that approval of the prescribed authority is to be obtained. In order to avail exemption by an educational institution under section 10(23C)(vi), following conditions are provided :—
(a) educational institution exists solely for educational purposes;
(b) it is not for purposes of profit; and
(c) it is approved by the prescribed authority.
Further, provisos to above section provide certain conditions, such as, income is to be applied up to 85 per cent of receipts towards educational purposes; in case accumulation is to be made in excess of 15 per cent, same would be only for a period of five years; investment of funds has to be in the modes prescribed in section 11(5); and books of account have to be maintained and audited and also report in the prescribed proforma is to be submitted with the return of income.
Section 11 provides for exemption of income of a charitable institution. These are general provisions applicable to every charitable institution, including an educational institution. Conditions provided for exemption under section 11 are that 85 per cent of receipt should be spent for charitable purposes, accumulation in excess of 15 per cent has to be made for the purpose of the institution for a period of five years, investment has to be made in the modes prescribed in section 11(5); and accounts have to be audited and report has to be submitted in the prescribed form. Section 13 further provides that exemption under section 11 will not be available in case any part of income has been used for the personal purpose or benefit of a person having interest in the activities of the charitable society including its founder, substantial contributor, trustees, etc.
- On the basis of above analysis of provisions of the Act governing exemption of income of a charitable institution and of educational institution, it is stated that after amendment of section 10(23C), by and large, conditions prescribed for an educational institution referred to in sub-clause (vi) of above section are the same as are applicable to a charitable institution in a normal course. Conditions provided under section 13, however, are still not specifically applicable to an educational institution, if covered under the above sub-clause.
- Further, it can be observed on the basis of above analysis that the intention of the Government is always there to grant blanket exemption to income of an educational institution if it is solely for the purpose of carrying of education activities and not for the purpose of profit. While granting approval, a prescribed authority is also required to only satisfy itself to the genuineness of its activities. Section 10(23C)(vi), however, further provides for application of its income to the extent of 85 per cent, which condition was earlier not existing in section 10(22).
3. Conditions to be satisfied by Educational Institutions
- As has been shown hereinabove with reference to analysis of relevant provisions of the Act, in order to avail exemption by an educational institution under section 10(23C)(vi) it should be solely for the purpose of education and it should apply at least 85 per cent of its receipts during the year for educational purposes and it should be not for the purpose of profit.
- In view of above, it is necessary to examine with reference to the case law and clarification given by the CBDT, the scope and meaning of following terms :—
(i) Education.
(ii) Solely for the purpose of education.
(iii) Not for the purpose of profit.
(iv) Application of income.
The term ‘Education’ has not been specifically defined in the Act. Accordingly, common meaning of above term has been adopted for the purpose of granting exemption to educational institutions. Commonly, it has been understood that an institution imparting education by way of classroom courses in schools, colleges, etc., including courses for professionals, lectureships, scholarships, fellowships and readerships and also grants in respect of researches, prized essays and other academic rewards is for promotion of education. The Apex Court in Sole Trustee, Loka Shikshana Trust v. CIT [1975] 101 ITR 234 enunciated the following principles while interpreting the expression ‘education’ in section 2(15).
“The sense in which the word ‘education’ has been used in section 2(15) in the systematic instruction, schooling or training given to the young is preparation for the work of life. It also connotes the whole course of scholastic instruction which a person has received. The word ‘education’ has not been used in that wide and extended sense, according to which every acquisition of further knowledge constitutes education. According to this wide and extended sense, travelling is education, because as a result of travelling you acquire fresh knowledge. Likewise, if you read newspapers and magazines, see pictures, visit art galleries, museums and zoos, you thereby add to your knowledge. Again, when you grow up and have dealings with other people, some of whom are not straight, you learn by experience and thus add to your knowledge of the ways of the world. If you are not careful, your wallet is liable to be stolen or you are liable to be cheated by some unscrupulous person. The thief who removes your wallet and the swindler who cheats you teach you a lesson and in the process make you wiser though poorer. If you visit a night club, you get acquainted with and add to your knowledge about some of the not much revealed realities and mysteries of life. All this in a way is education in the great school of life. But that is not the sense in which the word ‘education’ is used in clause (15) of section 2. What education connotes in that clause is the process of training and developing the knowledge, skill, mind and character of students by normal schooling.” (p. 241)
Societies set up for extending financial assistance to educational institutions have also been considered for the purpose of education. Granting of loans, scholarships and grants for purchase of books and other educational requisites by a society have also been considered for educational purposes.
- The term ‘solely for the purpose of education’ has also come up for discussion before the Courts in certain cases. In this regard also, the Courts have taken a common man’s approach depending upon the facts and circumstances of each case and has taken a view that wherever receipts/income are being spent only for educational purposes, society is solely for educational purposes. In a case, however, only a small portion of income of trust was spent for educational purpose leaving a huge portion thereof for other charitable purposes and a part of income was also spent on religious purposes, therein it was held that trust was not existing solely for educational purpose so as to qualify for exemption under section 10(22) - Sri Rao Bahudur A.K.D. Dharmaraja Education Charity Trust v. CIT [1990] 182 ITR 80/[1989] 47 Taxman 441 (Mad.). In another case where memorandum of an educational society provided for managing other allied or ancillary institutions also including an automobile workshop, driving school and printing press, etc., and it was provided that, if need be these ancillary institutions can be run on commercial basis in order to make them self-supporting, it was held by the Madras High Court that the clause of the memorandum providing to run these ancillary institutions on commercial basis was only to make them self supporting and the intention was to run them on a no profit no loss basis and, accordingly, this excluded the idea of any intention to earn profit by establishing such institution and, therefore, the society was solely for the purpose of education and not for the purpose of earning profit. CIT v. Bimetal Bearings Ltd. [1985] 152 ITR 85/[1984] 16 Taxman 235 (Mad.). Accordingly, it is to be seen with reference to facts of each case that whether institution is solely for educational purposes or not. In the case of CIT v. Vidya Vikas Vihar [2004] 265 ITR 489 (Bom.), it was held that if an educational institution as per its objects undertakes construction of houses for poor out of its surplus income and profit earned therefrom is also to be used solely for the purpose of promoting education, it cannot be said that institution is not solely for the purpose of education and, accordingly, it was held to be eligible for exemption.
- The term “not for the purpose of profit” has also been considered by the Courts in certain cases. It has been observed that overall facts and circumstances of each case have to be considered in order to decide whether institution is for the purpose of profit or not. In the case of Ereaut v. Girl’s Public Day School Trust Ltd. [1930] 15 TC 529 (HL) inspite of the facts that the society had issued preference shares to generate funds for the purpose of establishing the school and dividend was paid on preference shares, the House of Lords came to the conclusion that issue of preference shares and payment of dividend was only a method of raising funds for the purpose of funding the charitable religious organization. The dominant purpose of the institution was to run school as a charity. The purpose of making a profit was completely a subsidiary purpose. Accordingly, the institution was not for the purpose of making profit. Applying the above test, it has been held by the Andhra Pradesh High Court in the case of Governing Body of Rangaraya Medical College v. ITO [1979] 117 ITR 284, 287 that where no finding was recorded that any surplus arising from the operations of the institution was distributed by way of profit to any individuals, the assessee-trust, the sole object of which was managing and maintaining the medical college, was an educational institution without any motive of private or personal profit. It was also observed that “.....Merely because certain surplus arises from its operations, it cannot be held that the institution is being run for the purpose of profit so long as no person or individual is entitled to any portion of the said profit and the said profit is used for the purposes and for the promotion of the objects of the institution......” It was further held in the above case that merely because immovable properties had not been formally vested in the society, it would not be in any manner, deprived of its character of an educational institution existing solely for the purpose of educational purpose. However, in the case of Dharmaraja Educational Charity Trust (supra), it has been held that where only a small portion has been spent for charitable purpose it would not qualify for exemption as educational institution under section 10(22). Further, in the case of CIT v. Delhi Kannada Education Society [2000] 246 ITR 731/113 Taxman 503, the Delhi High Court held that merely for the reason that middle and higher secondary schools were being run at profit so as to subsidise the primary school it would not lose the exemption. Further, it has been held that income from dividend CIT v. A.M.M. Arunachalam Society [2000] 243 ITR 229/[2003] 128 Taxman 285 (Mad.) and income from manufacture of furniture and stone crushing CIT v. Lal Bahadur Shastry Education Society [2001] 252 ITR 837/118 Taxman 374 (Raj.) would be exempt when societies are engaged in the activities of education and no profit is being distributed to any individual. Income from all the sources received by the assessee is exempt, provided the assessee is an educational institution existing solely for educational purposes - A.M.M. Arunachalam Educational Society’s case (supra); CIT v. Sree Narayana Chandrika Trust [1995] 212 ITR 456/81 Taxman 199 (Ker.); CIT v. Kshatriya Girls Schools Managing Board [2000] 245 ITR 170/[1998] 101 Taxman 555 (Mad.); CIT v. Economic Entrepreneurship Development Foundation [1991] 188 ITR 540/59 Taxman 156 (Cal.); Director of Income-tax (Exemptions) v. A.M.M. Hospital & Medical Benefit Society [2003] 262 ITR 241/[2004] 140 Taxman 81 (Mad.) and Trustees of Vanita Vishram v. CIT [2006] 280 ITR 345/[2005] 148 Taxman 546 (Bom.).
- The term ‘application of income’ has also been repeatedly considered by the Courts and it has held by the Courts that application of income need not be equated with spending :—
- CIT v. Trustees of H.E.H. the Nizam’s Charitable Trust [1981] 131 ITR 497/7 Taxman 178 (AP).
- CIT v. Radhaswami Satsang Sabha [1954] 25 ITR 472 (All.).
- CIT v. St. George Forane Church [1988] 170 ITR 62/36 Taxman 42 (Ker.).
Expenditure incurred for capital purposes including construction of a building for charitable purpose and also repayment of loan borrowed for the purpose of construction of building would also be considered as application of income for charitable purposes and would, accordingly, qualify for exemption;
- Satya Vijay Patel Hindu Dharamshala Trust v. CIT [1972] 86 ITR 683 (Guj.)
- CIT v. St. George Forane Church [1988] 170 ITR 62/36 Taxman 42 (Ker.)
- CIT v. Janmabhumi Press Trust [2000] 242 ITR 457 (Kar.)
- CIT v. Kannika Parameswari Devasthanam & Charities [1982] 133 ITR 779 (Mad.)
In this regard reference can also be made to case of CIT v. Kamla Town Trust [1996] 217 ITR 699/84 Taxman 248 in which case the dispute travelled up to the Supreme Court on the issue whether a trust with the object of constructing residential quarters for poor workers was having object of general public utility. It was, however, an accepted position that construction of quarters was application of income.
Legal Controversies
4. In connection with exemption of income in the cases of educational institutions broadly following controversies have arisen for the reason that exemption has been refused by the Assessing Officer’s or approval required under section 10(23C)(vi) has been rejected on the basis of these contentions :—
(a) Exemption is available to educational institution and not to the trust/society running the educational institution.
(b) Objects of trust/society include other objects also and, therefore, it is not solely for educational purposes.
(c) Activities have resulted in surplus and, therefore, it cannot be said that society is being run not for the purpose of profit.
These issues have arisen for consideration before the Courts in a number of cases and the Courts have been taking the view that exemption is available in respect of income of educational institution and it is immaterial whether exemption is being claimed in the assessment of educational institution, i.e., school or college or in case of a society running the educational institution. Similarly, as regards second controversy, the Courts have taken the view that the educational institution for which exemption is being claimed should be solely for the purpose of education. It may be that there are other charitable objects also being carried on by the same assessee. In such a case, exemption is not available in respect of receipts from other objects. It has also been the view of the Courts that it would make no difference if there are objects other than education also in the memorandum, but, in fact, only object of education is being pursued by the assessee-society. Similarly, as regards the third controversy regarding surplus of income also, the Courts in number of decisions have observed that exemption will not be denied simply for the reason that there has been surplus from the running of educational institution in case same is used for educational purposes only. In fact, the Supreme Court in the case of Addl. CIT v.Surat Art Silk & Cloth Mfrs. Association [1980] 121 ITR 1, 26/[1979] 2 Taxman 501 observed that “.....where the predominant object of the activity is to carry out the charitable purpose and not to earn profit, it would not lose its character of a charitable purpose merely because some profit arises from the activity. The exclusionary clause does not require that the activity must be carried on in such a manner that it does not result in any profit. It would indeed be difficult for persons in charge of a trust or institution to so carry on the activity that the expenditures balances the income and there is no resulting profit. That would not only be difficult of practical realization but would also reflect unsound principle of management......” Further, the Hon’ble Supreme Court in the case of Aditanar Educational Institution v. Addl. CIT [1997] 224 ITR 310/90 Taxman 528, 534 observed that “......We may state that the language of section 10(22) is plain and clear and the availability of the exemption should be evaluated each year to find out whether the institution existed during the relevant year solely for educational purposes and not for the purposes of profit. After meeting the expenditure, if any surplus results incidentally from the activities lawfully carried on by the educational institution, it will not cease to be one existing solely for educational purposes, since the object is not one to make profit. The decisive or acid test is whether on an overall view of the matter, the object is to make profit.....” In fact, all the three legal controversies mentioned hereinabove were elaborately discussed by the High Court of Calcutta in the case of Birla Vidhya Vihar Trust v.CIT [1982] 136 ITR 445/[1981] 7 Taxman 391. In the above case, the High Court had also reproduced a circular of the CBDT No. F. No. 194/16-17II(AI), wherein the CBDT had, in fact, expressed its view in respect of all the three legal controversies mentioned above after taking note of the fact that a number of instances have come to the notice of the Board that exemptions were not being allowed to educational institutions and hospitals under sections 10(22) and 10(22A). It was clarified that an educational institution may be owned by the trust or society. Further, where all the objects of the trust are educational and the surplus is used only for educational purposes, it cannot be said that institution was not existing solely for educational purposes and for the purpose of profit. Further, it was stated that if surplus can be used for non-educational purposes, then only it could be said that institution is not existing solely for educational purposes. If profit of an educational institution can be diverted for the personal use of the proprietor, then income of the educational institution will be subject to tax. In view of aforesaid circular of the CBDT as well as large number of the Courts’ decision on the subject including the decisions of the Supreme Court, these legal controversies could have been settled and no further dispute ought to have been raised on these grounds. It has, however, not happened so and controversies are being raised even now. At times even the counsels representing the department before the Courts with a view to pursue the contention taken by the Assessing Officer do not provide desirable assistance to the Courts and decisions in such circumstances may be rendered by the Courts without correctly noticing the correct legal position. One such example, which has created a serious controversy/difficulty in the matters of charitable institutions is the decision of the Uttarakhand High Court in the case of CIT v. Queens’ Educational Society and St. Paul Sr. Secondary School [2009] 319 ITR 160/177 Taxman 326. In the above case the assessee-societies were running educational institutions and had claimed exemption under section 10(23C)(iiiad). The Assessing Officer rejected the exemption on the ground that there were surpluses from gross receipts though after taking into consideration expenditure on fixed assets there were losses in some of the years and in some of the years there were minor surpluses. The Commissioner (Appeals) as well as the Tribunal upheld the claim of the assessee societies. The High Court, however, set aside the order of the Tribunal and affirmed the order of the Assessing Officer. The High Court while rendering the decision had not noticed that there was no condition for applying a particular percentage of income under section 10(23C)(iiiad). It has already been held in various cases that in order to avail exemption under section 10(22), the only requirement has been that the educational institution should be solely for the educational purposes and not for the purpose of profit. As mentioned hereinabove, it has also been held by the Courts, including the Supreme Court that in case whole of the income is being applied for educational purposes only and no amount is diverted for personal benefit of any person, it cannot be said that institution was being run for the purpose of making profit. It was also not noticed that as per general provisions of section 11 as well as provisions of section 10(23C)(vi) also, accumulation up to 15 per cent of gross receipts is permitted and even accumulation in excess of above limit can be made for a limited period of five years (earlier ten years). Further, expenditure incurred on purchase of capital asset is also an application of income. After the aforesaid decision of the Uttarakhand High Court, the department started rejecting the approvals under section 10(23C)(vi) and also rejecting the claims for exemption of income in assessments of educational institutions even if surplus of income over expenditure has been within the limit of 15 per cent. The CBDT ought to have appreciated the correct position and should have issued clarification to its officers so as to avoid harassment to educational institutions. Number of cases by way of writ petitions had to be filed before the Courts by such educational institutions and the Courts have been burdened by such cases. Recently, the High Court of Punjab and Haryana vide its decision dated 29-1-2010 disposed of 21 writ petitions, which were filed against similar orders of the Chief Commissioners of Chandigarh and Ludhiana passed on being inspired by the view taken by the Uttarakhand High Court. The Punjab & Haryana High Court has discussed quite in detail the legal position and whole case law on the subject and has after dissenting with the view expressed by the Uttarakhand High Court summarized the legal principles in regard to the matter as have been laid down by the Supreme Court in earlier decisions. Accordingly, orders passed by the Chief Commissioners were quashed with the direction to pass fresh orders after taking into consideration propositions of law culled out by the High Court in its order.
In regard to the matter, it would also be relevant to refer to the decision of the Supreme Court in the case of American Hotel & Lodging Association, Educational Institute v. CBDT [2008] 301 ITR 86/170 Taxman 306. In the above case, the issue that came up before the Supreme Court was also regarding approval of an educational institution under section 10(23C)(vi). The Supreme Court analyzed the relevant provisions quite in detail and held that at the stage of granting prior approval scope of the authority is restricted to examine whether the institution has the necessary stipulation for the compliance of the conditions. Actual compliance of the conditions has to be examined subsequently. Accordingly, at the time of granting the approval, the authority has to satisfy that institution existed solely for educational purposes and not for profit. The questions regarding application of income, accumulation of income or investments in specified assets, etc., have to be examined at the time of assessment and in case the institutions do not fulfil the condition, exemption can be denied and approval earlier granted can be withdrawn. In the light of aforesaid decision of the Supreme Court also, approval in terms of section 10(23C)(vi) should be granted considering the objects of the institutions.
It may be added that legal position discussed hereinabove in the context of educational institutions is equally applicable in respect of hospitals and other institutions carrying on activities solely for philanthropic purposes, to which institutions provisions of section 10(23C)(iiiae) or 10(23C)(via) are applicable.
Conclusion
5. In conclusion, it is submitted that the revenue should not raise controversies, which have already been settled by the Courts and CBDT should issue necessary instructions in regard to the matter so as to avoid harassment to the assessees and also to develop confidence of the assessees in the department. The legal position needs to be settled in the interest of encouraging charitable activities also.

Operational Requirements For A Society

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.

Concept on CENVAT Cerdit

In the production process output of a manufacturer may become the input of another manufacturer. Thus, when tax is based on selling price of a product, burden of tax will go on increasing as tax on subsequent stages are levied on tax on earlier stages. This is known as cascading effect. For example, let us assume that the tax rate of a product is 10 % of the selling price. Manufacturer X sells goods to Y for Rs. 110 (inclusive of tax of Rs. 10 i.e. 10 % of selling price of Rs. 100). Y uses such as input and incurs conversion cost of Rs 90. If Y sells such goods to Z, the value of such goods will be Rs. 220 (Rs. 200+ 10% of Rs 200). Tax is levied by Y on Rs. 200 which includes tax of Rs. 10 levied by X. Thus, tax is levied on tax also. In fact, value added by Y is Rs. 90 (Rs 200-Rs 110). So, tax should be Rs. 9 (i.e. 10% of value added). In this way, tax liability goes on increasing on every transfer.

To remove the above defect, MODVAT (MODIFIED Value added) Credit scheme was introduced in 1986. Later on, this scheme was renamed as CENVAT (Central value added) Credit scheme which came into force from April, 1, 2000.

CENVAT Credit Scheme:

If a manufacturer pays excise duty for purchases of materials used by him as input in the process of manufacture, he will get credit of such duty paid from the duty payable on sale value of his output so that the duty payable shall be on the ‘value added’. Such scheme is known as CENVAT Credit scheme.

Let us assume that the rate of excise duty is 10 %. Let A raises invoice of Rs. 220 for goods sold to B which includes excise duty of Rs. 20. B uses the same inputs and incurs conversion cost of Rs. 80. B sells such goods to C and raises invoices of Rs. 308. While calculating cost of input a Rs. 200 (and and Rs. 220 as he is allowed a credit of duty paid amounting Rs. 20 under CENVAT Credit Scheme) and the conversion cost of Rs. 280 @ 10 %. Excise duty is charged on Rs. 280 @ 10% and B raises invoice of Rs. 308(i.e. Rs. 280 + 10 % of RS. 280) to C. thus. The effective duty payable by B is Rs 8 (Rs 28- RS 20) which implies that the duty is levied on ‘value added’ by B (i.e. 10% of Rs .80).

Persons entitled to CENVAT Credit: According to rule 3(1) of the CENVAT Credit Rules, a manufacturer or producer of final products shall be entitled to CENVAT Credit of specified duties paid on input or capital goods received in the factory.

Products for which CENVAT credit is available: CENVAT Credit is available to all ‘final products’ and capital goods received in the factory. According to rule 3 (e) of the CENVAT Credit Rule, ‘final products’ means excisable goods manufactured from input except matches. Rile 2 (g) of the CENVAT Credit Rule defines the term ‘input’. High Speed Diesel Oil (HSD), Light Diesel Oil (LDO) and Motor Spirit (Petrol) are not ‘input’ and hence not eligible for CENVAT Credit.
Thus, from the above explanation one can have a general view of CENVAT Credit scheme.

EMPLOYEE STOCK OPTION SCHEME

EMPLOYEE STOCK OPTION SCHEME

Employee Stock Option Scheme means the option given to the Whole Time Directors, Officers and Employees of the Company which gives them a right or benefit to purchase or subscribe the securities offered by the Company at a predetermined price at a future date.
The idea behind sock option is to motivate the employees by linking the profitability of the Company.

Eligibility to participate in ESOS:-

Option shall be granted only to the eligible permanent employees of the Company excluding the following:-

• An employee who is a promoter or belongs to the promoter group shall not be eligible to participate in the ESOS.
• A director who either by himself or through his relative or through any body corporate, directly or indirectly holds more than 10% of the outstanding equity shares of the company shall not be eligible to participate in the ESOS.

Disclosure to the Grantees:-

A disclosure regarding risk involve, brief of Company, Terms and Conditions of ESOS has to be made available to the prospective grantees.

Compensation Committee:-

A Compensation Committee of the Board of Directors, consisting majority of independent directors, has to be constituted for administration and superintendence of the ESOS. The Committee shall formulate the detailed terms and conditions of the ESOS.

Merchant Banker:-

The company shall appoint Merchant Banker for the implementation of ESOS.

Shareholders Approval:-

Shares can be issued under ESOS with the approval of shareholders by way of Special Resolution. The explanatory statement of the notice and the resolution proposed to be passed in general meeting shall include details regarding the ESOS.
A separate Special Resolution in the general meeting shall be required in case grant of option to identified employees, during any one year, equal to or exceeding 1% of the issued capital of the company.



Variation of terms of ESOS:-

The Company, by special resolution, may variate the terms, including the pricing, of the ESOS offered but not yet exercised by the employees provided such variation is not prejudicial to the interest of the option holders.

Lock in Period:-

There shall be a minimum period of one year between the grant of option and vesting of option. However the Company shall have the freedom to specify the lock in period for the shares issued pursuant to exercise of option. The employees shall not have any right to receive dividend or to vote or in any manner enjoy the benefits of a shareholder in respect of option granted to him, till the shares are issued on exercise of option.

Non transferability of option:-

The option granted to an employee shall not be transferable to any person, the option can only be exercised by the employee to whom the option is granted. The option cannot be transferred, pledged, hypothecated, mortgaged or otherwise alienated in any manner. This is a personal right only to the offeree.

Determination of Exercise Price:-

Exercise price means the price payable by the employee for exercising the option granted to him. The companies will have the freedom to determine the exercise price subject to conforming to the accounting policies.

Stock Exchange Compliance

• Step by Step intimation to the Stock Exchange.
• Certain details of the Company along with the details of ESOS are required to be given to the Stock Exchange.
• In principal approval to be obtained before allotment of shares to the employees.
• The shares issued and allotted under ESOS should be immediately listed.

Disclosure in Directors’ Report:-

The Board of Directors shall disclose either in Directors’ Report or in the annexure to the Directors’ Report the details of ESOS.

Certificate from the Auditors:-

The Board of Directors shall place before the shareholders a certificate from the auditors of the company that the scheme has been implemented in accordance with these guidelines and in accordance with the resolution of the company in the general meeting.

Procedure for Granting of Shares Under ESOS

1. Hold board meeting for
a. Approving the ESOS
b. Calling and Approving the notice of AGM/EGM for passing special resolution
c. Constituting the compensation committee
2. In case of listed company advance notice to the Stock Exchange and after the Board Meeting, outcome of the Board Meeting is also to be notified immediately.
3. Send three copies of notice to the Stock Exchange.
4. Make disclosures to the grantees.(Schedule IV)
5. Hold general meeting and pass required special resolution.
6. Intimation to Stock Exchange along with the certified copy of special resolution.
7. File form 23 within 30 days of the special resolution to register the resolution with ROC.
8. Hold Board Meeting for:-
a. Appointing a registered Merchant Banker for the implementation of ESOS.
b. Authorisation for obtaining in principal approval from the stock exchange.
c. Implementation of the scheme.
9. Disclosure to the Stock Exchange. (Schedule V)
10. Obtain in principal approval from Stock Exchange.
11. Prepare a list of options exercised by employees.
12. Hold board meeting for allotment of shares.
13. File a return of allotment in form 2 to the ROC within 30 days.
14. Giver prior intimation to the Stock Exchange about the Board Meeting and outcome of the Board Meeting is also to be notified immediately.
15. Give intimation to NSDL/CDSL regarding corporate actions.

Accounting Policies:-

In respect of any option granted during any accounting period, the accounting value of the option shall be treated as another form of employee compensation in the financial statements of the Company.

The accounting value of option shall be equal to aggregate, over all employee stock options granted during the accounting period, of the intrinsic value of the option or , if the company so chooses, the fair value of the option.

Where the Accounting value is accounted for as employee compensation, as above, the amount shall be amortised as under:-

• Where the scheme does not provide for graded vesting, the amount shall be amortised on a straight line basis over the vesting period.
• Where the scheme provide for graded vesting-
o The vesting period shall be determined separately for each separate vesting portion of the option, as if the option was, in substance, multiple option and the amount of employee compensation cost shall be accounted for and amortised accordingly on a straight line basis over the vesting period; or
o The amount of employee compensation cost shall be accounted for and amortised on a straight line basis over the aggregate vesting period of the entire option (i.e. over the vesting period of the last separately vesting portion of the option).
Provided that the amount of employee compensation cost recognized at any date at least equals the fair value or the intrinsic value, as the case may be, of the vested portion of the option at that date.
• When an unvested option lapses by virtue of the employee not conforming to the vesting conditions after the accounting value of the option has already been accounted for as employee compensation, this accounting treatment shall be reversed by a credit to employee compensation expenses equal to the amortized portion of the accounting value of the lapsed options and a credit to deferred employee compensation expense equal to the unamortized portion.
• When a vested option lapses on expiry of the exercise period, after the fair value of the option has already been accounted for as employee compensation, this accounting treatment shall be reversed by a credit to employee compensation expense.
In case the company calculates the employees compensation cost using the intrinsic value of the stock options, the difference between the employee compensation cost so computed and the employee compensation cost that shall have been recognized if it had used the fair value of the options, shall be disclosed in the Directors’ Report and also the impact of this difference on profits and on EPS of the company shall also be disclosed in the Directors’ Report.


Determination of Fair Market Value in case of Listed Companies:-

1. When the shares of the company are listed on an Indian recognized stock exchange:-

When the shares are traded on the date of vesting, FMV is the average of the opening price and the closing price on the stock exchange on the date of vesting of option in the hands of the employee.

When the shares are not traded on the date of vesting, FMV is the closing price on a date closest to the date of vesting of the option and immediately preceding such date.

2. When the shares are listed on more than one Indian recognized stock exchanges:-

When the shares are traded on the date of vesting, FMV is the average of the opening price and the closing price on the stock exchange, which records the highest volume of trading in shares, on the date of vesting of option in the hands of the employee.

When the shares are not traded on the date of vesting, FMV is the closing price on a date closest to the date of vesting of the option and immediately preceding such date which records the highest volume of trading in shares.

Tax Implications:-

ESOP have now been included in the purview of perquisites under section 17(2) of the Income Tax Act, 1961. The value of the ESOP determined on the date of exercise, as the difference between the fair market value of the shares as on the date of exercise and the exercise price actually paid by the employee, would be taxable as a perquisite in the hands of the employees in the assessment year relevant to the previous year in which shares or securities are allotted or transferred to the employees.

Ex:- Exercise Price=20
Fair Market Value on the date of vesting of option = 50
Fair Market value on the date of exercise = 80
Taxable Value = 80-20=60

Any subsequent gain on sale of shares would be taxed as capital gains. The cost of acquisition for computing capital gains would be the Fair Market Value on the date of exercise of option. In case of a listed Company, long term capital gains tax would be nil but the holding period would start from the date on which the employee becomes the registered owner of the shares.

Registration Under Central Excise Act

Registration

As per section 6 of the Central Excise Act, prescribed person who is engaged in –

(a) The production or manufacturer of any specified goods included in the First Schedule and the Second Schedule to the Central Excise Tariff Act,

(b) The wholesale purchase or sale (whether on its own account or broker or commission agent) or the storage of any specified goods included in the First Schedule and the Second Schedule to the Central Excise Tariff Act,

shall get himself registered with the appropriate authority.

Moreover as per CENVAT Credit Rules, if a dealer or importer intends to issue CENVATABLE invoices, he is required to take registration.

CENVAT Credit Scheme: If a manufacturer pays excise duty for purchases of materials used by him as input in the process of manufacture, he will get credit of such duty paid from the duty payable on sales value of his output so that duty payable shall be on the ‘value added’. Such scheme is known as CENVAT Credit Scheme.

Registration procedure and other relevant issues

Rule 9 of Central Excise Rule and the relevant circulars of CBE & C lay down the procedure of registration. The procedures are discussed below in brief:

(a) The registration will be made in respect of premises and not in respect of person. Separate registration is required for each separate premises, if the person has more than one premises.

(b) Application of Form A-1 shall be submitted in office of the Assistant Commissioner or Deputy Commissioner of Central Excise having jurisdiction over the premises. In case of EOU located in port towns, application should be submitted to the concerned Deputy Commissioner or Assistant Commissioner, Custom.

(c) Application shall be accompanied by self-attested copy of PAN, if not available copy can be accepted.

(d) Registration Certificate in Form ‘RC’ shall be issued within 7 days of the receipt of the application form, if it is found in order.

(e) If there is any change in the constitution of the firm or company, the same shall be intimated within 30 days of change.

(f) Each registered person will be allotted a 15 digit-code known as Excise Control Code. Assessee is required to mention the ECC code in all invoices.

(g) If the registered person ceases to carry on the operation for which he is registered, he is required to apply for de-registration. However, if he closes his business, he can voluntarily surrender his registration certificate to registering authority. If no demand is pending, the registering authority will cancel the registration.

(h) Registration certificate can be revoked or suspended for breach of any of the conditions of the Act and Rules and if the holder or person in his employment has been convicted of an offence under section 161 of Indian Penal Code.

Penalty for failure to get registered

If the manufacturer or producer who is required to take registration fails to apply for registration, a penalty upto duty of contravening goods or Rs 10,000, whichever is higher, can be imposed and contravening goods can be confiscated. Moreover, imprisonment up to 7 years (minimum 6 months) can be imposed as per section 9 of the Central Excise Act.

17. Registration under Foreign Contribution (Regulation) Act, 1976 (FCRA)

17. Registration under Foreign Contribution (Regulation) Act, 1976 (FCRA)
0. Any Charitable Trust, Society, Company, desirous of receiving any foreign contribution from a foreign source, is required to obtain registration under section 6(1) of FCRA Any such association which is not registered or which has been denied registration, can receive foreign contribution only after obtaining prior permission from home ministry of the Central Government under section 6(1A) of the Act.
In order to obtain registration under the Foreign Contribution (Regulation) Act, (FCRA), the applicant association should preferably be incorporated as a legal entity, that is, as a Charitable Trust, Society, or a Company (u/s. 25) and should have been working for a period of at least three years. The association must not have received any foreign contribution earlier without prior permission of the Government.
1. Application for obtaining permission to accept foreign contribution or hospitality
0. Every individual, association, organization or other person, who is required by or under this Act to obtain the prior permission of the Central Government to accept any foreign contribution, or foreign hospitality, shall before the acceptance of any such contribution or hospitality, make an application for such permission to the Central Government in such form and in such manner as may prescribed.
1. If an application referred to in sub-section (1) is not disposed of within ninety days from the date of receipt of such application, the permission prayed for in such application shall, on the expiry of the said period of ninety days, be deemed to have been granted by the Central Government :
PROVIDED that, where in relation to an application, the Central Government has informed the applicant the special difficulties by reason of which his application cannot be disposed of within the said period of ninety days, such application shall not, until the expiry of a further period of thirty days, be deemed to have been granted by the Central Government.
An application for obtaining prior permission of the Central Government to –
a) receive foreign contribution under sub-section (1) of section 5, or clause (a) of sub-section (2) of that section, shall be made in Form FC-1;
aa) receive foreign contribution under proviso to sub-section (1) of section 6, or under sub-section (1A) of that section or clause (b) of section 10, shall be made in Form FC-1A.
b) accept foreign hospitality under section 9 or clause (d) of section 10, shall be made in Form FC-2.
2. Application for registration
An application for registration of an association referred to in sub-section (1) of section 6 for acceptance of foreign contribution shall be made in Form FC-8.

How to Form a Charitable Trust

A public charitable or religious institution can be formed either as a Trust or as a Society or as a Company registered u/s 25 of the Companies Act.

It generally takes the form of a trust when it is formed primarily by one or more persons.

To form a Society at least seven persons are required. Institutions engaged in promotion of art, culture, commerce etc. are often registered as non-profit companies.

These forms are enumerated as under :

Charitable Trust settled by a settlor by a Trust Deed or under a Will.

Charitable or religious institution / association can be formed as a society.

Charitable institution can be formed by registering as a company u/s. 25 of the Companies Act, 1956, as non profit company (without addition to their name, the word “Limited” or “Private Limited”).

Registration under Income-tax Act

Charitable or religious trusts, societies and companies claiming exemption under sections 11 and 12 of the Income-tax Act are required to obtain registration under the Act. Private/family trusts are neither allowed such exemption nor required to seek registration under the Income-tax Act. The detailed procedure is as under :

Registration of Trust under Income-tax Act procedure for registration u/s. 12AA of I.T. Act.

Application for registration in Form No.10A in duplicate.

List of Name and Address of the Trustees

Copy of Registration Certificate with Charity Commissioner or copy of application to him.

Certified True Copy of the Trust Deed.

PAN No. or Copy of application of the Trust.

PAN of the trustees.

Procedure for registration (Sec 12AA)
The Commissioner, on receipt of an application for registration of a trust or institution made under clause (a) of section 12A, shall –

call for such documents or information from the trust or institution as he thinks necessary in order to satisfy himself about the genuineness of activities of the trust or institution and may also make such inquiries as he may deem necessary in this behalf; and

after satisfying himself about the objects of the trust or institution and the genuineness of its activities he –

shall pass an order in writing registering the trust or institution;

shall, if he is not so satisfied, pass an order in writing refusing to register the trust or institution,

and a copy of such order shall be sent to the applicant.

Provided that no order under sub-clause (ii) shall be passed unless the applicant has been given a reasonable opportunity of being heard.

Donation Given to Charitable Trust is allowed to deduction u/s 80G.

How to Form a Company in India

The following steps are required to form a company (private or public) in India.

Get ‘name availability’ from Registrar of Companies (ROC).
Draft and execute Memorandum & Articles of Association and other documents.
Pay duties and fees
File Memorandum & Articles of Association and other documents with ROC
Represent with ROC for any reservations or comments he may have
Procure incorporation certificate from ROC.
Subscribe to the agreed share capital of the company
Obtain commencement certificate (for public companies)
How to get Name Availability

Company law requires that the name of each company should be unique. As such, the proposed name of the company to be formed has to be approved by the Registrar of Companies and blocked till registration. The following is the process to get availability of name.

Promoters have to file an application in Form 1A giving the following particulars: Names and addresses of promoters
Proposed name of the company
Alternative names of the proposed company. This is required if the proposed name is not available.
Type of company - Private or Public
Brief objects of the company
Proposed Directors and their addresses
Proposed address of the company
Authorised Share Capital (Authorised capital is the one upto which company can issue shares. The paid up capital can be lower than this).
Details of Group companies, if any
Details of fees paid for name availability
Note about significance of the proposed name. This is because regulations have some criteria based on which names are to be allowed.
A fee of INR 500 is to be paid along with the application.
Typically it takes 4 working days for the ROC to confirm availability of name/s. There may happen iteration with the ROC to get the desired name.
If the proposed names are not approved, more alternative names have to suggested.
On approval of name, the Registrar will issue a name allotment letter and will block the name.
Memorandum & Articles of Association – Facts to Remember

The following are some critical facts to remember in executing M&A of A.

1. The promoters in their own handwriting have to give the following details in the Memorandum and Articles of association of the company:

Name
Occupation
Father’s/husband’s name
Complete Address
Number of Shares subscribed

The Memorandum and Articles have to be signed by all the promoters and witnessed. The person/s witnessing has/have to give the following details in their own handwriting:

Name
Occupation
Father’s/husband’s name
Complete Address
Signing outside India

In case the Memorandum and Articles is to be signed by any of the promoters out side India, then the signing should be done in the presence of Consul of India at the Indian Consulate.

Share Capital

The minimum authorised share capital for incorporating a Private Limited company is

INR 100,000.

The minimum authorised share capital for incorporating a Public Limited company is

INR 500,000.

Number of Promoters

For incorporating a Private Limited Company a minimum of two promoters are required. For incorporating a Public Limited Company a minimum of seven promoters are required.

Number of Directors

For incorporating a Private Limited Company a minimum of two directors are required. For incorporating a Public Limited Company a minimum of three directors are required.

Fee Structure

The following is the fees required to be paid to the ROC for incorporation of the company.

Authorised Capital Incremental capital Fee / incremental fee (INR)
Upto INR 100,000 4,000
From INR 100,000 to INR
500,000

For every INR 10,000 @ 300
From INR 500,000 to INR
5,000,000

For every INR 10,000 @ 200
From INR 5,000,000 to INR
10,000,000

For every INR 10,000 @ 100
Over INR 10,000,000 For every INR 10,000 @ 50
Commencement of Business

A commencement of business certificate has to be obtained from the ROC in case of Public

Limited Companies before any business activity can be taken up.

Information Required for Name Approval

The following information is required for seeking name approval.

Name of the applicant which should be one of the promoters
Address of the applicant - this is where all communication will be sent by Registrar of Companies (ROC)
Proposed name of the company Alternative names
Significance of the first word of the proposed name. This makes it easier to get a desired name.
Names of the proposed first directors – minimum 2 in the case of a private company and in the case of a public company
Addresses, dates of birth, father’s/husband’s names of the proposed directors
Authorised Share Capital – minimum INR 100000 in the case of a private limited and INR 500000 in the case of a public company
Objects of the company in brief.
Address of Registered office of the proposed company. If a place is not finalized, this information can be given at the time of incorporation.
Application fee for approval of name of INR 500 has to be remitted in cash.

CHARITABLE TRUSTS

CHARITABLE TRUSTS
Exemption

Income derived from property held under trust or of an institution (‘trust’) wholly for charitable/religious purpose is exempt, if 85% of the income is spent on the objects of the trust, during the year. If the amount spent is less than 85% of the income, the shortfall is taxable, unless the trust has complied with the conditions mentioned in the table below.

‘Charitable purpose’ includes relief of the poor, education, medical relief, and the advancement of any object of general public utility. However, if it involves carrying on of any activity in the nature of trade, commerce or business or any activity of rendering any service in relation to 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 the said activity, the same will not be regarded as advancement of any object of general public utility. However, if the total receipts from such activities do not exceed Rs. 10,00,000/-, such activities of the trust will continue to be regarded as activities for charitable purpose. Preservation of environment (including watersheds, forests and wildlife) and preservation of monuments or places or objects of artistic or historic interest would be considered as "charitable purpose" other than "advancement of any object of general public utility".

Circumstances for not spending 85% of income
Written appln. to be made
Conditions
Consequences, if conditions not satisfied
Application in F. No. 10 to be made specifying purpose for accumulation of income for period of 5 years. Period for which unable to apply income for that purpose due to court order/injunction to be excluded
Before the expiry of time allowed
u/s. 139(1) for furnishing the return
To be spent within period of accumulation or immediately following year. Pending application of income, to be invested in manner as specified in S. 11(5). Cannot be spent by way of donation to another charitable trust or institution except if the Assessing Officer permits the same in the year in which the trust or institution is dissolved.
Such income deemed to be income of the previous year in which any of the conditions not satisfied.
If income not spent within stipulated time, for the purpose of accumulation, deemed to be income of the previous year immediately following period of accumulation, unless Assessing Officer’s permission obtained to spend it on other objects of the trust.
Whole/part of the income not received during previous year
As above
To be spent in the year of receipt, or in the next year
Such income deemed to be income of previous year immediately following year of receipt.
Any other reason
As above
To be spent in the year of receipt, or in the next year.
Such income deemed to be income of previous year
Voluntary Contribution received by any university or educational institution referred to in section 10(23C)(vi) or hospital or other institutions referred to in section 10(23C)(via) shall be deemed to be income (with retrospective effect from assessment year 1999-2000). Similarly, voluntary contributions received by any university or other educational institution or any hospital or other institution referred to in sections 10(23C)(iiiad) and 10(23C)(iiiae) respectively will be deemed as income received by them.

With effect from 1st June, 2007 any fund or institution established for charitable purposes or any trust established for public, religious and charitable purposes will be notified by Prescribed Authority which hitherto was notified by Central Government.

Registration

Registration under section 12AA will be granted from 1st day of the financial year in which the application for registration is made. Commissioner not empowered to condone the delay in application for registration. The Commissioner has power to cancel the registration of the trust by an order in writing if he is satisfied that the activities of trust are not genuine or are not being carried out in accordance with the objects of the trust. Commissioner of Income tax now also has power to cancel registration of trust granted under provisions of section 12A of the Income-tax Act, 1961.

Appeals

Orders passed under section 12AA or under section 80G rejecting the registration of trust/ rejecting approval under section 80G are appealable. The appeal lies to the Income tax Appellate Tribunal.

Approval under section 80G

From 1st October, 2009, approval once granted under section 80G will be valid in perpetuity unless revoked by the Commissioner of Income tax in accordance with the provisions of section 80G(5)(vi) of the Income tax Act, 1961.

Audit

To qualify for exemption u/ss. 11 and 12, a trust having total income (before exemption u/ss. 11 and 12) exceeding the maximum amount not chargeable to tax must have its accounts audited by a C.A.

Investments

All investments of the trust must be in modes provided in s. 11(5). If not, they must be brought in conformity within 1 year from the end of the previous year in which such investments are acquired, or 31-3-1993, whichever is later. Contravention results in income and wealth of the trust being taxed at maximum marginal rate. This restriction does not apply to:

Any asset held as part of the corpus as on 1-6-1973;

Any accretion to shares, forming part of the corpus as on 1-6-1973, by way of bonus shares;

Any debentures acquired before 1-3-1983. If debentures acquired after 28-2-1983 and before 25-7-1991, exemption is denied only in respect of income from such debentures, provided debentures are disinvested by 31-3-1992.

Modes of Investment specified in S. 11(5)

Investment in Government savings certificates/other securities/ certificates issued by Central Government under Small Savings Schemes;

Deposit in any account with the Post Office Savings Bank;

Deposit in any account with a scheduled/co-operative bank;

Investment in units of the Unit Trust of India;

Investment in any security of the Central/State Government;

Investment in debentures whose principal and interest are fully and unconditionally guaranteed by Central/State Government;

Investment or deposit in any public sector company (PSC); Shares of PSC may be retained for three years and other investments or deposits till its maturity once PSC ceases to be a PSC;

Deposits with or investment in any bonds issued by an approved financial corporation engaged in providing long-term finance for industrial development in India;

Deposits with or investment in any bonds issued by an approved public company with main object of carrying on business of providing long-term finance for construction / purchase of houses in India for residential purposes or for urban infrastructure;

Investment in immovable property;

Deposits with the Industrial Development Bank of India;

Any other prescribed form or mode of investment or deposit. (for example, Units of mutual funds referred to in s. 10(23D), investment by way of acquiring equity shares of a ‘depository’ prescribed).

Investment in "Indira Vikas Patra" and "Kisan Vikas Patra" are in accordance with the norms and modes specified in sec. 11(5) – Circular No. 566, dt. 17-7-1990.

Corpus donations

U/s. 11(1)(d), voluntary contributions with specific direction that they shall form part of the corpus of the trust are not includible in the total income of the trust. However, u/s 12 other voluntary contributions would be deemed to be income of the trust.

Business income

Exemption is not available in relation to any profit and gains of business of a trust, unless the business is incidental to the attainment of the objectives of the trust and separate books of account are maintained in respect of such business.

Capital gains

The gains arising from transfer of a capital asset, is deemed to have been applied to charitable/religious purposes, if the whole net consideration is used to acquire new capital assets. If only part of the net consideration is so utilised, such gains, as equals the excess of the amount so utilised over the cost of the transferred asset is deemed to have been applied for charitable/religious purposes.

Anonymous donations

The term "anonymous donation" is defined to mean any voluntary contribution, where the person receiving such contribution does not maintain a record consisting of the identity of the person making such contribution indicating the name and address of the person and such other particulars as may be prescribed. Such anonymous donations will be taxed @ 30%. However, the following anonymous donations are not covered:–

donations received by a trust or institution which is created or established wholly for religious purposes;

donations received by any trust or institution created or established wholly for religious and charitable purposes other than any anonymous donation made with a specific direction that such donation is for any university or other educational institution or any hospital or other medical institution run by such trust or institution.

However, in case of partly religious and partly charitable institutions where the anonymous donations are directed towards medical or educational institutions run by such entities or anonymous donations are received by wholly charitable institutions, it will be taxable to the extent such donations exceeds 5% of the total income of institution or Rs.100,000/- whichever is more.

Time limit for application for claiming exemption

Application by funds, trusts, institutions, universities, other educational institutions, hospitals or medical institutions seeking exemption under section 10(23C), could now be made on or before 30th September of the relevant assessment year.

Electoral Trust

Electoral Trust to be approved by the Central Board of Direct Taxes. Voluntary contributions received by Electoral Trust to be treated as income with effect from 1st April, 2010. Income of Electoral Trust by way of voluntary contribution will be exempt subject to fulfillment of following conditions:

Such Electoral trust distributes to the political parties (registered under section 29A of the Representation of the People Act, 1951) 95% of the donation received by it during the previous year along with the surplus, if any brought forward from any earlier years and;

Electoral Trust functions in accordance with the rules made by the Central Government.

Contribution to Electoral Trust eligible for deduction while computing taxable income.