Government Likely to Clear the Long-pending Forward Contracts Amendment Bill

— Anand Singhvi, Manama

A: Until recently, funds could be remitted after furnishing a certificate from a chartered accountant certifying that appropriate tax had been deducted. These certificates had to be filed with the Reserve Bank of India, which then forwarded them to the Income-tax Department post facto. The government had, in the Finance Act, 2008, introduced sub-section (6) in section 195 of the Income-tax Act, which had made it mandatory for companies to file a declaration as to how much money had been remitted out of the country. However, this declaration was also post facto, to be filed after the transfer of funds had taken place.

Companies and individuals who wish to send funds overseas will hereafter have to get the Income-tax Department’s certificate. A certificate from the Assessing Officer (AO) prescribing the rate at which withholding tax is to be deducted would be required.

The certificate issued by AO is to make the applicant’s tax liability clear. If there is no tax liability, then the AO would issue a certificate prescribing a nil rate of withholding tax. In case the assessee has a tax liability, the AO will prescribe the rate at which tax is to be deducted.

Q: Has a regulator been appointed in India for commodity futures? I have got conflicting news on the question whether the regulator has already been appointed?

— R.C. Bhatt, Doha

A: The Government is likely to clear the long-pending Forward Contracts (Regulation) Amendment Bill to give more teeth to the regulator, Forward Markets Commission (FMC). Armed with the powers, including financial independence, the Commission’s role and functions will be similar to the Securities and Exchange Board of India (SEBI).

If Parliament approves the Bill in the forthcoming session, the regulator will be empowered to levy penalties besides getting the power to approve options trading. In addition, it will pave the way for the entry of institutional players like mutual funds and foreign institutional investors into the trading arena, which many believe will deepen the markets.

Similarly, the FMC will be able to decide on who can set up commodity exchanges. This is contrary to its existing role which is confined to recommending the most suitable applicant, while the Government issues the orders.

Q: About five years ago I had made a gift to my distant relative in India. He is now having difficulty in explaining the genuineness of the gift to his tax officer. Can the tax department question the transaction?

— P. Ahmed, Ruwi

A: A gift cannot be accepted to be genuine merely because the amount has been given by way of cheque or draft through banking channels, unless the identity of the donor, his creditworthiness, relationship with the donee and the occasion are proved. Unless the recipient has proved the genuineness thereof, the gift may very well be treated to be an accommodation entry of the assessee’s own money, which is not disclosed for the purpose of taxation. This point was considered by the Punjab and Haryana High Court in a recent judgment.

The facts in this case were that the assessee had shown a foreign remittance by way of gift of Rs1 lakh from one D. The Assessing Officer found that the gift was not genuine as the assessee was not able to explain the foreign gift and relationship with the donor. The Commissioner of Income-tax (Appeals) reversed the view taken by the Assessing Officer, but the Tribunal set aside the order of the Commissioner and held that the gift was not genuine.

The High Court held that there was no occasion for the alleged donor to have gifted a huge amount of money to the assessee and his family.

The donor was working as a watchman in a foreign country and his gift of Rs1 lakh each to the assessee, his two sons and two other family members was highly improbable. The assessee could not establish his relationship with the donor. The Court concluded that the Tribunal, on a consideration of the facts, had rightly come to the conclusion that the gift received by the assessee was not genuine.