Computing the income chargeable to tax as per the provisions of the Income-Tax Act, 1961 is the first step in tax compliance. The natural sequence thereafter would be filing the return of income and awaiting approval of the tax authorities in respect of the income returned by means of an assessment order.

Section 139 (1) enjoins on all corporate and partnership firms to file return of income whether or not they have income or loss. In the case of other assessees i.e., individuals, HUFs etc., the return of income has to be filed only if the income exceeds the prescribed basic limit.

This write-up discusses the scrutiny procedure prescribed by the Central Board of Direct Taxes (CBDT) for the current financial year and the related issues.

Legal provisions

As per Section 143 (1) if any tax or interest is due, an intimation is required to be issued to the assessee. Similarly, where there is any refund due on the basis of return filed by the assessee, an intimation is required to be issued by the Assessing Officer (AO). The time limit for giving intimation is one year from the end of the financial year in which the return was filed. For example, for the assessment year 2006-07 if the return is filed on June 5, 2007, the time limit for giving intimation under Section 143(1) is available up to March 31, 2009.

Where the AO believes that the claim of loss, exemption, deduction, allowance or relief in the return is inadmissible or if he considers it necessary to ensure that the assessee has not understated his income, a notice under Section 143 (2) would be issued for verifying the books of account and other relevant documents and evidences. The culmination of this exercise would be scrutiny assessment envisaged in Section 143(3).

The time limit for service of scrutiny notice is 12 months from the end of the month in which the return was filed by the taxpayer. The time limit for completing the assessment is 21 months from the end of the assessment year in which the return was first assessable.

For the assessment year 2007-08 if the return is filed after June 1, 2007 the time limit for completing scrutiny assessment would expire after December 31, 2009. The time limit for issuing intimation under Section 143(1) for non scrutiny cases, however, is available up to March 31, 2010 (i.e.2 years from the end of the financial year in which the return was filed).

The CBDT instruction

The CBDT has given norms for current fiscal for selection of cases meant for scrutiny.

For corporates: All banks and public Sector undertakings are liable for scrutiny. Also, all NSE-500 companies and BSE-A group companies listed in Bombay Stock Exchange as on March 31, 2007, are covered. Companies in Delhi, Mumbai, Chen nai, Kolkata, Pune, Hyderabad, Bangalore and Ahmedabad paying book profit tax under Section 115 JB on the book profit of Rs 50 lakh and above are liable for scrutiny. In the case of companies in other places the monetary limit for book profit is Rs 25 lakh.

All non-banking financial corporations and investment companies having paid up capital of Rs 10 crore are covered. Companies who have amalgamated and seeking set off of loss under Section 72 A are also to be scrutinised. Where the fresh capital introduced is Rs 50 lakh during the year such assessees are liable for scrutiny assessment.

For non-corporates: If the fresh capital introduced exceeds Rs 50 lakh in respect of cases in Delhi, Mumbai, Chennai, Kolkata, Pune, Hyderabad, Bangalore and Ahmedabad are liable for scrutiny. In respect of other places the monetary li mit for fresh capital introduction is Rs 10 lakh for scrutiny selection.

Where the unsecured loans introduced during the year exceeds Rs 25 lakh, such case is also covered. All market committees and statutory bodies are liable for compulsory scrutiny. Professionals with gross receipts of Rs 20 lakh or more but the income returned is less than 20 per cent are liable for scrutiny of their cases.

Common to all taxpayers

The following criteria apply for all the taxpayers regardless of their status.

All search and seizure cases and surveys conducted under Section 133 A.

Cases where deduction under chapter VI-A exceeds Rs 25 lakh.

Cases were the CIT or ITAT has confirmed addition or disallowance of Rs 5 lakh or above in an earlier year and the identical issue arising in the current year.

All cases in which the appeal is pending before CIT or pending before ITAT in respect of appeal preferred by the Department relating to addition or disallowance of Rs 5 lakh and the identical issue arising in the current year.

Charitable trusts claiming exemption under Section 11 with gross receipt exceeding Rs 5 crore in 8 cities viz Delhi, Mumbai, Chennai, Kolkata, Pune, Hyderabad, Bangalore and Ahmedabad. For other places the monetary limit is Rs 1 crore.

Educational institutions, hospitals (being non profit organisations) with aggregate receipt exceeding Rs 10 crore (including corpus donations) in 8 cities and Rs 5 crore in other places. However, it will not apply to those which are su bstantially financed by the Government.

All cases where the total value of International Transactions for the year exceeds Rs 15 crore.

Stock brokers and commodity brokers where the brokerage exceeds Rs 1 crore.

Stock brokers and commodity brokers including sub-brokers if the bad debt claim is Rs 5 lakh. For corporates, if the bad debt claim is Rs 10 lakh or more it will be liable for scrutiny.

All cases where deduction under Sections 10A/10B/10BA/10AA exceeds Rs 25 lakh.

Contracts (other than transporters) whose contract receipt exceeds Rs 1 crore and the income declared is less than 5 per cent of gross contract receipts.

Loss from house property if more than Rs 2.50 lakh.

Investment in property is more than 5 times the gross income (including agriculture and other exempt incomes).

Short-term capital gains covered under Section 111A and long-term capital gains exceeding Rs 25 lakh.

Sale of property as per AIR return but no capital gain declared in the return of income.

Commission paid during the year if more than Rs 10 lakh.

Real estate business with gross turnover of Rs 5 crore.

Business of hotels/tour operators with gross turnover exceeding Rs 5 crore but the net profit is less than 0.05 per cent.

All cases where depreciation claimed at the rates of 80 per cent and 100 per cent is more than Rs 25 lakh.

All cases where the net agricultural income is more than Rs 10 lakh.

Deduction under Sections 80-IA (4), 80-IB, 80-IAB, 80-IC, 10(23C), 10A, 10AA, 10B or 10BA is claimed for the first time. All returns filed in response to notice under Section 148 shall be liable for scrutiny.

Some issues

While above the parameters set for selection of cases for scrutiny is welcome, there is no general exemption or relief from scrutiny for admitting higher income by the taxpayers.

For example, if the taxpayer admits 30 per cent more than the previous year income still he can be subjected to scrutiny assessment if any transaction therein is covered by the above-said criteria. Indiscriminate issue of Section 148 notice and thereby subjecting the taxpayer to scrutiny assessment is possible. Necessary safeguards have to be introduced for preventing its misuse.

Currently, even exempted entities and taxpayers with below taxable income do not get exemption certificate from AO without going through the rigours of approval from the Joint Commissioner. While justification of such bureaucratic measures remains on one side, the difficulties of the small assessees require objective consideration.

At present, approval of scrutiny draft orders by the higher authorities delays the completion of assessment and causes hardship to the taxpayers. The AO who is empowered to make assessment in law must be permitted to complete the assessment without procedural bottlenecks. The administrative delay could be reduced by fixing the responsibility on the AOs wholly and solely for completing the scrutiny assessments.

If the AO chooses a case for scrutiny deviating from the norms fixed by the Board then the assessee can challenge the selection of case by means of a writ. There is no provision within the statute book for preventing the AO from proceeding further. However, even after the completion of assessment it could be challenged. Favourable decisions could be found in Nayana P. Dedhia vs Asst. CIT (86 ITD 398); Bombay Cloth Syndicate vs CIT (214 ITR 210) and CIT vs Savoy Enterprises Ltd (211 ITR 192). Contrary decision could be found in Setalvad Brothers vs M.K.Meerani, Addtl. CIT (253 ITR 530)

What are books of account?

In a recent case, the Madras High Court concluded that P&L account and balance-sheet are not books of account as contemplated under the I-T Act.  

T. C. A. Ramanujam

Computation of business income under the income-tax law has to be made on the basis of 'books of account'. This law has been in operation since 1992, but surprisingly there was no definition of the term " till 2001. Finance Act, 2001 introduced the definition through Section 2(12A). The definition, which took effect from June 1, 2001, reads thus:

"Books or books of account includes ledgers, day-books, cash books, account-books and other books, whether kept in the written form or as print-outs of data stored in floppy, disc, tape or any other form of electro-magnetic data storage device". This is an inclusive definition.

The Memorandum explaining the amendment, mentions that the passing of the Information Technology Act, 2000 necessitated the insertion of this definition in the I-T Act, 1961. A new Section 2 (22AA) was also brought in to define "document", as including electronic record as defined in Section 2(1)(t).

Books of account are prescribed by Rule 6F of the I-T Act. The proviso to this Rule grants exemption from the requirement of maintenance of books of account if the gross receipts from the profession do not exceed Rs 60,000. Section 44AA makes it obligatory for every person carrying on business or profession to maintain books of account if the income, turnover or gross receipts exceeded the prescribed limits. Failure without reasonable cause to maintain books may attract penalty under Section 271A read with 273B.

P&L account

Since the definition is inclusive and not exhaustive, the question of what constitutes books of account arises. If a profit and loss (P&L) account is maintained and credits are found in such an account, can we consider the same to be books of account? This is an interesting issue and not merely academic. It was taken up for detailed consideration by the Madras High Court in CIT vs Taj Borewells (291 ITR 232 Madras).

Taj Borewells did not maintain books of account since the gross receipts were below Rs 5 lakh. The partners of the firm had brought in Rs 5,25,00 as investments. The assessing officer (AO) did not accept the claim about the investment by partners. He concluded that the amount represented the undisclosed income of the firm and added the same under Section 68 of the I-T Act.

The Income Tax Appellate Tribunal (ITAT) annulled the addition and the department took up the matter in appeal before the Madras High Court. .

The Madras High Court quoted with approval the definition given in Ramanatha Iyer's Advanced Law Lexicon. The definition in the Lexicon appears wider than the in the tax law. A book containing a monetary transaction, according to the Lexicon, would attract the definition of books of accounts under the Indian Evidence Act.

Striking features

The High Court observed that books of account will mean any book which formed an integral part of a system of book keeping employed in any particular business and included the ledger and the books of original entry. After explaining the object behind the making of a P&L account, the court observed that the balance-sheet listing the assets and liabilities and equity accounts of the company is prepared "as on" a particular day and the accounts reflected the balances that existed at the close of business on that day. The court took note of earlier precedents on the subject and held:

"We can safely conclude that the profit and loss account and the balance-sheet are not books of account as contemplated under the provisions of the Act."

The court referred to three striking features in this case:

Since there are no books of accounts, there can be no credits in such books;

It is the first year of assessment of the assessee;

The Explanation offered by the assessee firm was not rejected and only the explanation offered by the partners was.

Hence, the High Court concluded that it was not a fit case for making addition under Section 68 of the Act. The judgment will have far-reaching ramifications both under tax law and company law.

(The author is a former Chief Commissioner of Income-Tax.)

NOW THIS IS REALLY CONFUSING - TALKING ABOUT CONTROLLING DOLLAR INFLOWS ON ONE HAND .... AND ... READ THE ARTICLE BELOW WHICH HAS COME IN FINANCIAL EXPRESS TODAY!!!!!

New Delhi, Aug 9 Foreign institutional investors (FIIs) and mutual funds may get to invest in debt paper that is below investment grade (aka junk bonds). The government is planning to create a separate segment for such instruments, in effect hiking the present ceiling of $4.7 billion on FIIs investing in Indian paper.

At present, FIIs can invest up to $3.2 billion in government securities and $1.5 billion in corporate bonds, which are mostly above investment grade. The Centre wants to specify a separate cap for debt papers with sub-investment grades.

The finance ministry has discussed the proposal with the Securities and Exchange Board of India (Sebi). An official familiar with the issue said the Reserve Bank of India (RBI) was not against the proposal. The proposal is, nevertheless, still at a preliminary stage and would be formalised only after wider consultations, the official said.

The move is expected to deepen and widen the debt market while at the same time enabling smaller firms, which do not possess top-notch investment ratings, attract FII funding.

The government feels that permitting investment in sub-investment grade securities would put in place one crucial link that is missing in the Indian debt market. It would enable FIIs to invest in bonds that are comparatively riskier but offer higher returns.

Various agencies such as Icra, Crisil, Care and Fitch rate securities. For instance, on the Crisil scale, bonds carrying the BBB (-) rating or better are considered above investment grade.

One leading analyst, however, said the government’s proposal might not necessarily be a favourable move. “It’s a risky proposition and not consistent with our philosophy in the financial sector. We should not allow exposure to unrated bonds,” said the executive director of a major rating agency, who did not wish to be identified.

When you travel around the world nowadays, it's not uncommon to find that there is a marked preference for a particular currency say the USD. Let us have a look into as to how this scenario developed.

Overview
During the eighteenth and nineteenth centuries, the British pound reigned as the world's reserve currency but in the twentieth century, the US dollar took over this title.
Dollarization is a generic term that can fall into three categories:

1. Official Dollarization: The dollar is the only legal tender; there is no local currency. Examples of this can be seen in Panama, El Salvador and Ecuador. For example, since independence in 1903, Panama has only used the U.S. dollar. Surprisingly, the U.S. government does not have to provide approval for another country to use its currency as legal tender.
2. Semi-Dollarization: A country will use both its own currency and the U.S. dollar interchangeably as legal tender. Lebanon and Cambodia are good examples of this.
3. Unofficial Dollarization: For many countries in the developing world, the dollar will be widely used and accepted in private transactions, but it is not classified as legal tender by the country's government.

Why is the U.S. dollar the currency of choice?
One of the major reason is stability of the currency. The U.S. dollar has never been devalued, and its notes have never been invalidated. Business is easier to conduct when a stable currency is used.

Unofficial dollarization can be so prevalent in some countries that more U.S. currency is in circulation than local currency. Once this happens, it can be difficult to reverse. Ironically, the very stability that dollarization brings can be a curse to local governments, as they lose the power to control inflation and fiscal policy. However, to many, what is a curse to the government is a blessing to others.

Money is only valuable if it is acceptable. Therefore, the U.S. dollar is not without its problems. For example, $100 bills have a reputation of being vulnerable to counterfeiting. As a result, they also tend to be the ones that are most rejected or discounted around the world. Long gone are the days when bills denominated in $500, $1,000, $5,000 and even $10,000 circulated because money launderers love large bills. This also represents the final attraction of the U.S. dollar: anonymity. While the U.S. dollar is accepted around the world, it's not necessarily tracked well around the world.

Conclusion
This article should have helped unveil some of the mystery of unofficial dollarization. It's a topic that comes up repeatedly with international travelers and business people. Stability, acceptability and anonymity are all reasons why the U.S. dollar has become the world's currency of choice. Despite its popularity, however, don't become too enamored with the U.S. dollar, as no currency has held onto the title of "currency of choice" forever.