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Legal and Procedural Aspects in

Management
- Prof. Dr. Sameera Raees

Legal and Procedural Aspects of Management

Course Contents:
1. The Information Technology Act, 2000
1.1 Specifies of the Act
1.2 Essence of the Act
1.3 Digital Signature [Authentication of electronic proof]
1.4 Electronic Governance
1.5 Regulation of certifying authorities
1.6 Offences
2. Income Tax Act, 1961
2.1 Heads of Income and computation of income under different heads
2.2 Carry forward and set off of losses
2.3 Deductions from Gross Total Income
2.4 Incomes which do not form part of total income
2.5 Income tax authorities, appointment, control, jurisdiction and powers
2.6 VAT Basic concepts and principles
2.7 Service Tax Introduction and Key aspects
3. Due Diligence and Corporate compliance Management
3.1 Due Diligence Meaning, Scope and Objectives, steps in process of due diligence
3.2 Areas of Due Diligence IPO, ESOP, JVs, M&A
3.3 Compliance management Systems compliance, Establishment of compliance system,
Compliance in letter and spirit
3.4 Account and Audit report and Directors report
3.5 Inspection and Investigation
3.6 SEBI regulations w.r.t Corporate governance

4. Indian Stamp Act


4.1 Introduction to Stamp duty Meaning and Purpose
4.2 Instruments chargeable with stamp duty
4.3 Payment procedure and execution of stamped instruments
4.4 Review of stamp duties applicable to Maharashtra State
4.5 Adjudication of stamp duty
4.6 Prosecution for offence against Stamp Law.

Reference Books:
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1.
2.
3.
4.

Students guide to Income Tax- Vinod .K.Sighania.


Indian Stamp Act, 1899 Bare Act.
Companies Act, 1956 Bare Act.
Information Technology Act, 2000 Bare Act.

Legal and Procedural Aspects of Management

Chapter 1 INFORMATION TECHNOLOGY ACT, 2000


New communication systems and digital technology have made dramatic changes in way of
transacting business. Use of computers to create, transmit and store information is increasing.
Computer has many advantages in e-commerce. It is difficult to shift business from paper to
electronic form due to two legal hurdles (a) Requirements as to writing and (b) Signature for
legal recognition. Many legal provisions assume paper based records and documents and
signature on paper.
The General Assembly of the United Nations by resolution dated the 30th January, 1997 adopted
the Model Law on Electronic Commerce and recommended that all States should give
favourable consideration to the Model Law when they enact or revise their laws.
The Information Technology Act has been passed to give effect to the UN resolution and to
promote efficient delivery of Government services by means of reliable electronic records.
As per preamble to the Act, the purpose of Act is (a) to provide legal recognition for transactions
carried out by means of electronic data interchange and other means of electronic
communication, commonly referred to as "electronic commerce", which involve the use of
alternatives to paper-based methods of communication and storage of information and (b) to
facilitate electronic filing of documents with the Government agencies. The Act came into effect
on 17.10.2000.
The Act does not apply to (a) a negotiable instrument as defined in section 13 of the
Negotiable Instruments Act, except cheque (b) a power-of-attorney as defined in section 1A of
the Powers-of-Attorney Act (c) a trust as defined in section 3 of the Indian Trusts Act(d) a will as
defined in section 2(h) of the Indian Succession Act, including any other testamentary
disposition by whatever name called (e) any contract for the sale or conveyance of immovable
property or any interest in such property (f) any such class of documents or transactions as may
be notified by the Central Government in the Official Gazette. - - Broadly, documents which are
required to be stamped are kept out of the provisions of the Act.
Overview of the Act - The Act provides for - * Electronic contracts will be legally valid * Legal
recognition of digital signatures * Digital signature to be effected by use of asymmetric crypto
system and hash function * Security procedure for electronic records and digital signature *
Appointment of Certifying Authorities and Controller of Certifying Authorities, including
recognition of foreign Certifying Authorities * Controller to act as repository of all digital
signature certificates * Certifying authorities to get License to issue digital signature certificates
* Various types of computer crimes defined and stringent penalties provided under the Act *
Appointment of Adjudicating Officer for holding inquiries under the Act * Establishment of
Cyber Appellate Tribunal under the Act * Appeal from order of Adjudicating Officer to Cyber
Appellate Tribunal and not to any Civil Court * Appeal from order of Cyber Appellate Tribunal
to High Court * Act to apply for offences or contraventions committed outside India * Network
service providers not to be liable in certain cases * Power of police officers and other officers to

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enter into any public place and search and arrest without warrant * Constitution of Cyber
Regulations Advisory Committee who will advice the Central Government and Controller
1.2 Essence of the Act - The Information Technology Act enables:* Legal recognition to
Electronic Transaction / Record * Facilitate Electronic Communication by means of reliable
electronic record * Acceptance of contract expressed by electronic means * Facilitate Electronic
Commerce and Electronic Data interchange * Electronic Governance * Facilitate electronic
filing of documents * Retention of documents in electronic form * Where the law requires the
signature, digital signature satisfy the requirement * Uniformity of rules, regulations and
standards regarding the authentication and integrity of electronic records or documents *
Publication of official gazette in the electronic form * Interception of any message transmitted in
the electronic or encrypted form * Prevent Computer Crime, forged electronic records,
international alteration of electronic records fraud, forgery or falsification in Electronic
Commerce and electronic transaction.
1.3 DIGITAL SIGNATURE - Any subscriber may authenticate an electronic record by affixing
his digital signature. [section 3(1)]. Subscriber" means a person in whose name the Digital
Signature Certificate is issued. [section 2(1)(zg)]. "Digital Signature Certificate" means a Digital
Signature Certificate issued under section 35(4) [section 2(1)(q)].
"Digital signature" means authentication of any electronic record by a subscriber by means of an
electronic method or procedure in accordance with the provisions of section 3. [section 2(1)(p)].
"Affixing digital signature" with its grammatical variations and cognate expressions means
adoption of any methodology or procedure by a person for the purpose of authenticating an
electronic record by means of digital signature. [section 2(1)(d)].
Objectives
To provide legal recognition for transactions carried out by means of electronic data interchange
and other means of electronic communication, commonly referred to as electronic commerce,
which involve the use of alternatives to paper-based methods of communication and storage of
information
To facilitate electronic filing of documents with the Government agencies
To facilitate electronic storage of data in place of paper- based methods of storage of data.
To provide for matters connected therewith or incidental thereto.
Digital Signature [Sec. 3]
Any subscriber may authenticate an electronic record by affixing his digital signature.
[Section 3(1)]
The authentication of the electronic record shall be effected by the use of asymmetric crypto
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system and hash function which envelop and transform the initial electronic record into another
electronic record. [Section 3(2)]
Hash function means an algorithm mapping or translation of one sequence of bits into another,
generally smaller set known as hash result, the purpose is such that an electronic record yields
to the same hash result every time the algorithm is executed with the same electronic record.
Any person by the use of a public key of the subscriber can verify the electronic record. [Section
3(3)]
The private key and the public key are unique to the subscriber and constitute a functioning key
pair. [Section3(4)]
Subscriber means a person in whose name the Digital Signature Certificate is issued. [Section
2(1) (zg)]
Digital Signature means authentication of any electronic record by a subscriber by means of an
electronic method.[Sec.2(1)(p)]
1.4 Electronic Governance [Sec. 4 to 10]
Electronic Governance :- Electronic governance is recognition by Government to accept
communication, storage of information, acceptance of digital signatures in electronic forms and
retention of electronic records and giving it a legal sanctity.
Following are the provisions related to Electronic Governance provided under IT Act.
Legal recognition of electronic records [Sec. 4]
Where there is a requirement by any law that matter shall be in writing or in the type written or
printed form. Sec. 4 says that such requirements shall be fulfilled if such information or matter is
available in an electronic form and can be accessible for a subsequent reference.
Legal recognition of electronic signatures [Sec. 5]
Where the law provides that information or any matter shall be authenticated by affixing the
signature or shall be signed or bear the signature of any person, such requirement shall be
fulfilled if such information or matter is authenticated by means of electronic signature affixed in
such manner as may be prescribed by the Central Government.
Use of electronic records and electronic signatures in Government and its agencies [Sec. 6]
Where the filing of any form, application or other document with any office, authority, body or
agency owned or controlled by the appropriate Government for the issue or grant of any licence,
permit, sanction or approval, the receipt or payment of money then such requirement shall be
satisfied if such filing, issue, grant, receipt or payment, is effected by means of such electronic
form as may be prescribed by the appropriate Government.
Delivery of services by service provider [Sec. 6 A]
For the efficient delivery of services to the public through electronic means the appropriate
Government may authorize any service provider to set up, maintain and upgrade the
computerized facilities and perform such other services as may specify by notification in the
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Official Gazette.
The service provider can collect, retain and appropriate such service charges for the purpose of
providing such services, from the person availing such service.

Retention of electronic records [Sec. 7]


Where the documents, records or any information shall be retained for any specific period, such
documents are retained in the electronic form, if
the information contained remains accessible so as to be usable for a subsequent reference,
the electronic record is retained in the format in which it was originally generated, sent or
received the details which will facilitate the identification of the origin, destination date and time
of dispatch or receipt of such electronic record are available.
Audit or documents, etc. maintained in electronic form [Sec. 7 A]
Where there is a provision for audit of documents, records or information, that provision shall
also be applicable for audit of documents, records or information processed and maintained in
the electronic form.
Publication of rule, regulation, etc. in Electronic Gazette [Sec. 8]
where the law provides that any rule, regulation, order, bye-law, notification or any
other matter shall be published in the Official Gazette, then such requirement shall be
fulfilled if such matter is published in the Official Gazette or Electronic Gazette.
No Right conferred to insist that document shouldbe accepted in electronic form [Sec. 9]
Section 6, 7 and 8 shall not confer a right upon any person to insist any Ministry or
Department of Central or State Government or any body established or controlled by Central
or State Government should accept, issue, create, retain and preserve any document in the
form of electronic records or effect any monetary transaction in the electronic form.
Power to make rules by Central Government in respect of Electronic Signatures [Sec. 10]
The Central Government may prescribe
the type of electronic signature;
the manner and format in which the electronic signature shall be affixed;
the manner or procedure which facilitates identification of the person affixing the electronic
signature;control processes and procedures to ensure integrity, security and confidentiality of
electronic records or payments; and
any other matter which is necessary to give legal effect to electronic signatures.

Validity of contracts formed through electronic means [Sec. 10-A]


where a contract is made in electronic form, such contract shall not be deemed to be
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unenforceable on the ground that such electronic form or means was used for that purpose.
This means that the contract made in electronic form have the same validity as they are made in
person.

Electronic Records [Sec. 11-13]


Attribution of electronic records [Sec. 11]
An electronic record shall be attributed to the originatorif it was sent by the originator himself,
by the person who had the authority to act on behalf of the originator in respect of that electronic
record;
by an information system programmed by or on behalf of the originator to operate
automatically.
Acknowledgement of receipt [Sec. 12]
Where the originator has not agreed with the addressee that the acknowledgement of receipt of
electronic record be given in a particular form or by a particular method, an acknowledgement
may be given by
any communication by the addressee, automated or otherwise; or
any conduct of the addressee, sufficient to indicate to the originator that the electronic record
has been received.
where the originator has stipulated that the electronic record shall be binding only on receipt of
an acknowledgement of such electronic record by him, then unless acknowledgement has been
so received, the electronic record shall be deemed to have been never sent by the originator.
where the originator has not stipulated that the electronic record shall be binding only on receipt
of such acknowledgement, and the acknowledgement has not been received by the originator
within the time specified or agreed or, if no time has been specified or agreed to within a
reasonable time, then the originator may give notice to the addressee stating that no
acknowledgement has been received by him and specifying a reasonable time by which the
acknowledgement must be received by him and if no acknowledgement is received within the
aforesaid time limit he may, after giving notice to the addressee, treat the electronic record as
though it has never been sent.
Time and Place of Dispatch and Receipt of Electronic Record [Sec. 13]
1) the dispatch of an electronic record occurs when it enters a computer resource
outside the control of the originator.
2) the time of receipt of an electronic record shall be determined as follows :a) if the addressee has designated a computer resource for the purpose of receiving records
i) receipt occurs at the time when the electronic record enters the designated computer resource;
ii) if the electronic record is sent to a computer resource of the addressee that is not the

Legal and Procedural Aspects of Management

designated computer resource, receipt occurs at the time when the electronic record is
retrieved by the addressee;
b) if the addressee has not designated a computer resource along with specified timings,
if any, receipt occurs when the electronic record enters the computer resource of the
addressee.
3)the electronic record is deemed to be dispatched at the place where the originator has his
place of business, and is deemed to be received at the place where the addressee has his place
of business.
4)The above provisions shall apply notwithstanding that the place where the computer resource
is located may be different from the place where the electronic record is deemed to have been
received under (3)
5)If the originator or the addressee has more than one place of business, the principal place
of business shall be the place of business,if the originator or the addressee does not have a
place of business, his usual place of residence shall be deemed to be the place of business.

1.5 Regulation of Certifying Authorities


Appointment of Controller and other officers [Sec. 17]
The Central Government by notification in the Official Gazette, appoint a Controller of
Certifying Authorities for the purposes of this Act and may also appoint such number of
DeputyControllers, Assistant Controllers and other officers and employees as it deem fit.
The Controller shall discharge his functions under this Act subject to the general control and
directions of the Central Government.
The Deputy Controllers and Assistant Controllers shall perform the functions assigned to them
by the Controller under the general superintendence and control of the Controller.
The qualifications, experience and terms and conditions of service of Controller, Deputy
Controllers, Assistant Controllers, other officers and employees shall be such as may be
prescribed by the Central Government.
The Head Office and Branch Office of the office of the Controller shall be at such
places as the Central Government may specify.
There shall be a seal of the Office of the Controller.
Functions of Controller [Sec.18] :
exercising supervision over the activities of the Certifying Authorities, certifying public
keys of the Certifying Authorities,
laying down the standards to be maintained by the Certifying Authorities,
specifying the qualification and experience which employees of the Certifying Authorities
should possess,
specifying the conditions subject to which the Certifying Authorities shall conduct their

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business,
specifying the contents of written, printed or visual materials and advertisements that may
be distributed or used in respect of a Electronic Signature Certificate and the public key,
specifying the form and content of a Electronic Signature Certificate and the key,
specifying the form and manner in which accounts shall be maintained by the Certifying
Authorities,
specifying the terms and conditions subject to which auditors may be appointed and the
remuneration to be paid to them,
facilitating the establishment of any electronic system by a Certifying Authority either
solely or jointly with other Certifying Authorities and regulation of such system,
specifying the manner in which the Certifying Authorities shall conduct their dealings
with the subscribers,
resolving any conflict of interests between the Certifying Authorities and the subscribers,
laying down the duties of the Certifying Authorities,
maintaining a database containing the disclosure record of every Certifying Authority
containing such particulars as may be specified by regulations, which shall be accessible
to public.

1.6 Offences
Penalty & Adjudication [Sec. 43-47]
Penalty & Compensation for Damage to Computer, Computer System, etc. [Sec. 43]
A person who without permission of the owner or any other person who is in charge of a
computer, computer system or computer network :a)Accesses or secures access to it;
b)Down loads, copies or extracts any data, computer database of information from it, including
information or data held or stored in any removable storage medium;
c)Introduces or causes to be introduced any computer contaminant or computer virus into it;
d) Damages or causes to be damaged any computer, etc. data, computer database or any other
programs residing in such computer, etc.
e) Disrupts or causes disruption of any computer, etc.
f)Denies or causes the denial of access to any person authorized to access any computer etc.
g) Provides any assistance to any person to facilitate access to a computer, etc. in contravention
of the provisions of this Act;
h) Charges the services availed of by a person to the account of another person by tampering

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with or manipulating any computer, etc.


i)Destroys, deletes or alters any information residing in a computer resource or diminishes its
value or utility or affects it injuriously by any means;
j)Steels, conceals, destroys or alters or causes any person to steal, conceal, destroy or alter any
computer source code used for a computer resource with an intention to cause damage,
he shall be liable to pay damages by way of compensation not exceeding 1 crore rupees to the
person so affected.
Penalty for Failure to furnish information, return etc. [Sec. 44]
If any person who is required under this Act, to
a)Furnish any document, return or report to the controller or the Certifying Authority, fails to
furnish the same, he shall be liable to a penalty not exceeding one lakh and fifty thousandfor
each such failure;
b)File any return or furnish any information, books or other documents within the specified time
there for, fails to file return or furnish the same within the time specified, he shall be liable to a
penalty not exceeding five thousand rupees for everyday during which such failure continues;
c)Maintain books of accounts or records, fails to maintain the same, he shall be liable to a
penalty not exceeding ten thousand rupees for every day during which the failure continues.
Residuary Penalty [Sec. 45]
whoever contravenes any rules or regulations made under this Act, for the contravention of
which no penalty has been separately provided, shall be liable to pay a compensation not
exceeding rupees twenty five thousand to the person affected by such contravention.
Power to Adjudicate [Sec. 46]
For the purpose of adjudicating whether any person has committed a contravention of any of the
provisions of this Act or of any rule, regulation, direction or order made there under, the Central
Government shall appoint an officer not below the rank of a Director to the Government of
India or an equivalent officer of a state government to be an adjudicating officer for holding and
enquiry in the manner prescribed by the Central Government.
the adjudicating officer appointed shall exercise jurisdiction to adjudicate matters in which the
claim for injury or damage does not exceed rupees five crore
provided that the jurisdiction in respect of the claim for injury or damage exceeding rupees
five crore shall vest with the competent Court.
The adjudicating officer shall, after giving the person a reasonable opportunity for making
representation in the matter and if, on such inquiry, he is satisfied that the person has committed
the contravention, he may impose such penalty or award such compensation as he thinks fit in
accordance with the provisions of that section.

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No person shall be appointed as an adjudicating officer unless he possesses such experience


in the field of Information Technology and legal or judicial experience as may be prescribed
by the Central Government.

Questions:1. Define Digital Signature, Private Key Public Key, Asymmetric crypto system.
Explain digital signature in detail. Under what circumstances digital signature can be
suspended and revoked?
2. What do you understand by Electronic Governance? Explain the provisions related to
electronic governance provided under the Information Technology Act, 2000.
3. What do you understand by Electronic Record? Explain the provisions related to
electronic record provided under the Information Technology Act, 2000.
4. What are the functions of Certifying Authorities under the Act?

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Chapter 2 INCOME TAX ACT, 1961


There are two types of taxes ie. Direct and indirect. Income tax is one of the type of direct tax.
The provision of Income tax are contained in Income tax Act, 1961. It became applicable from
1st April 1962. It extends to the whole of India.

Important Definitions
1. Person u/s 2(31) includes,
a. An Individual,
b. Hindu Undivided Family (HUF),
c. A Company,
d. A Firm,
e. An Association of Persons(AOP) or Body of Individuals (BOI),
f. A Local Authority,
g. Every other Artificial Juridical Person
2. Assessee u/s 2(7) means a person by whom income-tax or any other sum of money is
payable under the Act. Assessee includes every person in respect of whom any proceeding
under the Act has been taken for the assessment of his income or loss or the amount of refund
due to him. Assessee includes a person who is assessable in respect of income or loss of
another person or who is deemed to be an assessee, or an assessee in default under any
provision of the Act.
3. Assessment Year u/s 2(9) means, the period of 12 months commencing on the 1st April
every year. It is the year (just after previous year) in which income is earned is charged to
tax. The current Assessment is 2012-2013. Assessment year 2012-13 will commenced on
April 1, 2012, will end on March 31, 2013.
4. Previous Year u/s 2(34) means, the year in which income is earned.
5. Gross Total Income (G.T.I) :- The aggregate income under the 5 heads of income (viz.
Salary, House Property, Business or Profession, Capital Gains & Other Sources) is
termed as Gross Total Income.
6.
Total Income (T.I) :- Total Income of assessee is gross total income as reduced by the
amount permissible as deduction under sections 80C to 80U.

7.

Definition of income [section 2(24)]

Income includes a) Profit or gains;


b) Dividend;

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c) Voluntary contribution received by a trust created wholly or partially for charitable or


religious purpose or by an institution established wholly or partially religious purpose or by
certain other specified association or institution;
d) The value of any perquisites or profit in lieu of salary taxable under clause (2)and (3) of
section 17;
e) Export Incentives;
f) Any interest, salary, bonus, commission or remuneration earned by a
partner of a firm such firm;
g) Any capital gain chargeable under section 45;
h) Profits and gains of business of insurance company or by a cooperative society
i) Profits and gains of any business of banking carried on by a cooperative
society with its members;
j) Winnings from lotteries, crosswords, puzzles, races including horse races
card games and other games of any sort or from gambling or betting of
any form or nature whatsoever;
k) Any sum received by the assessee from his employees towards welfare
fund contribution such as provident fund, superannuation fund etc.
1) Any sum received under a key man insurance policy including the sum
allocated by way of bonus on such policy.
How To Determine Residential Status Of Individual?
We all are aware of the fact that tax is charged on total income and the Individual income is
taxed based on his residential status . Ultimately, Incidence of tax on the income depends upon
the residential status . So, now, let us truly describe the Primary & secondary condition for

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determination of residential status of an Individual.

There are normally two primary classifications Resident and Non- Resident.
Again, Resident is divided into two sub-categories (secondary classification) - Ordinarily and
Not-ordinarily Resident.
Primary Condition:
An Individual is said to be Resident in India, if he satisfies at least one of the basic condition:
1. He is in India for at least 182 days in the previous year (PY).
2. He is in India for at least 60 days in PY and for 365 days or more during 4 years
immediately preceding PY.
NOTE: Both days i.e. the day when one left and the day on which he came to India is
considered for Number of days of stay in India.
Exceptions:
Condition 2 is not applicable when Indian citizen during PY

Leaves India for employment outside India.


Leaves India as he is a crew member of an Indian ship.
Comes to visit India.

Secondary Condition:

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When it is determined that a person is resident, then the further process to determine whether he
is an ordinarily or non-ordinarily resident takes place.
An individual is said to be not-ordinarily resident if he satisfies any one of the following
conditions:
He is a resident in India:
1. For at least 2 years out of 10 previous years preceding the relevant PY.
2. For at least 730 days during 7 years immediately preceding the relevant PY.
Lets understand it with an Example:
Mr. X is an Indian citizen. He went to Canada for employment. He leaves India for first time on
Sep. 26, 2010. During the PY 2011-12 he comes to India for 175 days. Now, we have to
determine his residential status for AY 2011-12 and AY 2012-13.
Determination:
An Individual is said to be resident in India as per primary conditions mentioned above:
In the given example, since Mr. X is an Indian citizen, leaving India for employment, therefore
condition 2 is not operative. But condition 1 will get satisfied if he stays in India for at least 182
days in PY.
Number of days of stay of Mr. in India in the PY 2012-13.
MONTH

NO. OF DAYS

APRIL

30

MAY

31

JUNE

30

JULY

31

AUGUST

31

SEPTEMBER

26

TOTAL

179

Since Mr. X stays for less than 182 days (179 days) in India, so he is a Non-Resident in AY
2013-14. Also, in AY 2013-14, he stays for 175 days in India which is less than 182 days, so he
is a non-resident for AY 2012-13 also.

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Tax incidence on an assessee depends on his residential status. For instance, whether an income,
accrued to an individual outside India, is taxable in India depends upon the residential status of
the individual in India. Similarly, whether an income earned by a foreign national in India (or
outside India) is taxable in India depends on the residential status of the individual, rather than
on his citizenship. Therefore, the determination of the residential status of a person is very
significant in order to find out his tax liability.

The following norms one has to keep in mind while deciding the residential status of an assessee:
1. Different taxable entities - All taxable entities are divided in the following categories for the
purpose of determining residential status:
a. An individual;
b. A Hindu undivided family;
c. A firm or an association of persons;
d. A joint stock company; and
e. Every other person.
2. Different residential status - An assessee is either: (a) resident in India, or (b) non-resident in
India.
However, a resident individual or a Hindu undivided family has to be (a) resident and ordinarily
resident, or (b) resident but not ordinarily resident. Therefore, an individual and a Hindu
undivided family can either be:
a. resident and ordinarily resident in India; or
b. resident but not ordinarily resident in India; or
c. non-resident in India
All other assessees (viz., a firm, an association of persons, a joint stock company and every other
person) can either be:
a. resident in India; or
b. non-resident in India.

Category

Individual/Hindu undivided family

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Firm, association
of persons, joint
stock company and
every other person

17

Category 1

Resident in India

Resident in India

Ordinarily resident
Not-ordinarily resident

Category 2

Non-resident in India

Non-resident
India

in

3. Residential status for each previous year - Residential status of an assessee is


to be determined in respect of each previous year as it may vary from previous year to previous
year.
4. Different residential status for different assessment years - An assessee may enjoy different
residential status for different assessment years. For instance, an individual who has been
regularly assessed as resident and ordinarily resident has to be treated as non-resident in a
particular assessment year if he satisfies none of the conditions of section 6(1).
5. Resident in India and abroad - It is not necessary that a person, who is resident in India,
cannot become resident in any other country for the same assessment year. A person may be
resident in two (or more) countries at the same time. It is, therefore, not necessary that a person
who is resident in India will be non-resident in all other countries for the same assessment year.
2.1 Heads of Income and Computation of income under different heads.
All kinds of taxable income of an assessee fall under any of the following five heads of
income. Those incomes which do not find place under any of the first four heads and are
taxable, fall under the fifth head of income. In order to compute the taxable income under each
head, certain deductions have to be made from gross income of the head. These deductions are
different for each head.
There are separate sections in the Income Tax Act for computing the taxable income under
each head, which are as under1. Salaries sec. 11 to 17;
2. Income from house property sec. 22 to 27;
3. Profits and gains from business or profession sec. 28 to 44;
4. Capital gains sec. 45 to 55 and
5. Income from other sources sec. 56 to 69.
Computation of income under different heads

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Taxable income is computed under the respective heads after allowing from gross receipts
admissible deductions for cost and expenses. The net income under each of these heads is then
aggregated to arrive at the 'Gross total Income'. Computation of income under individual heads is
explained in paragraphs following.
Salaries
Income from salaries is computed in accordance with the provisions of section 15 to 17 of the
Act. 'Salary' means all remuneration paid or due under the contract of employment. It includes
wages, annuity, pension, gratuity, fees, commission, perquisites, profits in lieu of or in addition
to any salary or wages, any advance of salary, leave salary encashment or any other payment by
the employer for services rendered. The annual accretion to the balance at the credit of an
employee participating in a recognised provident fund in excess of the prescribed limit is
includible in the salary income of the employee. 'Perquisites' mean the benefits or amenities
provided in kind by the employer free of cost or at a concessional rate. The value of these is
regarded as part of salary. Rule 3 of the Income Tax Rules lays down the methods for
determining the value of certain perquisites. For others, the general rule of valuing the
perquisites in the hands of the employee is to take the cost to the employer in providing the
benefit or amenity. It has been clarified that securities allotted to an employee free of cost or at
concessional rate under ESOP or as sweat equity shares, will not be taxable as perquisite.
In order to be taxable under the head 'Salaries', it is necessary that there is a relationship of
employer and employee between the payer and the receiver. It is for this reason that the
remuneration received as a partner is not taxable as 'salary'.
Income from house property
Income from house property is computed in the hands of the owner in accordance with the
provisions of sections 22 to 27 of the Act. It is determined with reference to its 'annual value', i.e.
the sum for which the property might reasonably be let from year to year. However, where any
property is tenanted and the annual rent received or receivable by the owner is in excess of the
sum for which the property might reasonably be expected to be let from year to year, the actual
annual rent received or receivable is taken as the annual value of the property.
From the annual value of a house property in the occupation of a tenant, taxes levied by any
local authority in respect of the property to the extent such taxes are borne by the owner are
deductible on actual payment basis to arrive at the 'net annual value'.
Where the property consists of a house or a part of a house which is in the occupation of the
owner for his own residence, its annual value is taken as Nil. But if such a property is let out
during any part of the previous year, its annual value is taken proportionately. Further, where the
owner has only one resedential house and the house cannot be actually occupied by reason of the

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fact that owing to his employment, business or profession carried on at any other place, he has to
reside at that other place in a building not belonging to him, its annual value is taken to be Nil
provided the house is not actually let out and no other benefit is derived by the owner from it.
From the net annual value, determined as above deductions on account of annual repairs and
collection expenses (1/4th of the net annual value irrespective of actual expenditure), insurance
charges in respect of property, any annual charge, interest paid on any money borrowed for the
building, ground rent, land revenue, unrealised rent are allowed. All these deductions are not
allowed in respect of the house property in the occupation of the owner for his own residence,
the annual value of which is taken at Nil. In such a case deduction is allowed only for interest
and that too upto Rs. 1,00,000 only provided the house was constructed or acquired after
1.4.1999 but before 1.4.2003.
Under the circumstances mentioned in Sec. 27 of the I.T. Act, a person can be deemed to be the
owner of the house property and in such a case the income from that property is taxable in the
hands of that person.
Where the net result of computation of income from house property is loss and the assessee has
income assessable under any other head of income, he is entitled to have such loss set off against
income under other heads. Any loss remaining unadjusted can be carried forward to the
following assessment year for set- off against income from house property in that years and in
succeeding seven years.

Profits and gains of business or profession


Income from business or profession is computed in accordance with the provisions of sections 28
to 44D of the Act. The expression 'business or profession' includes any trade commerce or
manufacture or vocation. Apart from income from any of these activities the income chargeable
under this head includes the following receipts as well:i.

Compensation received for the termination or for modifications in terms and conditions
of any managing agency agreement.

ii.

Income of trade, professional and similar associations from specific services performed
for its members.

iii.

Value of any benefit or perquisite arising from any business or profession.

iv.

Profit on sale of a replenishment license, cash assistance or refund of duty drawback


granted to the exporters.

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v.

Any interest, salary, bonus, commission or remuneration due to or received by a partner


of a firm from such firm.

vi.

Any sum received under a keyman insurance policy including bonus on such policy.

Primarily the business or professional income is computed as per the accepted business and
accounting norms and in accordance with the method of accounting regularly employed by the
tax payer. Thus, whatever constitutes a legitimate outgoing of revenue nature of a business is
allowed as a deduction in computing the business income. However, certain deductions are
allowed in the Act as per the specific provisions made with regard to those deductions and
certain deductions, though business related, are not allowed because of specific bar on their
allowance under the Act.
Capital Gains
Sections 45 to 55A deal with the provisions relating to computation of income from capital
gains. Gains arising from the transfer of a capital asset are either short-term or long-term
depending upon the period for which the assets giving rise to capital gains were held by the tax
payer. A gain is short term if the asset was held for a period upto 36 months. In the case of share
of a company, listed security, unit of Unit Trust of India or of any other specified mutual fund,
this period is 12 months. All other gains i.e. those arising from assets held for more than this
period are called 'Long-term capital gains'.
Capital gain is computed by deducting from the full value of transfer consideration the
following:a. the cost of acquisition (or the written down value) of and cost of improvement in the
asset;
b. the amount of expenditure incurred in connection with such transfer.
The resultant amount in case of short term capital gains is taxable in full at the normal rate of
taxation applicable to the tax payer.

Income from other sources


Sections 56 to 59 deal with the provisions for computation of income under the head 'income
from other sources'. This is a residuary head covering all incomes which do not specifically fall
.under any of the heads mentioned earliers. Some of the types of income which are assessable
under this head are mentioned below:i.

Dividends or income from units of mutual fund.

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ii.

Interest including 'interest on securities' if it is not taxable under the head 'Profits and
gains of business or profession'.
iii. Income such as a.
Ground rent or rent received or sub-letting a property.
b.
Winning from lotteries, cross-word puzzles, races
including horse races, card games or from gambling or betting etc.
c.
Income from hiring of machinery, plant or furniture unless such a hiring is the
business of the taxpayer.
iv.
Family pension.
In computing the taxable income under this head, deduction is allowable for expenditure (other
than capital expenditure) which is incurred by the tax payer wholly and exclusively for the
purpose of earning such income. Besides, in assessing dividend income, any remuneration or
commission paid for realising such income is allowed as deduction. In assessing income from
letting the machinery, plant or furniture on hire, the depreciation on the value of such assets
calculated in the same manner as in respect of assets used in a business or profession is allowable
as a deduction. No deduction is, however, allowed in respect of
i.

any personal expenditure of the tax payer;

ii.

any salaries or interest payable outside India from which tax is deductible at source under
the Act but has not been deducted.

2.2 Carry forward and set off of losses


Set off of Losses
In case of computation of income under any of the heads of income results in a loss figure, such
loss can be set off against income under any other head (including capital gains) in the same
year. This, however, does not apply to losses from speculative transactions, losses from owning
and maintaining race horses or to losses under the head 'Capital Gains'. Losses of these excluded
categories can be set off only against income, if any, from activities in the same category in that
year.

Carry Forward of Losses


Losses under the head 'Profits and Gains of business or profession' except those sustained from
speculative activities which cannot be set off against income under any other head within the
same year can be carried forward to the succeeding eight years and set off only against income
under the same head in those years. In case of amalgamation of company owning industrial
undertaking or a ship with another company; a demerger of a company; a reorganisation of
business resulting in succession of a firm or a proprietory concern by a company; the

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accumulated losses or unabsorbed depreciation of the amalgamating company, demerged


company or the predecessor concern will, subject to fulfillment of certain conditions (sec. 72A),
be treated as losses or depreciation of amalgamated company, resulting company or the
successor concern and will be allowed to be set off and carried forward as their own loss or
depreciation Gains which would not be set off against income of respective nature in any year
can be carried forward for eight succeeding years for set off against income of similar nature, if
any, in those years. Losses in the activity of owning and maintaining race horses can be carried
forward for set off against profits of similar activities in succeeding four years only.

Losses under the head income from house property which could not be set off against income
under any other head can be carried forward for eight succeeding years for set off against income
under this head in those years.
If 51% or more of the voting power changes hands in an unlisted company, the company will not
be able to carry forward losses incurred before such change.

2.3 Deductions from Gross Total Income


All deductions mentioned under section 80C to 80U are taken into consideration while
calculating total income of an assesse.

2.4 Incomes which do not form part of Total Income


Exempted Incomes- Sec. 10
An exempted income is that income on which no tax is chargeable. Some incomes are
not even included in total income and some are included in total income but are exempted
from income tax.
While computing the total income, any income falling within any of the following clauses
shall not be included in total income, and is not taxableAgricultural income-section 10(1)
The income defined as agricultural income under section 2(1 A) is
totally exempt from tax. However, agricultural income is taken into account for calculation of
tax liability of non agricultural income.
Receipts by member of HUF- section 10(2)
Amount received by an individual being a member of HUF either out of income of the
family or out of income of estate belonging to the family is exempt from tax.

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Since, HUF is liable to pay tax on income receipts from HUF by the members of HUF
are tax free in order to avoid double taxation.
Share of profit from partnership firm section 10 (2A)
Share of profit received by partners of firm from the firm is not taxable in the hands of partners.
This is also based on the principle of avoidance of double taxation.
Leave Travel Consession in India section 10(5)
The value of leave travel consession and passage money available to Indias as well as foreign
employee is subject to some conditions.
Remuneration Received by Foreign Diplomats and Nationals section 10(6)
Remuneration received by foreign diplomats and nationals is exempt from tax as follows:A) Salary of diplomatic personnel
B) Salary of foreign employees
C) Salary received by a ships crew
D) Remuneration of a foreigh trainee
Note : The above incomes are exempt from tax subject to some conditions.
Gratuity section 10(10)
Gratuity is monetary compensation on leaving the job after certain specified number of years. It
is treated as a retirement benefit. Gratuity received by government employees (central
government employees, state government employees, employees of local authority) is wholly
exempted from tax.
Gratuity received from other employers is partly exempt from tax subject to some conditions
Retrenchment Compensation section 10(10B)
Compensation received by a workman at the time of retrenchment is exempt from the tax subject
to some provisions.
Compensation Received section 10(10C)
Compensation received from a public sector company at the time of voluntary retirement.
Exemption of VRS compensation available even if received in installment. The said exemption
would not be available if the employee has already claimed relief u/s 89 from tax on
compensation received at time of voluntary retirement or terminatin of service.

Tax on Perquisite Paid by Employer section 10(10CC)

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If tax is paid by the employer on behalf of an employee, on non monetary perquisities the same
being in the nature of an obligation which but for such payment would have been payable by the
employee, is considered perquisite and is chargeable to tax.

Salary Received from UNO


Salary received from United Nations Organization is not taxable in India.
Payment from Provident Fund section 10(11), 10(12)
Lump sum payment at the time of retirement or termination of service is totally exempt from tax
in case of statutory provident fund. Amount received from recognized provident fund is exempt
in some cases. Amount received on maturity of public provident fund account is totally exempt
from tax. Payment received in respect of employees own contribution is exempt from tax in case
of unrecognized provident fund.
Interest on Security section 10(15)
Interest received on the following securities is exempt from tax:
a) Interest on notified securities, bonds or certificates such as 12 year National Saving
Annuity Certificates, National Defenses Gold Bonds, 1980, Interest on PPF, etc.
b) Interest received by NRI from notified bonds.
c) Interest on 9% Relief Bonds.
d) Interest on Gold Deposit Bonds issued under Gold Deposit Scheme, 1999.
Educational Scholarship section 10(16)
Scholarship granted to meet the cost of education is exempt from tax. Such scholarships should
have been financed by the government.

Daily Allowances of Members of Parliament section 10(17)


Daily allowances of members of Parliament and State legislature is totally exempt from tax.
Income of Local Authority section 10(20)
Local authority means municipal corporation, municipalities etc. Income of a local authority
which is chargeable under the head Income from house property, business gains and income
from other sources is exempt from tax.
Income of Scientific Research Association section 10(21)

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Income of an approved Scientific Research association is exempt from tax. Such an institution
must get approved under section 36(1)(II).
Income of Professional Institution section 10(23A)
Any income of professional institution such as Institute of Chartered Accountants of India,
Institute of Cost and Works Accountants of India is exempt from tax.
Income of Khadi and Village Industries section 10(23B)
Income of Khadi and Village industries which is deprived from the business of production sale
or marketing of Khadi and products of village industries is exempt from tax subject to some
conditions.
Income of Mutual Fund section 10(23D)
Any income of the following mutual funds is exempt from tax:
a) Mutual fund registered under the SEBI act.
b) A notified mutual fund set up by bank or a public financial institution or authorized by
RBI.
Income of Trade Unions section 10(24)
Income of a trade union registered under Trade Union Act, 1926 derived from Income from
house porperty and Income from other sources is exempt from tax.
Income of Minor section 10(32)
If individual includes the income of minor child in terms of section 64(IA), such an individual is
entitled to exemption of Rs. 1500/-in respect of each minor child.
Income on Transfer of US64 section 10(33)
Any income arising from the transfer of a unit of the unit scheme, 1964 is exempted from
assessment year 2003-04.
Income from dividend section 10(34)
Any income by way of dividends referred to in section 115-0 declared distributed or paid by a
domestic company or after 1/4/2003 is exempted.
Income from interest on units of mutual fund section 10(35)
Any income by way of interest on units of mutual fund on or after 1/4/2003 is exempted.
Long Term Capital Gains on transfer of listed equity shares section 10(36)

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Long Term Capital Gains arising of transfer of eligible equity shares in a company purchase on
or after 1/3/2003 and before 1/3/2004 and held for a period of 12 months or more is exempt from
AY 2004-05 and onwards.
Capital gain on compulsory acquisition of urban agriculture land section 10(37)
In case of an individual or HUF capital gain arising on transfer by way of compulsory acquisition
of urban agriculture land is not charegeable to tax from the assessment year 2005-06, if such
compensation is received after March 31, 2004 and agricultural land used by the assessee for
agricultural purpose during 2 years immediately prior to transfer.
Long term capital gains on transfer of equity shares/units in cases recovered by securities
transaction tax section 10(38) applicable from assessment year 2005-06
Long term capital gains arising of equity shares or units of equity oriented mutual fund will not
be chargeable to tax from the assessment year 2005-06 if such transaction is covered by
securities transaction tax.
2.5 Income Tax Authorities, Appointment, Control, Jurisdiction and Powers
Who are income tax authorities? (Sec 116)
(a) the Central Board of Direct Taxes.
(b) Directors-General of Income-tax.
(c)Directors of Income-tax or Commissioners of Income-tax.
(d)Deputy Directors of Income-tax or Deputy Commissioners of Income-tax.
(e)Assistant Directors of Income-tax or Assistant Commissioners of Income-tax.
(f)Income-tax Officers.
(g)Tax Recovery Officers.
(h) Inspectors of Income-tax.
(i) Additional Directors of Income tax.
(j) Joint Directors of Income tax and Joint Commissioners.
Since 1 January 1964 the Central Board of Direct Taxes (CBDT) has been charged with
all matters relating to various direct taxes in India and it derives its authority from Central
Board of Revenue Act 1963.

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Powers of CBDT
Instructions to subordinate authorities :
Orders issued by way of relaxation of certain provisions under section 119(2)(a);
Orders giving extension of time limit [Sec. 119(2)(b)];
Orders giving relaxation for claiming deduction [119(2)(c)].
Director General/Chief Commissioner of Income tax

Appointment:
By the central Govt.
Jurisdiction:
Determined by CBDT.
Functions:
CBDT assigns functions by general or special order.
Powers:
-Exercise powers of an assessing officer.
-Appoint income tax authorites below the rank of assisstant commissioner.
-Make enquiries on investigations into concealment Section 131 (1A).
-Giving instructions to income tax officers Section 119 (2).
-Power of Survey- Section 133A.
-Power to make enquiry Section 135.
Commissioners/Directors of Income Tax
Appointment:
By central govt.
Jurisdiction:
Determined by central board of direct taxes.
Functions :
The Board assigns functions by general or special order.
Powers:
- Commissioner may exercise powers of an assessing officer.
- Power to transfer any case from one or more assessing officers to any other assessing
officer.
-Grant approval for an order issued by the assessing officer.
- Prior approval is required for reopening of an assessment.
-Power to revise an order passed by an assessing officer.
Deputy Commissioner/Assistant commissioners of income tax.
Appointment:
By central govt.
Jurisdiction:

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Determined by central board of direct taxes.


Functions :
The Board assigns functions by general or special order.
Powers:
Empowered to accord to sanction to levy additional income tax.
Power to exercise powers of an assessing officer.
Cancel registration of a firm.
Power to issue instructions to assessing officer.
Joint commissioner
Functions:
Detect tax evasions and supervise
subordinate officers.
Powers:
-Accord approval to adopt fair market value as full consideration section 52.
-Instructions to income tax officers section 119 (3).
-Exercise powers of income tax officers section 125 a.
- Power to call information section 133.
- Power to inspect registers of companies section 134.
- Power to make any enquiry section 135.
Assisstant Commissioner/ Income tax officer
Jurisdiction:
Determination of CBDT.
Instructions by Director General.
Concurrent jurisdiction .
Disputes regarding jurisdiction.
Jurisdiction not to be disputed.
Powers:
-Power of civil court.
-Powers of search and seizure
-Power of assessment.
-Power to call information.
-Power of survey.
-Power to inspect registers of companies.
Income tax officers
Class I service - appointed by central govt.
Class II service - appointed by commissioner of income tax.
Powers, functions and duties of the income tax officer.

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The authorities can exercise these powers when due to the information in their
possession; they have firm reason to believe :
Any person to whom a summon or notice has been or might be served, has failed or
would not produce the books of accounts or other documents as called for.
Any person is in possession of money, bullion, jewellery or such property which has
not been disclosed.
2.6 VAT Basic Concept and Principles :
A value added tax (VAT) is a form of consumption tax. From the perspective of the
buyer, it is a tax on the purchase price. From that of the seller, it is a tax only on the value
added to a product, material, or service, from an accounting point of view, by this stage
of its manufacture or distribution. The manufacturer remits to the government the
difference between these two amounts, and retains the rest for themselves to offset the
taxes they had previously paid on the inputs.
The purpose of VAT is to generate tax revenues to the government similar to the
corporate income tax or the personal income tax.
The value added to a product by or with a business is the sale price charged to its
customer, minus the cost of materials and other taxable inputs. A VAT is like a sales
tax in that ultimately only the end consumer is taxed. It differs from the sales tax in that,
with the latter, the tax is collected and remitted to the government only once, at the point
of purchase by the end consumer. With the VAT, collections, remittances to the
government, and credits for taxes already paid occur each time a business in the supply
chain purchases products.
2.7 Service Tax Introduction and Key Aspects :
Service tax is a tax levied by the government on service providers on certain service
transactions, but is actually borne by the customers.
Definition: Service tax is a tax levied by the government on service providers on certain
service transactions, but is actually borne by the customers. It is categorized under
Indirect Tax and came into existence under the Finance Act, 1994.
Description: In this case, the service provider pays the tax and recovers it from the
customer. Service Tax was earlier levied on a specified list of services, but in the 2012
budget, its scope was increased. Services provided by air-conditioned restaurants and
short term accommodation provided by hotels, inns, etc. were also included in the list of
services.
It is charged to the individual service providers on cash basis, and to companies on

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accrual basis. This tax is payable only when the value of services provided in a financial
year is more than Rs 10 lakh. This tax is not applicable in the state of Jammu &
Kashmir.

Levy of Service Tax


As on 1st May, 2006, 95 services are identified as taxable services in India. Section 64
of the Finance Act, 1994, extends the levy of service tax to the whole of India, except the
State of Jammu & Kashmir.
Generally, the liability to pay service tax has been placed on the service provider.
Service tax is payable @ 12% of the gross amount ( in specific cases partial deductions
are allowed, refer section 67 of the Finance Act) charged by the service provider for
providing such taxable service. The Education Cess is payable @2% of the service tax
payable. The liability to pay service tax has been placed on the receiver / recipient of
the service under certain situations.( Refer section 68 of the Finance Act and Rule 2(1)(d)
of Service Tax Rules, 1994)
Example: Suppose the value of taxable service is Rs.100. Service tax @12% will be
Rs.12 and Education Cess @2% of the Service Tax will be Rs.0.24
Procedure for Registration
Fill the Form ST-1 in duplicate. (Form ST-1 is available on the departmental website
( www.cbec.gov.in ) Enclose photocopy of PAN card and proof of address to be
registered.
Copy of PAN card is necessary as a PAN based code (Service Tax Code) is allotted to
every assessee.
These forms are required to be submitted to the jurisdictional Central Excise office ( in
case of six Service Tax Commissionerates, to the jurisdictional Division office. There are
separate service tax commissionerates in Mumbai, Chennai, Delhi, Kolkata, Bangalore
and Ahmedabad as mentioned in the previous chapter).
A person liable to pay service tax should file an application for registration within thirty
days from the date on which the service tax on particular taxable service comes into
effect or within thirty days from the commencement of his activity.
(Refer Rule 4 (1) of Service Tax Rules, 1994)
Where a person, liable for paying service tax on a taxable service,
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(i) provides such service from more than one premises or offices; or
(ii) receives such service in more than one premises or offices; or,
(iii) is having more than one premises or offices, which are engaged in relation to such
service in any other manner, making such person liable for paying service tax,
and has centralised billing system or centralised accounting system in respect of such
service, and such centralised billing or centralised accounting systems are located in one
or more premises, he may, at his option, register such premises or offices from where
centralised billing or centralised accounting systems are located.
The registration under sub-rule (2), shall be granted by the Commissioner of Central
Excise in whose jurisdiction the premises or offices, from where centralised billing or
accounting is done, are located:
Provided that nothing contained in this sub-rule shall have any effect on the registration
granted to the premises or offices having such centralised billing or centralised
accounting systems, prior to the 2nd day of November, 2006.
A single registration is sufficient even when an assessee is providing more than one
taxable services. However, he has to mention all the services being provided by him in
the application for registration and the field office shall make suitable
entries/endorsements in the registration certificate.
(Refer Rule 4 (4) of Service Tax Rules, 1994).
An assessee should get the registration certificate (registration number) within 7
days from the date of submission of form S.T.1, under normal circumstances.
(Refer Rule 4 (5) of Service Tax Rules, 1994).
A fresh registration is required to be obtained in case of transfer of business to another
person.
(Refer Rule 4 (6) of Service Tax Rules, 1994).
Any registered assessee when ceases to provide the taxable service shall surrender
the registration certificate immediately.
(Refer Rule 4 (7) of Service Tax Rules, 1994).
In case a registered assessee starts providing any new service from the same premises, he
need not apply for a fresh registration. He can simply fill in the Form S.T.1 for necessary
amendments he desires to make in his existing information. The new form may be
submitted to the jurisdictional Superintendent for necessary endorsement of the new
service category in his Registration certificate.

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Returns
Every assessee is required to submit a half yearly return in form S.T.3 or S.T.3A (in
triplicate) along with copies of T.R.6 challans. For the purpose of filing returns half year
is counted from April to September and October to March. In case the assessee has opted
for provisional payment of service tax he is required to file the service tax return in form
S.T.3A. (Rule 7(1) of Service Tax Rules, 1994).
Date of filing of Returns : The half yearly return is required to be filed by the 25th of
the month following a particular half year. (Rule 7(2) of Service Tax Rules, 1994).
E-filing of Returns : The department has extended the facility of filing the returns online (e-filing of returns). This facility is available for all the categories of service
providers. The assessee who is willing to opt for this facility is required to submit an
application ( at least one month in advance before the due date for filing the return), in
prescribed format (Annexed to Circular No.71/1/2004-ST dated 02.01.2004) to the
jurisdictional Central Excise officer. The department would allot a username and
password in due course of time to such assessee.

Questions:1. Define :- Assessee, Assessment Year, Previous Year, Gross Total Income, Total Income,
Income
2.Determine the residential status of an assessee.
3. How would you calculate the Gross Total Income of an individual?
4. Explain the income which do not form part of Total income.
5. What are the deductions which can be made while determining the total income of an
assessee?
6. What is the procedure to appoint the Income Tax authorities and explain their powers?
7. Write note on Service Tax and VAT (Value Added Tax)
8. Explain the rules relating to carry forward and set-off of losses.

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Chapter 3 DUE DILIGENCE AND CORPORATE COMPLIANCE MANAGEMENT

Due diligence is the process by which confidential legal, financial and other material information
is exchanged, reviewed and appraised by the parties to a business transaction, which is done
prior to the transaction.
Due diligence is an analysis and risk assessment of an impending business transaction. It is the
careful and methodological investigation of a business or persons, or the performance of an act
with a certain standard of care to ensure that information is accurate, and to uncover information
that may affect the outcome of the transaction.
Due diligence is used to investigate and evaluate a business opportunity. The term due diligence
describes a general duty to exercise care in any transaction.
3.1 Due diligence
Is a risk assessment tool with respect to a business transaction.
Is a Evaluation Mechanism with respect to a business opportunity.
Is a tool that provides insight into hidden facts.
Takes care of present, past and future aspects that effect the business transaction.
Scope of due diligence
Scope of due diligence is transaction-based and is depending on the needs of the people who are
involved in the potential investments, in addressing key uncovered issues, areas of concern and
in identifying additional opportunities.
In general it covers compliances, litigations, uncovered risks, future prospects etc.
Due diligence is generally understood by the legal, financial and business communities investors
to mean the disclosure and assimilation of public and proprietary information related to the assets
and liabilities of the business being acquired. This information includes financial, human
resources, tax, environmental, legal matters, intellectual property matters etc.
The investigation or inspection would cover :-Compliance with applicable laws
-Regulatory violations or disciplinary actions
-Litigation and assessment of feasibility of pursuing litigation
-Financial statements
-Assets real and intellectual property, brand value etc.
-Unpaid tax liens and/or judgements
-Past business failures and consequential debt
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-Exaggerated credentials/Fraudulent claims


-Misrepresentations or character issues
-Cross-border issues double taxation, foreign exchange fluctuation, sovereign risk, investment
climate, cultural aspects
-Reputation, goodwill and other intangible assets.
Objectives of Due Diligence
Collect material of information from the target company.
Conduct a SWOT analysis to identify the strength and to uncover threats and weaknesses.
Improve the bargaining position depending on SWOT analysis.
Take an informed decision about an investment.
Identification of areas where representations and warranties are required.
Provide a desired comfort level in a transaction.
Ensure complete and accurate disclosure.
Bridge the gap between the existing and expected.
Take smooth/accurate action/decision.
Enhance the confidence of stakeholders.
Due diligence is necessary to allow the investigating party to find out everything that one needs
to know about the subject of the diligence. The objective is to allow the investigator to consider
the following options, considering the facts found in the course of due diligence:
Withdrawal of deal :- if the due diligence uncovers information that disclosed the investment,
loan or participation, a risky or undesirable one and which cannot be adequately resolved then
the investigator may withdraw from the deal.
Adjusting the valuation of the investment : The investigator may revise his valuation of the
company or reassess the price at which it will provide services.
Solving of problems uncovered : it may be possible for a problem uncovered by the due
diligence to be solved before the deal goes ahead.
Process of Due diligence :
A due diligence process can be divided into three stages
Pre diligence, diligence and post diligence
Pre diligence is primarily the activity of management of paper, files and people.
-Signing the letter of intent and the non disclosure agreement letter.
-Receipt of documents from the company and review of the same with the checklist of
documents already supplied to the company.

Legal and Procedural Aspects of Management

35

-Identifying the issues.


-Organizing the papers required for a diligence.
-Creating a data room.
The first and foremost in a deal for the management of the target company, is that the investor is
to sign a Letter of Intent (LOI) or a term sheet which underlines the various terms on which the
proposed deal is to be concluded. Immediately on receipt of the LOI the investors sign an NDA
with the various agencies conducting a diligence, be it finance, accounting, legal or secretarial
diligence.
The company, would usually receive a checklist from the agency conducting the diligence. The
company may either collate and compile the documents in-house, or outsource this to an external
agency.
As regards the process of diligence, a professional care should be taken to scrutinize every
document that is made available and asking for details and clarifications, though, generally the
time provided to conduct the diligence may not be too long and though things have to be
wrapped up at the earliest. The company may be provided an opportunity to clear the various
issues that may arise out of the diligence.
(ii) Diligence
After the diligence, is conducted, the professionals submit a report, which in common parlance is
called the DD report. These reports can be of various kinds, a summary report; a detailed report
or the like; and the findings mentioned in the report can be very significant, is as much as the
deal is concerned.
There are certain terms used to define the outcome of these reports :Deal Breakers : In this report the findings can be very glaring and may expose various noncompliance that may arise any criminal proceedings or known liabilities.
Deal Diluters : The findings arising out a diligence may contain violations which may have an
impact in the form of quantifiable penalties and in turn may result in diminishing the value of
company.
Deal Cautioners : It covers those findings in a diligence which may not impact the financials, but
there exist certain non compliances which though rectifiable, require the investor to tread a
cautious path.
Deal makers : Which are very hard to come by and may not be a reality in the strict sense, are
those reports wherein the diligence team have not been able to come across any violations,
leading them to submit what is called a clean report.
(iii) Post Diligence

Legal and Procedural Aspects of Management

36

Post diligence sometimes result in rectification of non-compliances found during the course of
due diligence. There can be interesting assignments arising out of the diligence made by the team
of professionals. It can range from making applications/filing of petition for compounding of
various offences or negotiating the shareholders agreement, since the investors will be on a
strong wicket and may negotiate the price very hard.

3.2 Transactions Requiring Due Diligence


Mergers, Amalgamations and Acquisitions
Due diligence investigations are generally for corporate acquisitions and mergers, i.e.
investigation of the company being acquired or merged. These are also generally the most
thorough types of due diligence investigations. The buyer or transfree company wants to make
sure it knows that what it is buying. Partnerships are another time when parties investigate each
other in conjunction with negotiations. Some other transactions where due diligence is
appropriate could be :
-Strategic Alliances and Joint Ventures
-Strategic Partnerships
-Partnering Agreements
-Business Coalitions
-Outsourcing Arrangements
-Technology and Product Licensing
-Technology Sharing and Cross Licensing Agreements
-Distribution Relationships etc.
As regards the acquirer due diligence is an opportunity to confirm the correct value of the
business transaction, accuracy of the information disclosed by the target company as well as
determines whether there are any potential business concerns that need to be addressed. This
process helps evaluation and plan for the integration of business between the transacting parties.
As regards the target company, it is ascertaining the ability of the acquirer to pay or raise funds
to complete the transaction, of rights that should be retained by the target company,
determination of any obstacles that could delay the closing and aid in the preparation of the
target companys disclosure schedules for the definitive and final transactional document.
Joint venture and collaborations
Before entering into a major commercial agreement like a joint venture or other collaboration
with a company, a collaboration partner will want to carry out a certain amount of due diligence.
This is particularly likely to be the case where a large company is forming a relationship for the

Legal and Procedural Aspects of Management

37

first time with a relatively small start-up company. The due diligence may not to be as extensive
as in an acquisition, but the larger company will be seeking comfort that its investment will be
secure and the small company has the systems personnel, expertise and resources to perform its
obligations.
Venture Capital Investment
Before making an investment in any company, venture capitalizes will conduct business due
diligence, which generally includes aspects such as a review of the market for the product of the
company, background check on the founders and key management team, competition for the
company, discussions with key customers of the company, analysis of financial projections for
the business, review of any weakness/differences in the management team, minutes and consents
of the board of directors and shareholders, corporate charter and bylaws, documents on
litigations, patents and copyrights, and other intellectual property-related documents etc.
Public Offer
-Public issue due diligence spans the entire public issue process. The steps involved may be
-Decisions on public issue
-Business due diligence
-Legal and financial due diligence
-Disclosures in prospectus
-Marketing to investors
-Post issue compliance

Documents To Be Checked In Due Diligence Process


The types of information or documents to be checked, during the process of due diligence are as
follows :
Basic information

Particulars
Scope

Audit
Limited to financial analysis

Data

Based on historical data

Mandatory
Assurance

Mandatory
Positive assurance ie, true and
fairness of the financial statements
Post mortem analysis

Type

Legal
and ProceduralAlways
Aspectsuniform
of Management
Nature

Due diligence
Includes not only analysis of financial
statements, but also business plan,
sustainability of business, future aspects,
corporate and management structure,
legal issues etc.
Covers future growth prospects in
addition to historical data
Mandatory based on the transaction
Negative assurance ie. Identification of
risks if any
Varies according to the nature of
transaction
38
Varies according to the nature of

transaction
Occasional event

Repetitiveness
Recurring event
Financial data
Important business agreements
Litigation aspects
IPR details
Marketing information
Internal control system
Taxation aspects
Insurance coverage
Human resources aspects
Environmental impact
Cultural aspects
However, the list mentioned above is not an exhaustive. The purpose of providing this list is to
provide a general idea of documents that are required to be checked in any type of due diligence.
Due Diligence Vs Audit
An audit is concerned with historical financial statements only and provides an opinion as to
whether the financial statements represent a true and fair view of the companys operations.
Due diligence, on the other hand, review not only look the historical financial performance of a
business but also consider the forecast financial performance for the company under the current
business plan. The following table describes the difference between Due Diligence and Audit.

3.3 Compliance Management


Corporate compliance means having internal policies and procedures designed to prevent
and detect violations of applicable law, regulations, rules and ethical standards by
employees, agents and others. It involves legal risk management and internal controls.

Clause 49 of Listing Agreement:


The Board shall periodically review compliance reports of all laws applicable to the
company, prepared by the company as well as steps taken by the company to rectify
instances of non-compliances.

Compliance of all Laws

Legal and Procedural Aspects of Management

39

Product
Profile

Employees

Transaction

Factory

Segment

Location
Sector

The Five Step Process


1.
2.
3.
4.
5.

Understanding the company


Identification
Evaluation
Assessment
Compliance Structure

Understanding the Company


Companys History and Background
Capital Structure and Evolution
Promoters and Group Companies
Management and Administration buildup
Financial Soundness and Debt Structure
Risk Management and Protection
Licenses and Approvals
Identification Process
General application of laws
Sectoral applications
Industry / Segment applications
Geographical applications
Number of Employees
Legal and Procedural Aspects of Management

40

Transaction applications

Evaluation Process
Through Questionnaires
Evaluating the applicable laws after due identification process
Assessment Process
Further improvements
Implication of Compliance System
Effective Usability
Bridging the gap of Compliance In Letter and Compliance In Letter & Spirit
Creation of Compliance Structure
Establishing Controls and Standard
Delegation of Responsibility
Analysis and Assessment
Compliance Reporting
Compliance in Letter

Compliance in Letter and Spirit

Complaint Received

Complaint
Resolved

Pending

430

360

70

Legal and Procedural Aspects of Management

41

Reasons of
Complaints

Total
Complai
nts

Complaints Resolved &


Time involved (in days)
0
7

815

16

21

Pending
Complaints

Reason
for
Pendenc
y

Non-receipt
of Bonus

145

67

32

16

30

Wrong
address,
Legal
Issues

Demat

65

24

20

16

Wrong
Folio no.

Non-receipt
of dividend

130

62

28

15

25

Wrong
address,
Court
Cases

Non-receipt
of Notice

90

42

24

14

10

Undelive
red,
Wrong
address

Total

430

195

104

16

70

3.4 Account and Audit Report and Directors report provided in Clause 49 provisions
3.5 Inspection and Investigation
Section 209A(2) requires every director, other officer or employee of the company to assist in
inspection. He is required to produce to the inspecting authority such books of account and other
books and papers of the company in his custody or control and to furnish him with any
statement, information or explanations relating to the affairs of the company as the said authority
may require him wiihin such time and at such place as may be specified.
Section 209 gives certain powers to the inspectors. These are: (i) to make copies; (ii) to place
identification marks; (iii) to exercise powers of civil courts with regard to (a) the discovery and
production of books of account and other documents, at such place and such time as may be
specified by him; (b) summarising and enforcing the attendance of persons and examining them
on oath; (c) inspection of any books, registers and other documents of the company at any place.

Legal and Procedural Aspects of Management

42

Investigation. The Act, affords some protection to shareholders and creditors of a company by
giving powers to the Central Government in certain circumstances to investigate either in the
affairs; or (ii) the ownership of a company.
The following chart shows the powers of the Central Government to appoint one or more
competent inspectors to conduct investigation of the affairs of a company (Ss.235 and 237).

Power of Investigation of Central Government


Discretionay
Mandatory
i If required by the members, or If required by the company by sepcial resolution; or
Ot the report by the registrar; or If
tpocMI
molulMn.ii On
required
by the or
court
iii On the suggestion of CLB

Discretionary Powers of the Central Government: The Central Government may appoint one or
more competent persons as inspectors to investigate into the affairs of any company and to report
in such manner as the Central Government may direct in the circumstances as under.
(i) On the application of members of a company. Where (a) in the case of a company having a
share capital, the number of members making application is not less than 200,or the members are
holding not less than one-tenth of the total voting power, or (b) in the case of a company not
having a share capital, an application has been received from not less than one-fifth of the
members, the Company Law Board may, after giving the parties an opportunity of being heard,
by order, declare that the affairs of the company should be investigated by an inspector or
inspectors and on such declaration being made, the Company Law Board shall appoint one or
more competent persons as inspectors to investigate the affairs of the company and to report
thereon in such manner as the Central Government may direct (s.235).
(ii) On the report of the registrar. The Central Government may, where a report has been made
by the Registrar in pursuance of s.243, appoinl one or more inspectors to investigate the affairs
of a company and to report thereon in such manner as the Central Government may direct. The
Registrar's report is made where a document filed by any company (whether having a share
capital or not) with him discloses an unsatisfactory state of affairs, or it does not disclose full and
fair statement of the matter to which it purports to relate [s.235( 1 )].

Legal and Procedural Aspects of Management

43

(iii)On suggestion of the Company Law Board, Section 237 provides that the Central
Government may appoint if, in opinion of the Company Law Board, there are circumstances
suggesting: (a) that the company's business is being conducted with intent to defraud its
creditors, members or any other persons, or otherwise for a fraudulent or unlawful purpose, or in
a manner oppressive of any of its members, or that the company was formed for any fraudulent
or unlawful purpose; or (b) that persons concerned in the formation or the management of its
affairs have in connection therewith been guilty of fraud, misfeasance or other misconduct
towards the company or any of its members; or (c) that the members of the company have not
been given all the information with respect to its affairs which they might reasonably expect,
including information relating to the calculation of the commission payable to a managing or
other director or the manager of the company.
(iv)Where the company, by special resolution, resolves that the affairs of the company be
investigated by an inspector appointed by the Central Government (s.237).
(v)Where the court by order declares that the affairs be investigated by an inspector appointed by
the Central Government (s.237).
Mandatory Powers of the Central Government Section 237 provides that the Central
Government must appoint (independently of its powers under s.235) one or more competent
inspectors to investigate the affairs of a company, and to report thereon as the Central
Government directs, if either the company by special resolution or the Court by order, declares
that its affairs ought to be so investigated.

Powers of the Inspectors


1. Under s.239, (the Inspector, appointed under s.235 or 237, is empowered to investigate the
affairs of any other body corporate which is, or has at any relevant time been: (a) the company's
Subsidiary or holding company or a subsidiary of its holding company, or a holding company of
its subsidiary; (b) managed by any person as managing director or manager or who is, or was at
the relevant time either the managing director or manager of the company; (c) managed by the
company or whose Board of Directors comprises of nominees of the company or is accustomed
to act in accordance with the directions or instructions of: (i) the company, or (ii) any of the
directors of the company, or (iii) any company, any of whose directorships is held by the
employees or nominees of those having the control and management of the first mentioned
company; (d) the company's managing director or manager.

Legal and Procedural Aspects of Management

44

2. The inspector may require any officer and other employees to preserve and produce to him or
any person authorised by him all books and papers of, or relating to the company, which are in
their custody or power.
3. The inspector may, with the prior approval of the Central Government, require anybody
corporate to furnish or produce such books and papers as he may consider necessary if the
furnishing of such information or the production of such books and papers is relevant or
necessary for the purposes of his investigation. The inspector is further empowered to keep such
books in his custody for 6 months.
4. An inspector is also empowered to examine on oath: (a) any officers or employees of the
company; (b) any other person provided prior approval of the Central Government has been
obtained.

3.7 SEBI Regulations Clause 49 - Corporate Governance


The Securities and Exchange Board of India (SEBI) has formulated guidelines for Corporate
Governance by listed companies through the listing agreement. The relevant clause is Clause
49 Corporate Governance. These have and would continually evolve. Given below are the
guidelines as enunciated by SEBI in October 2004. These are for information only and no
responsibility is accepted.
Definition:-Corporate Governance is the application of best management practices,
compliance of law in letter and spirit and adherence to ethical standards for effective
management and distribution of wealth and discharge of social responsibility for sustainable
development of all stakeholders.
The company agrees to comply with the following provisions:
I. Board of Directors
(A) Composition of Board
(i) The Board of directors of the company shall have an optimum combination of executive and
non-executive directors with not less than fifty percent of the board of directors comprising of
non-executive directors.
(ii) Where the Chairman of the Board is a non-executive director, at least one-third of the Board

Legal and Procedural Aspects of Management

45

should comprise of independent directors and in case he is an executive director, at least half of
the Board should comprise of independent directors.
(iii) For the purpose of the sub-clause (ii), the expression independent director shall
mean a non-executive director of the company who:
a. apart from receiving directors remuneration, does not have any material pecuniary
relationships or transactions with the company, its promoters, its directors, its senior
management or its holding company, its subsidiaries and associates which may affect
independence of the director;
b. is not related to promoters or persons occupying management positions at the board level or at
one level below the board;
c. has not been an executive of the company in the immediately preceding three financial years;
d. is not a partner or an executive or was not partner or an executive during the preceding three
years, of any of the following:
i) the statutory audit firm or the internal audit firm that is associated with the company, and
ii) the legal firm(s) and consulting firm(s) that have a material association with the company.
e. is not a material supplier, service provider or customer or a lessor or lessee of the company,
which may affect independence of the director; and
f. is not a substantial shareholder of the company i.e. owning two percent or more of the block of
voting shares.

Explanation
For the purposes of the sub-clause (iii):
a. Associate shall mean a company which is an associate as defined in Accounting
Standard (AS) 23, Accounting for Investments in Associates in Consolidated Financial
Statements, issued by the Institute of Chartered Accountants of India.
b. Senior management shall mean personnel of the company who are members of its core
management team excluding Board of Directors. Normally, this would comprise all members of
management one level below the executive directors, including all functional heads.
c. Relative shall mean relative as defined in section 2(41) and section 6 read with Schedule

Legal and Procedural Aspects of Management

46

IA of the Companies Act, 1956..


(iv) Nominee directors appointed by an institution which has invested in or lent to the company
shall be deemed to be independent directors.
Explanation:
Institution for this purpose means a public financial institution as defined in Section 4A of the
Companies Act, 1956 or a corresponding new bank as defined in section 2(d) of the Banking
Companies (Acquisition and Transfer of Undertakings) Act, 1970 or the Banking Companies
(Acquisition and Transfer of Undertakings) Act, 1980 [both Acts].

(B) Non executive directors compensation and disclosures


All fees/compensation, if any paid to non-executive directors, including independent directors,
shall be fixed by the Board of Directors and shall require previous approval of shareholders in
general meeting. The shareholders resolution shall specify the limits for the maximum number
of stock options that can be granted to non-executive directors, including independent directors,
in any financial year and in aggregate.

(C) Other provisions as to Board and Committees


(i) The board shall meet at least four times a year, with a maximum time gap of three months
between any two meetings. The minimum information to be made available to the board is given
in Annexure I A.

(ii) A director shall not be a member in more than 10 committees or act as Chairman of more
than five committees across all companies in which he is a director. Furthermore it should be a
mandatory annual requirement for every director to inform the company about the committee
positions he occupies in other companies and notify changes as and when they take place.
Explanation:
1. For the purpose of considering the limit of the committees on which a director can serve, all
public limited companies, whether listed or not, shall be included and all other companies
including private limited companies, foreign companies and companies under Section 25 of the
Companies Act shall be excluded.
2. For the purpose of reckoning the limit under this sub-clause, Chairmanship/membership of the
Legal and Procedural Aspects of Management

47

Audit Committee and the Shareholders Grievance Committee alone shall be considered.
(iii) The Board shall periodically review compliance reports of all laws applicable to the
company, prepared by the company as well as steps taken by the company to rectify instances of
non-compliances.
D) Code of Conduct
(i) The Board shall lay down a code of conduct for all Board members and senior management of
the company. The code of conduct shall be posted on the website of the company.
(ii) All Board members and senior management personnel shall affirm compliance with the code
on an annual basis. The Annual Report of the company shall contain a declaration to this effect
signed by the CEO.
Explanation: For this purpose, the term senior management shall mean personnel of the
company who are members of its core management team excluding Board of Directors.
Normally, this would comprise all members of management one level below the executive
directors, including all functional heads.
II Audit Committee
(A) Qualified and Independent Audit Committee
A qualified and independent audit committee shall be set up, giving the terms of reference
subject to the following:
(i) The audit committee shall have minimum three directors as members. Two-thirds of the
members of audit committee shall be independent directors.
(ii) All members of audit committee shall be financially literate and at least one member shall
have accounting or related financial management expertise.
Explanation 1: The term financially literate means the ability to read and understand basic
financial statements i.e. balance sheet, profit and loss account, and statement of cash flows.
Explanation 2: A member will be considered to have accounting or related financial management
expertise if he or she possesses experience in finance or accounting, or requisite professional
certification in accounting, or any other comparable experience or background which results in
the individuals financial sophistication, including being or having been a chief executive officer,
chief financial officer or other senior officer with financial oversight responsibilities.
(iii) The Chairman of the Audit Committee shall be an independent director;
(iv) The Chairman of the Audit Committee shall be present at Annual General Meeting to answer
Legal and Procedural Aspects of Management

48

shareholder queries;
(v) The audit committee may invite such of the executives, as it considers appropriate (and
particularly the head of the finance function) to be present at the meetings of the committee, but
on occasions it may also meet without the presence of any executives of the company. The
finance director, head of internal audit and a representative of the statutory auditor may be
present as invitees for the meetings of the audit committee;
(vi) The Company Secretary shall act as the secretary to the committee.
(B) Meeting of Audit Committee
The audit committee should meet at least four times in a year and not more than four months
shall elapse between two meetings. The quorum shall be either two members or one third of the
members of the audit committee whichever is greater, but there should be a minimum of two
independent members present.
C) Powers of Audit Committee
The audit committee shall have powers, which should include the following:
1. To investigate any activity within its terms of reference.
2. To seek information from any employee.
3. To obtain outside legal or other professional advice.
4. To secure attendance of outsiders with relevant expertise, if it considers necessary.

(D) Role of Audit Committee


The role of the audit committee shall include the following:
1. Oversight of the companys financial reporting process and the disclosure of its financial
information to ensure that the financial statement is correct, sufficient and credible.
2. Recommending to the Board, the appointment, re-appointment and, if required, the
replacement or removal of the statutory auditor and the fixation of audit fees.
3. Approval of payment to statutory auditors for any other services rendered by the statutory
auditors.
4. Reviewing, with the management, the annual financial statements before submission to the
board for approval, with particular reference to:

Legal and Procedural Aspects of Management

49

a. Matters required to be included in the Directors Responsibility Statement to be included in the


Boards report in terms of clause (2AA) of section 217 of the Companies Act, 1956.
b. Changes, if any, in accounting policies and practices and reasons for the same.
c. Major accounting entries involving estimates based on the exercise of judgment by
management.
d. Significant adjustments made in the financial statements arising out of audit findings.
e. Compliance with listing and other legal requirements relating to financial statements.
f. Disclosure of any related party transactions.
g. Qualifications in the draft audit report.
5. Reviewing, with the management, the quarterly financial statements before submission to the
board for approval.
6. Reviewing, with the management, performance of statutory and internal auditors, adequacy of
the internal control systems.
7. Reviewing the adequacy of internal audit function, if any, including the structure of the
internal audit department, staffing and seniority of the official heading the department, reporting
structure coverage and frequency of internal audit.
8. Discussion with internal auditors any significant findings and follow up there on.
9. Reviewing the findings of any internal investigations by the internal auditors into matters
where there is suspected fraud or irregularity or a failure of internal control systems of a material
nature and reporting the matter to the board.
10. Discussion with statutory auditors before the audit commences, about the nature and scope of
audit as well as post-audit discussion to ascertain any area of concern.
11. To look into the reasons for substantial defaults in the payment to the depositors,
debenture holders, shareholders (in case of non payment of declared dividends) and
creditors.
12. To review the functioning of the Whistle Blower mechanism, in case the same is existing.
13. Carrying out any other function as is mentioned in the terms of reference of the Audit
Committee.
Explanation (i): The term "related party transactions" shall have the same meaning as contained

Legal and Procedural Aspects of Management

50

in the Accounting Standard 18, Related Party Transactions, issued by The Institute of Chartered
Accountants of India.
Explanation (ii): If the company has set up an audit committee pursuant to provision of the
Companies Act, the said audit committee shall have such additional functions / features as is
contained in this clause.
(E) Review of information by Audit Committee
The Audit Committee shall mandatorily review the following information:
1. Management discussion and analysis of financial condition and results of operations;
2. Statement of significant related party transactions (as defined by the audit committee),
submitted by management;
3. Management letters / letters of internal control weaknesses issued by the statutory
auditors;
4. Internal audit reports relating to internal control weaknesses; and
5. The appointment, removal and terms of remuneration of the Chief internal auditor shall be
subject to review by the Audit Committee.

III. Subsidiary Companies


i. At least one independent director on the Board of Directors of the holding company shall be a
director on the Board of Directors of a material non listed Indian subsidiary company.
ii. The Audit Committee of the listed holding company shall also review the financial statements,
in particular, the investments made by the unlisted subsidiary company.
iii. The minutes of the Board meetings of the unlisted subsidiary company shall be placed at the
Board meeting of the listed holding company. The management should periodically bring to the
attention of the Board of Directors of the listed holding company, a statement of all significant
transactions and arrangements entered into by the unlisted subsidiary company.

Explanation 1: The term material non-listed Indian subsidiary shall mean an unlisted
subsidiary, incorporated in India, whose turnover or net worth (i.e. paid up capital and free
reserves) exceeds 20% of the consolidated turnover or net worth respectively, of the listed
holding company and its subsidiaries in the immediately preceding accounting year.

Legal and Procedural Aspects of Management

51

Explanation 2: The term significant transaction or arrangement shall mean any individual
transaction or arrangement that exceeds or is likely to exceed 10% of the total revenues or total
expenses or total assets or total liabilities, as the case may be, of the material unlisted subsidiary
for the immediately preceding accounting year.
Explanation 3: Where a listed holding company has a listed subsidiary which is itself a holding
company, the above provisions shall apply to the listed subsidiary insofar as its subsidiaries are
concerned.

IV. Disclosures
(A) Basis of related party transactions
(i) A statement in summary form of transactions with related parties in the ordinary course of
business shall be placed periodically before the audit committee.
(ii) Details of m aterial individual transactions with related parties which are not in the normal
course of business shall be placed before the audit committee.
(iii) Details of material individual transactions with related parties or others, which are not on an
arms length basis should be placed before the audit committee, together with Managements
justification for the same.
(B) Disclosure of Accounting Treatment
Where in the preparation of financial statements, a treatment different from that prescribed in an
Accounting Standard has been followed, the fact shall be disclosed in the financial statements,
together with the managements explanation as to why it believes such alternative treatment is
more representative of the true and fair view of the underlying business transaction in the
Corporate Governance Report.
(C) Board Disclosures Risk management
The company shall lay down procedures to inform Board members about the risk
assessment and minimization procedures. These procedures shall be periodically
reviewed to ensure that executive management controls risk through means of a properly defined
framework.
(D) Proceeds from public issues, rights issues, preferential issues etc.
When money is raised through an issue (public issues, rights issues, preferential issues etc.), it
shall disclose to the Audit Committee, the uses / applications of funds by major category (capital

Legal and Procedural Aspects of Management

52

expenditure, sales and marketing, working capital, etc), on a quarterly basis as a part of their
quarterly declaration of financial results. Further, on an annual basis, the company shall prepare
a statement of funds utilized for purposes other than those stated in the offer
document/prospectus/notice and place it before the audit committee. Such disclosure shall be
made only till such time that the full money raised through the issue has been fully spent. This
statement shall be certified by the statutory auditors of the company. The audit committee shall
make appropriate recommendations to the Board to take up steps in this matter.
(E) Remuneration of Directors
(i) All pecuniary relationship or transactions of the non-executive directors vis--vis the
company shall be disclosed in the Annual Report.
(ii) Further the following disclosures on the remuneration of directors shall be made in the
section on the corporate governance of the Annual Report:
(a) All elements of remuneration package of individual directors summarized under major
groups, such as salary, benefits, bonuses, stock options, pension etc.
(b) Details of fixed component and performance linked incentives, along with the
performance criteria.
(c) Service contracts, notice period, severance fees.
(d) Stock option details, if any and whether issued at a discount as well as the period over
which accrued and over which exercisable.
(iii) The company shall publish its criteria of making payments to non-executive directors in its
annual report. Alternatively, this may be put up on the companys website and reference drawn
thereto in the annual report.
(iv) The company shall disclose the number of shares and convertible instruments held by nonexecutive directors in the annual report.
(v) Non-executive directors shall be required to disclose their shareholding (both own or held by
/ for other persons on a beneficial basis) in the listed company in which they are proposed to be
appointed as directors, prior to their appointment. These details should be disclosed in the notice
to the general meeting called for appointment of such director

(F) Management
(1) As part of the directors report or as an addition thereto, a Management Discussion and

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53

Analysis report should form part of the Annual Report to the shareholders. This Management
Discussion and Analysis should include discussion on the following matters within the limits set
by the companys competitive position:
i. Industry structure and developments.
ii. Opportunities and Threats.
iii. Segmentwise or product-wise performance.
iv. Outlook
v. Risks and concerns.
vi. Internal control systems and their adequacy.
vii. Discussion on financial performance with respect to operational performance.
viii. Material developments in Human Resources / Industrial Relations front, including number
of people employed.
(2) Senior management shall make disclosures to the board relating to all material financial and
commercial transactions, where they have personal interest, that may have a potential conflict
with the interest of the company at large (for e.g. dealing in company shares, commercial
dealings with bodies, which have shareholding of management and their relatives etc.)

Explanation: For this purpose, the term "senior management" shall mean personnel of the
company who are members of its. core management team excluding the Board of Directors).
This would also include all members of management one level below the executive directors
including all functional heads.
(G) Shareholders
(i) In case of the appointment of a new director or re-appointment of a director the shareholders
must be provided with the following information:
(a) A brief resume of the director;
(b) Nature of his expertise in specific functional areas;
(c) Names of companies in which the person also holds the directorship and the membership of
Committees of the Board; and

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(d) Shareholding of non-executive directors as stated in Clause 49 (IV) (E) (v) above.
(ii) Quarterly results and presentations made by the company to analysts shall be put on
companys web-site, or shall be sent in such a form so as to enable the stock exchange on which
the company is listed to put it on its own web-site.
(iii) A board committee under the chairmanship of a non-executive director shall be formed to
specifically look into the redressal of shareholder and investors complaints like transfer of
shares, non-receipt of balance sheet, non-receipt of declared dividends etc. This Committee shall
be designated as Shareholders/Investors Grievance Committee.
(iv) To expedite the process of share transfers, the Board of the company shall delegate the
power of share transfer to an officer or a committee or to the registrar and share transfer agents.
The delegated authority shall attend to share transfer formalities at least once in a fortnight.

V. CEO/CFO certification
The CEO, i.e. the Managing Director or Manager appointed in terms of the Companies Act, 1956
and the CFO i.e. the whole-time Finance Director or any other person heading the finance
function discharging that function shall certify to the Board that:
(a) They have reviewed financial statements and the cash flow statement for the year and that to
the best of their knowledge and belief :
(i) these statements do not contain any materially untrue statement or omit any material fact or
contain statements that might be misleading;
(ii) these statements together present a true and fair view of the companys affairs and are in
compliance with existing accounting standards, applicable laws and regulations.
(b) There are, to the best of their knowledge and belief, no transactions entered into by the
company during the year which are fraudulent, illegal or violative of the companys code of
conduct.
(c) They accept responsibility for establishing and maintaining internal controls and that they
have evaluated the effectiveness of the internal control systems of the company and they have
disclosed to the auditors and the Audit Committee, deficiencies in the design or operation of
internal controls, if any, of which they are aware and the steps they have taken or propose to take
to rectify these deficiencies.
(d) They have indicated to the auditors and the Audit committee
(i) significant changes in internal control during the year;

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(ii) significant changes in accounting policies during the year and that the same have
been disclosed in the notes to the financial statements; and
(iii) instances of significant fraud of which they have become aware and the involvement therein,
if any, of the management or an employee having a significant role in the companys internal
control system.

VI. Report on Corporate Governance


(i) There shall be a separate section on Corporate Governance in the Annual Reports of
company, with a detailed compliance report on Corporate Governance. Non-compliance of any
mandatory requirement of this clause with reasons thereof and the extent to which the nonmandatory requirements have been adopted should be specifically highlighted. The suggested list
of items to be included in this report is given in Annexure- I C and list of non-mandatory
requirements is given in Annexure I D.
(ii) The companies shall submit a quarterly compliance report to the stock exchanges within 15
days from the close of quarter as per the format given in Annexure I B. The report shall be
signed either by the Compliance Officer or the Chief Executive Officer of the company

VII. Compliance
(1) The company shall obtain a certificate from either the auditors or practicing company
secretaries regarding compliance of conditions of corporate governance as stipulated in this
clause and annex the certificate with the directors report, which is sent annually to all the
shareholders of the company. The same certificate shall also be sent to the Stock Exchanges
along with the annual report filed by the company.
(2) The non-mandatory requirements given in Annexure I D may be implemented as per the
discretion of the company. However, the disclosures of the compliance with mandatory
requirements and adoption (and compliance) / non-adoption of the non-mandatory requirements
shall be made in the section on corporate governance of the Annual Report.

Annexure I A
Information to be placed before Board of Directors
1. Annual operating plans and budgets and any updates.
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2. Capital budgets and any updates.


3. Quarterly results for the company and its operating divisions or business segments.
4. Minutes of meetings of audit committee and other committees of the board.
5. The information on recruitment and remuneration of senior officers just below the board level,
including appointment or removal of Chief Financial Officer and the Company Secretary.
6. Show cause, demand, prosecution notices and penalty notices which are materially important
7. Fatal or serious accidents, dangerous occurrences, any material effluent or pollution
problems.
8. Any material default in financial obligations to and by the company, or substantial
nonpayment for goods sold by the company.
9. Any issue, which involves possible public or product liability claims of substantial nature,
including any judgement or order which, may have passed strictures on the conduct of the
company or taken an adverse view regarding another enterprise that can have negative
implications on the company.
10. Details of any joint venture or collaboration agreement.
11. Transactions that involve substantial payment towards goodwill, brand equity, or intellectual
property.
12. Significant labour problems and their proposed solutions. Any significant development in
Human Resources/ Industrial Relations front like signing of wage agreement, implementation of
Voluntary Retirement Scheme etc.
13. Sale of material nature, of investments, subsidiaries, assets, which is not in normal course of
business.
14. Quarterly details of foreign exchange exposures and the steps taken by management to limit
the risks of adverse exchange rate movement, if material.
15. Non-compliance of any regulatory, statutory or listing requirements and shareholders service
such as non-payment of dividend, delay in share transfer etc.
Annexure I C
Suggested List of Items to Be Included In the Report on Corporate Governance in the
Annual Report of Companies

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1. A brief statement on companys philosophy on code of governance.


2. Board of Directors:
i. Composition and category of directors, for example, promoter, executive, nonexecutive, independent non-executive, nominee director, which institution represented as
lender or as equity investor.
ii. Attendance of each director at the Board meetings and the last AGM.
iii. Number of other Boards or Board Committees in which he/she is a member or
Chairperson
iv. Number of Board meetings held, dates on which held.
3. Audit Committee:
i. Brief description of terms of reference.
ii. Composition, name of members and Chairperson.
iii. Meetings and attendance during the year.
4. Remuneration Committee:
i. Brief description of terms of reference.
ii. Composition, name of members and Chairperson.
iii. Attendance during the year.
iv. Remuneration policy.
v. Details of remuneration to all the directors, as per format in main report.
5. Shareholders Committee:
i. Name of non-executive director heading the committee.
ii. Name and designation of compliance officer.
iii. Number of shareholders complaints received so far.
iv. Number not solved to the satisfaction of shareholders.
v. Number of pending complaints.
6. General Body meetings:
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i. Location and time, where last three AGMs held.


ii. Whether any special resolutions passed in the previous 3 AGMs.
iii. Whether any special resolution passed last year through postal ballot details of
voting pattern.
iv. Person who conducted the postal ballot exercise.
v. Whether any special resolution is proposed to be conducted through postal ballot.
vi. Procedure for postal ballot.

7. Disclosures:
i. Disclosures on materially significant related party transactions that may have potential
conflict with the interests of company at large.
ii. Details of non-compliance by the company, penalties, strictures imposed on the
company by Stock Exchange or SEBI or any statutory authority, on any matter related to
capital markets, during the last three years.
iii. Whistle Blower policy and affirmation that no personnel has been denied access to the
audit committee.
iv. Details of compliance with mandatory requirements and adoption of the
nonmandatory requirements of this clause
8. Means of communication:
i. Quarterly results
ii. Newspapers wherein results normally published
iii. Any website, where displayed
iv. Whether it also displays official news releases; and
v. The presentations made to institutional investors or to the analysts.
9. General Shareholder information:

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i. AGM : Date, time and venue


ii. Financial year
iii. Date of Book closure
iv. Dividend Payment Date
v. Listing on Stock Exchanges
vi. Stock Code
vii. Market Price Data : High., Low during each month in last financial year
viii. Performance in comparison to broad-based indices such as BSE Sensex, CRISIL
index etc.
ix. Registrar and Transfer Agents
x. Share Transfer System
xi. Distribution of shareholding
xii. Dematerialization of shares and liquidity
xiii. Outstanding GDRs/ADRs/Warrants or any Convertible instruments, conversion date
and likely impact on equity
xiv. Plant Locations
xv. Address for correspondence
Annexure I D
Non-Mandatory Requirements
(1) The Board
A non-executive Chairman may be entitled to maintain a Chairmans office at the companys
expense and also allowed reimbursement of expenses incurred in performance of his duties.
Independent Directors may have a tenure not exceeding, in the aggregate, a period of nine years,
on the Board of a company.

(2) Remuneration Committee


i. The board may set up a remuneration committee to determine on their behalf and on behalf of

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the shareholders with agreed terms of reference, the companys policy on specific remuneration
packages for executive directors including pension rights and any compensation payment.
ii. To avoid conflicts of interest, the remuneration committee, which would determine the
remuneration packages of the executive directors may comprise of at least three directors, all of
whom should be non-executive directors, the Chairman of committee being an independent
director.
iii. All the members of the remuneration committee could be present at the meeting.
iv. The Chairman of the remuneration committee could be present at the Annual General
Meeting, to answer the shareholder queries. However, it would be up to the Chairman to decide
who should answer the queries.

(3) Shareholder Rights


A half-yearly declaration of financial performance including summary of the significant events
in last six-months, may be sent to each household of shareholders.
(4) Audit qualifications
Company may move towards a regime of unqualified financial statements.
(5) Training of Board Members
A company may train its Board members in the business model of the company as well as the
risk profile of the business parameters of the company, their responsibilities as directors, and the
best ways to discharge them.
(6) Mechanism for evaluating non-executive Board Members
The performance evaluation of non-executive directors could be done by a peer group
comprising the entire Board of Directors, excluding the director being evaluated; and Peer Group
evaluation could be the mechanism to determine whether to extend /continue the terms of
appointment of non-executive directors.
(7) Whistle Blower Policy
The company may establish a mechanism for employees to report to the management concerns
about unethical behaviour, actual or suspected fraud or violation of the companys code of
conduct or ethics policy. This mechanism could also provide for adequate safeguards against
victimization of employees who avail of the mechanism and also provide for direct access to the
Chairman of the Audit committee in exceptional cases. Once established, the existence of the
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mechanism may be appropriately communicated within the organization.

Questions:1.
2.
3.
4.

What do you understand by Due deligence? Explain the procedure of due deligence.
What do you understand by compliance in letter and compliance in letter and spirit?
State the rules relating to investigation and inspection under the company law.
What are the provisions relating to corporate governance under clause 49?

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Chapter 4 INDIAN STAMP ACT, 1889


4.1 Meaning and Purpose
The basic purpose of Indian Stamp Act, 1899 is to raise revenue to Government. However,
over a period of time, the stamped document has obtained so much value that a stamped
document is considered much more authentic and reliable than an un-stamped document.
Power of Parliament in respect of stamp duty - Parliament can make law in respect of Stamp
Duty. It can prescribe rates of stamp duty. The stamp duty rates prescribed by Parliament in
respect of bill of exchange, cheques, transfer of shares etc. will prevail all over India.
However, other stamp duty rates prescribed by Parliament in Indian Stamp Act, 1899 (e.g.
stamp duty on agreements, affidavit, articles of association of a company, partnership deed,
lease deed, mortgage, power of attorney, security bond etc.) are valid only for Union
territories. In case of States, the rates prescribed by individual States will prevail in those
States.
Powers of State Government of Stamp Duty - State Government has powers to fix stamp
duties on all documents except bill of exchange, cheques etc. Rates prescribed by State
Government will prevail in that State. State Government can make law for other aspects of
stamp duty also (i.e. matters other than quantum of duty). However, if there is conflict
between State law and Union law, the Union law prevails [Article 254 of Constitution].
It is a type of tax which is paid to the State Government for the transaction performed by way
of document or instrument under the provisions of Bombay Stamp Act, 1958 and Indian
Stamp Act,1899.
The Act levies stamp duty on documents or instruments by which any right or liability is, or
purports to be created, transferred, limited, extended, extinguished or recorded.
A tax on legal documents such as those used, e.g., for the sale or purchase of shares or the
conveyance of a property to a new owner.
The basic purpose of Indian Stamp Act, 1899 is to raise revenue to Government.
Instrument :Instrument is a document by which a right or liability is created, transferred, extended, limited,
extinguished or recorded. [Section 2(17) of Indian Stamp Act].
Document :A document is the record of the conditions agreed upon by the parties involved in a
transaction in a proper format. A document whose stamp duty has been paid or, a stamped
document is considered an authentic and legal document. It gets evidentiary value and can be
admitted as evidence in Courts under the provisions of the Indian Stamp Act, 1899.

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Types of Stamps:
-Impressed stamp
-Adhesive stamp

Impressed stamps can be:


1. Labels affixed and impressed by proper officer,
2. Stamps embossed or engraved on stamp paper, and
3. Impressions by franking machines generally done by the bank by depositing the necessary
amount of stamp duty with the banks.
Adhesive stamps can be:
Adhesive stamps are labels which can be conveniently stuck on the instruments. Adhesive stamps
can be further categorized into two categories:
Postal and non-postal stamps.
Postal stamps are used only for transaction with the post office and related function.
Whereas a
non-postal stamp can be a court fee stamp, revenue stamp, notarial stamp, special adhesive
stamp, foreign bill stamp, brokers note, insurance policy stamp or a share transfer stamp.

4.2 Instruments chargeable to stamp duty - Instrument includes every document by which any
right or liability, is, or purported to be created, transferred, limited, extended, extinguished or
recorded [section 2(17) of Indian Stamp Act]. Any instrument mentioned in Schedule I to Indian
Stamp Act is chargeable to duty as prescribed in the schedule [section 3]. The list includes all
usual instruments like affidavit, lease, memorandum and articles of company, bill of exchange,
bond, mortgage, conveyance, receipt, debenture, share, insurance policy, partnership deed,
proxy, shares etc. Thus, if an instrument is not listed in the schedule, no stamp duty is payable.
Instrument does not include ordinary letters. Similarly, an unsigned draft of an agreement is not
an instrument.
Duty payable when several instruments - In case of sale, mortgage or settlement, if there are
several instruments for one transaction, stamp duty is payable only on one instrument. On other
instruments, nominal stamp duty of Re. 1 is payable [section 4(1)]. If one instrument relates to
several distinct matters, stamp duty payable is aggregate amount of stamp duties payable on
separate instruments [section 5]. However, it may happen that one instrument covering only one
matter can come under more than one descriptions given in Schedule to Stamp Act. In such case,
highest rate specified among the different heads will prevail [section 6].
Adjudication as to stamp duty payable - Adjudication means determining the duty payable.
Normally, the person paying the duty himself may decide the stamp duty payable and pay
accordingly. However, in cases of complex documents, the person paying the duty may not be
sure of the stamp duty payable. In such case, he can apply for opinion of Collector. He has to

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apply with draft document and prescribed fees. Collector will determine the stamp duty payable
as per his judgment [section 31(1)].
4.3 Payment procedure and execution of stamped instruments
Execution of Instruments meaning
Execution of Instruments means putting signatures on the instruments by the person or persons
who are the parties to the transaction which is being performed through such instruments.
Thus, when the respective parties signs the instrument, the instrument is said to have been
executed.
Duties how to be paid [S.10]
All duties with which any instruments are chargeable shall be paid, and such payment shall be
indicated on such instruments, by means of stamps-
(a) according to the provisions herein contained; or

(b) when no such provision is applicable thereto--as the State Government may by rule
direct.
The rules made under sub-section (1) may, among other matters, regulate, -

(a) in the case of each kind of instrument--the description of stamps which may be used;

(b) in the case of instruments stamped with impressed


stamps--the number of stamps which may be used;

(c) in the case of bills of exchange or promissory notes -the size of the paper on which
they are written.

Time and mode of Payment of Stamp


The payment of stamp duty can be made by adhesive stamps or impressed stamps.

Instrument executed in India must be stamped before or at the time of execution


(section 17).

Instrument executed out of India can be stamped within three months after it is first
received in India [section 18(1)].

However, in case of bill of exchange or promissory note made out of India, it should be
stamped by first holder in India before he presents for payment or endorses or negotiates
in India [section 19].

4.4 Review of Stamp Duties applicable to Maharashtra State


Levy of stamp duty (SD) in Maharashtra on different types of instruments is governed by the
Bombay Stamp Act, 1958 (BS Act) which empowers the Government to reduce, remit or
compound SD in public interest. Concessions in SD have been granted from time to time on

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instruments relating to information technology (IT) units in the IT sector with a view to generate
employment, self employment, promote business and enterprise in the IT industry. For
promotion and growth of other industries in the State, similar concession in SD is offered on
instruments relating to amalgamation of companies and new industries.
4.5 Adjudication of Stamp Duty
Adjudication means determining the duty payable. Normally, the person paying the duty
himself may decide the stamp duty payable and pay accordingly.
However, in cases of complex documents, the person paying the duty may not be sure of
the stamp duty payable. In such case, he can apply for opinion of Collector.
He has to apply with draft document and prescribed fees.
Collector will determine the stamp duty payable as per his judgment [section 31(1)].

4.6 Prosecution for offence against Stamp Law


62. Penalty for executing, etc., instrument not duly stamped
Any person drawing, making, issuing, endorsing or transferring, or signing or presenting for
acceptance or payment, or accepting, paying or receiving payment of, or in any manner
negotiating, any bill of exchange or promissory note without the same being duly stamped; or
executing or signing any instrument without the same being duly stamped; shall for every
such offence be punishable with fine which may extend to five hundred rupees.
If a share-warrant is issued without being duly stamped, the company issuing the same, and
also every person who, at the time when it is issued, is the managing director or secretary or
other principal officer of the company, shall be punishable with fine which may extend to five
hundred rupees.
63. Penalty for failure to cancel adhesive stamp
Any person fails to cancel adhesive stamp in manner prescribed, shall be punishable with fine
which may extend to one hundred rupees.
64. Penalty for omission to comply with provisions of section 27
Any person who, with intent to defraud the Government, executes any instrument in which all
the facts and circumstances affecting the chargeability of any instrument with duty are not fully
and truly set forth therein; or being employed or concerned in, about the preparation of any
instrument, neglects or omits fully and truly to set forth therein all such facts and circumstances;
or does any other act calculated to deprive the Government of any duty or penalty under this
Act; shall be punishable with fine which may extend to five thousand rupees.
65. Penalty for refusal to give receipt, and for devices to evade duty on receipts -

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Any person who, being required under section 30 to give a receipt, refuses or neglects to give the
same; or with intent to defraud the Government of any duty, upon a payment of money or
delivery of property exceeding twenty rupees , gives a receipt for an amount or value not
exceeding twenty rupees, shall be punishable with fine which may extend to one hundred
rupees.
66. Penalty for not making out policy, or making one not duly stamped
Any person who receives, or takes credit for, any premium or consideration for any contract of
insurance and does not, within 186 month after receiving, or taking credit for, such premium or
consideration, make out and execute a duly stamped policy of such insurance; or makes, executes
or delivers out any policy which is not duly stamped, shall be punishable with fine which may
extend to two hundred rupees.
67. Penalty for not drawing full number of bills or marine policies purporting to be in sets
Any person drawing or executing a bill of exchange or a policy of marine insurance purporting to
be drawn or executed in a set of two or more,drawing or executing on paper duly stamped the
whole number of bills or policies of which such bill or policy purports the set to consist,
shall be punishable with fine which may extend to one thousand rupees.
68. Penalty for post-dating bills, and for other devices to defraud the revenue
Any person who, with intent to defraud the Government of duty, draws, makes or issues any bill
of exchange or promissory note bearing a date subsequent to that on which such bill or note is
actually drawn or made; or knowing that such bill or note has been so post-dated, endorses,
transfers, presents for acceptance or payment, or accepts, pays or receives payment of, such bill or
note, or in any manner negotiates the same; or with the like intent, practises or is concerned in
any act, contrivance or device not specially provided for by this Act shall be punishable with fine
which may extend to one thousand rupees.
68. Penalty for post-dating bills, and for other devices to defraud the revenue
Any person who,with intent to defraud the Government of duty, draws, makes or issues any bill of
exchange or promissory note bearing a date subsequent to that on which such bill or note is
actually drawn or made; or knowing that such bill or note has been so post-dated, endorses,
transfers, presents for acceptance or payment, or accepts, pays or receives payment of, such bill or
note, or in any manner negotiates the same; or with the like intent, practises or is concerned in
any act, contrivance or device not specially provided for by this Act shall be punishable with fine
which may extend to one thousand rupees.
70. Institution and conduct of prosecutions -No prosecution in respect of any offence punishable under this Act shall be instituted without
the sanction of the Collector or such other officer as the State Government generally, authorizes
in that behalf.
-The Chief Controlling Revenue-authority, or any officer generally or specially authorized by
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67

it in this behalf, may stay any such prosecution or compound any such offence.
-The amount of any such composition shall be recoverable in the manner provided by section
48.

Questions:1. What do you mean by Stamp Duty? How the stamp duty can be paid?
2. What is the time and mode of payment of stamp duty?
3. What do you mean by execution of instrument? Explain the legality or importance of
payment of stamp duty?
4. Name the instrument which attracts stamp duty under the Bombay Stamp Act. Who is
having the power to reduce the stamp duty?
5. How the stamp duty can be paid and who is liable to pay the stamp duty?

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