Busineww Law

BUSINESS LAW & TAXES

CI INSTITUTE OF LOGISTICS 1 Website: www.ciilogistics.com

Course Material

Business laws & Taxes

SEMESTER - IV

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INDEX Chapter 1: INDIAN CONTRACTS ACT / LAW OF CONTRACT .................................... 4

Chapter 2: NEGOTIABLE INSTRUMENTS ACT ........................................................... 24

Chapter 3: COMPANY LAW ........................................................................................... 32

Chapter 4: INCOME TAX ACT 1961 .............................................................................. 57

Chapter 5: THE CENTRAL EXCISE ACT 1944 .............................................................. 77

Chapter 6: CENTRAL SALES TAX ACT 1956 ............................................................... 84

Chapter 7: THE CUSTOMS ACT 1962 ............................................................................ 92

Chapter 8: FOREIGN TRADE POLICY ........................................................................ 102

Chapter 9: THE CONSUMER PROTECTION ACT , 1986 ............................................ 124

Chapter 10: THE ENVIRONMENT PROTECTION ACT ............................................. 131

Chapter 11: VAT- VALUE ADDED TAX ..................................................................... 135

Chapter 12: FRINGE BENEFIT TAX - CONCEPT AND COMPLIANCE ................... 141




Chapter 1: INDIAN CONTRACTS ACT / LAW OF CONTRACT

After studying this unit you will understand Meaning of law of contract Objectives of law of contract Requirements of valid contract Salient provisions of law of contract

Contents

1. Object of Law of contract 2. Definition of Contract 3. Classification of Contracts 4. Essential elements of Contract

a. Offer and Acceptance b. Consideration c. Capacity to Contract d. Free consent e. Legality of Object f. Contingent contracts g. Performance of contract

5. Discharge of contract 6. Remedies for breach of contract 7. Summary 8. Key Words 9. Self Assessment questions 10. Reference Readings

Object of Law of contract

The Law of Contract is that branch of law which determines the circumstances in

which promises made by the parties to a contract shall be legally binding on them. Its

rules define the remedies that are available in a court of law against a person who fails

to perform his contract and the conditions under which the remedies are available. It is

the most important branch of business law. It affects all of us in one way or the other. It

is, however, important to people who are engaged in trade, commerce and industry as

bulk of their business transactions are based on contracts.




Definition of Contract

A contract is an agreement made between two or more parties which the law will

enforce. Sec 2 (h) defines contract as an agreement enforceable by law. The

immediate question will be what is an agreement? An agreement is defined as ‘every

promise and every set of promises, forming consideration for each other’ - Sec 2 (e).

A contract is “an agreement creating and defining obligations between the parties”. We

can observe that a contract essentially consists of two elements i) agreement and ii) its

enforceability by law.

An agreement is a wider term; it may be a social or legal agreement. An agreement to

become a contract, must give rise to a legal obligation or duty.

Eg., G agrees to sell his bike to N for Rs. 10,000 . The agreement gives rise to an

obligation on the part of G to deliver the vehicle to N and on part of N to pay Rs

10,000.

Classification of Contracts

Contracts can be classified according to their i) validity ii) formation and iii)

performance.

i) Classification according to Validity: A contract is based on an agreement. An

agreement becomes a contract when all the essential elements referred earlier are

present. In such cases they are valid contracts. If one or more of these elements are

missing, the contract is either void-able or illegal or unenforceable.

An agreement which is enforceable by law at the option of one or more of the parties

there to but not at the option of the other/others, is a voidable contract. This happens

when the essential element of ‘free consent’ is missing, that is, when the consent is not

there or consent of a party is caused by coercion or undue influence or fraud, a

contract is voidable at his option.

Eg., A promises to sell his car to B for Rs. 2,000. His consent is obtained by use of

force. The contract is voidable at the option of A. He may avoid the contract.




Similarly a contract which ceases to be enforceable by law becomes void when it

ceases to be enforceable. A contract when originally entered may be valid and binding

on the parties, it may subsequently become void.

Eg., import of goods from a country may be valid at the time of ordering but becomes

void when war breaks out between the countries.

An illegal agreement is one which is of criminal in nature or violates basic principles or

laws or that which is immoral. All illegal agreements are void. The consequence may

be that even collateral transactions may be tainted with illegality.

An un-force-able contract is one which cannot be enforced in a Court of Law because

of some technical defect such as absence of writing or where the remedy has been

barred by lapse of time. The contract may be continued but at the end, the aggrieved

party will not be entitled for the legal remedies.

ii) Classification according to formation: The modes of formation of contract may

be (a) made in writing or by word of mouth or (b) inferred from the conduct of the

parties or the circumstances of the case.

Contracts may be classified accordingly as:

a) Express contracts

b) Implied contract

c) Quasi Contract

If the terms of a contract are expressively agreed upon at the time of formation of the

contract, it is said to be an express contract

Implied contract is one which is inferred from the acts or conduct of the parties or

course of dealings between them. It is not the result of express promise. For an

example: getting into a bus; Taking a cup of tea in a restaurant.

A quasi contract is not a contract at all. It resembles a contract in which the legal

obligation is imposed on a party who is required to perform.




E-Commerce contract is a contract which is entered into by parties via internet.

iii) Classification according to performance: This can be further sub classified as

(a) executed contract and (b) executory contract.

Executed contract means which is completed, that is in which both the parties have

performed their obligations.

Executory contract is one in which both the parties are yet to perform their obligations.

1.4 Essential elements of Contract 1.4.1Offer and Acceptance

Offer is made by one person to another, it may be made by express words, spoken or

written.

§ When offer is made to a definite person, it is called specific offer.

§ When an offer is made to the world at large, it is called a general offer.

The person making the offer is called offeror or proposer or promisor and the person to

whom it is made is called the offeree or promisee. When he accepts the offer, he is

called acceptor.

1.4.11 Requirements of valid offer Following are the requirements for an offer to be valid 1] Offer must be such as in law is capable of being accepted and giving rise to legal

relationship. A social offer does not create legal relationship because it is not so intended. An offer,

hence, must be such as would result in a valid contract when it is accepted

2] Terms of offer must be definite, unambiguous and certain.

If the terms of an offer are vague or indefinite, its acceptance cannot create any

contractual relationship.

Eg., A tells to B, “I will sell you a car”. A owns three different cars. The offer is not

definite.




3] Offer must be communicated. 4] Offer must be made with a view to obtaining the assent. 5] Offer should not contain a term the non compliance of which may be assumed to

amount to acceptance (A tells B “I will sell my horse to you for Rs. 5,000 and if you

do not reply I will assume that you have accepted the offer”)

6] A statement of price is not an offer. 7] An offer may be distinguished from: ³ A declaration of intention and an announcement (eg., an announcement by a

beauty parlour of a beauty competition is a mere statement)

³ An invitation to make an offer or to do business (eg., catalogues or quotations

are not offers)

8] Tender as a response to an advertisement is an offer 1.4.12 Acceptance The acceptance to the offer is the very essence of a contract. Requirements of valid acceptance

³ It must be absolute and unqualified: ie., it must conform with the offer.

³ Eg., A informs B “I will sell my car for Rs. 50,000” B replies that “I will

purchase for Rs 45000” There is no valid acceptance.

³ It must be communicated to the offeror.

³ It must be in the mode prescribed or an acceptable reasonable mode.

³ Eg., A makes an offer to B and says : “If you accept the offer, reply by wire” B

sends reply by post – it is a valid acceptance.

³ It must be given within a reasonable time, if any time limit is specified, it

should be made within the time specified.




³ It can not precede an offer Eg., In a company if shares are allotted to a

person who has not applied for – it becomes an acceptance before offer and

hence void

³ It must be given by parties to whom it was made.

³ It can not be implied from silence.

³ It must show an intention to fulfil on part of acceptor.

1.4.13 Communication of offer, acceptance and revocation

An offer, its acceptance or their revocation should be communicated. The

communication may be by words spoken or written or by conduct. The communication

is complete when it comes to the knowledge of the person to whom it was

communicated.

When can an offer or acceptance be revoked?

It can be before the communication reaches and not afterwards When does an offer come to an end?

³ By communication of notice of revocation by offeror before acceptance.

³ By lapse of time (If not accepted within prescribed time).

³ By non fulfilment of a condition by the offeree, precedent to acceptance (A sells

goods to B with a condition that B has to pay money on a date, B fails to pay,

offer gets cancelled).

³ By death or insanity of the offeror provided the offeree comes to know about it

before acceptance.

³ If the offer is not accepted by prescribed or usual mode.

³ If law is changed making the offer unlawful.

1.4.2 Consideration Consideration is one of the essential elements to support a contract. A contract made

without consideration is void, subject to certain exceptions.




1.4.21 Definition: When at the desire of the promisor, the promisee or any other

person has done or abstained from doing or does or abstains from doing or promises

to do or abstain from doing, such act or promise is called consideration.

1.4.22 Requirements of a valid consideration:

It must move at the desire of the promisor (eg., A saves B’s goods without being

asked to do so. A can not demand payment for his services).

It may move from promisee or any other person (eg., An old lady O, by deed of gift

made over some property to her daughter D, with a direction that D shall pay A, sister

of O, certain money annually. D entered into an agreement with A to pay the agreed

amount, later refused claiming that no consideration moved from A. Here A was

entitled to the sum as consideration has moved from O in this case).

It may be past, present or future. Past consideration: When consideration for the present promise was given in the past,

it is valid (eg., A renders some service to B at latter’s request. After a month B

promises to compensate A for the services rendered to him. It is past consideration

and valid).

Present or executed consideration: When consideration is given simultaneously with

promise, it is present consideration (eg., cash sale).

Future or executory consideration: When consideration passes from one to another

subsequently to the making of contract, it is future or executory contract (eg., credit

enjoyed by customers).

It need not be adequate: Consideration means ‘something in return’ and that

something in return need not be equal to value of ‘something given’.

It must be real and not illusory: Though it need not be adequate, it must be real (

Eg., A promises to put life into B’s life if B pays Rs 500).




It must be something which the promisor is already not bound to do: A promise

to do a public duty by a public servant is not a consideration

It must not be illegal or immoral

Exceptions to the rule – Contract without consideration is void: Love and affection: A written agreement based on natural love and affection between

near relatives is enforceable even without consideration (eg., A , out of love and affection

promises to give his son B Rs. 1,000 /- and puts it in writing and registers it. It is a valid

contract).

Compensation for voluntary services: A promise to compensate a person who has

already voluntarily done something for the promisor, is enforceable, even though without

consideration (eg., A finds B’s purse and gives it to him, B promises to give A Rs. 100/-,

this is a contract).

Promise to pay a time barred debt: A promise to pay a time barred debt is enforceable

provided it is made in writing and signed by the debtor (time barred debt- a debt remains

unpaid for more than 3 years which is legally irrecoverable). For example, D owes C Rs.

1,000 but the debt is barred by the limitation act-time barred debt. D signs a written

promise to pay C Rs. 500 on account of the debt. This is a contract.

Completed gifts: The rule ‘no contract if no consideration’ will not apply to completed

gifts, gifts actually made.

1.4.3Capacity to Contract

The parties who enter into a contract must have the capacity to do so. Capacity means

competence of the parties to enter into a valid contract. Section 11 of the Contract law

declares the following persons to be incompetent to contract:

³ Minors

³ Persons of unsound mind and

³ Persons disqualified by any law




Minors: A Minor is a person who has not completed eighteen years of age. Law protects

Minors against their inexperience as against those more experienced.

The position of a minor as regards his agreements may be summed up as under:

An agreement with or by a minor is void and inoperative.

He can be a promisee or a beneficiary: Incapacity of a minor to enter into a contract

means incapacity to bind him self by a contract. There is nothing which debars him

from becoming a beneficiary. (eg., A mortgage was executed in favor of a minor, if

upheld, he could get a decree for the enforcement of the mortgage).

His agreement can not be ratified by him on attaining the age of majority:

Consideration which passed under the earlier contract can not be implied into the

contract which the minor enters on attaining majority Thus; consideration given during

minority is no consideration. If it is necessary a fresh contract may be entered into by

Minor on becoming Major provided it is supported by fresh consideration.

If he has received any benefit under a void agreement, he can not be asked to

compensate or pay for it.

He can always plead minority: Even if he has, by misrepresenting his age, induced the

other party to contract with him, he can not be sued.

He can not enter into a contract of partnership but he may be admitted to the benefits

of an already existing partnership with the consent of other partners.

He can not be adjudged as insolvent, this is because he is incapable of contracting

debts.

His parents/guardians are not liable for the contract entered into by him.

He is liable for necessaries supplied: He is liable to pay out from the property for

necessaries supplied to him. He is not personally liable; it is only the property of the

minor which is liable.




Persons of unsound mind:

One of the essential conditions of competence of parties to a contract is that they

should be of sound mind. A person is said to be of sound mind for the purpose of

making a contract if, at the time when he makes it, he is capable of understanding it

and of forming a rational judgment as to its effect upon his interests.

Contracts of persons of unsound mind

Lunatics- a person who is mentally affected due to some mental strain Idiot- a person

who has completely lost his/her mental powers Drunken person- a person who suffers

from temporary incapacity to contract.

Persons disqualified by law:

Contracts with alien enemy is void

Contracts with insolvents are void 1.4.4 Free consent

Consent means- an act of assenting to an offer. Consent is said to be free when it is

not caused by-

³ Coercion

³ Undue influence

³ Fraud

³ Misrepresentation

³ Mistake

When consent to an agreement is caused by coercion, fraud or misrepresentation, the

contract is voidable at the option of the party.

Coercion: When a person is compelled to enter into a contract by the use of force by

the other party coercion is said to be employed. It need not necessarily proceed from a

party to the contract. It may proceed from a stranger also.




Eg., A threatens to shoot B if he (B) does not release him (A) from a debt which A

owes to B. B releases A under threat. The release has been brought about by

coercion.

Threat to commit suicide amounts to coercion

Undue influence: Sometimes a party is compelled to enter into an agreement against

his will as a result of unfair persuasion by the other party. This happens when a special

kind of relationship exists between the parties such that one party is in a position to

exercise undue influence over the other.

Eg., a spiritual guru induced his devotee to gift to him the whole his property in return

of a promise of salvation of the devotee, the consent was given under undue influence.

Misrepresentation: A representation, when wrongly made, either innocently or

intentionally, is a misrepresentation. It is a false statement which the person making it

honestly believes to be true.

Eg., A while selling his mare to B , tells him that the mare is thoroughly sound. A

actually believes it. Later on B finds that the mare to be unsound. The representation

of A is a misrepresentation.

Requirements of misrepresentation ³ It must be a representation of material fact

³ It must be made before conclusion of the contract

³ It must be made with an intention that it should be acted upon by the person to whom

it is addressed

³ It must have been acted upon

³ The person making it must have believed it to be true

³ It must be made without any intention to deceive

³ It must be made directly to the plaintiff




Fraud: Fraud exists when it is shown that –

A false representation has been made knowingly or without belief in its truth or

recklessly not caring whether it is true or false - there is a concealment of material fact

Essential elements of fraud:

Ø There must be a representation which is false

Ø Representation is made before conclusion of contract

Ø Representation is made without belief in its truth or recklessly not caring

whether it is true or false

Ø The other party must have been induced to act upon

Ø The other party must have relied upon the representation

Ø The other party must have subsequently suffered some loss

Mistake: Where both the parties are to an agreement are under a mistake to a matter

of fact essential to the agreement, there is a bilateral mistake. In such a case the

agreement is void. Following are two conditions to be fulfilled for the application

Mistake must be mutual

Mistake must relate to a matter of fact essential to the agreement

When in a contract only one of the parties is mistaken regarding the subject matter or

in expressing or understanding terms, the mistake is unilateral and not voidable. 1.4.5Legality of Object

A contract must have a lawful object. If the object of an agreement is the performance

of an unlawful act, the agreement is unenforceable.

Consideration or object is unlawful-

§ if it is forbidden by law (A promises B that he will get a job in Government if he

is paid Rs 10000)




§ If it is of such a nature that if permitted, it would defeat the provisions of any

law

§ If it is fraudulent

§ If the court regards it as immoral

§ Where the court regards it as opposed to public policy

Unlawful and illegal agreements: An unlawful agreement is one which is not

enforceable in law. An illegal agreement, on the other hand, is not only void as

between immediate parties but has this further effect that the collateral transactions to

it also become tainted with illegality.

Eg.,L lends Rs. 5,000 to B to help him to purchase some prohibited goods from T, an

alien enemy. If B enters into agreement with T, the agreement will be illegal and the

agreement between B and L shall also become illegal, being collateral to the main

transaction which is illegal.

Agreements opposed to public policy: The following are the agreements opposed to public policy Ø Agreements of trading with enemy

Ø Agreement to commit a crime

Ø Agreements which interfere with administration of justice

Ø Agreements in restraint of legal proceedings

Ø Agreements in restraint of parental rights

Ø Agreements restraining personal rights

Ø Agreements in restraint of marriage

Ø Agreements interfering with marital rights (eg., a promise by a married person to

marry during the lifetime or after the death of spouse

Ø Agreements defrauding creditors or revenue authorities

Ø Agreements in restraint of trade




1.4.6 Contingent contracts

A contract can be an absolute contract or a contingent contract. Absolute contract is one in which the promoter binds himself to performance in any event without any conditions. Contingent contract is to do or not to do something if some event does or does not happen. Eg., A agrees to pay B Rs. 1,000 if B’s house is burnt. This is a contingent contract

Rules regarding contingent contract:

It depends on uncertain future event, can not be enforced till the event has happened

(eg., A contracts to pay B a sum of money when B marries C. C dies without marrying

B. The contract becomes void).

Contingent contracts to do or not to do anything, if a specialized uncertain event

happens within a fixed time, become void if the event does not happen within a fixed

time (eg, A promises to pay B a sum of money if a certain ship returns within a year.

The contract may be enforced if the ship returns within one year and become void if

the ship is burnt within the year).

Where a contingent contract is to be performed if a particular event does not happen,

its performance can be enforced when the happening of that event becomes

impossible (eg., A promises to pay B certain money if a ship does not return. The ship

is sunk. The contract can be enforced when the ship sunk).

Contingent agreements to do or not to do anything, if an impossible event happens,

are void. (A agrees to pay B Rs. 1,000 if two straight lines should enclose a space.

The agreement is void) 1.4.7 Performance of contract

Performance of a contract takes place when the parties to the contract fulfill their

obligation arising under the contract within the time and manner specified.

Sometimes it so happens that the promisor offers to perform his obligation under the

contract at the proper time and place but the promisee does not accept the

performance. This is known as attempted performance or tender. Where a promisor




has made an offer of performance to the promise and the offer has not been accepted,

the promisor is not responsible for the non performance nor does he thereby lose his

rights under the contract. Thus a tender of performance is equivalent to actual

performance. It excuses the promisor from further performance and entitles him to sue

the promise for the breach of contract

Requisites of a valid tender:

Ø It must be unconditional. It becomes conditional when it is not in accordance

with terms of contract (eg. D, debtor offers to pay C, his creditor, the amount

due to him on the condition that C sells to him certain shares at cost. This is

not a valid transfer.

Ø It must be for whole quantity or whole obligation contracted and can not be on

instalment.

Ø It must be by a person who is willing to perform the promise.

Ø It must be made at the proper time and place. It must be made to the proper

person and in proper form.

Discharge of contract

A contract may be discharged

a) By performance- when both the parties perform their promises the contract is

discharged.

b) By agreement- As it is the agreement of the parties which binds them, so by their

further agreement or consent the contract may be terminated.

c) By impossibility- If an agreement contains an undertaking to perform an

impossibility, it is void (eg. A sold to B certain goods supposed to be on a voyage. The

goods has ceased to exist due to the perils of the sea, the contract is void).




d) By lapse of time- A contract should be performed within a specified period, called

period of limitation. If it is not performed, and if no action is taken by the promisee

within the period of limitation, the contract is terminated

e) By operation of law- Contract can be terminated by

Ø death of party

Ø insolvency of party

Ø unauthorized alteration of the terms and conditions of a written agreement

f) By breach of contract- breach by one of the parties 1.6 Remedies for breach of contract When a contract is broken, the injured party has one or more of the following remedies: Ø Rescission of contract

Ø Suit for damages

Ø Suit upon quantum merit

Ø Suit for specific performance

Ø Suit for injunction

Rescission: When a contract is broken by one party, the other party may sue to treat

the contract as rescinded and refuse further performance. Eg., A promises B to supply

10 bags of cement on a certain day. B agrees to pay the price after the receipt of the

goods. A does not supply the goods. B is discharged from liability to pay the price

However in the following cases rescission is not permitted Where one part of the contract is sought to be rescinded and such part is not

severable from the rest of the contract

Where the plaintiff has ratified the contract




Damages Damages are monetary compensation allowed to the injured party by the Court. The rules relating to damages are

Damages arising naturally

When a contract has been broken, the injured party can recover from the other party

such damages as naturally and directly arose in the usual course of things from the

breach. Eg., A contracts with B to buy at Rs 950 per quintal of rice, but no time being

fixed for delivery. A afterwards informs B that he will not accept the rice if tendered to

him. The market price of rice on that day was Rs 930, B is entitled to receive Rs 20 per

quintal.

ii) Damages to contemplation of the parties

Damages other than those arising from the breach of a contract may be recovered if

such damages may reasonably be supported to have been in the contemplation of

both the parties as the probable result of breach of contract. Such damages can not be

claimed as a matter of right. These can be claimed only if the special circumstances

which would result in a special loss in case of breach of a contract, are brought to the

notice of other party.

Eg., A , a builder contracts to erect a house for B by 1st of Jan in order that B may give

possession of it at that time to C to whom B has contracted to let, A is informed of that. A

builds so badly that before 1st Jan it falls down. Consequently B loses the rent. A is liable

to compensate for the cost of rebuilding and the rent loss.

iii) Vindictive or exemplary damages

Vindictive damages have no place in law normally, but in case of breach of promise to

marry and dishonor of cheque by a bank wrongfully when he possesses sufficient

funds, Court may award vindictive or exemplary damages.




iv) Nominal damages

Where the injured party has not in fact suffered any loss by reason of the breach of a

contract, the damages recoverable by him are nominal. ie very small

v) Damages for loss of reputation

Damages for loss of reputation in case of breach of a contract are generally not

recoverable. Exception to this rule is that in case of a banker who wrongfully refuses

to honor a customer’s cheque.

vi) Damages for inconvenience and discomfort Damages can be recovered for physical inconvenience and discomfort. The general

rule is that measure of damages is not affected by the motive of the breach.

vii) Mitigation of damages

It is the duty of the injured party to take all reasonable steps to mitigate the loss

caused by the breach.

viii) Difficulty of assessment

Although damages which are incapable of assessment can not be recovered, it does

not prevent the aggrieved from recovering them. Court will do its best to do the

estimation

ix) Cost of decree

The aggrieved party is entitled, in addition to damages, to get the cost of getting the

decree for damages.

x) Damages agreed upon in advance in case of breach

If a sum is named in a contract as the amount to be paid in case of the breach, the

aggrieved party is entitled to get the same from the other who breaks it.




1.7 Summary

A contract is an agreement made between two or more parties which the law will

enforce. The essentials of contracts are as follows:

³ There must be an agreement

³ The parties should have the intention and capacity to contract

³ There should be valid offer and acceptance

³ The agreement should be supported by consideration

³ The consent of the parties are free

³ The object of the agreement are lawful

³ The terms are capable of performance

Contracts are classified into different types based on nature and execution.

Essentials of valid contracts are offer, acceptance, consideration, free consent, legality

of objects.

A contingent contract is a contract to do something or not to do something.

There are many modes of discharge of contracts, performance, lapse of time,

agreement, impossibility, breach etc and there are remedies prescribed for breach of

contracts.

1.8 Key Words

Offer: An offer is an undertaking by the offeror to be contractually bound in the event

of a proper acceptance of the offer by the offeree

Consideration: It means ‘something in return’. When at the desire of the promisor, the

promisee or any other person has done or abstained from doing or does or abstains

from doing or promises to do or abstain from doing, such act or promise is called

consideration.




Ø Minor is a person who has not completed 18 years of age

Ø Coercion means compulsion

Ø Consent means act of assenting to an offer

Ø Contingent means depends on something

Ø Breach of contract means breaking of the obligation which a contract imposes

1.9 Self Assessment questions

1. What is the object and nature of law of contract?

2. Explain various types of contracts.

3. What is an offer? When is it complete? State the rules of a valid offer.

4. How can the offer be accepted? State the rules relating to the communication of

acceptance.

5. Define consideration. What are the essentials?

6. A contract without consideration is void! Comment!

7. What do you understand by ‘capacity of contract’? What are the effects of such

agreements?

8. Define fraud and point out its effect on agreements.

9. Discuss law relating to effect of mistake in contracts.

10. Under what circumstances is the object or consideration of a contract deemed

unlawful?

11. Explain meaning of contingent contract and rules relating to such contracts?

12. What are essentials of valid tender?

13. What are various ways that a contract may be discharged?

14. What are remedies available to an aggrieved party on the breach of a contract?

1.10 Reference Readings

1. Business law by N D Kapoor

**********




Chapter 2: NEGOTIABLE INSTRUMENTS ACT After studying this unit you will understand

1. Meaning of Negotiable Instrument

2. Types of Instruments

3. Concepts relating to Negotiable Instruments

Contents

Introduction

Types

2.1 Promissory note

2.2 Bills of exchange

2.3 Cheque

2.4 Hundi

Summary

Key words

Self examination questions

Reference reading

Introduction

The word ‘negotiable’ means transferable from one person to another and the term

‘instrument’ means any written document by which a right is created in favour of some

person.

Negotiable Instrument is defined as a promissory note, bills of exchange or cheque

payable either to order or bearer. Thus the negotiable instrument is a document by

which rights vested in a person can be transferred to another person in accordance

with the provisions of the Negotiable Instruments Act 1881

Law relating to promissory notes, bills of exchange, cheques and other negotiable

instruments is codified in India under the Negotiable Instruments Act, 1881. It defines




promissory note, bill of exchange, cheque, foreign instrument and negotiable

instrument. As per the provisions of this Act, in India, every person capable of

contracting, according to the law to which he is subject, may bind himself and be

bound by making, drawing, accepting, endorsing, delivering and negotiating of a

promissory note, bill of exchange or cheque and every person capable of binding

himself or of being bound, may so bind himself or be bound by a duly authorized agent

acting in his name. The act provides for the liability of an agent, legal representative,

drawer, drawee, maker and acceptor of a bill, endorser, holder in due course,

suretyship, etc.

As per the provisions laid down in the said act, a negotiable instrument means a

promissory note, bill of exchange or cheque payable either to order or to bearer and

when a promissory note, bill of exchange or cheque is transferred to any person so as

to constitute the person, the holder thereof the instrument is to be negotiated. Detailed

provisions have been made in the Act concerning presentment, payment, interest,

discharge from liability, notice of dishonour, noting and protest, reasonable time for

payment, acceptance and payment for honour and reference in case of need,

compensation, special rules of evidence, providing for certain presumptions and

estoppels, cross cheques, bills in sets, etc.

A very noteworthy amendment has been recently made with effect from 1st April 1989

in the form of Chapter XVII which provides for penalties in case of dishonour of certain

cheques for insufficiency of funds in the accounts. Under this Chapter dishonour of a

cheque in certain cases is an offence. After a cheque is dishonoured, written notice is

required to be given within 15 days of the receipt of information from the bank

regarding the return of cheque as unpaid and if the drawer of the cheque fails to make

the payment of the cheque within 15 days from the receipt of such notice, then only

the dishonour of the cheque amounts to an offence. If a cheque, which is dishonoured,

is issued by way of gift or loan, it does not become an offence. The cheque should

have been issued for the discharge of any debt or any other liability which can be

legally enforced AND the dishonour should be on account of insufficiency of funds.

The cheque should be presented to the bank within a period of six months from the

date on which it is drawn or within the period of its validity whichever is earlier. A

cheque otherwise valid does not become invalid merely by reason of its being either




post dated or ante dated. The complaint with the Metropolitan Magistrate has to be

filed within one month from the date on which the cause of action arose. It shall be

presumed that the holder of the cheque has received it for the discharge of any debt or

liability and the onus would be on the issuer of the cheque to prove otherwise. The

punishment of the offence is imprisonment for a term which may extend to one year or

with fine which may extend to twice the amount of the cheque or with both.

Features of Negotiable Instrument:

Freely transferable- transferability may be by delivery or endorsement and delivery

Holder’s title free from defects- the term negotiability means that not only is the

instrument transferable by endorsement and or? delivery, but that its holder in due

course acquires a good title not withstanding any defect in a previous holders’ title. A

holder in due course is one who receives the instrument for value and without any

notice as to the defect in title of the transfer

The holder can sue in his own name

Negotiable instrument can be transferred any number of times.

Types: There are various types of negotiable instruments in use

2.1 Promissory note: It is an instrument in writing containing an unconditional

undertaking, signed by the maker to pay certain sum of money to another or to the

bearer of instrument.

eg., “I Promise to pay B or order Rs 5000”

“I acknowledge myself to the indebted to B in Rs 1000, to be paid on demand for value

received”

Following are NOT promissory notes:

“Mr B, I owe you Rs. 500”




“I promise to pay B Rs. 500 after my marriage with C”

Essential characteristics of a Promissory Note:

Ø It should be in writing

Ø It must contain an undertaking or promise to pay - a mere acknowledgement of

debt is not sufficient

Ø It should be unconditional

Ø It should be signed by the maker

Ø The instrument must point out with certainty the maker and the payee of the

promissory note

Ø The sum payable must be certain

Ø It should be a promise to pay money only

Ø It may be payable in instalments

Ø It is payable on demand or after a definite period

Ø It must be duly stamped under Indian Stamp Act

2.2 Bills of Exchange

A bill of exchange (BE) is defined by Sec 5 as an instrument in writing, containing an

unconditional order, signed by the maker, directing a certain person to pay a certain

sum of money only to or to the order of, a certain person, or to the bearer of

instrument.

Characteristics of BE:

Ø It must be in writing

Ø It must contain an order to pay and not a promise or request. Words like “please

pay Rs. 1000 to A on demand do not constitute the instrument of BE”

Ø The order must be unconditional

Ø There must be 3 parties, drawer, drawee and payee

Ø The parties must be certain

Ø It must be signed by the drawer

Ø The sum payable must be certain

Ø The order must be to pay money alone




Distinction between BE and Promissory Note

Sl no Promissory note Bill of Exchange 1 There are only two parties There are 3 parties 2 A note contains an

unconditional promise by the maker to pay the payee

It contains an unconditional order to the drawee to pay according to the drawer’s directions

3 No prior acceptance is required

It should be accepted by the drawee

4 No notice of dishonour need be given

Notice of dishonour must be given

2.3 Cheque A cheque is defined as a bill of exchange drawn on a specified banker and not expressed

to be payable otherwise than demand. Thus a cheque is a BE with two added features 1)

It is always drawn on a specified banker and 11) it is always payable on demand and not

otherwise

Distinguish cheque and BE

Cheque Bills of exchange 1 It must be drawn only on banker It can be drawn on any person 2 The amount is always payable on

demand The amount is payable on demand or after a specified time

3 The cheque is not entitled to days of grace

A usance (time) is entitled to three days of grace

4 A cheque can be crossed Crossing is not possible Holder in due course

A holder of a NI is a person entitled in his own name to the possession thereof and to

receive or recover the amount due thereon from the parties thereto. Thus a person

who has obtained the possession of an instrument by theft or under a forged

endorsement is not a holder

A holder in due course, on the other hand , is a person who for consideration become

the possessor of a promissory note, BE or cheque, if payable to bearer, or the payee

or endorsee, if payable to order , before the amount mentioned in it becomes payable.




Thus a person receives a NI without consideration; he may be a holder but will not be

called as a holder in due course. Besides, the title of holder of a NI is always subject to

the title of its transferor whereas a holder in due course acquires a better title than that

of a transferor

Some Privileges of holder in due course:

Every prior party to a NI (maker, drawer, acceptor, intermediate endorsers) continue to

remain liable to the holder in due course until the Instrument is satisfied

A person who signed and delivered to another a stamped but otherwise incomplete

instrument, is stopped from asserting against the holder in due course that the

instrument is incomplete provided the stamp covers the value filled in not only the title

of holder in due course is not subject to the defect in previous holders’ title but once

the instrument passes through the hands of a holder in due course it is purged of all

defects

Hundis

Hundis have been in circulation in India from very early times even before the NI Act

1881.

The NI Act does not apply to Hundis, but where, by any words in the Instrument itself ,

the usages regarding such Instruments are excluded or where it is expressly indicated

that the legal relations of the parties thereto shall be governed by NI Act, THE Act

becomes applicable. In the absence of any of above indications, Hundis shall be

governed by local usages applying to such documents. They are some times drawn in

the form of promissory notes but more often they take the form of BE.

Certain important explanations under NI Act

When amount stated in words and figures differ, words will prevail over figures

A forged instrument confers no title




A person who has obtained a NI by theft cannot enforce payment of it against any

party nor can he retain it against the party from whom he had stolen it

If consideration of a NI is unlawful, the instrument is void

Crossing of cheque serves a measure of safety against theft. By crossing a cheque, a

person, who is not entitled to receive its payment, is prevented from getting the

cheque en-cashed

Dishonor of cheque invites criminal penalties

A NI payable otherwise than to bearer can be negotiated only by endorsement and

delivery

A banker plays two roles, one as holder for value – ie., when to oblige a customer, a

bank pays the proceeds of a cheque drawn upon another banker , before collection,

he is treated as a holder for value. Another role as an agent – of a customer if he

credits the latter’s account with the amount of the cheque after it is actually realized

Summary

Negotiable Instrument is defined as a promissory note, Bills of Exchange or Cheque

payable either to order or bearer.

There are different types of NIs some of them are Promissory note, Bills of Exchange,

Cheques, etc. It is an Instrument in writing containing an unconditional undertaking,

signed by the maker to pay certain sum of money to another or to the bearer of the

Instrument.

Hundis have been in circulation in India from very early times before the NI Act 1881.

The NI Act does not apply to Hundis, but where, by any words in the instrument itself,

the usages regarding such Instruments are excluded or where it is expressly indicated

that the legal relations of the parties thereto shall be governed by NI Act.




Key words

Bill of exchange (BE) is defined by Sec 5 as an instrument in writing, containing an

unconditional order, signed by the maker, directing a certain person to pay a certain

sum of money only to or to the order of, a certain person, or to the bearer of

instrument.

Cheque is defined as a bill of exchange drawn on a specified banker and not

expressed to be payable otherwise than demand.

Holder in due course is a holder of a NI, a person entitled in his own name to the

possession thereof and to receive or recover the amount due thereon from the parties

thereto.


1. What are essential requirements of a promissory note?

2. What are essential characteristics of NI?

3. Explain three NIs.

4. Distinguish BE and Cheque

5. Write short notes on Holder in due course

Reference reading

³ Business Law by N D Kapoor

³ Business laws by S S Gulshan & G K Kapoor




Chapter 3: COMPANY LAW

After studying this unit you will understand Ø Meaning of a company

Ø Formation

Ø Kinds of companies

Ø Laws covering operations

Ø Share capital and shares

Contents

1 Introduction 2 Characteristics 3 Kinds of companies 4 Formation of a Company 5 Memorandum & Articles of Association 6 Prospectus 7 Membership in a Company 8 Share capital 9 Borrowing powers 10 Summary 11 Key words 12 Exercises 13 Reference readings

1. Introduction

The law relating to companies in India is contained in Companies Act 1956 as

amended now and then. The last amendment was done in 2002. This material covers

the basics of company law and excludes other parts.

A company means a group of persons associated together for the attainment of a

common end, social or economic. It is a voluntary association of person; it has capital

divisible into parts. It is an artificial person; it has no soul or body.




2. Characteristics

Separate legal entity

A company, in law, is regarded as an entity separate from its members. In other words

it has an independent corporate existence. The company’s money is owned by it and

not by its members. Its members can enter into contracts with it.

Limited liability

A company may be a company limited by shares or limited by guarantee. If a company

is limited by shares, the liability of members is limited to the unpaid value of the

shares. (eg., if the face value of share is Rs 10 and a member has paid Rs 7, he can

be called upon to pay not more than Rs 3 during the life time of the company). If a

company is limited by guarantee, the liability of the members is limited to such amount

as the members may undertake to contribute to the assets of the company, in the

event of its being wound up.

Perpetual succession

A company never dies, nor does its life depend on the life of its members. It is not

affected by insolvency or mental disorder or retirement of members. It is created by

process of law and can be put to end only by a process of law. Perpetual succession,

therefore means, that a company’s existence persists irrespective of the change in the

composition of its membership.

Common seal

Since a company has no physical existence, it must act through its agents and all such

contracts entered into by its agents must be under the seal of the company.




Transferability of shares

The capital of a company is divided into parts, called shares. These shares are,

subject to some conditions, freely transferable, so that no shareholder is permanently

wedded to the company.

Separate property

As a company is a legal person distinct from its members, it is capable of owning,

enjoying and disposing of property in its own name. The members do not have

ownership. The company is the real person on which all its property is vested.

Capacity to sue

A company can sue and be sued in its corporate name.

Lifting or Piercing the Corporate Veil

A company is a legal person distinct from its members. This principle is referred as

“the veil of incorporation”. The effect of this principle is that there is a fictional veil

between the company and its members which means that a company has a corporate

personality which is distinct from its members.

However, this concept was later found to be misused for fraud or improper conduct.

Hence it became necessary to lift the veil and look inside at the persona behind the

company who are the real beneficiaries.

Following are the various situations where the veil would be lifted:

Protection and revenue

The corporate entity of a company will be ignored when it is used for tax evasion.




Prevention of fraud or improper conduct

If the machinery of incorporation has been found to be used for fraudulent purpose, the

legal personality of the company may also be disregarded.

Determination of character of a company whether it is an enemy

A company may assume an enemy character when persons in de facto control are

residents in enemy country.

Where the company is a sham

The veil will also be lifted if the company is found to be sham (hoax)

Company avoiding legal obligations

When the use of an incorporated company is being made to avoid legal obligations,

the legal personality may be disregarded.

Company acting as agent or trustee of share holders

Where the company is acting as an agent for its shareholders, the shareholders will be

liable for the acts of the company.

Avoidance of welfare legislation

It is like avoidance of taxation. and treatment is the same when veil is lifted

Protecting public policy

The veil will be lifted to prevent transactions contrary to public policy




Number of members below minimum

If a company carries on business for more than 6 months after the number of its

members reduced below 7 in case of a public limited company and 2 in case of private

limited company, every person who knows and a member during this time, is severally

liable for the debts of the company contracted during that time.

Failure to refund application money

The directors of a company are jointly and severally liable to repay the application

money with interest if the company fails to refund the application money who have not

been allotted shares within 130 days of the date of issue of prospectus.

Misescription of company’s name

Where an officer or an agent of a company does not act or enters into a contract

without properly mentioning the company’s name and the address of the registered

office, he shall be personally liable.

Fraudulent trading

Sometimes in the course of winding up of a company it may appear that some

business of the company has been carried on with intent to defraud creditors of the

company or any other person. In those cases such persons involving in those activities

are liable.

3. Kinds of companies

There are 5 broad classifications under which different kinds of companies can be

grouped:

Classification on the basis of incorporation




i) Statutory Companies: These are created by special Acts; Eg., RBI, SBI, LIC etc.

ii) Registered Companies: These are companies formed and registered under

Companies Act 1956.

Classification on the basis of liability

i) Company with limited liability

Limited by shares: A company may be a company limited by shares or limited by

guarantee. If a company is limited by shares, the liability of members is limited to the

unpaid value of the shares (eg., if the face value of share is Rs 10 and a member has

paid Rs 7, he can be called upon to pay not more than Rs 3 during the life time of the

company).

Limited by guarantee: If a company is limited by guarantee, the liability of the members

is limited to such amount as the members may undertake to contribute to the assets of

the company, in the event of its being wound up.

ii) Companies with unlimited liability: A company without limited liability is known as

unlimited company. In case of such a company, every member is liable for the debts of

the company in proportion of his interest in the company.

Classification on the basis of number of members

i) A private limited company: It is a company which has a minimum paid up capital of

Rs. 1,00,000 or such higher paid up capital as may be prescribed and by its Articles:-

Restricts right to transfer its shares

Limits the number of its members to 50

Prohibits any invitation to public to subscribe for any shares, debentures of the

company




Prohibits invitation or acceptance of deposits from persons other than members

ii)A public limited company: It is a company which has a minimum paid up capital of Rs

5 lakh or such high paid up capital as may be prescribed and if a private limited

company, which is a subsidiary of a company which is not a private limited company.

Distinction between private limited and public limited companies

Sl no Characteristics Private limited Public Limited 1 Minimum capital Rs 100000 Rs 500000 2 Minimum number 2 7 3 Maximum number 50 No restriction 4 Number of Directors At least 2 At least 3 5 Restriction on appointment

of Directors No requirements Directors must file

consent with Registrar 6 Restriction on invitation to

subscribe for shares Article prohibits Can invite, no

prohibition 7 Transferability of shares/

debentures Restriction on transfer

No restrictions, freely transferable

8 Special privileges Enjoys some privileges

No privileges

9 Quorum 5 2 10 Managerial remuneration No restriction Can not exceed 11%

on net profits Privileges of a Private limited company Ø Number of members can be 2

Ø Can allot shares before minimum subscription

Ø Can allot shares without issue of prospectus

Ø No restrictions on issue of further shares

Ø Can issue any kind of shares

Ø Can commence business immediately on incorporation

Ø Need not keep index of members

Ø Need not hold statutory meeting

Ø No restriction on managerial remuneration

Ø Need not have more than 2 Directors

Ø Rules regarding directors are less stringent




When a private company does becomes a public limited company, its rule regarding

private limited companies are violated by choice.

Classification on the basis of control

i) Holding company: A company is a holding company of another if it has control over

another.

ii) Subsidiary company: A company is a subsidiary company of another if control is

exercised by the latter on former.

Classification on the basis of control

i) Government Company: A company is a government company if not less than 51% of its

share capital is held by

central government

any state government

partly by both

ii) Non Government Company: It is controlled and operated by private capital

4. Formation of a Company

4.1 Incorporation

Before a company is formed certain preliminary steps are required.

Mode of incorporation: Any 7 or more persons (2 or more in case of private limited)

associated for any lawful purpose may form an incorporated company, with or without

limited liability.




Documents to be filed with the Registrar: Before a company is registered, it is to be

ascertained from the Registrar on the proposed name of the company for registering the

name. Then the following documents are to be filed:

³ Memorandum & Articles of Association

³ Agreement if any, with the proposed candidate for Managing Director

³ List of Directors

³ Declaration that all requirements under companies act have been complied

with

Once all requirements are complied with and Registrar is satisfied with the compliance, he

will issue a certificate of incorporation which is the conclusive evidence for compliance.

4.2 Promoter

A promoter is a person who does the necessary preliminary work incidental to the

formation of the company.

The fiduciary position of a promoter may be summed up as follows:

Not to make any profit at the expense of the company

To give benefits of negotiation to the company

To make a full disclosure of interest or profit

Not to make unfair use of position

Pre incorporation contracts

The promoters of a company usually enter into contracts to acquire some property which

is yet to be incorporated. Such contracts are called pre incorporation or preliminary

contracts.

Position of promoters as regard to pre incorporation contracts




Company not bound by pre incorporation contracts even where it takes the benefits

Company can not enforce preliminary contracts

Promoters personally liable

A company can not ratify a contract entered into by its promoters before incorporation

5. Memorandum & Articles of Association

5.1 Memorandum

The Memorandum of Association is the fundamental document and of great importance in

relation to the proposed company. It contains the fundamental condition upon which alone

the company is allowed to be incorporated. It is the charter of the company and defines

the reasons for existence. It defines area beyond which the actions of company can not

go. It also regulates the external affairs in relation to outsiders.

5.1.1 Purpose

The purpose is two fold:

Ø The prospective shareholders shall know the purpose for which their money is

going to be used

Ø The outsiders dealing with the company shall know with certainty as to what the

objects of the company are and as to whether the contractual relation into which

they contemplate to enter with the company is within the objects of the company

5.1.2 Printing and Signing

The Memorandum shall be printed, divided into paragraphs and numbered and signed. It

shall be as per the form prescribed.




5.1.3 Contents

Ø Name of the company (limited / private limited)

Ø The state in which the registered office is to be situated

Ø Objects of the company classified as main objects & other objects

Ø Limited liability (shares/ guarantee)

Ø Share capital

5.1.4 Alteration

Alteration of change of name can be done by special resolution.

Change of registered office from one place to another within the state which is to be

approved by Regional Director.

If the change is from one state to another, a special resolution is required for approval.

The object clause is the most important clause in Memorandum. Change in the clause

may be done with special resolution with following purposes:

Ø To carry on business more economically

Ø To attain its main purpose by new or improved means

Ø To carry on business which can be conveniently combined with existing business

Ø To sell or dispose of the whole or part of undertaking

Ø To amalgamate with any other company

5.2 Articles

The Articles of association are the rules, regulations and bye laws for the internal

management of the affairs of the company. They are next in importance to Memorandum

of Association.




5.2.1 Contents

Ø Share capital, rights of shareholders, variation of these rights

Ø Lien on shares

Ø Calls on shares

Ø Transfer of shares

Ø Transmission of shares

Ø Forfeiture of shares

Ø Conversion of shares into stock

Ø Share warrants

Ø Alteration of capital

Ø General meetings

Ø Voting rights of members

Ø Directors, their appointments, remuneration, qualification

Ø Manager/Secretary

Ø Accounts, audit and borrowing powers

Ø Winding up

5.2.2 Table A

There are three options for a Company for articles

Ø it can adopt table A

Ø it can have its own articles

Ø can have combination

5.2.3 Alteration

Companies have been given very wide powers for alteration of articles. It can alter by

passing a special resolution.




However there are certain restrictions:

Ø It must not be inconsistent with the act

Ø Must not conflict with the memorandum

Ø Must not sanction anything illegal

Ø Must be for the benefit of company

Ø Alteration can be done only by special resolution

Ø It can be with retrospective effect

Ø Must not result in expulsion of member

Memorandum Articles 1 It is the charter of the company

indicating nature of business, also defines company’s relationship with outside world

Regulations of the internal management

2 Defines the scope of activity of the company

Rules for carrying out objects of the company

3 Supreme document Subordinate to Memorandum 4 Every company must have their

own Memorandum Table A can be adopted

5 Strict restrictions on alteration Can be altered by special resolution 6 Any act of company ultra-wires

the Memorandum is wholly void and can not be ratified even by shareholders

Any act ultra-wires the articles but intra-wires the memorandum can be confirmed by shareholders

5.3 Legal effect of Memorandum and Articles a) Members to company: The memorandum and articles constitute a binding contract

between the members and the company. The effect of this is that each member is bound

to the company as if each member has actually signed the memorandum and articles

5.4 Exception to doctrine of indoor management b) Company to members: A company is bound to the individual members in terms of

their ordinary rights as members (right to receive notice of general meeting).

c) Members to members: They act as contract between members and binding each

against other.




d) Company to outsiders: Articles do not constitute any binding contract between

company and outsider

Doctrine of constructive notice and indoor management

Every outsider dealing with the company is deemed to have notice of contents of

Memorandum and articles. These documents are public documents, filed with Registrar of

companies.

The outsiders dealing with a company are entitled to assume that as far as the internal

proceedings of the company are concerned, everything has been regularly done. They are

presumed to have read these documents and to see that proposed dealing is not

inconsistent therewith and they are not bound to do more, they need not go into regularity

of internal proceedings as required by the memorandum and articles. They can presume

that all are done regularly. This is known as doctrine of indoor management

Thus, whereas doctrine of constructive notice protects the company against outsiders,

doctrine of indoor management seeks to protect outsiders against the company.

Exceptions to doctrine of indoor management:

If one already has the knowledge of irregularity

Acts with negligence

f acts on a forged document

Acts outside scope (officer of a company acts beyond authority)

6. Prospectus

To raise money to meet expenses or projects, company issues prospectus as invitation to

deposits or shares or debentures etc.




Prospectus is any document issued as prospectus includes notice, circular, advertisement

or other document inviting deposits from public or offers from public for subscription of or

purchase of shares or debentures.

Contents of prospectus:

Part I

Ø General information of company

Ø Capital structure of company

Ø Terms of present issue

Ø Particulars of issue (project cost etc)

Ø Company, management and project

Ø Details on companies under same management

Ø Outstanding litigations pending

Ø Management perception on risk factors

Part II

General information

Ø Consent of directors , auditors, solicitors

Ø Procedure and time schedule of allotment

Ø Change, if any, in directors and auditors

Ø Names of company secretary, legal advisor, lead managers etc

Financial information

Ø Report by auditors

Ø Principal terms of loans and assets

Ø Statutory information

Ø Minimum subscription

Ø Expenses on issues, fees payable to registrar, advisers, and managers

Ø Underwriting commission

Ø Previous issues




Ø Issue of shares otherwise than cash

Ø Rights of members regarding voting etc

Ø Revaluation of assets if any

Ø Material contracts and inspection

Statement in lieu of prospectus

Where a public company does not invite public to subscribe for the shares, but arranges to

get money from private resources, it need not issue a prospectus to the public, in such a

case the promoters are required to prepare a draft prospectus known as a statement in

lieu of prospectus which should contain the information required to be disclosed by the

Act.

Misstatements in prospectus and consequences

If there is a misstatement of material fact there may arise liability as follows: Liability for misstatement I I ----------------------------------------------------------------------------------- I I Civil liability Criminal liability I I I I Against the company Against directors, promoters, experts I I ------------------------------------- ------------------------------------------------------ I I I I I Rescission Of contract claim for damages damages compensation damages for I non- compliance I ---------------------------------------------- I I For fraudulent misrepresentation For innocent misrepresentation




Commencement of business: A company can commence business once the shares are

allotted up to an amount equal to minimum subscription. A declaration has to be filed with

Registrar to this effect. Registrar will issue a certificate of commencement of business.

7. Membership in a Company

The members or shareholders of a company are the persons who collectively constitute

the company as a corporate entity.

Member Vs Share holder

A registered shareholder is a member but a member need not be a shareholder because a

company need not have share capital.

A legal heir of deceased member is not a member unless he applies and gets the

registration.

Who can not be members?

³ A minor

³ Insolvent

³ Partnership firm (except sec 25 licensed firms)

³ Foreigner of alien enemy nation

Rights and liabilities of members

Rights:

Statutory rights (not exhaustive)

Ø To obtain copies of memorandum & articles

Ø Priority to get offer of shares in case of increase of capital

Ø To transfer shares

Ø To inspect register of members




Ø To receive copies of statutory, annual reports

Ø Receive notice of meetings

Ø To appoint proxy

Ø To demand poll

Ø To have minutes on request to participate in appointment of directors

Documentary rights

These are rights given by memorandum and articles

Legal rights

These are rights given by general law (eg., for misstatement in prospectus, damages can

be claimed).

Right on assets of company

No shareholder has any right on the assets of a company as they are owned by the

company, but in case of winding up, he will have a share in the distribution of surplus

assets.

Liabilities of members:

In case of company with unlimited liability, each member is liable in full of all debts of the

company.

In case of company limited by shares, each member is liable only to pay the unpaid

amount on the shares held by him.

Company limited by guarantee, each member is liable to contribute to the amount

guaranteed by him to be paid in the event of winding up.




Register and Index of Members:

Every company shall keep a register of its members with particulars like name, address,

occupation, shares held, amount unpaid or paid, date of membership etc. Company

having more than 50 members should have an index of members also.

Annual return:

Every company, having share capital, shall within 60 days from the date of annual general

meeting, file every year a return with Registrar of companies called annual return.

Format has been prescribed in the schedule, the contents are:

Ø Address of the registered office

Ø Details on shares and debentures

Ø Details of charges/ indebtedness

Ø Details of members with addresses

Ø Details of directors, managing director

8. Share capital

Share capital means the capital raised by the company by issue of shares

Ø Capital may denote - Authorised or nominal- value of shares up to which company

is empowered to issue

Ø Issued- amount of shares issued for subscription

Ø Subscribed- amount of capital subscribed

Ø Paid up-amount paid

There are two kinds of capital: Equity capital and Preference capital




Alteration of capital:

A company can alter its share capital, if permitted by articles, by

Ø Issuing new shares

Ø Consolidate into shares of larger amount

Ø Sub divide shares into shares of smaller amount

Ø Cancel shares

Reduction of capital:

Law relating to reduction of capital is rigid. It has to be done strictly according to

procedure.

Reduction can be in following ways:

Extinguish or reduce liability on any of shares not paid up (Rs 10 is valus of share, only Rs

6 paid up, remaining Rs 4 can be extinguished)

Pay off any paid up capital which is excess of requirements

Procedure

Special resolution to approve

Application to Tribunal (interest of share holders and creditors will be ensured)

Registration of approval with Registrar of Companies

Reduction can take place without approval of tribunal in following cases:

Forfeiture of shares –for non payment of calls

Surrender of shares- if partly paid up shares are surrendered instead of going through

forfeiture route

Buy back of shares by company

Redemption of preference shares




Types of preference shares:

Cumulative preference shares-dividends are accumulated till the capital is returned

Non cumulative preference shares- dividends are not accumulated

Participatory preference shares-not only eligible for fixed rate of dividend but also share in

surplus after the claims of equity share holders

Non participatory preference shares- only fixed rate of dividend

Convertible preference shares- convertible into equity

Non convertible preference shares

Redeemable preference shares- can be redeemed after a period

Buy back of shares: A company can purchase its own shares from

Out of its reserves

Out of premium account

Out of proceeds of earlier issue

Conditions

Should be authorized by its articles

To be approved by special resolution

If listed, as per guidelines of SEBI

9. Borrowing powers

Borrowings of a company may ultra-wires the company or intra-wires the company but

ultra-wires the directors, that is beyond the scope of their authority

Ultra-wires the company: If the borrowings ultra-wires the company, that is beyond its

scope or powers, it is void.

Intra-wires the company but ultra-wires the directors: This can be ratified and rendered

valid by the company




Debentures

It is the most common way of borrowing. It is like issue of shares for capital. It is a

document creates debt or acknowledges it

Characteristics:

Ø It is issued in the name of company and as a certificate

Ø Issued under company’s seal

Ø It usually specifies period

Ø It generally creates charge on assets

Ø The holder does not have right to vote

Kinds of debentures:

Ø Bearer debentures- this is payable to the bearer, kind of negotiable instruments

Ø Registered debentures-payable to registered holders, however are also

transferable

Ø Secured debentures- which create some charge on the property of the

company

Ø Unsecured debentures- which do not create charge

Ø Redeemable debentures- usually issued on the condition that they shall be

redeemed after a period

Ø Irredeemable debentures or perpetual debentures- when they are irredeemable

they are called perpetual

Ø Convertible debentures-given an option to holders to convert into capital

Ø Non convertible debentures

Charges:

The power of a company to borrow includes the power to create a charge upon its

assets. The charge that may be created on the assets of a company may be a fixed

charge or a floating charge.




A fixed charge or specific charge is one which is created on some specific and definite

assets of the company (eg., charge on land & building). A floating charge is an

equitable charge which is crated on some class of property which is constantly

changing (on stock).

Charges are to be registered with Registrar of companies, if not charge becomes void.

10. Summary

We saw the definition of a company as voluntary association of persons. There are unique

characteristics of a company and by which it is always treated as separate legal entity.

Companies may be limited by capital or liabilities.

The fundamental documents for a company are Memorandum & Articles of association

which govern the powers and internal regulations of a company. While amendment of

clauses of Memorandum calls for stringent procedures, for Articles it is internal.

Prospectus is the document issued for raising capital by a company.

The share holders are the owners of a company. They can be registered members of a

company. There are stipulated rights and liabilities of members.

The share capital of a company can be up to the authorized amount. The capital can be

altered, increased or reduced following certain procedures.

Debentures are certificates issued to acknowledge the debts. It can be secured or

unsecured.

The borrowings of a company may have charge on assets which can be fixed or floating.




11. Key words

1. Separate legal entity: A company, in law, is regarded as an entity separate from

its members. In other words it has an independent corporate existence.

2. Limited by shares: A company may be a company limited by shares or limited by

guarantee. If a company is limited by shares, the liability of members is limited to

the unpaid value of the shares.

3. Limited by guarantee: If a company is limited by guarantee, the liability of the

members is limited to such amount as the members may undertake to contribute to

the assets of the company , in the event of its being wound up.

4. Companies with unlimited liability: A company without limited liability is known

as unlimited company. In case of such a company, every member is liable for the

debts of the company in proportion of his interest in the company.

5. Memorandum: The Memorandum of Association is the fundamental document

and of great importance in relation to the proposed company. It contains the

fundamental condition upon which alone the company is allowed to be

incorporated. It is the charter of the company and defines the reasons for

existence. It defines area beyond which the actions of company can not go. It also

regulates the external affairs of the in relation to outsiders.

6. Articles: The Articles of association are the rules, regulations and bye laws for the

internal management of the affairs of the company. They are next in importance to

Memorandum of Association.

7. Prospectus: It is any document issued as prospectus includes notice, circular,

advertisement or other document inviting deposits from public or offers from public

for subscription of or purchase of shares or debentures.

8. Membership in a Company: The members or shareholders of a company are the persons who collectively constitute the company as a corporate entity.

9. Annual return : Every company , having share capital , shall within 60 days from the date of annual general meeting, file every year a return with Registrar of companies called annual return.

10. Authorised or nominal capital: value of shares up to which company is

empowered to issue.




11. Issued capital: amount of shares issued for subscription

12. Subscribed capital: amount of capital subscribed

13. Debentures: It is the most common way of borrowing. It is like issue of shares for

capital. It is a document creates debt or acknowledges it.

14. Fixed charge or specific charge: It is one which is created on some specific and

definite assets of the company (eg., charge on land & building).

15. Floating charge: is an equitable charge which is crated on some class of property

which is constantly changing (on stock).

12. Exercises

1. Define a company, what is corporate viel?

2. What is Memorandum of association, what are the contents?

3. What is an Articles of association, what are the contents?

4. Write a note on alteration of memorandum and articles

5. Define prospectus, when is a company not required to issue a prospectus?

6. Explain the liabilities for mis-statements in prospectus

7. Who are members of a company?

8. What are rights & liabilities of members?

9. Explain concept of capital

10. What are the different ways of alteration of capital?

11. What are types of preference shares?

12. Define debentures, what are various types?

13. Explain charges

13. Reference readings

³ company Law by N D Kapoor

³ Company Law by Ramiah




Chapter 4: INCOME TAX ACT 1961 After reading this act you will understand

³ Meaning of various terms used

³ Income on which tax is charged

³ Exempted income

³ Tax structure

³ Certain procedures

³ Penalties

Contents

1 Introduction 2 Basis of charge 3 Income do not form part of total income 4 Heads of income 4.1 Salaries 4.2 Income from house property 4.3 Profits and gains from business 4.4 Capital gains 4.5 Income from other sources 5 Set off / set on 6 Deductions 7 Double taxation 8 Brief note on transfer pricing 9. MAT 10.Tax on distribution of income 11.Special provisions for shipping companies 12. Advance tax 13 Income tax on fringe benefits 14 TDS 15 Appeals 16 Penalties 17 Summary 18 Key words 19 Practical questions 20 Reference readings




1. Introduction The act was introduced in the year 1961.It extends to whole of India. The Act contains 23

chapters and 298 sections (at the time of preparation of the material). The major

amendments are carried out by the budget proposals of every year. The last amendments

were carried out by the Finance 2005

2. Basis of charge

Income tax is chargeable on total income of a person resident in India for the previous

year

Resident- if is in India for a period of 182 days and more in the previous year or in

previous 4 years has been in India for 365 days or more

Previous year-financial year immediately preceding the assessment year

Assessment year means a period of 12 months commencing every 1st April

3. Income do not form part of total income

The following are some major income not to be included in total income to be considered

for taxation

Ø Agricultural income

Ø Any income by way of interest on securities for NRIs as notified by Central

Government

Ø In case of an individual, the travel concession received from employer (LTA)

subject to certain restrictions

Ø Income of an individual working in embassy or trade commission with restrictions

Ø Gratuity as per rules received subject to limitations

Ø Commuted pension upto one half of pension amount

Ø Leave credit amount received after retirement




Ø Compensation received under workmen compensation act

Ø Sums received from super annuation fund after retirement

Ø Payment from provident fund to the extent provided in rules

Ø Sums received under LIC policy subject to restrictions

Ø Scholarships granted to meet educational expenses

Ø Allowance received by MPs and MLAs

Ø Income of scientific research association

Ø Income of a public charitable trust

Ø Incomes of certain approved funds (PM Relief fund)

Ø Dividends received from Mutual and venture capital funds subject to conditions

stipulated

Ø Income of undertakings established in special trade zone for ten years which is

subject to conditions

Ø Income of certain 100 % EOUs with conditions

4. Heads of income

4.1 Salaries

It has to be kept in mind that there will not be any type of deductions allowed in respect

of expenditure incurred relating to income which do not form part of total income

Meaning : Salary includes any salary due from employer or previous employer whether

paid or not and arrears of salaries paid during the previous year. This also includes

bonus, commission by whatever name called

Ø Salary includes , as per definition,

Ø Wages

Ø Any annuity or pension

Ø Gratuity

Ø Fees, commission, perquisites, profits in lieu of salary

Ø Advance salary

Ø Leave wages

Ø Annual accumulation to PF fund




Perquisite means –

Ø Value of rent free accommodation

Ø Value of concession of rent

Ø Value of benefit or amenity granted at free of cost or at concessional cost

Ø Any sum paid by the employer in respect of any obligation which was payable by

the assessee

Ø Value of fringe benefits

However this shall not apply to the medical facilities provided by the employer

Deductions : Following is the list of major deductions allowed to be deducted from

salary income

If salary exceeds Rs 5 lacs a standard deduction of Rs 20000 , if salary does not exceed

Rs 5 lacs , it will be 40% or Rs 30000 whichever is less

Sum paid by employee for taxation as per rules

In case of Government employee, for entertainment expenses, if any allowance is

received, a sum equal to one fifth of salary or Rs 5000 whichever is less

Taxation slabs / rates with details of deductions are explained in IT rules which are

amended from time to time

4.2 Income from house property

The annual value of property consisting of any buildings or land appurtenant thereto of

which assessee is the owner, is chargeable to tax provided he does not occupy for the

purpose of carrying on business , the profits of which is chargeable under other heads

Annual Value – actual rent received or sum which the property is expected to earn as

reasonable rent

If it is vacant for some period , the value will get reduced proportionately




If the property is residential and occupied by owner, the value shall be taken as nil

Deductions from property income

Sum equal to 30% of annual value

Interest on borrowed capital used for construction of property (not exceeding Rs 150000)

Taxes paid on the house

If rent is unrealized during a previous year but subsequently realized, it will be

chargeable to tax in the year of receipt

If property is owned jointly, the income and deductions are shared in the same

proportion of ownership

4.3 Profits and gains from business

Following income are chargeable to tax under head Profits & Gains from Business

Profits and gains of any business or profession

Profits on sale of license granted under Exim policy

Cash assistance received for exports under Exim policy

Value of any benefit or perquisite whether convertible into money or not, arising from

business

Interest, salary, bonus, commission or remuneration, by whatever name called, received

by partners of a firm

Sum received under key man insurance policy

Any sum received or receivable for not carrying out any activity relating to business or

not sharing know how etc

Any compensation received for termination of business

Income received by a trade or professional association for the services rendered by its

members




Following are some major deductions allowed :

Rent, rates and taxes, repairs , insurance of premises occupied and used for business

Repairs of building, machinery etc

Depreciation as computed by the Act (Various rates have been prescribed for different

types of assets and also to encourage investments in specific areas or industry)

Development rebate / reserve - Various rates have been prescribed for different types of

assets

Expenditure on scientific research

Expenditure on acquisition of patent rights

Expenditure on know how

Expenditure for obtaining telecommunication license

Amortisation of certain preliminary expenses

Amortisation of expenses in VRS

Amortisation of amalgamation expenses

Insurance premium for the assets of the business

Bonus or commission paid to employees as per rules

Interest on loans

Contribution to PF fund for employees

Contribution to approved gratuity fund

Salaries and wages

Bad debts provided as per rules

Any normal business expenditure

Amounts not allowed as deduction :

Interest or royalty fees payable outside India on which tax is not deducted at source or

deducted but not remitted in time

Any brokerage or commission to professionals or contractors on which tax is not

deducted at source or deducted but not remitted in time

Sum paid on account of fringe benefit tax

Sum of tax paid on account of profits and gains from business

Any expenses which the assessing officer feels as unreasonable or excessive




Cash payments in excess of Rs 20000

Expenses on interest on loans, contribution to PF etc, rates and taxes etc which are not

paid (allowed only hen they are paid)

Audit of accounts:

Every person carrying on business shall , if his total sales , turnover exceeds Rs 40

lacs or for a person carrying on profession , the gross receipts exceeds Rs 10 lacs has

to get his accounts audited and report be furnished before a specified date

Special provision for computing profits and gains of plying , hiring or leasing of goods carriages

In case of an assessee who owns not more than 10 goods carriages at any point of

time during the previous year and who is engaged in the business of plying , hiring or

leasing of goods carriages , the business income for tax computation shall be

if heavy goods vehicle, Rs 3500 per vehicle per month

For other vehicles Rs 3150 per vehicle per month

No expenses are allowed as they are already factored

In case the assessee shows a higher amount , it will be accepted

Special provision for computing profits and gains in case of shipping & air craft

business in case of non residents

If an assessee is a non resident and engaged in the business of operation of ships , a

sum equal to 7 ½ % of the aggregate of following amounts shall be deemed to be the

profits and gains of such business

An amount payable to assessee on account of carriage of passengers , live stock or

mail or goods shipped at any port in India




an amount received in India on account of the carriage of passengers, live stock ,

mails or goods shipped at any port outside India

4.4 Capital gains

Profits arising out of transfer of assets are chargeable to tax under the head ‘Capital

Gains’

Some important points

If an assessee gets an insurance claim for loss of assets due to flood or hurricane or

earth quake or riots etc then such profits are taxed as capital gains

If an assesse transfers an asset to a firm in which he gets admitted , it is treated as

transfer and capital gain is attracted

When the assets of a firm is distributed on liquidation , it is treated as transfer and capital

gain will be attracted in the hands of the firm.

If a company goes for liquidation , the distribution is not transferred as transfer in the

hands of company and there be no capital gains for the company. The shareholder who

gets the assets will be covered under capital gains

If a shareholder gets money for buying its own shares by the company , the difference

between the cost and realization is subject to capital gain tax

The following are not considered as transfers :

Distribution of assets by HUF Transfer of assets by gift Transfer of assets by holding to subsidiary and vice versa subject to certain conditions

Transfer under scheme of amalgamation subject to conditions

Transfer under scheme of demerger

Transfer of asset by a firm to a company as a result of succession of the firm by the

company subject to conditions




Mode of computation:

The income of capital gains can be computed by reducing from full value of

consideration the following :

Ø Expenditure incurred wholly and exclusively for the transfer

Ø Indexed cost of acquisition (worked out based on cost inflation index)

Ø Indexed cost of improvements

Capital gain not to be taxed If the assessee invests the net consideration from the

transfer of long term assets in specified assets (if part amount is invested , exemption is

proportionate) Net consideration means full revenues reduced by direct expenses

If the capital gains are invested in residential properties or in specified assets as notified,

then the capital gains are exempted from tax

4.5 Income from other sources

Income which shall not be excluded from total income and which has not been included in

any other head , shall be charged under the head ‘income from other sources’

Following are some of such income

Ø Dividends

Ø Interest on securities

Ø Lease or rental income if not charged under house property or profits and gains of

business

Reasonable commission or other expenses relating to such income are deductible as

expenses




5. Set off

Set off of loss from one source against income of another source under same head of

income:

Such set off can be done except for loss under head capital gains

In case of loss of short term asset, the loss can be set off against gain of another short

term asset only. Similarly loss of a long term capital asset can be set off against gain of

long term capital asset

Set off of loss from one head against income of another

If the net result of any head other than capital gains is a loss, and there is no income

under the head capital gains, such loss can be set off against income of any other head

If the net result of any head other than capital gains is a loss, and there is income under

the head capital gains, such loss can be set off against income of any other head

including capital gains (both short and long term)

However the loss under the head capital gains can not be set off against income of other

heads

Loss under speculation business can be set of only against profits of another speculation

business

Carried forward for set off: In case of loss under head income from house property,

which can not be set off against income of other heads, can be carried forward to set off

in subsequent year , against income from house property of that year

Similarly the losses of head business income and capital gains can be carried forward

and set off against gains of business income and capital gains of following year




Losses of speculation business can be carried forward and set off against speculation

business profits of subsequent year and so on

The carried forward can be done for 8 years

The procedures for set off and carried forward are prescribed in the Act

6. Deductions

Section 80 of IT Act provides various deductions from the computed total income

Some of major deductions are:

Ø LIC Premium

Ø Deferred annuity plan

Ø Pf

Ø Unit linked insurance scheme

Ø Tuition fees for self an family

Ø principal repayment for housing loan

Ø stamp duty and registration fees for purchase of house

Subject to maximum of Rs 100000 and subject to rules prescribed

Ø Deposits into National savings scheme

Ø Medical insurance premia

Ø Expenses for medical maintenance of dependents

Ø Repayment & interest of educational loan taken for higher education

Ø Rents paid , not receiving HRA, any expenditure in excess of 10% of salary

Ø Donations

Ø Profits and gains of certain notified undertakings

Ø Interest on securities subject to Rs 12000 and certain conditions




7. Double taxation

Central government may enter into agreement with any country

for granting relief in respect of Income tax chargeable by both countries to promote

mutual economic relations

for avoidance of double taxation of income under this Act and corresponding law in force

List of countries with whom India has already signed double taxation agreement is

provided by the rules

8. Brief note on transfer pricing

Any income or expense from / to an international transaction with an associated

enterprise shall be computed having regard to arm’s length price

This means that all international transactions , sale, purchase or expenses, with

associated enterprise (s) are subject to review and such transactions shall be computed

with arm’s length price

Arm’s length price can be by any reasonable method

comparable method

cost plus method

profit split method

net margin method

any other prescribed method by Board

The price by most appropriate method would be applied irrespective of the document

price and tax shall be computed accordingly

Documents and books are to be maintained as prescribed by the Act




9. MAT

If a company shows book profit and the profits as per IT Act is a loss or is less than 7 ½

% of the book profits , then such book profits would deemed to be the income of the

assessee and tax payable would be at the rate of 7 ½ %

10. Tax on distribution of income

In addition to the normal income tax, additional tax shall be charged on the distribution of

income by companies at the rate of 12 ½ %

11. Special provisions for shipping companies

A shipping company has the option to work out the income as per prescribed methods of

computation and such income shall deemed to be the income under the head ‘profits

and gains from business’

Eligible companies-

Indian company

The place of effective management of the company is in India

It owns at least one qualifying ship

Main object of company is to carry on the business of operating ships

What is a qualifying ship?

It is sea going ship of fifteen net tonnage or more

It is a ship registered under Merchant shipping Act and in respect of which license has

been issued by Director General of shipping

A valid certificate is in force




Does not include

Fishing vessels

Pleasure crafts

Harbour ferries

A shipping company shall compute the tonnage income as per following table and such

computation has to treated as separate income

Qualifying ship having tonnage Amount of daily tonnage income ( 1 ) ( 2 ) Up to 1000 Rs 46 for each 100 tons exceeding 1000 but not more than 10000 Rs 460 plus Rs 35 for each 100 tons

exceeding 1000 tons exceeding 10000 but not more than 25000

Rs 3610 plus Rs 28 for each 100 tons exceeding 10000 tons

Exceeding 25000 Rs 7810 plus Rs 19 for each 100 tons exceeding 25000 tons

The amount shall be multiplied by the number of days operated and such income shall

deemed to be the income as per the head ‘profits and gains of business’

12. Advance tax

Tax has to be paid in advance and for that purpose an assessee has to estimate his

income properly

The advance tax schedule is given as follows :

For companies Due date of instalment Amount payable On or before 15th of June Not < 15% of advance tax On or before 15th of September Not < 40% of advance tax as reduced by

earlier instalment On or before 15th of December Not <75% of advance tax as reduced by

earlier instalments On or before 15th of arch Whole amount of such advance tax as

reduced by amounts paid earlier




All assesses other than companies Due date of instalment Amount payable On or before 15th of September Not < 30% of advance tax On or before 15th of December Not <60% of advance tax as reduced by

earlier instalments On or before 15th of March Whole amount of such advance tax as

reduced by amounts paid earlier 13. Income tax on fringe benefits

In addition to the income tax , an additional income tax called FBT shall also be charged

on the facilities / benefits provided by employers to employees.

The following are such benefits-

Any privilege , service or amenity provided directly or indirectly

Free or concessional ticket given to employees for private journeys

Contribution to approved super annuation fund

Following are the benefits deemed to have been provided if the employer has incurred any

expenses towards-

Ø Entertainment

Ø Conference

Ø Sales promotion

Ø Employees welfare

Ø Conveyance, tour and travel

Ø Use of hotel

Ø Reapair and running of motor car

Ø Festival celebrations

Ø Use of health club and other clubs

Ø Gifts

Ø Scholarships

The values of these fringe benefits have also been stated in the act Employer has to file a return on FBT by 31st of October every year




14. TDS

Certain income are liable to be charged tax and such tax is charged at source, collected

and remitted. In case of income in respect of which there is no ruling for such recovery

and remittance at source, for such income the assessee shall pay the tax directly

Following are major such incomes which are subject to tax deduction at source

Ø Salaries

Ø Interest on securities

Ø Interest other than Interest on securities

Ø Winnings from lotteries, horse race

Ø Payments to contractors and sub contractors

Ø Insurance commission

Ø Commission and brokerage

Ø Professional and technical services

Ø Income from mutual funds

Ø Others as notified from time to time

Failure to deduct and remit attracts penalties. Assessee can take credit of such tax

amount deducted in his return based on certification by the person who had deducted.

More and more sources are being brought into this bracket to ensure avoidance of tax

and collection of tax in advance

15. Appeals

Aggrieved assessee , by the order of assessing officer , may appeal to higher authorities

in the following order

Deputy commissioner of appeals

Commissioner of appeals

Appellate Tribunal

High Court

Supreme Court




16. Penalties Following are some failures which attract penalties:

Ø Failure to furnish returns, comply with notices

Ø Concealment of income

Ø Failure to keep , maintain books as required by Act

Ø Failure to get accounts audited

Ø Failure to furnish audit report as per requirement

Ø Failure to deduct tax at source

Ø Failure to furnish annual information return

Ø Failure to comply with rules on fringe benefits

Ø Failure to allow inspection by authorities

Ø Failure to estimate and pay advance tax

17. Summary

Income tax is chargeable on total income of a person resident in India for the previous

year

Resident- if is in India for a period of 182 days and more in the previous year or in


Previous year-financial year immediately preceding the assessment year

The income are classified under some broad categories for taxation purposes , viz.,

salaries, Income from house property, profits nad gains from business, capital gains and

income from other sources

Set off of loss from one source against income of another source under same head of income is permitted Set off of loss from one head against income of another is allowed

If the net result of any head other than capital gains is a loss, and there is no income

under the head capital gains, such loss can be set off against income of any other head




If the net result of any head other than capital gains is a loss, and there is income under

the head capital gains, such loss can be set off against income of any other head

including capital gains (both short and long term)

However the loss under the head capital gains can not be set off against income of other

heads

In case of loss under head income from house property , which can not be set off

against income of other heads , can be carried forward to set off in subsequent year ,

against income from house property of that year

Similarly the losses of head business income and capital gains can be carried forward

and set off against gains of business income and capital gains of following year

The carried forward can be done for 8 years

Central government may enter into agreement with any country

For granting relief in respect of Income tax chargeable by both countries to promote

mutual economic relations

For avoidance of double taxation of income under this Act and corresponding law in

force

Any income or expense from / to an international transaction with an associated

enterprise shall be computed having regard to arm’s length price

This means that all international transactions, sale, purchase or expenses, with

associated enterprise (s) are subject to review and such transactions shall be computed

with arm’s length price by prescribed methods

Assessees shall pay tax in advance as per the schedule prescribed by the Act

In addition to the income tax , an additional income tax called FBT shall also be charged

on the facilities / benefits provided by employers to employees.




18. Key words

a) Resident- if is in India for a period of 182 days and more in the previous year or in


b) Previous year-financial year immediately preceding the assessment year

c) Assessment year: means a period of 12 months commencing every 1st April

d) Salary: Salary includes any salary due from employer or previous employer whether

paid or not and arrears of salaries paid during the previous year. This also includes bonus,

commission by whatever name called

e) Annual Value – actual rent received or sum which the property is expected to earn as

reasonable rent

f) Capital gains: Profits arising out of transfer of asset

g) Set off: Loss of one head – adjustment agaist gain of another head

h) Transfer pricing : Any income or expense from / to an international transaction with

an associated enterprise shall be computed having regard to arm’s length price

i) Advance tax: Taxation to be paid in advance based on estimates on the schedule

prescribed by the Act

j) Fringe benefit tax: In addition to the income tax , an additional income tax called FBT

shall also be charged on the facilities / benefits provided by employers to employees.

k) TDS: Tax deducted at source




19. Practical questions

1. What are income that do not form part of total income?

2. Define salary and perquisite

3. What do you mean by income from house property and what are major deductions

allowed under that head?

4. What are income and deductions under the head profits and gains from business?

What are the disallowed deductions?

5. What do you mean by Capital gain? Hat are not considered as transfers?

6. List major deductions under section 80

7. What do you understand by Transfer Pricing and what are major provisions?

8. What do you understand by double taxation agreements?

9. Write a note on special provisions applicable to shipping companies

10. What is the schedule of payments of advance tax?

11. Write a note on TDS

12. What are salient rules regarding fringe benefit tax?

13. Write a note on provisions on appeals?


³ Bare Act

³ Income Tax by Taxman

³ Income Tax by Singhania




Chapter 5: THE CENTRAL EXCISE ACT 1944 After studying this module you will understand Ø Meaning Ø How are Levies & collections of duty are done Ø Methods of Valuation of goods Ø Powers and duties of officers Ø Penalties

Contents

1. Introduction 2. Levy and collection of duty 3. Powers and duties of officers 4. Advance rulings 5. Settlement of cases 6. Adjudication , confiscations and penalties 7. Appeals 8. Summary 9. Self examination questions 10. Reference books

1 Introduction The Central Excise Act was introduced in year 1944. On various occasions the Act has got

amended , the amendments are normally introduced by Finance Bills passed every year.

There are 40 sections in the Act in seven chapters. The act is framed in such a way that it

describes levy and collection, indicating amount of duty, powers of authorities, adjudication

of confiscations and penalties etc. Most of amendments are implemented through

schedules

Recently concept of CENVAT is introduced (Central Value Added ). This concept is

derived from internationally used concept of VAT , earlier known as MODVAT

2.Levy and collection of duty

2.1 A duty of excise , called as CENVAT, shall be levied and collected on all excisable

goods , which are produced or manufactured in India (excluding goods produced in special




economic zones) at the rates specified in First and second schedule of Central Excise

Tariff Act

In case of goods produced or manufactured in special economic zones (SEZ) or by a

hundred percent export oriented units (100 % EOU) and brought to any other place in

India , the duty shall be the aggregate of duties of customs which are leviable as per

customs act as if they are manufactured outside India and imported into India

The application of levy shall not apply to manufacture of salt by or on behalf of

Government

2.2 Valuation of excisable goods:

If the transaction is genuine , not between related parties , the duty shall be chargeable on

value of goods which is the transaction value , when the goods are sold by the assessee ,

at the time of delivery or removal

In other cases , the value will be determined and not the transaction value automatically

(related means ‘relative’ or ‘inter connected undertakings’)

This does not apply for goods for which a tariff value has been fixed

Transaction value means – price actually paid or payable for the goods when sold and

includes in addition to the amount charged as price. However it excludes excise duty and

sales tax and other levies

Valuation of goods for retail sale price

Where the goods are excisable and are chargeable to duty with reference to value , then

such value shall be deemed to be the retail sale price declared on such goods

Where the excisable goods are removed from the place of manufacture without declaring

the retail price of the goods on the packages




Or retail price has been declared not as per the requirements of the provisions of the Act,

then such goods shall be liable to confiscation and retail price shall be ascertained as per

the prescribed manner

Registration : A person who is engaged in production / manufacture of any specified

goods included in first and second schedule of Act , shall register himself with proper

officer in prescribed manner

Any person violating the provisions will be pushishable , in case the offence relating to

duty amount exceeding Rs 1lac – imprisonment which may extend to 7 years , in other

cases imprisonment which may extend to 3 years with fine

If duty is short levied or excess refunded erroneously then authorities have powers to

issue show cause notice

If dues are not recovered , the Authorities have the right to enforce attachment on the

goods or can enforce others to deduct such amounts payable to the defaulter

Authorities also have powers to charge interest on delayed payments , the rates are

stipulated from time to time, not less than 10 % and not more than 36 % pa

If by suppression of facts or fraud duties are short paid , authorities shall determine the

exact duties and can also levy penalties for equal amount

Refund : Any person claiming refund can file an application to the Assistant Commissioner

of Central excise before expiry of one year from the incurrence date. If duties are paid

under protest , one year limitation does not apply

If refunds are elayed , interest shall be paid as per rules , not less than 5 % and not

exceeding 30 % pa




Indicating amount of duty in the price of goods etc

Every person has to prominently indicate the amount of duty which will form part of the

price , at the time of clearance of goods

Every person who has paid the duty of excise on any goods , be deemed to have passed

on the full incidence of such duty to the buyer of such goods

3. Powers and duties of officers A central excise officer may exercise the powers and discharge the duties conferred or

imposed under this Act

With the prior approval of Commissioner, can arrest any person whom he has reason to

believe to be liable to be punished under this Act

Can summon persons to produce documents

With the prior approval of Commissioner, can order for special audit of the manufacturer

by a nominated person, if he is of the opinion that values are not correctly declared

Special audit can also be ordered if it is felt that credit of duty availed is not within normal

limits

All officers of police, customs, village administration, land revenue are required to assist

Central excise officers

Any excise officer makes search or seizure of places or documents without reasonable

reasonable ground or reason, is punishable with fine

Any excise officer who ceases or refuses to perform or withdraws himself from duties , is

punishable for imprisonment and or penalties

4. Advance rulings Advance rulings means the determination by the authority, of law or facts specified in the

application regarding the liability to pay duty in relation to an activity proposed to be

undertaken by the applicant




An applicant desirous of of obtaining an advance ruling may make an application in such

form and in such manner as may be prescribed setting the question on which the advance

ruling is sought

The question shall be in respect of

Ø Classification of goods

Ø Applicability of notifications issued

Ø Principles to be adopted for the purpose of determination of value of goods

5. Settlement of cases:

Central Government, by notification in official gazette, constitute a commission to be

called the customs and excise settlement commission for the settlement of cases.

An assessee may, file an application in the prescribed form and manner, containing full

details of duty or liability with workings and the short levy of on account of mis.

Classification etc to settle the case. On receipt, the commission will call for a report from

the Commissioner of central excise and opportunity will be given to all concerned

If for any reason the commission is of the opinion, pending the proceedings, for the

purpose of protecting the interests of revenue it is necessary to do so , it may

provisionally attach any property belongs to the applicant

The commission has also powers to reopen completed proceedings if it thinks it is

required to be done. It has got powers to inspect the any such person, can grant

immunity to person, can send back the case back to central excise officer if felt the

applicant has not cooperated with officer, the order of settlement shall be conclusive as

to matters stated therein

6. Adjudication, confiscations and penalties

If anything required to be confiscated under the act, it can be done with restriction on

values by assistant commissioner level and without restrictions by commissioner

However opportunity will be given to the party in the proceedings

Party has option to pay fine in lieu of confiscations




7.Appeals

Any person aggrieved by the order of Central excise officer may appeal to to the

commissioner of central excise within 60 days of date of communication of such order

The commissioner shall give an opportunity to the applicant to be heard and after such

hearing he shall pass the order which shall be in writing

Commissioner shall pass the order within 6 months , where ever possible, from the date

of filing

A person who is aggrieved by the order of commissioner , may appeal to Appellate

tribunal in certain cases

The tribunal after hearing from parties concerned , may amend or confirm the order

If any party is aggrieved with such orders they can appeal to High Court and similarly

further to Supreme court

8. Summary

A duty of excise , called as CENVAT, shall be levied and collected on all excisable

goods , which are produced or manufactured in India (excluding goods produced in

special economic zones) at the rates specified in First and second schedule of Central

Excise Tariff Act

If the transaction is genuine , not between related parties , the duty shall be chargeable

on value of goods which is the transaction value , when the goods are sold by the

assessee , at the time of delivery or removal

In other cases , the value will be determined and not the transaction value automatically

Where the excisable goods are removed from the place of manufacture without

declaring the retail price of the goods on the packages

A person who is engaged in production / manufacture of any specified goods included in

first and second schedule of Act , shall register himself with proper officer in prescribed

manner




Any person violating the provisions will be pushishable , in case the offence relating to

duty amount exceeding Rs 1lac – imprisonment which may extend to 7 years , in other

cases imprisonment which may extend to 3 years with fine

Any person claiming refund can file an application to the Assistant Commissioner of

Central excise before expiry of one year from the incurrence date. If duties are paid

under protest , one year limitation does not apply

A central excise officer may exercise the powers and discharge the duties conferred or

imposed under this Act

Any person aggrieved by the order of Central excise officer may appeal to the

commissioner of central excise within 60 days of date of communication of such order.

Further appeals shall be in the order of Appellate tribunal, High court and Supreme court

9. Self examination questions

1. Explain applicability of the act

2. Explain how valuation is done and rules regarding the same

3. Explain penalties in case of irregularities

4. What are powers and duties of officers?

5. What do you mean by advance rulings?

6. Mention the procedures for settlement of cases?

7. Explain provisions relating to appeals?

10.Reference books Ø Bare Act

Ø R K Jain




Chapter 6: CENTRAL SALES TAX ACT 1956 After reading this act you will understand Ø Meaning and purpose Ø Way of operating Ø Inter state tax Ø Way of settling disputes

Contents

1. Introduction 2. Incidence 3. Inter sales tax 4. Goods of special importance 5. Settlement of disputes 6. Summary 7. Key words 8. Practical questions 9. Reference readings

Introduction

This Act was enacted in the year 1956 and extends to whole of India

This Act contains six chapters and 23 sections. The Act is supplemented by schedules

and rules. Major amendments are effected by Finance bills normally

Meaning of some important terms –

a) Appropriate state- if a dealer operates from one state , that state; if he operates from

different states , all such states

b) Business- any trade , commerce or manufacture whether or not the firm is carried on

with profit motive

c) dealer- means a person who carries on business of buying , selling, supplying or

distributing goods directly or indirectly for cash or for deferred payment or for

commission , remuneration or other valuable consideration and includes-

- a local authority, company , cooperative society , club , firm, HUF

- broker , commission agent




d) Goods- includes all materials, articles, commodities and all movable property but does

not include newspapers, shares and securities

e) Place of business- if a dealer carries on business directly or through agent, such

place of business

- warehouse, godown

- place where dealer keeps his accounts

f) Registered dealer- a dealer registered as per the provisions

g) Sale – any transfer of property in goods by one person to another for cash or for

deferred benefit or for any valuable consideration

h) sale price- amount payable to dealer as consideration for sale of any goods less any

sum allowed as cash discount according to practice prevailing in the trade

Incidence 2.1 when sale or purchase of goods deemed to take place in the course of inter state trade

when the sale or purchase

- occasions the movement of goods from one state to another

- Is effected by transfer of documents of title to goods during their movement

from one state to another

explanation

– where movement of goods commences and terminates in the same state , it shall

not be a movement of goods from one to another state

- determination of movement from one to another state depends on contract and not

mere movement of goods




2.2 when a sale or purchase of goods said to take place in the course of import or export

A sale or purchase of goods shall be deemed to have taken place in the course of

exports out of country if sale or purchase of goods is effected by transfer of documents

of title to the goods after the goods have crossed the customs frontiers of India

A sale or purchase of goods shall be deemed to have taken place in the course of import

of goods into territory of India only if the sale or purchase is effected by transfer of

documents of title to the goods before the goods have crossed the customs frontier

The point to note here is that the documents to be complete on transfer of title

Inter sales tax Liability to tax on inter state sales

Every dealer shall be liable to pay tax on all sales of goods effected by him in the course

of inter state trade . however he is not liable for taxation in case of export of goods. Any

subsequent sale is exempt from taxation subject to rules

Inter unit transfers When a dealer transfers goods to his other units in other states , he is not liable to pay

tax , however , the burden of proof , lies with him

Registration of dealers Every dealer liable to pay tax shall make an application for registration under this Act to

the prescribed authority. Once approved , the dealer will be issued a certificate in this

regard

Rates of taxes The rates of sales tax will be as per the rate schedule notified and amended by the

Government from time to time




A dealer who sells goods to Government or a registered dealer , shall pay tax which

shall be 2 % or the rate applicable to the state whichever is lower

A rate of 4% shall operate till this percentage of 2% takes effect

If the dealer sells to other than mentioned above , in case of declared goods , the rate

will be twice the rate applicable within the state and in case of goods other than declared

goods, the rate shall be 10% or the rate applicable in the state whichever is higher

Determination of turnover In determining the turnover the following shall be deducted

Amount determined by the formula (rate of tax x aggregate of sale price) / (100+ rate of

tax)

Sale price of returned goods

Any other deductions notified by Government

Levy , collection and penalties

The tax payable shall be collected by the government from the dealer as per the

provisions of the act

On sales only a registered dealer can collect the tax from the buyer

Person who violates any provision of the act is punishable with penalties, for false

representations, non furnishing returns, failure to declare proper values , failure to remit

tax etc

Goods of special importance

It is not permissible for state legislature to impose a tax on goods declared to be of

special importance in inter state trade or commerce except in accordance with

restrictions and conditions stipulated in the act




Following are some of goods notified as of special importance :

Ø Cereals (paddy, rice , wheat, ragi , barley etc)

Ø Coal

Ø Cotton, cotton yarn but not cotton waste

Ø Crude oil

Ø Hides and skins

Ø Iron and steel

Ø Steel tubes

Ø Wheels , tyres

Ø Sugar

The restrictions imposed on state are in respect of declared goods

Ø A tax either on sale or on purchase alone can be levied

Ø Rate of tax shall not exceed 4 %

Ø Tax can be levied only at one definite stage (state can determine whether it can be

at first sale or purchase or any one of successive points)

Settlement of disputes

The central government shall constitute an authority to settle inter state disputes to be

known as “ central sales tax appellate authority”

Summary

Business- means any trade , commerce or manufacture whether or not the firm is carried

on with profit motive

dealer means a person who carries on business of buying , selling, supplying or








when the sale or purchase

- occasions the movement of goods from one state to another

- is effected by transfer of documents of title to goods during their movement from

one state to another

A sale or purchase of goods shall be deemed to have taken place in the course of

exports out of country if sale or purchase of goods is effected by transfer of documents

of title to the goods after the goods have crossed the customs frontiers of India

A sale or purchase of goods shall be deemed to have taken place in the course of import

of goods into territory of India only if the sale or purchase is effected by transfer of

documents of title to the goods before the goods have crossed the customs frontier

Every dealer shall be liable to pay tax on all sales of goods effected by him in the course

of inter state trade . however he is not liable for taxation in case of export of goods. Any

subsequent sale is exempt from taxation subject to rules

When a dealer transfers goods to his other units in other states , he is not liable to pay

tax , however , the burden of proof , lies with him

Every dealer liable to pay tax shall make an application for registration under this Act to

the prescribed authority. Once approved , the dealer will be issued a certificate in this

regard

The rates of sales tax will be as per the rate schedule notified and amended by the

Government from time to time

A dealer who sells goods to Government or a registered dealer , shall pay tax which

shall be 2 % or the rate applicable to the state whichever is lower

A rate of 4% shall operate till this percentage of 2% takes effect




If the dealer sells to other than mentioned above , in case of declared goods , the rate

will be twice the rate applicable within the state and in case of goods other than declared

goods, the rate shall be 10% or the rate applicable in the state whichever is higher

In determining the turnover the following shall be deducted

Amount determined by the formula (rate of tax x aggregate of sale price) / (100+ rate of

tax)

Sale price of returned goods

Any other deductions notified by Government

Key words

Appropriate state- if a dealer operates from one state , that state; if he operates from

different states , all such states

Business- any trade , commerce or manufacture whether or not the firm is carried on

with profit motive

Dealer- means a person who carries on business of buying , selling, supplying or





Goods- includes all materials, articles, commodities and all movable property but does

not include newspapers, shares and securities

Place of business- if a dealer carries on business directly or through agent, such

place of business

- warehouse, godown

- place where dealer keeps his accounts

Registered dealer- a dealer registered as per the provisions




Sale – any transfer of property in goods by one person to another for cash or for

deferred benefit or for any valuable consideration

Sale price- amount payable to dealer as consideration for sale of any goods less any

sum allowed as cash discount according to practice prevailing in the trade

Practical questions

1. Explain the terms sale of goods, sale price, registered dealer

2. What are rates of taxes and how the turnover is determined

3. Explain provision regarding goods of special importance

4. Explain provision regarding inter state sales

Reference readings

Ø Bare Act

Ø Sales Tax by Jain




Chapter 7: THE CUSTOMS ACT 1962 After studying this material you will be familiar with Ø Meaning of various terms used in customs act Ø What are prohibitions on import and export Ø Detection of illegal exports Ø How duties are levied Ø What are exemptions Ø Clearance of export and import of goods Ø Drawback Ø Confiscation of goods

Contents

1. Introduction 2. officers of customs 3. Prohibition on exports and imports 4. Levy and exemption of duties 5. Refunds 6. Advance rulings 7. Clearance of imported and exported goods 8. Warehousing 9. Drawback 10. Provisions regarding baggage, goods imported / exported by post 11. Searches, seizure 12. Appeals 13. Summary 14. Key words 15. Exercises 16. Reference readings

1. Introduction

The Customs Act was introduced in year 1962. It contains 17 chapters with 161

sections. The Act provides for levy of duties of customs. The Act extends to whole of

India. This act goes under amendments based on the needs and requirements of

industries

Dutiable goods means- goods which are chargeable to duty and on which duty has not

been paid

Duty – means duty of customs leviable under this act




Goods includes- vessels, air crafts, stores, baggage, any kind of moveable property

2. Officers of customs

Following are the class of officers of customs

Ø Chief commissioner of customs

Ø Commissioner of customs

Ø Commissioner of customs- appeals

Ø Joint commissioner of customs

Ø Deputy commissioner of customs

Ø Assistant commissioner of customs

Ø Such other class of officers as may be appointed

3. Prohibition on exports and imports

If the Central Government is satisfied that it is necessary to do so for any purpose listed

below, it may prohibit by notification, import and export of certain goods , either

absolutely or with some conditions

The purposes are –

Ø Maintenance of security in India

Ø Prevention of smuggling

Ø Prevention of shortage of goods

Ø Conservation of foreign exchange

Ø Prevention of injury to economy by uncontrolled import / export of gold

Ø Establishment of any industry

Ø Prevention of serious injury to domestic industry

Ø Protection of national treasures of artistic or historical value

Ø Protection of human or animal life or health

Ø Protection of trade marks

Ø Implementation of any treaty or agreement with any country




Ø Prevention of contravention of any law in force

Ø Conservation of exhaustible natural resources

Ø Any other purpose against the interest of public 4 Levy and exemption of duties

4.1 Dutiable goods

Duties shall be levied as specified in Customs Tariff on goods imported into or exported

out of India

4.2 Duty on pilfered goods

If the goods are pilfered before the officer makes an inspection and after it is unloaded,

no duties are payable

4.3 Valuation for assessment

For the purpose of duty , the value of goods shall be the price at which they are offered

for sale or normal prices as per practice as the case may be. The rate of exchange shall

be calculated with reference to one prevailing on the date of presentation of Bill of

Exchange

4.4 Date for determination of rate of duty

The date shall be the date of bill of entry

4.5 Assessment and provisional assessment

The goods imported or to be exported shall first be examined for their description and

classification. After examination assessment is done, the officer may ask for proper

records , contracts, brokers notes etc to substantiate the values




When proper documents are not produced or the officer wants to refer the goods to lab

or proper documents produced but the officer feels to investigate further, a provisional

assessment can be made and then after the conditions are satisfied final assessment

shall be made

4.6 Duty for goods consist of articles of different rates of duty Rates are applied individually to those articles as per the rates applicable or if there are

no clear documentation in case of item like spares etc, then the ate of the same rate of

article is applied

4.7 Re importation of goods If goods are re imported after exports , such goods shall be liable to duty as if they are

imported into India

4.8 Power to exempt from duties If the Central Government is satisfied that it is necessary in the public interest to do so ,

it may , by notification exempt certain goods , generally or with conditions , from duties

4.9 Refund and claim Duty shall be refunded

if the goods are returned otherwise than by resale,

goods are re imported within one year from the date of exportation

Claim has to be furnished with Department within 6 months with all documentary

evidence to satisfy authorities 5. Advance rulings

This means determination of , by the authority, of a question of law or fact specified in

the application regarding the liability to pay duty in relation to an activity which is

proposed to be undertaken




An applicant desirous of obtaining advance ruling , may make an application in such

form and in such manner as prescribed

The question on which advance ruling is sought shall be in respect of

Ø classification of goods

Ø applicability of notification

Ø principles adopted for determination of value of goods

Ø rates of duties applicable

6. Clearance of imported and exported goods

An importer may furnish a duly filled in bill of entry and present to the proper officer

The bill of entry shall contain all details about the goods to be cleared

Based on the examination and assessment of goods the duties are fixed and paid

If the officer is satisfied that the goods are not prohibited goods and duties are paid , he

may pass order permitting clearance of goods

If the goods imported are not cleared within the prescribed time, it may be auctioned by

customs

Pending clearance , the importer may store the goods in warehouse

Exporter of goods may furnish a bill of entry with proper officer

Once the proper officer is satisfied that goods are not prohibited goods and all formalities

of customs are duly completed he may allow export of such goods

7. Warehousing

Customs may permit private warehouses wherein dutiable goods imported may be

deposited




An importer can utilize the services of warehousing and clear the goods in stages as per

his requirements . Duty shall be paid at the time of drawls . He has to execute a bond with

customs , with a guarantee for twice the amount of duty payable

He shall pay the rent for storage as per the prescribed rates

The maximum period for which the goods can be stored is for capital goods- 5 years, for

any goods for EOUs – 3 years for others – 1 year

The ware house shall be controlled by an authorized officer

The owner of warehoused goods may, with prior permission, transfer goods from one to

another warehouse

Goods may be taken for home consumption or for exports as the case may be

In case of improper clearance , there will be penalties and punishments

After total clearance of goods, the bond shall be cancelled

8. Drawback

The import duty paid on goods imported is refundable as duty drawback if the imported

goods are used in manufacture goods which is exported provided

the goods to be exported within 2 years

Customs should be satisfied that the imported goods are identifiable in goods exported

This is to make the exports competitive in world market

There are rules and procedures laid down to get the drawback in the Act

Government also prescribes brand rates for specified products which can be claimed

after goods are exported . These rates are revised from time to time




9. Provisions regarding baggage, goods imported / exported by post

The owner of a baggage should make a proper declaration to the customs officer about

the contents of the baggage

If the officer is satisfied that the items are for bonafied use the owner , he can exempt

from duties

Otherwise the rate shall be as applicable on the date of import as per rules

If the duties are not paid or if they are prohibited items , officer can detain the goods

10. Searches, seizure

If officer has reasonable grounds to believe that the person bringing in goods may not

have complied with rules, then he has powers to search , seize the goods and confiscate

. he person also can be arrested

11. Appeals

Any person aggrieved by any order or decision passed by the officer, can make appeal

to higher authorities

Commissioner (appeals)

Appellate Tribunal

Committee of Chief commissioners of Customs (in some specified cases)

High Court

Supreme Court

Detailed procedures have been laid down on appeals




12. Summary

The Act provides for levy of duties of customs , the Act extends to whole of India.

If the Central Government is satisfied that it is necessary to do so for prescribed

purposes, it may prohibit by notification, import and export of certain goods, either

absolutely or with some conditions

Duties shall be levied as specified in Customs Tariff on goods imported into or exported

out of India

If the goods are pilfered before the officer makes an inspection and after it is unloaded,

no duties are payable

For the purpose of duty, the value of goods shall be the price at which they are offered

for sale or normal prices as per practice as the case may be. The rate of exchange shall

be calculated with reference to one prevailing on the date of presentation of Bill of

Exchange

Rates are applied individually to those articles as per the rates applicable or if there are

no clear documentation in case of item like spares etc, then the ate of the same rate of

article is applied

If goods are re imported after exports, such goods shall be liable to duty as if they are

imported into India

If the Central Government is satisfied that it is necessary in the public interest to do so ,

it may , by notification exempt certain goods , generally or with conditions , from duties

Duty shall be refunded if the goods are returned otherwise than by resale, goods are re

imported within one year from the date of exportation

Customs may permit private warehouses wherein dutiable goods imported may be

deposited




An importer can utilize the services of warehousing and clear the goods in stages as per

his requirements. Duty shall be paid at the time of drawls . He has to execute a bond

with customs, with a guarantee for twice the amount of duty payable

The import duty paid on goods imported is refundable as duty drawback if the imported

goods are used in manufacture goods which is exported

The owner of a baggage should make a proper declaration to the customs officer about

the contents of the baggage. If the officer is satisfied that the items are for bonafied use

the owner, he can exempt from duties, otherwise the rate shall be as applicable on the

date of import as per rules

If officer has reasonable grounds to believe that the person bringing in goods may not

have complied with rules, then he has powers to search, seize the goods and confiscate.

He person also can be arrested

Any person aggrieved by any order or decision passed by the officer, can make appeal

to higher authorities : Commissioner (appeals), Appellate Tribunal, Committee of Chief

commissioners of Customs (in some specified cases), High Court, Supreme Court

13 Key words

1. Dutiable goods : goods which are chargeable to duty and on which duty has not

been paid

2. Duty: duty of customs leviable under this act

3. Goods includes- vessels, air crafts, stores, baggage, any kind of moveable property




4. Advance rulings : Determination of , by the authority, of a question of law or fact specified in the application regarding the liability to pay duty in relation to an activity which is proposed to be undertaken

5. Duty Drawback : Refund of duty paid on imports , when goods are exported , if the

imported goods are used in manufacturing the exported goods 14 Exercises

1. Name few officers of customs

2. Under what grounds Central Government prohibits import / export of certain

goods?

3. Mention the provisions on Levy and exemption of duties

4. What do you understand by warehousing ?

5. Write a note on duty drawback

6. Write provisions on baggage clearances

7. What do you understand by advance ruling ? 15 Reference readings

³ Bare Act

³ R K Jain

³ Nabhi Publications




Chapter 8: FOREIGN TRADE POLICY After reading this unit, you will be familiar with Ø The policy framework Ø Various authorities Ø Various schemes for exporters Ø General provisions for import & export Ø Export oriented units, SEZ etc

Contents

1. Introduction 2. General Provisions regarding Imports & exports 3. Duty exemption schemes 4. Export promotion capital goods scheme 5. Deemed exports 6. EOUs, EHTPs, STPs, BTPs 7. SEZ 8. Free trade zones 9. List of appendices 10. Questions 11. Reference readings

Introduction

In exercise of the powers conferred under Section 5 of The Foreign Trade (Development

and Regulation Act), 1992 (No. 22 of 1992), the Central Government hereby notifies the

Foreign Trade Policy for the period 2004-2009 incorporating the Export and Import

Policy for the period 2002-2007, as modified. This Policy shall come into force with effect

from 1st September 2004 and shall remain in force upto 31st March, 2009 unless as

otherwise specified

General Provisions regarding Imports & exports

Exports and Imports free unless regulated Exports and Imports shall be free, except

in cases where they are regulated by the provisions of this Policy or any other law for the

time being in force.




Procedure The Director General of Foreign Trade may, in any case or class of cases,

specify the procedure to be followed by an exporter or importer or by any licensing or

any other competent authority for the purpose of implementing the provisions of the Act,

the Rules and the Orders made thereunder and this Policy. Such procedures shall be

included in the Handbook (Vol.1), Handbook (Vol.2), Schedule of DEPB Rate and in

ITC(HS) and published by means of a Public Notice. Such procedures may, in like

manner, be amended from time to time.

Restricted Goods Any goods, the export or import of which is restricted under ITC(HS)

may be exported or imported only in accordance with a licence/ certificate/ permission or

a public notice issued in this behalf.

Importer-Exporter Code Number No export or import shall be made by any person

without an Importer-Exporter Code (IEC) number unless specifically exempted. An

Importer-Exporter Code (IEC) number shall be granted on application by the competent

authority in accordance with the procedure specified in the Handbook (Vol.1).

Actual User Condition Capital goods, raw materials, intermediates, components,

consumables, spares, parts, accessories, instruments and other goods, which are

importable without any restriction, may be imported by any person.

However, if such imports require a licence/ certificate/permission, the actual user alone

may import such goods unless the actual user condition is specifically dispensed with by

the licensing authority.

Second Hand Goods All second hand goods, excepting second hand capital

goods, shall be restricted for imports and may be imported only in accordance with the

provisions of this Policy, ITC(HS), Handbook (Vol.1), Public Notice or a

licence/certificate/permission issued in this behalf.

Import of Gifts Import of gifts shall be permitted where such goods are otherwise freely

importable under this Policy. In other cases, a Customs Clearance Permit (CCP) shall be

required from the DGFT.




Passenger Baggage Bonafide household goods and personal effects may be

imported as part of passenger baggage as per the limits, terms and conditions thereof in

the Baggage Rules notified by the Ministry of Finance.

Import on Export basis New or second hand capital goods, equipments, components,

parts and accessories, containers meant for packing of goods for exports, jigs, fixtures,

dies and moulds may be imported for export without a licence/certificate/permission on

execution of Legal Undertaking/Bank Guarantee with the Customs Authorities provided

that the item is freely exportable without any conditionality/requirement of licence/

permission as may be required under ITC(HS) Schedule II.

Re-import of goods repaired abroad Capital goods, equipments, components, parts

and accessories, whether imported or indigenous, except those restricted under ITC

(HS) may be sent abroad for repairs, testing, quality improvement or upgradation or

standardization of technology and re-imported without a licence/certificate/permission.

Execution of BG/ LUT Wherever any duty free import is allowed or where otherwise

specifically stated, the importer shall execute a Legal Undertaking (LUT)/Bank

Guarantee (BG)/ Bond with the Customs Authority before clearance of goods through

the Customs, in the manner as may be prescribed. In case of indigenous sourcing, the

licence/ certificate/ permission holder shall furnish LUT / BG / Bond to the licensing

authority before sourcing the material from the indigenous supplier/nominated agency.

Exemption from Bank Guarantee All the exporters who have an export turnover of at

least Rupees 5 crore in the current or preceding licencing year and have a good track

record of three years of exports will be exempted from furnishing a BG for any of the

schemes under this Policy and may furnish a LUT in lieu of BG.

Free Exports All goods may be exported without any restriction except to the

extent such exports are regulated by ITC(HS) or any other provision of this Policy or any

other law for the time being in force.

The Director General of Foreign Trade may, however, specify through a public notice

such terms and conditions according to which any goods, not included in the ITC(HS),

may be exported without a licence/ certificate/ permission.




Export of Gifts Goods, including edible items, of value not exceeding Rs.5,00,000/- in

a licensing year, may be exported as a gift.

However, items mentioned as restricted for exports in ITC(HS) shall not be exported as

a gift, without a licence/certificate/permission.

Export of Replacement Goods Goods or parts thereof on being exported and found

defective/damaged or otherwise unfit for use may be replaced free of charge by the

exporter and such goods shall be allowed clearance by the customs authorities provided

that the replacement goods are not mentioned as restricted items for exports in ITC(HS).

Realisation of Export Proceeds If an exporter fails to realise the export proceeds

within the time specified by the Reserve Bank of India, he shall, without prejudice to any

liability or penalty under any law for the time being in force, be liable to action in

accordance with the provisions of the Act, the Rules and Orders made there under and

the provisions of this Policy.

Registration -cum-Membership Certificate Any person, applying for (i) a licence/

certificate/ permission to import/ export, [except items listed as restricted items in

ITC(HS)] or (ii) any other benefit or concession under this policy shall be required to

furnish Registration-cum-Membership Certificate (RCMC) granted by the competent

authority in accordance with the procedure specified in the Handbook (Vol.1) unless

specifically exempted under the Policy.

Duty exemption schemes

Duty Exemption and Remission Schemes Duty exemption schemes enable duty free

import of inputs required for export production. An Advance Licence is issued as a duty

exemption scheme. A Duty Remission Scheme enables post export replenishment/

remission of duty on inputs used in the export product.

Value Addition The value addition for the purposes of this chapter (Except for the

Gems and Jewellery) shall be:-

V.A A - B = ----------- x 100, where




V.A. Value Addition

A FOB value of the export realised /FOR value of supply ceived.

B CIF value of the imported inputs covered by the licence, plus any other

imported materials used on which the benefit of duty drawback is being claimed.

ADVANCE LICENCE

An Advance Licence is issued to allow duty free import of inputs, which are physically

incorporated in the export product (making normal allowance for wastage). In addition,

fuel, oil, energy, catalysts etc. which are consumed/utilised in the course of their use to

obtain the export product, may also be allowed under the scheme.

Duty free import of mandatory spares upto 10% of the CIF value of the licence which are

required to be exported/ supplied with the resultant product may also be allowed under

Advance Licence.

Advance Licences are issued on the basis of the inputs and export items Advance

Licence can be issued either to a manufacturer exporter or merchant exporter tied to

supporting manufacturer(s):

i) for Physical exports (including exports to SEZ); and/ or

ii) for Intermediate supplies; and /or

Advance Licence is issued for duty free import of inputs, subject to actual user condition.

Such licences are exempted from payment of basic customs duty, additional customs

duty, education cess, anti dumping duty and safeguard duty, if any. However, the imports

for supplies covered under paragraph 8.2 (h) & (i) will not be exempted from the payment

of applicable anti-dumping and safeguard duty, if any.

Advance Licence and/or materials imported thereunder shall not be transferable even

after completion of export obligation. However, the licencee will have the option to dispose

off the product manufactured out of the duty free inputs once the export obligation is

completed.




Advance Licences shall be issued with a positive value addition.

The validity period of advance licence for import shall be as prescribed in the Handbook

(Vol.1).

The facility of Advance Licence shall also be available where some or all of the inputs are

supplied free of cost to the exporter.

Export Obligation The period for fulfilment of the export obligation under Advance

Licence shall be as prescribed in the Handbook (Vol.1).

Advance Licence for Annual Requirement

Advance Licence can also be issued on the basis of annual requirement for physical

exports, intermediate supplies and / or deemed exports.

One to Five Star Export House shall be entitled for the Advance licence for annual

requirement. All other categories of exporters having past export performance (in the

preceding two years) shall also be entitled for the Advance Licence for annual

requirement.

DUTY ENTITLEMENT PASSBOOK SCHEME

The objective of DEPB is to neutralise the incidence of Customs duty on the import

content of the export product. The neutralisation shall be provided by way of grant of duty

credit against the export product.

The DEPB scheme will continue to be operative until it is replaced by a new scheme which

will be drawn up in consultation with exporters .

Under the DEPB scheme, an exporter may apply for credit, as a specified percentage of

FOB value of exports, made in freely convertible currency.

The credit shall be available against such export products and at such rates as may be

specified by the Director General of Foreign Trade by way of public notice issued in this

behalf, for import of raw materials, intermediates, components, parts, packaging material

etc.




The holder of DEPB shall have the option to pay additional customs duty, if any, in cash as

well.

Validity The validity period of DEPB for import shall be as prescribed in the Handbook

(Vol.1).

Transferability The DEPB and/or the items imported against it are freely

transferable. The transfer of DEPB shall however be for import at the port specified in the

DEPB, which shall be the port from where exports have been made. Imports from a port

other than the port of export shall be allowed under TRA facility as per the terms and

conditions of the notification issued by Department of Revenue.

Applicability of Drawback Normally, the exports made under the DEPB Scheme shall

not be entitled for drawback. However, the additional customs duty/excise duty paid in

cash or through debit under DEPB shall be adjusted as CENVAT Credit or Duty Drawback

as per rules framed by the Department of Revenue.

Export promotion capital goods scheme

EPCG Scheme The scheme allows import of capital goods for pre production,

production and post production (including CKD/SKD thereof as well as computer software

systems) at 5% Customs duty subject to an export obligation equivalent to 8 times of duty

saved on capital goods imported under EPCG scheme to be fulfilled over a period of 8

years reckoned from the date of issuance of licence.

In the case of agro units, import of capital goods at 5% Customs duty shall be allowed

subject to a fulfillment of an export obligation equivalent to 6 times the duty saved (on

capital goods imported under the Scheme) over a period of 12 years from the date of issue

of licence.

However for SSI units, import of capital goods at 5% Customs duty shall be allowed

subject to a fulfillment of an export obligation equivalent to 6 times the duty saved (on

capital goods imported under the Scheme) over a period of 8 years from the date of issue

of licence provided the landed CIF value of such imported Capital Goods under the




Scheme does not exceed Rs Twenty Five Lakhs and the total investment in plant and

machinery after such imports does not exceed the SSI limit.

However, in respect of EPCG licences with a duty saved of Rs.100 crore or more, the

same export obligation, as the case may be shall be required to be fulfilled over a period of

12 years.

The capital goods shall include spares (including refurbished/ reconditioned spares), tools,

jigs, fixtures, dies and moulds. EPCG licence may also be issued for import of components

of such capital goods required for assembly or manufacturer of capital goods by the

licence holder.

Second hand capital goods without any restriction on age may also be imported under the

EPCG scheme.

However, import of motor cars, sports utility vehicles/ all purpose vehicles shall be allowed

only to hotels, travel agents, tour operators or tour transport operators and companies

owning/operating golf resorts whose total foreign exchange earning in current and

preceding three licencing years is Rs 1.5 crores. However, the parts of motor cars, sports

utility vehicles/ all purpose vehicles such as chassis etc. cannot be imported under the

EPCG Scheme.

Import of Restricted items of imports mentioned under ITC(HS) shall only be allowed to be

imported under the Scheme after approval from the Import Licensing Committee.

EPCG for Retail Sector To create modern infrastructure in the retail sector, concessional

duty benefits under EPCG scheme shall be extended for import of capital goods required

by retailers having minimum area of 1000 sq meters. The retailer shall fulfill the export

obligation i.e. 8 times the duty saved in 8 years.

Conditions for import of Capital Goods Import of capital goods shall be subject to

Actual User condition till the export obligation is completed.




Fixation of Export Obligation In case of direct imports, the export obligation

relating to the EPCG licence shall be reckoned with reference to the duty saved value on

the CIF value of capital goods (including spares, jigs, fixtures, dies and moulds) actually

imported. In case of domestic sourcing, the export obligation relating to EPCG shall be

reckoned with reference to the notional Customs duties saved on the FOR of capital goods

(including spares, jigs, fixtures, dies and moulds).

Deemed Exports

Deemed Exports "Deemed Exports" refers to those transactions in which the goods

supplied do not leave the country and the payment for such supplies is received either in

Indian rupees or in free foreign exchange.

Categories of Supply The following categories of supply of goods by the main/ sub-

contractors shall be regarded as "Deemed Exports" under this Policy, provided the goods

are manufactured in India:

1. Supply of goods against Advance Licence / Advance Licence for annual

requirement/DFRC under the Duty Exemption /Remission Scheme;

2. Supply of goods to Export Oriented Units (EOUs) or Software Technology Parks

(STPs) or Electronic Hardware Technology Parks (EHTPs) or Bio Technology

Parks (BTP);

3. Supply of capital goods to holders of licences under the Export Promotion Capital

Goods (EPCG) scheme;

4. Supply of goods to projects financed by multilateral or bilateral agencies/funds as

notified by the Department of Economic Affairs, Ministry of Finance under

International Competitive Bidding in accordance with the procedures of those

agencies/ funds, where the legal agreements provide for tender evaluation without

including the customs duty;

5. Supply of capital goods, including in unassembled/ disassembled condition as well

as plants, machinery, accessories, tools, dies and such goods which are used for

installation purposes till the stage of commercial production and spares to the

extent of 10% of the FOR value to fertilizer plants;




6. Supply of goods to any project or purpose in respect of which the Ministry of

Finance, by a notification, permits the import of such goods at zero customs duty;

7. Supply of goods to the power projects and refineries not covered in (f) above;

8. Supply of marine freight containers by 100% EOU (Domestic freight containers-

manufacturers) provided the said containers are exported out of India within 6

months or such further period as permitted by the customs;

9. Supply to projects funded by UN agencies; and

10. Supply of goods to nuclear power projects through competitive bidding as opposed

to International Competitive Bidding.

11. The benefits of deemed exports shall be available under paragraph (d), (e), (f) and

12. Only if the supply is made under the procedure of International Competitive Bidding

(ICB).

Benefits for Deemed Exports: Deemed exports shall be eligible for any/all of the

following benefits in respect of manufacture and supply of goods qualifying as deemed

exports subject to the terms and conditions as given in Handbook (Vol.1):-

1. Advance Licence for intermediate supply/ deemed export/DFRC/ DFRC for

intermediate supplies.

2. Deemed Export Drawback.

3. Exemption from terminal excise duty where supplies are made against

International Competitive Bidding . In other cases , refund of terminal excise duty

will be given.

Benefits to the Supplier

1. In respect of supplies made against Advance Licence in terms of paragraphs 8.2(a)

of the Policy, the supplier shall be entitled to Advance Licence for intermediate

supplies.




2. If the supplies are made against Advance Release Order (ARO) or Back to Back

Letter of Credit issued against Advance Licence in terms of paragraphs 4.1.11 and

4.1.12 of the Policy, supplier shall be entitled to the benefits listed in paragraphs

8.3(b) and (c) of the Policy, whichever is applicable.

3. If the supplies are made against Advance Release Order (ARO) or Back to Back

Letter of Credit issued against DFRC, the supplier shall be entitled to the benefit

listed in paragraph 8.3(b) of the Policy.

In respect of supply of goods to EOU/ EHTP/ STP/BTP in terms of paragraphs 8.2 (b) of

the Policy, the supplier shall be entitled to the benefits listed in paragraph 8.3(a),(b)and (c)

of the Policy, whichever is applicable.

In respect of supplies made under paragraph 8.2(c) of the Policy , the supplier shall be

entitled to the benefits listed in paragraph 8.3(a), (b) and (c), of the Policy, whichever is

applicable.

(i) In respect of supplies made under paragraphs 8.2 (d), (f) and (g) of the Policy, the

supplier shall be entitled to the benefits listed in paragraphs 8.3(a), (b) and

(c),whichever is applicable.

(ii) In respect of supplies mentioned in paragraph 8.2(d), supplies to the projects funded

by such agencies alone, as may be notified by Department of Economic Affairs,

Ministry of Finance, shall be eligible for deemed export benefits. A list of such

agencies/ funds is given in Appendix-13 of Handbook (Vol.I).

(iii) The benefits of deemed exports under para 8.2(f) of the Policy shall be applicable in

respect of items, import of which is allowed by the Department of Revenue at zero

customs duty subject to fulfillment of conditions specified under Notification

No.21/2002-Customs dated 1.3.2002, as amended from time to time.




EOUs, EHTPs, STPs, BTPs

Eligibility Units undertaking to export their entire production of goods and services

(except permissible sales in the DTA), may be set up under the Export Oriented Unit

(EOU) Scheme, Electronic Hardware Technology Park (EHTP) Scheme, Software

Technology Park (STP) Scheme or Bio-Technology Park (BTP) scheme for manufacture

of goods, including repair, re-making, reconditioning, re-engineering and rendering of

services. Trading units, however, are not covered under these schemes.

Export and Import of Goods

a) An EOU/EHTP/STP/BTP unit may export all kinds of goods and services except

items that are prohibited in the ITC (HS). Export of Special Chemicals, Organisms,

Materials, Equipment and Technologies (SCOMET) shall be subject to fulfillment of

the conditions indicated in the ITC (HS).

b) An EOU/EHTP/STP/BTP unit may import and/or procure from DTA or bonded

warehouses in DTA / international exhibition held in India without payment of duty

all types of goods, including capital goods, required for its activities, provided they

are not prohibited items of import in the ITC (HS). Any permission required for

import under any other law shall be applicable. The units shall also be permitted to

import goods including capital goods required for the approved activity, free of cost

or on loan/lease from clients. The import of capital goods will be on a self

certification basis.

c) State Trading regime shall not apply to EOU manufacturing units.

d) EOU/EHTP/STP/BTP units may import/procure from DTA without payment of duty

certain specified goods for creating a central facility which will be used by software

units. These software units can be EOU/ DTA units who will use the facility for

export of software.

e) An EOU engaged in agriculture, animal husbandry, aquaculture, floriculture,

horticulture, pisciculture, viticulture, poultry or sericulture may be permitted to




remove specified goods in connection with its activities for use outside the bonded

area.

f) Gems and jewellery EOUs may source gold/silver/platinum through the nominated

agencies also. Units obtaining gold/silver/platinum from the nominated agencies

shall export gold/silver/platinum jewellery within 90 days from the date of release.

This shall not, however, apply to outright purchase of precious metal from the

nominated agencies.

g) EOU/EHTP/STP/BTP units, other than service units, may export to Russian

Federation in Indian Rupees against repayment of State Credit/Escrow Rupee

Account of the buyer subject to RBI clearance, if any.

h) Procurement and supply of spares and consumables required for the goods

manufactured by the units may be allowed to be exported along with goods upto

1.5% of FOB value of exports. This shall, however, not count towards NFE

calculation, for concessional rate DTA sales or for Income Tax exemption.

Second Hand Capital Goods Second hand capital goods, without any age limit, may also

be imported duty free.

Leasing of Capital Goods An EOU/EHTP/STP/BTP unit may, on the basis of a firm

contract between the parties, source the capital goods from a domestic/foreign leasing

company without payment of customs/excise duty. In such a case, the

EOU/EHTP/STP/BTP unit and the domestic/foreign leasing company shall jointly file the

documents to enable import/procurement of the capital goods without payment of duty.

Net Foreign Exchange Earnings

(NFE) EOU/EHTP/STP/BTP unit shall be a positive net foreign exchange earner. Net

Foreign Exchange Earnings (NFE) shall be calculated cumulatively in blocks of five years,

starting from the commencement of production.

Letter of Permission/ Letter of Intent and Legal Undertaking

a) On approval, a Letter of Permission (LOP) /Letter of Intent (LOI) shall be issued by

the Development Commissioner/designated officer to EOU/EHTP/STP/BTP unit.

The LOP/LOI shall have an initial validity of 3 years by which time the unit should

have commenced production. Its validity may be extended further up to 3 years by

the competent authority. However, proposals for extension beyond six years shall

be considered in exceptional circumstances, on a case-to-case basis by the BOA.




Once the unit commences production, LOP/LOI issued shall be valid for a period of

5 years for its activities. This period may be extended further by the Development

Commissioner for a period of 5 years at a time.

b) LOP/LOI issued to EOU/EHTP/STP/BTP units by the concerned authority would be

construed as a licence for all purposes.

c) The unit shall execute a legal undertaking with the Development Commissioner

concerned. Failure to ensure positive NFE or to abide by any of the terms and

conditions of the LOP/LOI/IL/LUT shall render the unit liable to penal action under

the provisions of the Foreign Trade (Development & Regulation) Act, 1992 and the

Rules and Orders made thereunder without prejudice to action under any other

law/rules and cancellation or revocation of LOP/LOI/IL.

Investment Criteria : Only projects having a minimum investment of Rs.1 crore in plant

and machinery shall be considered for establishment as EOUs under the scheme. This

shall, however, not apply to existing units and units in EHTP / STP/ BTP, Handicrafts /

Agriculture/ Floriculture / Aquaculture / Animal Husbandry/Information Technology,

Services, Brass hardware, Handmade

Special Economic Zone (SEZ)

Eligibility

a) Special Economic Zone (SEZ) is a specifically delineated duty free enclave and

shall be deemed to be foreign territory for the purposes of trade operations and

duties and tariffs.

b) Goods and services going into the SEZ area from DTA shall be treated as exports

and goods coming from the SEZ area into DTA shall be treated as if these are

being imported.

c) SEZ units may be set up for manufacture of goods and rendering of services.




Export and Import of Goods.

a) SEZ units may export goods and services including agro-products, partly

processed goods, sub-assemblies and components except prohibited items of

exports in ITC (HS). The units may also export by-products, rejects, waste scrap

arising out of the production process. Export of Special Chemicals, Organisms,

Materials, Equipment and Technologies (SCOMET) shall be subject to fulfillment of

the conditions indicated in the ITC (HS) Classification of Export and Import Items.

b) SEZ units, other than trading/service units, may also export to Russian Federation

in Indian Rupees against repayment of State Credit/Escrow Rupee Account of the

buyer, subject to RBI clearance, if any.

Ø SEZ unit may import/procure from the DTA without payment of duty all types of

goods and services, including capital goods, whether new or second hand,

required by it for its activities or in connection therewith, provided they are not

prohibited items of imports in the ITC(HS). However, any permission required

for import under any other law shall be applicable. Goods shall include raw

material for making capital goods for use within the unit. The units shall also be

permitted to import goods required for the approved activity, including capital

goods, free of cost or on loan from clients.

c) SEZ units may procure goods required by it without payment of duty, from bonded

warehouses in the DTA set up under the Policy and/or under Section 65 of the

Customs Act and from International Exhibitions held in India.

d) SEZ units, may import/procure from DTA, without payment of duty, all types of

goods for creating a central facility for use by units in SEZ. The Central facility for

software development can also be accessed by units in the DTA for export of

software.

e) Gem & Jewellery units may also source gold/ silver/ platinum through the

nominated agencies.

f) SEZ units may import/procure goods and services from DTA without payment of

duty for setting up, operation and maintenance of units in the Zone.




Free trade zones

Objective The objective is to create trade-related infrastructure to facilitate the import and

export of goods and services with freedom to carry out trade transactions in free currency.

The scheme envisages creation of world-class infrastructure for warehousing of various

products, state-of-the-art equipment, transportation and handling facilities, commercial

office-space, water, power, communications and connectivity, with one-stop clearance of

import and export formality, to support the integrated Zones as ‘international trading hubs’.

These Zones would be established in areas proximate to seaports, airports or dry ports so

as to offer easy access by rail and road.

Status The Free Trade & Warehousing Zones (FTWZ) shall be a special category of

Special Economic Zones with a focus on trading and warehousing.

Establishment of Zone

(i) Proposals for setting up of FTWZs may be made by public sector undertakings or public

limited companies or by joint ventures in technical collaboration with experienced

infrastructure developers. The proposals shall be considered by the Board of Approval in

the Department of Commerce. On approval, the developer will be issued a letter of

permission for the development, operation and maintenance of such FTWZ.

(ii) Foreign Direct Investment would be permitted up to 100% in the development and

establishment of the zones and their infrastructural facilities.

(iii)The proposal must entail a minimum outlay of Rs.100 crores for the creation and

development of the infrastructure facilities, with a minimum built up area of five lakh

sq.mts.

(iv)The developer shall be permitted to import duty free such building materials and

equipment as may be required for the development and infrastructure of the zone. Such

equipment and materials as are sourced from the DTA shall be considered as physical

exports for the DTA suppliers.

(v)Once it has developed the FTWZ, the developer shall also be permitted to

sale/lease/rent out warehouses/workshops/office-space and other facilities in the FTWZ to

traders/exporters.




Maintenance of Zone The developer shall itself or through suitable special purpose

arrangements, ensure a reliable mechanism for the proper maintenance of the common

facilities and security of the FTWZ.

Functioning

(i)The scheme envisages duty free import of all goods (except prohibited items, arms and

ammunitions, hazardous wastes and SCOMET items) for ware housing. As far as bond

towards customs duty on import is concerned, the units would be subject to similar

provisions as are applicable to units in SEZs.

(ii)Such goods shall be permitted to be re-sold/re-invoiced or re-exported. Re-export shall

be permitted without any restrictions. However export of SCOMET items shall not be

permitted except with the permission of Inter-Ministerial Committee.

(iii)These goods shall also be permitted to be sold in the DTA on payment of customs

duties as applicable on the date of such sale. Payment of duty will become due only when

goods are sold/delivered to DTA and no interest will be charged as in the case of bonded

warehouses.

(iv)Packing or re-packing without processing, and labeling as per customer or marketing

requirements could be undertaken within the FTWZ.

(v)The maximum period that goods shall be permitted to be warehoused within the FTWZ

will be two years, after which they shall necessarily have to be re-exported or sold in the

DTA. On expiry of the two year period, customs duties as applicable would automatically

become due unless the goods are re-exported within such grace period, not exceeding

three months, as may be permitted.

Entitlement of units

(i) Income Tax exemption as per 80 IA of the Income Tax Act.

(ii) Exemption from Service Tax.

(iii) Free foreign exchange currency transactions would be permitted.

(iv) Other benefits mutatis mutandi as applicable to units in SEZs.




NFE criteria Units in FTWZs shall be net foreign exchange earners. Net foreign exchange

earning shall be calculated cumulatively for every block of five years from the

commencement of warehousing and/or trading operations as per formula. applicable for

SEZ units.

9. LIST OF APPENDICES APPENDIX NUMBER

DESCRIPTION

1 LIST OF LICENSING AUTHORITIES AND THEIR JURISDICTION

1A JURISDICTION OF LICENSING AUTHORITY AND LIST OF NOMINATED AGENCIES FOR THE PURPOSE OF GEM AND JEWELLERY EXPORT PROMOTION SCHEMES

2 LIST OF EXPORT PROMOTION COUNCILS/COMMODITY BOARD

3 LIST OF BRANCHES OF CENTRAL BANK OF INDIA AUTHORISED TO RECEIVE PAYMENTS FOR APPLICATION FEE

4A LIST OF AGENCIES AUTHORISED TO ISSUE GSP CERTIFICATION

4B LIST OF AGENCIES AUTHORISED TO ISSUE CERTIFICATES OF ORIGIN FOR SAPTA AND BANGKOK AGREEMENT

4C LIST OF AGENCIES AUTHORISED TO ISSUE CERTIFICATES OF ORIGIN - NON PREFERENTIAL

4D LIST OF AGENCIES AUTHORISED TO ISSUE GLOBAL SYSTEM OF TRADE PREFERENCES ( GSTP) AND INDIA SRI LANKA FREE TRADE AGREEMENT (ISLFTA) CERTIFICATION

5 LIST OF INSPECTION AND CERTIFICATION AGENCIES

6 LIST OF IS/ISO 9000 (SERIES) / ISO- 14000 (SERIES)/ WHO-GMP /HACCP/SEI/CMM LEVEL II AND OTHER CERTIFICATION AGENCIES

7 LIST OF TOWNS OF EXPORT EXCELLENCE

8 AGRI EXPORT ZONES

9 LIST OF COUNTRIES, EXPORT TO WHICH CONFERS DOUBLE WEIGHTAGE FOR THE GRANT OF STAR EXPORT HOUSE STATUS

10 LIST OF SERVICES




11 VALUE ADDITION NORMS FOR EXPORTS FOR WHICH PAYMENTS ARE

NOT IN FREELY CONVERTIBLE CURRENCY

11A DATA SHEET FOR ADVANCE LICENCE APPLICATION ON SELF DECLARATION UNDER PARA 4.4.2 & 4.7 OF HANDBOOK (Vol.I)

11B DATA SHEET FOR DEPB RATES

12A REPLENISHMENT FOR GEM & JEWELLERY

12B REPLENISHMENT SCALE FOR GEM REP LICENCE

13 AGENCIES/FUNDS/ NOTIFIED BY THE DEPARTMENT OF ECONOMIC AFFAIRS, MINISTRY OF FINANCE FOR THE PURPOSE OF DEEMED EXPORT BENEFITS.

14-I-A APPLICATION FOR SETTING UP EOU/SEZS OR UNITS IN SPECIAL ECONOMIC ZONE

14-I-B CRITERIA TO BE ADOPTED FOR AUTOMATIC APPROVAL OF UNITS UNDER EOU/SEZ SCHEME

14-I-C SECTOR SPECIFIC REQUIREMENTS FOR EOU/SEZ UNITS

14-I-D BOARD OF APPROVAL NOTIFICATION

14-I-E FORMAT FOR LETTER OF PERMISSION

14-I-F FORM OF LEGAL AGREEMENT FOR EOU/SEZ UNITS 14-I-G GUIDELINES FOR MONITORING THE PERFORMANCE OF

EOU/SEZ/STP/EHTP UNITS 14-I-H GUIDELINES FOR SALE OF GOODS IN THE DOMESTIC TARIFF AREA

(DTA) BY EOU/SEZ/EHTP/STP/BTP UNITS

14-I-I PROCEDURE TO BE FOLLOWED FOR REIMBURSEMENT OF CENTRAL SALES TAX (CST) ON SUPPLIES MADE TO EXPORT ORIENTED UNITS (EOUS) AND UNITS IN ELECTRONIC HARDWARE TECHNOLOGY PARK (EHTP) AND SOFTWARE TECHNOLOGY PARK (STP).

14-I-J ITEMS PERMITTED FOR IMPORT/DOMESTIC PROCUREMENT BY EOU/SEZ UNITS ENGAGED IN AGRICULTURE/HORTICULTURE WITHOUT PAYMENT OF DUTY FOR SUPPLY TO CONTRACT FARMERS IN THE DTA.

14-I-K JURISDICTION OF SPECIAL ECONOMIC ZONES

14-I-L




GUIDELINES FOR EXIT OF EOU/SEZ/EHTP/STP UNITS

14-I-M GUIDELINES FOR REVIVAL/EXIT OF SICK EOU/SEZ UNITS

14-I-N PROFORMA FOR EXTENSION OF LOP FOR EXPORT ORIENTED UNITS

14-II-O GUIDELINES FOR SEZ DEVELOPERS

14-II-P FORMAT FOR LETTER OF PERMISSION FOR SEZ DEVELOPER

14-II-Q FORMAT FOR LETTER OF PERMISSION FOR OPERATION AND MAINTENANCE OF INFRASTRUCTURE

14-II-R UNIT APPROVAL COMMITTEE

15A APPLICATION FOR CERTIFICATION OF EXPORT PERFORMANCE OF UNITS IN THE PHARMACEUTICAL AND BIOTECHNOLOGY SECTORS BY THE REGIONAL OFFICES OF THE DGFT AS PER CUSTOMS NOTIFICATION NO 21/2002 DATED 1.03.2002

15B APPLICATION FOR CERTIFICATION OF EXPORT PERFORMANCE OF UNITS IN AGRO CHEMICALS SECTORS BY THE REGIONAL OFFICES OF THE DGFT AS PER CUSTOMS NOTIFICATION NO 21/2002 DATED 1.03.2002

16 GUIDELINES FOR SETTLEMENT OF TRADE DISPUTES AND COMPLAINTS

17 LIST OF NODAL OFFICERS NOMINATED TO ASSIST EXPORTERS

18A FORMAT OF BANK CERTIFICATE FOR ISSUE OF IEC

18B FORMAT OF IMPORTER - EXPORTER CODE NUMBER

18C STATEMENT OF PARTICULARS OF IEC NUMBERS

18D LIST OF REGIONAL LICENSING AUTHORITIES OF DGFT AND THE CORRESPONDING OFFICE OF RESERVE BANK OF INDIA, EXCHANGE CONTROL DEPARTMENT

19A FORM OF APPLICATION FOR REGISTRATION CUM MEMBERSHIP (RCMC) WITH EXPORT PROMOTION COUNCILS

19B FORMAT OF REGISTRATION-CUM-MEMBERSHIP CERTIFICATE

19C PROFORMA FOR FURNISHING OF QUARTERLY EXPORT RETURNS

20A FORM OF APPLICATION OF IDENTITY CARD

20B FORMAT OF IDENTITY CARD




21A FORMAT FOR DEPOSIT OF APPLICATION FEE

21B PROCEDURE FOR DEPOSIT/ REFUND OF IMPORT APPLICATION FEE AND OTHER FEE

21C PROCEDURE OF ELECTRONIC FUND TRANSFER

22A BANK CERTIFICATE OF EXPORT AND REALISATION 22B BANK CERTIFICATE OF PAYMENTS FOR DOMESTIC SUPPLIES

22C CERTIFICATE OF PAYMENTS ISSUED BY THE PROJECT AUTHORITY

22D CERTIFICATE FOR OFFSETTING OF EXPORT PROCEEDS

22E BANK CERTIFICATE OF EXPORT REALISATION/ DEEMED EXPORTS

FOR STAR EXPORT HOUSE CERTIFICATE

23 REGISTER FOR MAINTENANCE OF CONSUMPTION AND STOCKS OF IMPORTED RAW MATERIALS/ COMPONENTS ETC BY THE ACTUAL USERS

24 FORM OF AFFIDAVIT FOR OBTAINING DUPLICATE COPY OF LICENCES WHICH ARE LOST OR MISPLACED

25A BANK GUARANTEE FORMAT

25B LEGAL AGREEMENT/UNDERTAKING FORMAT

26 CERTIFICATE OF CHARTERED ACCOUNTANT COST AND WORKS ACCOUNTANT/COMPANY SECRETARY

27 PROJECT AUTHORITY CERTIFICATE FORMAT

28 PROFORMA FOR SEEKING CLARIFICATIONS ON FOREIGN TRADE POLICY

29 PROFORMA FOR SUBMISSION OF GRIEVANCE REPRESENTATION

30 ADVANCE RELEASE ORDER (ARO) FORMAT

31 FORMAT OF IMPORT CERTIFICATE UNDER INDO US MEMORANDUM

32A FORMAT OF CHARTERED ENGINEER CERTIFICATE FOR EPCG SCHEME

32B FORMAT OF CHARTERED ENGINEER CERTIFICATE FOR FIXATION OF SION

33 INFORMATION TO BE SUBMITTED FOR FIXATION OF STANDARD INPUT OUTPUT NORMS

34 INFORMATION TO BE SUBMITTED IN CASES WHERE STANDARD




INPUT OUTPUT NORMS ARE NOT FIXED AND APPLICATION IS PREFERRED UNDER PARAGRAPH 4.42 AND 4.7 OF HANDBOOK (VOL.1)

35 FORMATS FOR CLAIMING DUTY DRAWBACK ON ALL INDUSTRY RATES/FIXATION OF DRAWBACK RATES/ REFUND OF TERMINAL EXCISE DUTY

36 END USE CUM END USER CERTIFICATE IN CASE OF EXPORT OF SCOMET ITEMS

37A LIST OF EXPORT ITEMS ALLOWED UNDER VISHESH KRISHI UPAJ YOJANA

37B LIST OF IMPORT ITEMS NOT ALLOWED UNDER VISHESH KRISHI UPAJ YOJANA

38A THE FOREIGN TRADE (DEVELOPMENT AND REGULATION) ACT, 1992 NO.22 OF 1992

38B FOREIGN TRADE (EXEMPTION FROM APPLICATION OF RULES IN CERTAIN CASES) ORDER, 1993

38C FOREIGN TRADE (REGULATION) RULES, 1993

10 Practical questions :

1 Write notes on general provisions regarding exports and imports

2. Explain duty exemption schemes

3.Explain EPCG scheme

4. What do you understand by EOU, SEZ. Write provisions apply to those units

5. What do you mean by deemed exports? What are the provisions regarding

deemed exports?


³ Exim Policy

³ Foreign trade by M I Mahajan




Chapter 9: THE CONSUMER PROTECTION ACT , 1986 After studying this material you will get familiarized with- ³ Purpose and background of the Act

³ Meaning of important terms

³ Role of Consume protection councils

³ Role of Consumer protection Redressal agencies

Contents

1. Introduction

2. Meanings and definitions

3. Consumer protection councils

4. Consumer Disputes Redressal Agencies

5. Miscellaneous

6. Summary

7. Key words



1. Introduction The Consumer protection Act is a central enactment applicable to whole of India except

the State of Jammu and Kashmir, passed by the India Parliament and implemented fro the

year 1986. Under the Act , Rules are made by almost all the states to implement the

provisions of the Act. Almost all the states framed rules and created enforcement

machinery. In a democracy , legislation is more often dictated by pressure groups who are

able to influence the party in power. It is really refreshing and heartening to find instance

when Government enacts laws which are really intended to safeguard the welfare of the

citizens




There are 4 major chapters, Chapter I defines various expressions used in the Act

Chapter II and III deals with substantial rights and procedural matters. Chapters I,II nad IV

came into force on 15th April 1987 and Chapter III on 1st July 1987 2.Meanings and definitions

Complainant means

a consumer or

a voluntary consumer association registered under the Act or

the State or Central government which makes the complaint or

legal heir in case of death of a consumer

one or more consumers where there are numerous consumers having same interest

Complaint means any allegation in writing made by a complainant that–

Ø an unfair or restrictive trade practice has been adopted by a trader or service

provider

Ø the goods brought by him suffer from defects

Ø service availed by him suffer from deficiency

Ø a trader or the service provider has charged the goods or for the service mentioned

in the complaint , a price in excess of the price a) fixed by any law b) displayed on

the goods c) displayed on price list d) agreed by the parties

Ø goods which will be hazardous to life and safety when used , are offered for sale

contravention to any standards

Restrictive Trade practice :

Practice which tends to bring about manipulation of price or its conditions of delivery or

to affect flow of supplies in the market relating to goods or services in such a manner as

to impose on the consumers unjustified costs or restrictions

(eg., delay beyond the period agreed in supply of goods or services which lead to hike in

price)




Unfair trade practice :

A trade practice which for the purpose of promoting sale , use of supply of any goods or

service , adopts any unfair practice including the following

Ø falsely represent that goods of particular quality or standard

Ø falsely represent old goods as new goods

Ø falsely represent that goods have certain characteristics but they do not

Ø false representation on need of goods 3. Consumer protection councils

The Central Government shall by notification , establish a Council called as Central

Government Consumer Protection council

The objects of the council shall be to promote and protect the rights of the consumers

Similarly the State Government shall also establish a council to be known as Consumer

Protection State Council

The object of the council shall be to promote and protect within the State the rights of

consumers

4. Consumer Disputes Redressal Agencies

There shall be established , for the purpose of the Act, the following agencies

Ø A Consumer Dispute Redressal forum to be known as District Forum established

by State government in each district of a State

Ø A Consumer Disputes Redressal commission to be known as State Commission

established by State Government

Ø A National Consumer Disputes Redressal Commission established by Central

Government




Procedure of registering and processing complaints :

Ø A consumer or consumer association can file a complaint to District Forum with

proper form and fee

Ø It shall not be rejected unless parties are heard

Ø After receiving the complaint the forum may , within 21 days , refer to the opposite

party asking him to furnish his version within 30 days

Ø If required forum may also ask for sample of goods which are under complaint

Ø Forum shall give opportunity to both parties to be heard

Ø Take up proceedings

Ø During proceedings , if deemed fit , pass interim orders

Ø Pass final orders after due hearing

Ø Order may be

§ To remove defects

§ Replace goods

§ Pay compensation

§ To discontinue the unfair trade practice

§ To issue corrective advertisement

§ To withdraw defective goods

Appeal : In case of grievance on order of the Forum , the aggrieved party can appeal to State

Commission and in case of grievance of order of State Commission appeal can be placed

with National Commission

Jurisdiction :

State commission shall take up the cases with complaint value of more than Rs 25 lacs

but not more than Rs 1 crore and appeals against order of Distric Forum

National commission can take up cases in which the value of complaint is more than Rs 1

crore and also the appeals against order of State Commission




5. Miscellaneous

All notices shall be issued as prescribed by the act

Vacancies or defects in appointment of the officers will not invalidate the order

Rules and regulations of the Act are to be approved by Parliament

National Commission can issue regulations with the approval of Central Government

6. Summary

The Consumer protection Act is a central enactment applicable to whole of India except

the State of Jammu and Kashmir, passed by the India Parliament and implemented fro the

year 1986.

The Central Government shall by notification , establish a Council called as Central

Government Consumer Protection councilThe objects of the council shall be to promote

and protect the rights of the consumers

Similarly the State Government shall also establish a council to be known as Consumer

Protection State Council

Following agencies fuction as authorized agencies , a Consumer Dispute Redressal forum

to be known as District Forum established by State government in each district of a State,

Consumer Disputes Redressal commission to be known as State Commission established

by State Government, a National Consumer Disputes Redressal Commission established

by Central Government

In case of grievance on order of the Forum , the aggrieved party can appeal to State

Commission and in case of grievance of order of State Commission appeal can be placed

with National Commission




7.Key words

Complainant means a consumer or a voluntary consumer association registered under

the Act or the State or Central government which makes the complaint or legal heir in

case of death of a consumerone or more consumers where there are numerous

consumers having same interest Complaint means any allegation in writing made by a complainant that–

an unfair or restrictive trade practice has been adopted by a trader or service provider

the goods brought by him suffer from defects

service availed by him suffer from deficiency

a trader or the service provider has charged the goods or for the service mentioned in

the complaint , a price in excess of the price a) fixed by any law b) displayed on the

goods c) displayed on price list d) agreed by the parties

goods which will be hazardous to life and safety when used , are offered for sale

contravention to any standards

Restrictive Trade practice : Practice which tends to bring about manipulation of price

or its conditions of delivery or to affect flow of supplies in the market relating to goods or

services in such a manner as to impose on the consumers unjustified costs or

restrictions

Unfair trade practice : A trade practice which for the purpose of promoting sale , use of

supply of any goods or service , adopts any unfair practice including the following

³ falsely represent that goods of particular quality or standard

³ falsely represent old goods as new goods

³ falsely represent that goods have certain characteristics but they do not

³ false representation on need of goods





1. Define Complaint and complainant

2. What do you mean by Unfair trade practice and restrictive trade practice

3. Write a note on Consumer rederassal agencies

4. Write a note on jurisdiction of rederassal agencies and appealing authorities


³ Bare Act




Chapter 10: THE ENVIRONMENT PROTECTION ACT After studying this unit you will understand Ø The need and objective of these laws Ø Various types of environment laws Ø Various authorities in each law Ø Requirements of persons under each law Ø Offence by companies Ø Meaning of certain important terms

Contents

1. Introduction 2. Environment Protection Act 3. Air (Prevention and Control of Pollution ) Act 4. Water (Prevention and Control of Pollution) Act 5. Self Examination questions

1. Introduction :

This act was passed as a measure to implement the decisions taken at the United

Nations Conference held in Stockholm in June 1972 to which India was a party

The objective of all laws on environment should be to create harmony between

development on the one hand and environment on the other hand since neither can be

sacrificed

This Act came into force in the year 1986

The following are various acts considered together as Environment laws

Air (Prevention and control of pollution ) Act 1981

Water (Prevention and Control of Pollution ) Act 1974

National Environment Tribunal Act

National Environment Appellate Authority Act




India Forest Act

Forest Conservation Act

Wild Life Protection Act

Public Liability Insurance Act

Let us discuss some of the laws in following sections

Environment Protection Act

Although there are existing laws relating directly or indirectly with several environment

matters, it was felt that these laws were focusing on specific types of pollution or specific

categories hazardous substances. There also exist uncovered gaps and inadequate

linkages in handling matters relating to industrial and environment safety. Because of

multiplicity of regulatory agencies there is need for an authority which can assume lead

role for studying , planning and implementing long term requirements of environment

safety and to give directions to and coordinate a system of speedy and adequate

response to emergency situations threatening the environment

This Act seeks to achieve these objectives

The term Environment includes water, air and land and other inter relationship which

exists among and between water, air and land and human beings , other living creatures

, plants etc

Environmental pollutant means any solid , liquid or gaseous substance present in such

concentration which is injurious to environment

Environment pollution means the presence of any environmental pollutant

Hazardous substance means any substance , preparation of which . by reason of its

chemical properties, is liable to cause harm to human beings or living creatures or plats

etc




Powers of Central Government : The Central Government has powers to take all

necessary measures as it deems necessary for the purpose of protecting and improving

the quality of environment and preventing environmental pollution

The Central government can appoint officers of such designations as it deems fit and

has powers to give such directions as it deems fit

Central government has powers to enter the premises of any facility to inspect the

compliance of norms laid

Prevention , control of environmental pollution:

Persons carrying on industry , operation etc not to allow emission or discharge of

environmental pollutants in excess of standards

Persons handling hazardous substances to comply with procedural safeguards

Such persons to furnish information to authorities / agencies

3. Air (Prevention and control of pollution Act)

With the increased industrialization and the tendency of most of industries to expand in

areas which are already heavily industrialized , the problem of air pollution has begun to

be felt in the country. The presence in air , beyond certain limits , of various pollutants

discharged through emissions has a detrimental effect on the health of people as also

on animal life, vegetations and property. It is therefore felt there should be an integrated

approach for tackling these issues and hence formation of the Act

Air pollutant means- any solid , liquid or gaseous substance including noice present in

the atmosphere in such concentration as may be or tend to be injurious to human beings

or other living creatures or plants or environment

Central and State Pollution control boards have been formed to control , monitor and

direct various issues




The Boards have elaborate powers as specified in the act . Industries may be directed to

ensure certain standards of emission and restricted on usage of certain plants. Persons

violating the rules are punishable

4. Water (Prevention and Control of Pollution) Act

The problem of pollution of rivers and streams has assumed considerable importance

and urgency in recent years as a result of the growth of industries and the increasing

tendency to urbanization. It is therefore essential to ensure that the domestic and

industrial effluents are not allowed to be discharged into the water courses without

adequate treatment as such discharges would render the water unsuitable as source of

drinking water as well as supporting fish life and or use of irrigation . A committee was

set up to analyse these issues in year 1962 and later the act was enacted in the year

1974

Central and State boars are formed to monitor, control and direct various issues under

this act

Any activity using stream or well for disposal of polluting matter is prohibited

Similarly discharge sewage into streams is also prohibited

Industries to get approval before commencing the operations , the approval is subject to

periodical reviews and renewals. Industries violating norms are punishable including

closure of industries


1. What are various environmental laws

2. Write a note on Environment Protection act

3. Write a note on Water (Prevention and Control of Pollution) Act

4. Write a note on Air (Prevention and control of pollution Act)




Chapter 11: VAT- VALUE ADDED TAX Introduction :

The biggest leap forward and the biggest change in the tax system in India , VAT

replaces the Sales tax from 1st April 2005. The Central Government has the power to

charge and collect excise duties on the production or manufacture of goods while the

State Governments have the powers to levy sales tax on consumption of goods. The

State also charges octroi, entertainment tax, electricity tax, motor vehicle tax etc. Thus

different state governments charge different rates of sales tax , but with the introduction

of VAT at State level , all these different rates of sales tax will become uniform over the

country

Vat is not new to our country as for Excise , this concept is being followed for a long time

in India

How is VAT different from Sales Tax ?

While in Sales tax , the ultimate consumer pays tax on some part (s) of the product more

than once , in VAT, the consumer pays tax on the value of the entire product only once.

Eg., a car manufacturer pays sales tax on all inputs used in manufacture of car , like

engine, steering, tanks etc. The consumer of a car pays tax on the price of car which

includes the above mentioned inputs on which tax has already been paid , meaning that

the consumer pays tax twice for the part used in the product

Eg., a manufacturer sells a product to a wholesaler at Rs 10000, he charges VAT at Rs

1250

For the wholesaler the cost is Rs 10000 and not Rs 11250

After adding profits of 20% say, he will sell to retailer at Rs 12000 + VAT Rs 1500 out of

which the wholesaler will pay only s 250 to the department (Rs 1500- Rs 1250 already




paid to manufacturer) . So the VAT cost to the consumer is added only by Rs 250 or 2.5

% on the wholesaler level

Under sales tax system , manufacturers were required to pay total tax calculated on their

sales every month without deducting any claim on their purchases . each month they

used to lodge a separate refund claim for the sales tax paid on their purchases. These

claims were delayed for many months and hence VAT is a welcome change for

industrialists

Basic VAT Rates :

VAT covers around 550 goods , have only three rates , 1 %, 4 %, and 12.5 %

The standard VAT rate is 12.5 % generally payable on most consumer goods

A 4% VAT is payable on basic necessities (including medicines and drugs) all industrial

and agricultural raw materials , declared goods and capital goods consisting of about

270 items

On gold and silver ornaments and precious stones 1% VAT is payable

There is also 0% VAT on natural and unprocessed products of the unorganized sector

that are largely excluded from tax

The only products which will be outside VAT will be petroleum products which will be

continued to be taxed under Sales tax as these prices are not fully market determined

Small vendors with a turnover of less than Rs 5 lacs per annum are exempted from VAT

Salient Features :

VAT is a tax on the supply of goods eventually paid by the final consumer. VAT is a tax

paid at each point of exchange of goods where value is added – starting from primary

production, distribution and final consumption

It is charged on the difference between the sale price of goods (outputs) and cost of

purchases (inputs)

At each point of exchange , when value is added VAT is collected




VAT is a multi point tax

The trader does not pay from his pocket, he collects and then pay

All transactions are taxed from the view point of seller

There is no difference whether one is selling to a dealer or consumer

VAT is not for CST sales as such, CST is planned to be phased out in 2 years

Who and why some people fear VAT?

Traders

Ø They have to learn new practices

Ø Maintain new set of books and documents

Ø More paper work

Ø Stock taking onj 1/4/2005 to be done

Ø No VAT refund on inter state purchases

Ø New registration required for VAT

Ø Averse to change to a new system

Industrialists

Ø Requires new accounting system

Ø CST and local tax charged by other state can not be claimed

Ø Stock transfers may create accounting problems

Ø Lack of clarity in the laws

Ø Buying from companies currently under a tax exemption scheme will attract VAT

Advantages of VAT

Ø Goods to become cheaper ultimately to the consumer

Ø Simple and transparent , lesser ‘Inspector Raj’

Ø Tax revenues for Government raises

Ø Ultimately the consumption will increase resulting in more demand for products

which results in higher economic growth

Ø Less paper work




Documents , Returns

Ø All tax payers will have a registration no called TIN – Tax payers Identification

number

Ø All transaction will have invoices/ bill/ memos

Ø For returns Credit notes will be issued

Ø Returns are to be filed every month on or before 7th of subsequent month

VAT calculation – a case Take a case wherein a chain of transactions involving manufacturer , wholesaler, retailer and consumer using standard VAT rate of 12.5% Manufacturer Wholesaler Retailer Consumer Price payable 11250 13500 16200 VAT Recoverable

1250 1500

Net cost 10000 12000 Profit 2000 2400 Net selling price

10000 12000 14400

VAT charged 1250 1500 1800 Sale price + VAT

11250 13500 16200

VAT Accounting Manufacturing Wholesaler Retailer Consumer VAT Payable 1250 1500 1800 VAT Recoverable

1250 1500

Net VAT paid 1250 250 300 VAT borne 1800




Some points to note here:

Total amount of VAT paid Rs 1800, represents 12.5 % of the value added in full chain of

transactions. Manufacturer created Rs 10000 in value , the wholesaler added Rs 2000

and retailer Rs 2400 , making Rs 14400 in total, and VAT on this at 12.5 % is Rs 1800

Consumer pays Rs 1800 as VAT , the parties involved earlier in the chain have paid

VAT but they have either recovered or to the extent they have not, passed on to down

the line to the ultimate consumer

Case study : Sales Tax vs VAT There are two types of taxable sales in Delhi, 1.First point tax- paid by manufacturer

2.Second point tax-paid by consumer

Let us take a comparison of sales tax impact at both these instances and VAT

Sales Tax at first point Sales Tax last point VAT Rs Rs Rs Vendor 100 Vendor 100 Vendor 100 ST 0 ST 0 VAT @ 12.5% 12.5 Selling price 100 Selling price 100 Selling price 112.5 Manufacturer Manufacturer Manufacturer Cost price 100 Cost price 100 Cost price 100 Profit 50 Profit 50 Profit 50 Selling price 150 Selling price 150 Cost price 150 ST '@ 12% 18 ST '@ 12% 0 VAT @ 12.5% 18.75 VAT paid 12.5 Net VAT 6.25 Total price 168 Total price 150 Selling price 156.25 Distributor Distributor Distributor Cost 168 Cost 150 Cost 150 Profit 20 Profit 20 Profit 20 Tax 0 Tax 0 VAT @ 12.5 % 21.25 VAT paid 18.75 Net VAT 2.5 Selling price 188 Selling price 170 Selling price 172.5 Retailer Retailer Retailer Cost 188 Cost 170 Cost 170 Profit 40 Profit 40 Profit 40




Tax 0 Sale Tax @ 12% 25 VAT @12.5% 26.25 VAT paid 21.25 Net VAT 5 Selling price 228 Selling price 235 Selling price 215 Consumer Consumer Consumer Cost 228 Cost 235 Cost 215 Net tax paid to Government 18

Net tax paid to Government 25

Net tax paid to Government 26.25

Consumer paid 228 Consumer paid 235 Consumer paid 215 Point to note here is that VAT results in lower price to consumer and more tax revenue for

the Government




Chapter 12: FRINGE BENEFIT TAX - CONCEPT AND COMPLIANCE Introduction

With the notification of the Finance Act, 2005, the Fringe Benefit Tax has become a law

and every person falling within the definition of employer shall now be required to comply

with the provisions relating to the Fringe Benefit Tax. The Hon’ble Finance Minister in

the Finance Bill 2005, has proposed to levy tax in the hands of the employer in respect

of the benefits being extended to the employees by such employer. After the

introduction of the bill many issues were raised by the trade, industry, chamber, After

extensive consultations and deliberations the initial proposal put forward in the Finance

Bill 2005 was modified. The salient features of the Fringe Benefit Tax after amendment

and notification of the Finance Act, 2005 are as under:

A. Applicability

The Fringe Benefit Tax is a tax to be paid by an employer in addition to the income tax payable for every assessment year starting from the assessment year 2006-07.

The tax is to be paid in respect of the fringe benefits provided or deemed to have been

provided by an employer to his employees. The liability to pay Fringe Benefit Tax

shall be there even when there is no liability to pay income tax by an employer. Even

loss making entities and entities whose income is exempt shall also be required to pay

Fringe Benefit Tax.

B. Meaning of ‘Employer’

The liability to pay Fringe Benefit Tax is on the employer. For this purpose an employer

shall mean a company, a firm, an association of persons or a body of individuals, a local

authority and every artificial juridical person. Individuals and HUFs are not required to pay Fringe Benefit Tax. A further exemption has been provided to the trusts or

institutions which are eligible for exemption under Section 10(23C) or which are

registered under Section 12AA of the Act.




C . Meaning of ‘Fringe Benefits’

The liability to pay tax under this new provision is on the value of fringe benefits.

As such, the first important issue is, ‘What is the meaning of fringe benefits?’. As per the

provisions of the Act, fringe benefit means any consideration for employment provided

by way of any privilege, service, facility or amenity directly or indirectly provided by the

employer whether by way of reimbursement or otherwise to his employees including

former employees

A deeming provision has been introduced where in, a certain percentage of

expenditure incurred on some heads shall be deemed to be the fringe benefit extended

to the employees by the employer. By this deeming provision a part of the expenditure,

irrespective of the fact whether it has actually resulted in any benefit or amenity to the

employees or not, shall be deemed to be the fringe benefit extended to the employees.

D. Valuation of Fringe Benefits

The various heads of expenditure and the value of each expenditure which shall be

deemed to be the fringe benefits are as under

Clause of Section 115WB(2)

Head of Expenditure Percentage of the expenditure deemed to be fringe benefit

(A). Entertainment 20% (B). Hospitality of every kind to any person 20% (C). Conference (other than fee for participation) 20% (D). Sales promotion, including publicity excluding

advertisement 20%

(E). Employees Welfare 20% (F). Conveyance, tour and travel, including foreign travel 20% (G). Use of Hotel, boarding and lodging 20% (H). Repair, running(including Fuel), maintenance of

motorcars and depreciation thereon 20%

(I) Repair, Running(including fuel), maintenance of aircraft and depreciation thereon

20%

(J). Use of Telephone including mobile phone(other than leased lines)

20%

(K). Maintenance of accommodation in the nature of guest houses (Other than for training purposes)

20%

(L). Festival celebration 50%




(M). Use of health club and similar facilities 50% (N). Use of any other club facilities 50% (O). Gifts 50% (P). Scholarship 50% 115WB(1)(b) Any Free or Concessional ticket for private journeys Actual 115WB(1)(c) Contribution to Superannuation fund Actual

Tax at a flat rate of 30 per cent is to be paid on the aggregate value of the fringe benefit

calculated by applying the above percentages. Further, surcharge at the rate of 10 per

cent and education cess at the rate of 2 per cent is to be added to the tax computed

above. The applicability of the surcharge and education cess is on all employer

irrespective of the total income of the employer. Thus, the effective fringe benefit tax rate

is 33.66 per cent.

D.Exemptions

1. Expenditure incurred on providing tea, coffee, food etc in office or factory is not to

be included in the fringe benefits.

2. Expenditure incurred on conference fee for participation by the employees in the

conference shall not be included in the fringe benefits. However, expenditure on

conveyance, tour, travel on hotel incurred in connection with any conference shall

be included in the value of the fringe benefits.

3. Expenditure incurred on advertisement is not to be included in the value of fringe

benefits. However, expenditure on sponsorship of any sports event or any other

event shall be excluded only when the event is organized by any government

agency or trade association or body.

4. Contribution made by the employer to the Provident Fund, ESI, approved Gratuity

fund etc shall not be liable for Fringe Benefit Tax.

Employer Specific Concessions :

In addition to the above general exemptions, there are certain employer specific

concessions have been provided.




1. In the case of an employer who is engaged in the business of hotel, the value of

fringe benefits liable for tax in respect of provision of hospitality (clause B) shall

be 5 per cent (as against the general rate of 20 per cent) of the total amount of

expenditure incurred on hospitality.

2. In the case of the employer who is engaged in the business of construction, the

value of the fringe benefits in respect of the expenditure incurred on conveyance, tour and travel including foreign travel (clause F) shall be 5 per cent instead

of 20 per cent.

3. In the case of employer engaged in the business of carriage of passengers or

goods by motor cars, the value of the fringe benefits in respect of the expenditure incurred on repair, running and maintenance of motor car including depreciation (clause H) shall be 5 per cent instead of 20 per cent.

4. In the case of an employer engaged in carriage of passenger or goods by aircraft,

the value of fringe benefit in respect of expenditure on repair, running,

maintenance including depreciation of aircraft shall be taken as nil instead of 20

per cent.

5. Further, in the case of an employer engaged in the business of manufacture or production of pharmaceuticals, and computer software, the value of fringe

benefits liable for tax in respect of expenditure incurred on conveyance, tour and travel including foreign travel (clause F) and use of hotel, boarding and lodging

facility (clause G), shall be 5 per cent (as against the general rate of 20 per cent)

of the expenditure incurred under these heads.

F. Need For Reclassification of Expenditure Heads

With the introduction of Fringe Benefit Tax from 1st April, 2005, there is a need to revise

the expenditure heads so that the expenditure not liable for fringe benefit do not get

merged with the expenditure liable for Fringe Benefit Tax. Some of the heads where this

regrouping will be required are as under.




1. Hospitality provided to the employees by way of food and beverage in office or

factory or by way of paid vouchers need to be debited under a separate head other

than the employee welfare / staff welfare expenditure.

2. Expenditure on repair, running and maintenance of motor car and depreciation

thereon need to be classified separately from the expenditure incurred on repair,

running of vehicles other than motor cars such as scooter, bus, truck, etc.

3. Expenditure on conference fee for participation of employees need to be classified

separately in view of exemption in clause (C).

4. Expenditure which is taxable as perquisite in the hands of employees is not liable

for Fringe Benefit Tax. As such all such expenditure need to be debited under the

head ‘Salary’ or ‘Establishment Expense’, so that the same does not get clubbed

with the other expenditure which is liable for Fringe Benefit Tax.

5. Expenditure on maintenance of guest house being used for training purposes need

to classified separately from the expenditure incurred on maintenance of guest

house as such.

G. Fringe Benefit Tax is not a deductible expenditure

i) The fringe benefit tax paid by the employer shall not be an eligible expenditure while

computing profit or gain of business or profession, despite the fact, that the same has

been paid on account of the liability of the employees.

ii) Further, tax auditor shall be required to specify the amount of fringe benefit tax

debited in the profit and loss account under clause 16(f) of Form 3CD of the tax audit

report from assessment year 2006-07 onwards.

H.Compliance of Fringe Benefit Provisions

i. Payment of tax in advance The Fringe Benefit Tax is applicable from financial year

beginning on 1st April, 2005, i.e., assessment year 2006-07. For complying with the

fringe benefit provisions, every employer shall be required to compute the value of the

fringe benefits, every quarter. It is to be noted that there is a liability to pay Fringe Benefit Tax by way of advance tax every quarter, not on the basis of yearly estimate,

but on the basis of the actual value of fringe benefits computed every quarter. The




immediate requirement will be to compute the same for the first quarter starting from 1st

April, 2005 to 30th June, 2005 of the current year and pay the tax thereon at the rate of

33.66 per cent (inclusive of surcharge and education cess) by 15th July, 2005. Similar

liability is to be computed and paid for the subsequent quarters by 15th October and 15th

January. However, for the quarter ending on 31st March, the fringe benefit tax is to be

paid even before the end of the quarter, i.e., by 15th March.

In case of failure to pay the tax for any quarter, or where the tax paid is less, then there

shall be a liability to pay interest at the rate of 1 per cent on the amount of the short-fall

for every month or part of the month till the short-fall continues.

ii. Filing of Return

Every employer who has provided the fringe benefits, as explained above, to his

employees is required to file return of fringe benefits irrespective of the fact whether

such employer is required to file the return of his own income under Section 139 of the

Act or not. The due date of filing the return shall be 31st October for a company and a

person whose accounts are required to be audited. In other cases, the due date shall be

31st July every year.

iii. Assessment

The procedure of the assessment including the best judgement assessment and

reassessment shall be the same as is applicable in the case of the regular assessment

of the income. Despite the return being a separate return, it appears that there will be no

separate scrutiny of FBT returns.

Fringe Benefit Tax is a new law. As is the case with any new law, many issues will arise on its interpretation and application. One can only hope that the same gets sorted out and clarified at the earliest.

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Busineww Law

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