tax stduy note sample ay 2012-13

7/31/2019 Tax Stduy Note Sample Ay 2012-13

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Roots Institute of Financial Markets1197 NHBC Mahavir Dal Road. Panipat. 132103 Haryana.

Ph.99961-55000, 0180-2663049 email: [email protected]

Web: www.rifm.in

Roots Institute of Financial Markets

RIFM

Study Notes

Tax Planning and Estate Planning

Assessment Year 2012-13


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Our Team

Deep Shikha Malhotra CFPCM

M.Com., B.Ed.

AMFI Certified for Mutual Funds

IRDA Certified for Life Insurance

IRDA Certified for General Insurance

PG Diploma in Human Resource Management

CA. Ravi Malhotra

B.Com.

FCA

DISA (ICA)

CERTIFIED FINANCIAL PLANNERCM

Vipin Sehgal CFPCM

B.Com.

NCFM Diploma in Capital Market (Dealers) Module



Neeraj Nagpal CFPCM

B.Com.


IRDA Certified for Life Insurance N

NCFM Certification in:

Capital Market (Dealers) Module

Derivatives Market (Dealers) Module

Commodities Market Module

Kavita Malhotra

M.Com. Previous (10th Rank in Kurukshetra University) AMFI Certified for Mutual Funds


Certification in all Modules of CFPCM Curriculum (FPSB India)


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Exam Pattern

Test Duration 120 Min.

No. of Questions

1Marks 40

2 Marks 20

4 Marks 1575

Maximum Marks 140Pass % 60

Passing Marks 84

Negative Marking Nil

Grade System

Grade Score(percentage)A Equal and above 80%B Equal and above 70% and less than 80%C Equal and above 60% and less than 70%

FAIL Less than 60%


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Curriculum

Tax Planning & Estate Planning

COURSE TITLE: Tax Planning & Estate Planning

COURSE DESCRIPTION: This module would cover the knowledge requirements relating to tax

planning and estate planning for a CFP professional.

LEARNING OBJECTIVES: At the end of this module, a student should be able to:

1. Evaluate the appropriateness of tax strategies for individual family situations.

2. Integrate tax planning into the six step Financial Planning process.

3. To understand the universal nature of estate planning needs.

4. To recognize the high level of ignorance regarding estate planning among the general

population as well as students.5. To comprehend the fundamental objective of greater efficiency in wealth transfer.

DETAILED CLASS OUTLINE:

Tax Planning Considerations

1. Ethical considerations in tax planning

a. Privileged communications

b. Dangers of tax evasion

2. Tax compliance matters

a. Filing tax returns and documentation

b. Advance tax

c. The audit process

d. Refund of income tax

e. Judicial review

3. Taxation terminology

a. Inclusions

b. Exclusions

c. Deductions

Tax Computations

4. Tax calculations and special rules

a. Gross income

b. Adjusted gross income

c. Itemized deductions

d. Taxable income

e. Tax liability


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f. Clubbing of Income

5. Tax characteristics of business forms

a. Sole proprietorshipb. General partnership

c. Limited liability companies

d. Trusts

e. Foundations/exempt organizations

f. Professional associations/corporations

g. Co-operative Societies

h. Others

6. Non Resident Indians (NRIs)

a. Residential status of individualsb. Types of accounts for non-residents

c. Investment opportunities for non-residents

d. Tax implication for non-residents

7. Heads of income

a. Salaries

b. Income from other sources

c. Capital gains

d. Business/ professione. House property

f. Interest on government securities

8. Capital Gains tax rules

a. Determination of gain or loss

b. Characterization of gain or loss

c. Netting rules

d. Indexation benefits

e. Capital loss limitations

Tax Planning Strategies

9. Tax relief

a. Exemptions


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b. Deductions

c. Rebates

10. Non taxable transactions (e.g., gifts, estate)

11. Tax management techniques

a. Deferral and acceleration

b. Maximizations of exclusions and credits

c. Managing loss limitations

d. Capital asset transactions

e. Deductible expenditures of individuals and business forms

12. Interest and penalty taxes and other charges

a. Failure to file tax return or to pay taxb. Preparer penalties

c. Accuracy related penalties

d. Fraud/concealment penalties

Estate Planning

13. Features of trust

a. Classification of trusts

b. Characteristics of selected trust provisionsc. Rule against perpetuities

14. Taxation of trust

A. Income tax implications of trusts

a. Exemptions

b. Simple and complex trusts

c. Distributable net income

d. Tax implications of trustse. Recommendations and justifications of the most appropriate trust

f. Tax issue on retirement plans at death

15. Property documentation

a. Sale letter/ power of attorney


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b. Freehold

c. Mutation

d. Will

e. Succession


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Assessment Year 2012-13

Index

1. Ethical consideration in tax planning

2. Tax compliance matters

3. Taxation terminology

4. Tax calculations and special rules

5. Tax characteristics of business forms

6. Non Resident Indians (NRIs)

7. Heads of income

8. Capital Gains tax rules

9. Tax relief10.Non taxable transactions (e.g., gifts, estate)

11.Tax management techniques

12.Interest and penalty taxes

and other charges

13.Features of trust

14.Taxation of trust

15.Property documentation

Annexure 1 Income Tax Rates for AY 2012-13Annexure 2 Dividend Tax under Section 115-O

Annexure 3 Securities Transaction Tax

Annexure 4 Minimum Alternate Tax

1-6

7-16

17-26

27-42

43-66

67-86

87-166

167-178179-196

197-218

219-230

231-236

237-244

245-252

253-284

285-287

288-289

290

291


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CHAPTER

1

ETHICAL CONSIDERATIONS IN TAX PLANNING


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A. Legal meaning of privileged communication

An exchange of information between two individuals in a confidential relationship.

A privileged communication is a private statement that must be kept in confidence by the

recipient for the benefit of the communicator. Even if it is relevant to a case, a privileged

communication cannot be used as evidence in court. Privileged communications are

controversial because they exclude relevant facts from the truth-seeking process.

Privileged communications exist because society values the privacy or purpose of certainrelationships. The established privileged communications are those between wife and husband,

psychotherapist and patient, physician and patient, attorney and client.

If patients were unable to keep secret communications with psychotherapists or physicians

relating to treatment or diagnosis, they might give doctors incomplete information. If doctors

received incomplete information, they might be unable to administer health care to the patient,

which is the very purpose of the doctor-patient relationship.

The Attorney-Client Privilege exists for roughly the same reason as the physician-patient

privilege. In order to secure effective representation Privileged Communications are not always

absolute. For instance, a criminal defendant may be able to access communications between

an accuser and the accuser's doctor if the defendant's interest in the disclosure, in the opinionof the court, outweighs the interest in confidentiality. The court will consider such a request only

if the defendant can establish a reasonable probability that important information exists in the

communication that will be relevant to the case.

Nature of the Privilege

When the communication involves an attorney, the communication between an attorney and

client is protected from compelled disclosure in a controversy when the communication:

(1.) is made in confidence (with an expectation of privilege);

(2.) occurs in the course of soliciting advice from an attorney in his or her capacity as such (i.e.,

providing legal advice); and

(3.) is relevant to the advice sought.

B. DANGERS OF TAX EVASIONS:

Tax Evasion

Tax Evasion entails the efforts that are made by trusts, individuals, firms, and various other

entities to avoid paying taxes by illegal and unfair means. The Evasion of Tax usually takes

place when taxpayers deliberately hide their incomes from the tax authorities in order to reduce

their liability of tax.

Evasion of Tax takes place when the people report dishonest tax that includes declaring less

gains, profits, or income than what has been actually earned and they even go for overstating

deductions.


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The level of Tax Evasion also depends on the chartered accountants and tax lawyers who help

companies, firms, and individuals evade paying taxes. Tax Evasion is a crime in all major

countries and the guilty parties are subjected to imprisonment and fines. The various methods

of Tax Evasion are:

Smuggling

Customs duty evasion Value added tax evasion

Illegal income tax evasion

Smuggling is a method of Tax Evasion, following which people export or import foreign goods

through routes that are unauthorized.

Customs dutyevasion is another method of Tax Evasion under which the importers evade

paying customs duty by false declarations of the description of the product and quantity.

value added tax evasion under which the producers who collect from the consumers the value

added tax evade paying taxes by showing less sales amount.

Many people earn money by means that are illegal such as theft, gambling, and drug trafficking

and so they do not pay tax on this amount and thus this is another method of Tax. Evasion that

is called illegal income tax evasion.

Tax Evasion results in the loss of revenue for the government and so ideally, no one should be

indulging in it and the Indian government must also take steps in order to stop Evasion of Tax

by the people.

Consequences of Evading Tax and Not Filing a Return

Every year, as July 31 approaches, we see large advertisements issued by the Income TaxDepartment of India, advising citizens to pay income tax and file their tax return to ensurepeace of mind. Indeed, by not complying with the law, you invite possible action from theauthorities. The cost of complying with the law is always less than the price you have to pay fornot doing so. Let us take a closer look at the two main types of non-compliance in tax matters.

Non-Payment or short payment of tax that is due, and failure to the file ones income tax return-

these are two violations that attract stern action from authorities. Other types of violations are

less severe.

Its a human instinct to save money

While tax evasion is punishable by law, the concept of tax planning has opened up career

avenues for thousands of educated youth, grooming them into financial consultants, creating

employment for them and using them to spread awareness among taxpayers about managing

money in a better way.

Failure to File Your Income Tax Return

An income tax return is a statement that tells the authorities how much you have earned during

the previous Financial Year, how much of your money you invested, what your expenditure was

and how much tax you need to pay based on your taxable income. It also gives them details


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about these that are relevant to your tax obligations.

If you dont file your return, the tax authorities will not get a picture of these details. Its your

annual financial statement that you are obliged to share with the government because you earn

a certain level of income in India.

Not paying the taxes due or not filing your return can lead to punitive action from authorities.

Lets look at the types of action that can be initiated against defaulters.

Types of Action

There are basically 3 types of action that can be initiated against a person who has violated

provisions of tax laws:

Charging interest: If you have not paid taxes by the due date, interest at the rate of 1% per

month or part of the month simple interest is charged. Interest is more of a reactive way of

taking action, in that the defaulter is punished after he has failed to do the needful. He may not

mind parting with some money as interest so long as he gets some time to organize his finances

and then pay the tax due.

Imposing a penalty:A penalty is like a fine and tends to tarnish ones image and track record.

So it acts as a deterrent to one who thinks he can relax and avoid filing a return or paying taxes

or defaulting in some other way.

Prosecution: If you were charged interest by the tax authorities because you did not pay taxes

in time, none of your contacts would probably know it. Very few might come to know if you were

assessed a penalty. But Jail? Yet if you failed to pay income tax, you could land up behind bars

for a period ranging from 6 months to 7 years, depending on the amount of tax evaded. This is

in addition to interest, penalty and any fine, if levied.

Why Take Punitive Measures?

In any society, self-censorship is the best form of censorship. Similarly, obeying the law of the

land pro actively is one of the surest indicators of societal progress. It shows that the citizens

are educated, aware, empathic and responsible. But if you fail to obey the law (as in tax

evasion, for instance), the governing authority has to step in, and put in place a system to

recover the loss suffered and at the same time discourage offenders in particular and the public

in general from repeating instances of unlawful behavior.

Let us conclude with this funny but thought-provoking point made by a former U.S. Senator

Elihu Root in a 1913 debate:

I guess you will have to go to jail, if that is the result of not understanding the Income

Tax Law I shall meet you there.


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CHAPTER

5

TAX CHARACTERISTICS OF BUSINESS

FORMS


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ASSESSMENT OF INDIVIDUALS

The term individual as such has nowhere been defined in the Income-tax Act. Section 2(31),however, states that person inter alia, includes an individual. In the commonly understoodsense of the term, an individual means a human being or a single person. The person may bemajor, minor, married or unmarried, possessing sound or unsound mind. All the same, he isassessable as an individual and is liable to pay tax, if the total income earned by him duringany previous year exceeds the prescribed limit exempted from tax. If an individual who is liableto pay tax for any year dies before he is assessed to tax, his executor, administrator or legal

representative is treated as the individual assessee for purposes of assessment of the incomeof the deceased person. In the case of an individual who is a minor or a lunatic, the assessmentof his income will be made on his guardian or the trustee. However, if the incapacitated personhas no trustee or guardian or trustee or guardian is a non-resident and cannot be traced, theassessment can be made directly on the minor or lunatic. The rights and duties of allrepresentative assessees are the same as those of the persons they are representing.

Total income of an individual: The total income of an individual for any previous year, which isliable to tax, is to be computed under the various heads discussed earlier. Further, sections 60to 65 of the Income-tax Act provide for clubbing of income arising to minor children, spouse,daughter-in-law etc. with the income of the individual under certain circumstances. Theseprovisions must be strictly construed inasmuch as they create an artificial liability to tax.

A married woman, being an individual, is liable to income tax in respect of the total income ofany previous year arising to her in her own right, including the income from assets inherited byher or gifted to her by a person other than her husband or her father-in- law or mother-in-law.

Exemptions and reliefs available to individuals : The tax exemptions and reliefs availableunder the Act to individuals in respect of income chargeable to tax fall under the followingcategories :

1. Income altogether excluded from the total income, and on which in consequence, noincome-tax is payable[Section 10].

2. Deductions from gross total income both in respect of income, a part of which is notchargeable to income-tax and payments made by the assessee, a part or the whole of

which is deductible from the gross total income.3. Relief in tax when salary is paid in arrears [Section 89].4. Special treatment for certain kinds of income [Section 180 and 180A].

Rebate of tax and relief in certain cases

Share of profit from firmUnder the provisions of Section 10(2A), in the case of a person being a partner of a firm whichis separately assessed as such, his share in the total income of the firm is completely exemptfrom income tax since AY 1993-94.For this purpose, the share of a partner in the total income of a firm separately assessed assuch would be an amount which bears to the total income of the firm the same share as the

amount of the share in the profits of the firm in accordance with the partnership deed bears tosuch profits.

Income from association of persons or bodies of individuals: If the assessee is a memberof an association of persons or a body of individuals (other than a H.U.F., a company or a firm)income-tax shall not be payable by him in respect of any portion of the amount receivable byhim from the association or body on which tax has already been paid by the association or body[Section 86]. For the purposes of this provision in the case of an association of persons which is


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assessable under section 67A, the members of the AOP whose shares in the income areindeterminate or unknown, will be entitled to receive equal shares in the income of the AOP andthe individual share of such member will be determined accordingly.

Relief when salary etc. is paid in arrears or in advance [Section 89]: It has already beenexplained in the Chapter relating to salaries that arrears or advances of salaries are assessablein the hands of the recipients in the year in which these are received. Consequently, in afinancial year, an employee may become chargeable to tax in respect of salary for more than 12months. Likewise any payment in the nature of profit in lieu of salary (within the meaning of

section 17(3) of the Act) is also chargeable in the year of receipt in addition to the normal salaryreceived by the employee. In consequence, the aggregate salary income may become liable totax at a rate higher than that at which it would otherwise have been assessed. To obviate sucha hardship, the Assessing Officer has been empowered to grant relief in appropriate cases, onthe employee making an application, in accordance with Rule 21A of the Income-tax Rules.In appropriate cases coming under section 192(2A), where the employer is the Government or apublic sector undertaking, co-operative society, local authority, university, institution or body,such employer himself is entitled to take into account the relief under section 89(1).

TAX IMPLICATION OF HUFIn many financial transactions, people while buying or selling immovable property -- residential,

agricultural, commercial or industrial property, or any movable property -- declare their status as

that of Hindu Undivided Family, or HUF.

But a mere declaration by a Hindu buyer or seller of real estate, or any other asset, that his

status is that of an HUF cannot be accepted in law because there are certain legal requirements

of a valid HUF status. Let us consider the main aspects which need to be borne in mind in

saving tax through HUF status.

Concept of HUF

Under the Income-tax Act, a Hindu undivided family (HUF) is treated as a separate entity for thepurpose of assessment. It is included in the definition of the term person undersection 2(31).The levy of income-tax is on every person. Therefore, income-tax is payable by a HUF. "Hinduundivided family" has not been defined under the Income-tax Act. The expression is howeverdefined under the Hindu Law as a family, which consists of all males lineally descended from acommon ancestor and includes their wives and unmarried daughters.

The relation of a HUF does not arise from a contract but arises from status. A Hindu is born intoa HUF. A male member continues to remain a member of the family until there is a partition ofthe family. After the partition, he ceases to be a member of one family. However, he becomes amember of another smaller family. A female member ceases to be a member of the HUF inwhich she was born, when she gets married. Thereafter, she becomes a member of the HUF ofher husband.

Some members of the HUF are called co-parceners. They are related to each other and to thehead of the family. A HUF may contain many members, but members within four degreesincluding the head of the family (karta) are called co-parceners. A hindu coparcenary includesthose persons who acquire by birth an interest in the joint coparcenary property. Only thecoparceners have a right to partition.


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Two schools of Hindu law

In India, Hindus are mainly governed by two schools of law, namely Mitakshara and

Dayabhagh. In some parts of India, particularly in south India, certain other systems are also

prevalent.

The Dayabhagh system is especially prevalent in West Bengal and Assam, whereas for the rest

of country for most of the Hindus the law relating to the ownership, devolution, etc. of properties

is the Mitakshara School of Hindu Law.

Generally speaking, under the Mitakshara School of Hindu Law the main principle is the

survivorship principle in the matter of devolution of the ancestral or HUF property, in contrast to

the principle of succession which applies to the individual property of a Hindu.

Another principle is that no member of the HUF, so long as the Hindu family remains joint, can

be said to have a specific share in the HUF property. It is only upon partition of an HUF that the

share belonging to a particular member can be ascertained.

Another way of attaining HUF status to a property is by way of partition and accretions to the

partitioned property. Thus, if the property of an HUF is partitioned amongst its members as per

the HUF law, then the member receiving the property will be said to hold it not in his individualcapacity but as HUF, provided there is more than one member in the family.

Further, if any addition is made to such partitioned HUF property, then the addition so made to

such property also gets the status of HUF property. It may be mentioned here that if an

individual property is inherited as per the Hindu Succession Law, then the property so inherited

is not to be termed as partitioned property.

Very often a mistake is committed by the Hindus in declaring the property received by them on

inheritance under the Hindu Succession Act, as HUF property, whereas it is in truth only the

individual property of the person inheriting it.

Another mode of acquiring the status of HUF in respect of property both movable and

immovable is by a special gift made by the father or mother of the male member of a family. In

some cases, there may not be any ancestral property. There might not have been any cases of

partition of the HUF property and thus the status of a Hindu regarding his property is that of

individual only.

If he is interested in owning property in the status of HUF, he may get the gift of the property of

any amount from his father or mother, or any relative or friend, specifically for his own HUF

consisting of himself, his wife and children. In that case the amount so gifted by the father, etc.

will form part of the HUF property.

If some loans are taken by that HUF and an immovable property or a movable property is

purchased by the HUF, the property so purchased will be known as HUF property. In somecases, the father, etc. may also pass on his individual property to the children as HUF property

through a specific declaration in a will. What is most relevant is the intention of the donor to treat

the gift for the specific recipient namely, whether the individual or the HUF.

Tax benefits of HUF

The question of HUF status for a Hindu buyer or seller of any property assumes importance

because of certain tax advantages attached with HUF under the income tax and wealth tax


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laws. Thus, if an individual has personal income and has also HUF income, he would be entitled

to have an exemption of Rs 180,000 for his individual income and another Rs 180,000 for his

HUF income.

Besides, he would also be eligible to a further income tax deduction or exemption of Rs 100,000

under Section 80C in respect of LIC premia, PPF contribution, NSC, etc., both on individual and

HUF income separately.

Besides, under the Wealth Tax Act, 1957 too, separate exemptions are available for individual

property and HUF property.

Thus, where the taxable individual wealth is eligible to a general exemption of Rs 180.000, the

HUF's taxable wealth is also eligible to a further general exemption of Rs 180,000. Hence,

persons having immovable property and jewellary and motorcars under HUF status stand to

gain from the extra exemption under Wealth Tax Act as well.

Other points to keep in mind

The bank account should be in the name of either the HUF or in the name of the Karta by

specifically declaring that the account is that of the HUF only. Only the funds belonging to the

HUF should be deposited in such an account.

Normally, the Kartaof the HUF is entitled to sign the bank transactions. He may, however, alsopermit the other adult members of the family to sign on behalf of the HUF.

Another important thing that can be remembered in connection with HUF property is that where

a person wants to transfer some property by Will to the members of his family, he can transfer

the same for the specific purpose of the HUF of his son or sons so as to constitute the amounts

so transferred through will or so gifted by will as the HUF property of the son(s) concerned.

This would result into a good deal of income tax and wealth tax saving for the persons inheriting

such property by will as mentioned above.

Assessment of Hindu Undivided familyThe income of a HUF is to be assessed in the hands of the HUF and not in the hands of any of

its members. This is because HUF is a separate and a distinct tax entity.

Partition of HUF There are two types of partition. They are(1) Total partition is a partition by which the entire family property is divided amongst thecoparceners. After the total partition, the HUF ceases to exist as such.(2) Partial partition is a partition which is partial as regards either the persons constituting the

joint family or as regards the properties belonging to the joint family or both. In case of a partialpartition as regards persons constituting the joint family, some coparceners may separate fromthe joint family while the others might continue to remain as part of the joint family. In case of apartial partition as regards the property, there may be a division or severance of interest inrespect of some part of the estate of the joint family, while the rest of the estate may continue toremain as property of the joint family.

Effect of partial partitions made after 31st December, 1978However, partial partitions after 31st December, 1978 are not recognized for tax purposes. Ifany partial partition has been effected after 31.12.78, then no claim of such partial partition shallbe recorded by the Assessing Officer. Such family will continue to be assessed as if no suchpartial partition has been effected. Every member of the HUF, immediately before such partialpartition, and the HUF shall be jointly and severally liable for any sum payable under the act.


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The several liability of a member would be proportionate to the share of joint family propertyallotted to him on such partial partition.


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CHAPTER

8

CAPITAL GAINS TAX RULES


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Basis of charge sec 45(1)

Any profits or capital gain arising from the transfer

Of a capital asset

Shall be chargeable to income tax under the head capital gains and Shall be deemed to be the income tax of p/y in which transfer took place

Unless such capital gain is exempt u/s 54, 54B,54D, etc.

BASICS OF THIS HEAD HAVE BEEN DISCUSSED EARLIER

Capital Gain on transfer of Bonus Shares- Capital gain on transfer of bonus shares shall becalculated as follows:Different Situations Special ProvisionsCost of acquisition of bonus shares allotted

before April 1, 1981

Fair Market Value on April 1, 1981 is taken as

cost.Cost of acquisition of bonus shares allotted onor after April 1, 1981

Cost of acquisition is taken as zero.

Period of holding bonus shares The period of holding shall be determined fromthe date of allotment of bonus shares (and notfrom the date of acquisition of original shares

Note: The above rules are also applicable in respect of shares, securities, debentures, bonds,units allotted without any payment on the basis of holding of any other financial assets.

Capital gain on transfer of rights shares- Cost of acquisition in different situations is asfollows:

Different Situations Cost of acquisitionOriginal Shares (on the basis on which thetaxpayer becomes entitled to right shares)

Amount actually paid for acquiring shares.

Right entitlement (which is renounced by theassessee in favor of a person)

Nil (see Note)

Right shares acquired by the taxpayer byexercising his rights entitlement.

Amount actually paid by the taxpayer foracquiring asset.

Right shares purchased by the person inwhose favor right entitlement has beenrenounced.

Purchase price paid to renouncer to rightsentitlement plus amount paid to the companywhich has allotted the rights shares.

Note: The amount realized by the original shareholder by selling his rights entitlement will beshort term capital gains in his hands (as the cost is taken as nil).the period of holding of the rightentitlement will be reckoned from the date of offer made by the company to the date ofrenouncement.

CONVERSION OF DEBENTURE INTO SHARES:-


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Conversion of debentures, debenture-stock, or deposit certificates in any form of a companyinto shares or debentures of that company will not be regarded as a transfer giving rise to anycapital gains. On the sale of shares or debentures received on such conversion, the capital gainshall be computed by taking the cost of acquisition as that part of the cost of debentures,debenture-stock or deposit certificates which has been appropriated towards the shares ordebentures.One has to keep in view the following points in the case of conversion of debentures intoshares-

1. Cost of debentures shall be taken as cost of acquisition of shares.

2. To find out whether or not shares are long term capital asset or short term capital asset,the period of holding shall be determined from the date of allotment of shares.

3. The indexation shall be determined from the date of conversion of debentures intoshares.

Example: X gets 1000 partly convertible debentures (face value Rs. 100) of A Ltd. (cost beingRs. 200 per debentures) at the time of original allotment to him on May 16, 1984. As per termsof allotment A ltd. Converts 60% portion of each debentures in to 2 equity shares of face valueof Rs. 10 on July 1, 1992. On September 10, 2011, X transfer 2000 equity shares in A ltd. @Rs.300 per share and 1000 (non convertible portion) debentures @ 310 per debentures. Find outthe amount of capital gains chargeable to tax for the assessment year 2012-13.

Solution: Immediately after conversion of debentures into equity shares, X holds the following-No. of Scrip Type of scrip Face Value (per scrip) Total Cost Rs.2000 Equity Shares 10 120000*1000 Debentures 40 80000**Total 200000*60% of original investment of Rs. 200000, i.e. Rs. 120000**Rs. 200000-Rs. 120000Computation of capital gains

Shares Rs. Debentures Rs.Sale Consideration 600000 310000

Less: Indexed cost of acquisition[*(Rs. 120000*785/223)**(indexation is not allowed in the case of debentures)] 422422* 80000**

Long term capital gains 177578 230000

Note: Securities transactions tax of Rs. 750 is applicable (i.e. 0.125% of Rs. 300*2000) if theseshares are transferred in recognized stock exchange and, consequently, long term capital gainon transfer of shares will not be chargeable to tax.

Capital gains on transfer of shares in demerged company or resulting company [sec.49(2C)/(2D)]- Section 49 (2C)/(2D) is applicable with effect from the assessment year 2010-11

1. Cost of acquisition of the shares in the resulting company shall be the amount whichbears to the cost of acquisition of shares held by the assessee in the demergedcompany the same proportion as the net book value of the assets transferred in a

demerger bears to the net worth of the demerged company immediately before suchdemerger.For this purpose net worth shall mean the aggregate of the paid up share capital andgeneral reserves as appearing in the books of the accounts of the demerged companyimmediately before the demerger.

2. Cost of acquisition of the original shares held by the shareholder in the demergedcompany shall be deemed to have been reduced by the amount as mentioned in (1)supra.


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One should note the following points.1. To find out whether or not shares in resulting company are long term capital asset,

the period of holding shall be determined from date of acquisition of shares in thedemerged company.

2. The indexation will start from the date of allotment of shares in the resultingcompany.

Short-term/Long-term Capital gains-How Charged to taxTax will be calculated as follows:Gross total Income (excludingincome given in columns (2)

and (3))

Long term capital gainstaxable under section 112

Short term capital gain taxableunder section 111A

(1) (2) (3Step A1-find out gross totalincome from all sourcesexcluding income given instep B1 and step C1

Step B1-Find out long-termcapital gain

Step C1-Find out short-termcapital gain taxable undersection 111A

Step A2-deduct, deductionpermissible under section 80C

to 80U (A2 cannot exceed A1)

Step B2-find out income taxon long term capital gain at

the rate specified by section112

Step C2-Find out income taxshort term capital gain at the

rate specified by section111A.Step A3-The balancingamount is other net income.Step A4-find out income taxon other net income.

Step D-Add the tax computed at steps A4, B2 and C2. It is income-tax on net income (incometax on A3+B1+C1).Step E-Add surcharge*on income tax computed under step D.Step F- Find out D+EStep G-Add education cess*at the rate of 2% of step F.

Step H-Add secondary and higher education cess*at the rate of 1%of step F.Step I-Tax liability is equal to F+G+H

How to compute tax on long term capital gains [Sec. 112]-Long term capital gain is taxableat a flat rate of 20% +SC+EC+SHEC*Tax rate is 10%in a few cases-In cases long-term capital gain is covered by section

115AB,115AC,115AD OR 115E, it is taxable at the rate of 10% +SC+EC+SHEC*. Moreover, iflisted shares/securities/units are transferred and the benefit of indexation is not taken, then longterm capital gain is taxable @10% +SC+EC+SHEC*Incentives under section 80C to 80U are not available-Deductions under sections 80C to80U are not available in respect of long term capital gains.

It does not include any long term capital gain. It includes short term capital gain but other

than those given in column (3). Surcharge, education cess and secondary and higher education cess is applicable as

follows:Assessment Year2012-13


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Surcharge (as a percentage of income tax)1. If the taxpayer is an individual/HUF/AOP/BOI and2. If the taxpayer is an artificial juridical person.3. If the taxpayer is a domestic company and Foriegn company

net income does not exceed Rs. 1 crore.4. If the taxpayer is a domestic company and net income does

exceed Rs. 1 crore.5. If the taxpayer is a Foreign company and net income does

exceed Rs. 1 crore.

NilNillNill

5%

2%

Exemption limit in some cases [provision to Sec. 112 (1) (a)]-The proviso to section 112 (1)(a) gives a relief which is given below-Conditions- the relief is available if the following conditions are satisfied.Condition 1 The taxpayer is a resident individual or a resident Hindu individual family.

He or it may be ordinarily resident or not ordinarily resident.

Condition 2 Taxable Income minus long term capital gain is less than the amount ofexemption limit, [i.e. Rs. 190000 in the case of a resident woman (below60 years), Rs. 250000 in the case of a resident senior citizen (60 years ormore), Rs. 180000 in the case of any other individual or every HUF], for

the assessment year 2012-13.Relief-If the aforesaid conditions are satisfied, the following shall be deducted from long term

capital gain-Exemption Limit- (Net income or taxable income-long term capital gain)After deducting the aforesaid amount, the balancing amount of long term capital gain ischargeable to tax.

X (28 years) is a resident individual. For the assessment year 2012-13, he has the followingincomes-

Rs.Long term capital (LT) 33000Other Income 167000

Net Income 200000In this case, the two conditions given above are satisfied (i.e. the taxpayer is a residentindividual and NI-Minus LT is Rs. 167000 which is lower than the exemption limit of Rs.180000). Consequently, from the long-term capital gain the following shall be deducted.Rs. 180000 (exemption limit)-[Rs. 200000(NI)-Rs. 33000 (LT)]= Rs. 13000In this case, the long term capital gain chargeable to tax will be Rs. 20000 (i.e. Rs. 33000-Rs.13000)

Exemption under Section 10- If long term capital gain arises on transfer on or after October 1,2004 of equity shares or units of equity oriented mutual fund and the transaction is covered bysecurities transaction tax, such capital gain is not chargeable to tax by virtue of section 10(38).Exemption is also available in some cases under section 10(33)/(36)/(37)

Tax Incidence on transfer of listed shares, securities and units-if the following conditionsare satisfied, then tax on long-term capital gain will be computed under option 1 or option 2given below-

Conditions-The following conditions should be satisfied-Condition 1 The taxpayer is an individual, HUF, company or any other person (may be

resident or non-resident)


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Condition 2 The asset is a long term capital asset.

Condition 3 The long term capital asset is-1. A security listed in any recognized stock exchange in India.2. A unit of UTI or a mutual fund (whether listed in a recognized stock exchange

or not)3. Zero coupon bonds

Note: As per section 2(h) of the securities Contracts (Regulation) Act, 1956 securitiesincludes-

1. Shares, scrips, stocks, bonds, debentures, debenture stock or other marketablesecurities of a like nature in or of any incorporated company or other body corporate.

2. Government securities.3. Such other instruments as may be declared by the Central Government to be securities4. Rights or interest in securities

In other words, Shares, Debentures, Government securities or bonds are securities for thispurpose.

Tax Computation-IF the capital asset which is transferred is equity shares or units of equity-oriented mutual fund and the transaction is subject to securities transaction tax, the long termcapital gain is not chargeable to tax. In other cases, if the above conditions are satisfied, the taxshall be computed as follows (i.e. under option 1 or option 2m, whichever is lower)-

Option 1 Option 21.Find out sale consideration. 1.Find out sale consideration.2.Deduct: Indexed cost ofacquisition/improvement and expenses ontransfer.

2.Deduct: cost of acquisition/improvement andexpenses on transfer.

3.The balancing amount [i.e. (1)-(2)] is longterm capital gain.

3.The balancing amount [i.e. (1)-(2)] is longterm capital gain.

20% of (3) +SC+EC+SHEC* is the amount oftax liability.

10% of (3) +SC+EC+SHEC* is the amount oftax liability.

The taxpayer has an option in respect of each transaction to pay tax under option 1 or option 2,whichever is lower. It is difficult to state when option 2 is better. However, in the case of transferof listed bonus shares, listed debentures and listed bonds, Options 2 is better as compared toOption 1.

Tax on short-term capital gain in certain cases [Sec 111A]- The provisions of section 111Aare given below-Conditions- Section 111A is applicable if the following conditions are satisfied-1. The taxpayer is an individual, HUF, firm, company or any other taxpayer.2. During the previous year, he has general short term capital gain on transfer of equity sharesor units in equity-oriented mutual fund.3. The transaction of transfer takes place on or after October 1, 2004.4. Such transaction is chargeable to securities transaction tax at the time of transfer.

Consequences if the above conditions are satisfied- If the above conditions are satisfied,short-term capital gain is taxable at the rate of 15% to +SC+EC+SHEC*. No deduction isavailable under section 80C to 80U from the above noted short-term capital gains.

Exemption limit in some cases [provision to sec 111A]- The provision to section 111A givesa relief-Conditions- The relief is available if the following conditions are satisfied-

1. The taxpayer is a resident individual or a resident Hindu undivided family. He or it maybe ordinarily resident or non ordinarily resident.


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2. Taxable income minus short-term capital gain is less than the amount of exemption limit.[i.e. Rs. 190000 in the case of a resident woman (below 60 years), Rs. 250000 in thecase of a resident senior citizen (60 years or more), Rs. 180000 in the case of any otherindividual or every HUF] for the assessment year 2012-13.Relief- If the aforesaid conditions are satisfied, the following shall be deducted fromsuch short term capital gain.Exemption Limit-(Net income or taxable income-such short-term capital gain)

After deducting the aforesaid amount, the balancing amount of such short-term capital gain is

chargeable to tax at the rate of 10 per cent +SC+EC+SHEC.

Cumulative impact of section 10,111A and 112- Section 10(33) gives exemptions on capital gain(if any) arising on transfer of unit of US-64. Section 10(38) gives exemption on long term capitalgain arising on transfer of equity shares, etc, If the transaction is covered by securitiestransaction tax . If securities transaction tax is applicable and capital gain is short term capitalgain, it is taxable at the lower rate 15 per cent (+SC+EC+SHEC*) as given by section 111A.Long term capital gain is taxable at the rate of 20 per cent (+SC+EC+SHEC)*[if the benefit ofindexation is not taken, it is taxable at the rate of 10 per cent (+SC+EC+SHEC)* in somecases]. The cumulative impacts of these provisions are given below.

Income tax rates

(Add SC+EC+SHEC)*

Capital AssetIf transaction iscovered bysecuritiestransaction taxat the time oftransfer

If it is not covered by securities

transaction tax

Long

Term

Short

Term

Long Term Short

termWithout

indexation

With

Indexation

US -64 0% 0% 0% 0% 0%

Units (equity oriented) 0% 15% 10% 20% Normal

Units (others) NA NA 10% 20% Normal

Equity shares (listed) any other 0% 15% 10% 20% Normal

Equity shares (not listed) NA NA NA NA Normal

Preference shares (listed) NA NA 10% 20% Normal

Preference shares (not listed) NA NA NA 20% Normal

Debentures (listed) NA NA 10% NA Normal

Debentures (not listed) NA NA 20% NA Normal


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Government securities NA NA 10% 20% Normal


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CHAPTER

10

NON TAXABLE TRANSACTIONS(E.G., GIFTS,

ESTATE)


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GIFT

When a gift or a specified property is received without consideration from a non-relative

whether in cash or in kind or any property is purchased for an inadequate consideration it shall

be treated as income from other sources and taxable in the hand of the recipient under the new

provisions for gift.

The following provisions of law were there in the income tax act prior to finance act, and

following provisions also exist after finance act, 2009

1. Section 47 provides that the following transaction shall not be regarded as transfer forpurpose of section 45 and therefore no capital gains shall arise:

"Any transfer of a capital asset under a gift".

Therefore, no capital gains shall arise on transfer of a capital asset under a gift.

2. section 49(1) which deals with cost of acquisition provides that where a ,capital assetbecame the property of the assessee under a gift, then the cost of acquisition of the

asset deemed to be the cost for which the previous owner acquired it. Therefore, the coain hands of donee shall be the coa in the hands of donor.

3. Section 2(42A) which deals with period of holding provides that for determining thenature of capital gains in the hands of the assessee who acquired the asset by way oftransaction of a gift,the period for which the asset was held by the previous owner shallalso be consideredTherefore in the hands of donee, the period of holding of donor shall also be included.

4. Any sum of money, received without consideration by an individual or a HUF from any

person or persons before 1.10.2009 , if the aggregate value exceeds Rs.50,000 i.e.

where any sum of money is received without consideration by an individual or a Hindu

undivided family from any person or persons and the aggregate value of all such sumsreceived during the previous year exceeds Rs.50,000, the whole of the aggregate value

of such sum shall be included in the total income of such individual or Hindu undivided

family under the head Income from other sources.

In order to avoid hardships in genuine cases, certain sums of money received have beenexempted(1) Any sum received from any relative; or(2) Any sum received on the occasion of the marriage of the individual; or(3) Any sum received under a will or by way of inheritance; or

(4) Any sum received in contemplation of death of the payer; or

(5) Any local authority; or(6) Any fund or foundation or university of other educational institution or hospital or othermedical institution or any trust or institution referred to in section 10(23C); or(7) Any trust or institution registered under section 12AA.

For the purpose of this clause, the expression relative means (i) spouse of the individual,(ii) brother or sister of the individual,


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(iii) brother or sister of the spouse of the individual,(iv) brother or sister of either of the parents of the individual,(v) any lineal ascendant or descendant of the individual,(vi) any lineal ascendant or descendant of the spouse of the individual, and(vii) spouse of a person referred to in items (ii) to (vi) mentioned above.

(4) Gift of any sum of money or property or transfer of property for inadequateconsideration on or after 1st October, 2009 to be subject to tax in the hands of therecipient

(i) New clause (vii) has been inserted in section 56(2) w.e.f. 1.10.2009 to bring within its scope,in addition to any sum of money, the value of any property received without consideration or forinadequate consideration. For this purpose, property means immovable property being land orbuilding or both, shares and securities, jewellery, archaeological collections, drawings,paintings, sculptures or any work of art.

(ii) If an immovable property is received without consideration, the stamp duty value of suchproperty would be taxed as the income of the recipient if it exceeds Rs.50,000. In case animmovable property is received for inadequate consideration, and the difference between thestamp duty value and such consideration exceeds Rs.50, 000, such difference would be taxedas the income of the recipient.

(iii) If the stamp duty value of immovable property is disputed by the assessee, the AssessingOfficer may refer the valuation of such property to a Valuation Officer. In such a case, theprovisions of section 50C and section 155(15) shall, as far as may be, apply for determining thevalue of such property.

(iv) If movable property is received without consideration, the aggregate fair market value ofsuch property on the date of receipt would be taxed as the income of the recipient if it exceedsRs.50, 000. In case movable property is received for inadequate consideration, and thedifference between the aggregate fair market value and such consideration exceeds Rs.50,000,such difference would be taxed as the income of the recipient. The CBDT would prescribe themethod of determination of fair market value of a movable property.

(v) The table below summaries the new scheme of taxability of gifts with effect from 1 stOctober,2009

Nature of asset Particulars Taxable value

Money Withoutconsideration

The whole amount if thesame exceedsRs.50,000.

Immovable property Without

consideration

The stamp value of the

property, if it exceedsRs.50,000.


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Immovable property Inadequateconsideration

The difference betweenthe stamp value and theconsideration, if suchdifference exceedsRs.50,000

Movable property Withoutconsideration

The aggregate fair marketvalue of the property, if itexceeds Rs.50,000.

Movable property InadequateConsideration

The difference betweenthe aggregate fair marketvalue and theconsideration, if suchdifference exceedsRs.50,000

(vi) However, any sum of money or value of property received -

(a) from any relative; or(b) on the occasion of the marriage of the individual; or(c) under a will or by way of inheritance; or(d) in contemplation of death of the payer or donor, as the case may be; or(e) from any local authority as defined in the Explanation to section 10(20); or(f) from any fund or foundation or university or other educational institution or hospital or

other medical institution or any trust or institution referred to in section 10(23C); or(g) from any trust or institution registered under section 12AA would be outside the ambit of

section 56(2)(vii).

Explanation.-for the purposes of this clause,-

1. "assessable" shall have the meaning assigned to it in the explanation 2 to sub-section(2) of section 50C;

2. "fair market value" of a property, other than an immovable property, means the valuedetermined in accordance with the method as may be prescribed;

3. For the purposes of this sub-clause, "jewellery" includesornaments

Ornaments made of gold, silver, platinum or any other precious metal or anyalloy containing one or more of such precious metals, whether or not containingany precious or semi-precious stone, and whether or not worked or sewn intoany wearing apparel;

Precious or semi-precious stones, whether or not set in any furniture, utensil or

other article or worked or sewn into any wearing apparel;4. "property" means-

Immovable property being land or building. Or both; ~

Shares and securities

Jewellery

Archaeological collections;

'Drawings;

Paintings;


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Sculptures; or

Any work of art;

Bullions5. for the purposes of this clause, "relative" means-

Spouse of the individual;

Brother or sister of the indivldual:

Brother or sister of the spouse of the individual;

Brother or sister of either of the parents of the individual;

Any lineal ascendant or descendant of the individual; Any lineal ascendant. Or descendant of the spouse of the individual;

Spouse of the person referred to in clauses (ii) to (vi).".6. "stamp duty value" means the value adopted or assessed or assessable by any authority

of the central government or a state government for the purpose of payment of stampduty in respect of an immovable property.

SECTION 49(4): COST OF ACQUISITION

Where the capital gain arises from the transfer of a property, the value of which has been

subject to income-tax under section 56(2)(vii), the cost of acquisition of such property shall be

deemed to be the value which has been taken in to account for the purpose of the said clause

(vii)

(Inserted by Finance Act, 2009)

Agriculture Income

As per Section 10(1) agricultural income is exempt from income tax.

Agricultural income means

Sec.2 (1A)

a. Any income earned

from the land situated in India and

that land is used for agricultural purposes

b. Any income derived from such land by:

(i) Agriculture, or

(ii) The sale of the produce raised or received as rent in kind.

Any income derived from saplings or seedlings*grown in a nursery shall be deemed to beagricultural income.

c. Any income derived from any building occupied by the cultivator provided that the

building is on or in the immediate vicinity* of the land and is a building which the

cultivator required as a

a. Dwelling*house or

b. As a store house


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However income from any such land or building from the use of any purpose other than

agriculture such as letting for residential or business purpose shall not be treated as agricultural

income.

Partly Agricultural and partly Non-agricultural income

If assessee is carrying on agricultural operations as well as non-agricultural operation.

In determining non-agricultural income which is chargeable to tax

The market value of any agricultural produce which has been raised by the assessee orreceived by him as rent in kind and which has been utilized as a raw material in such

business

Shall be deducted and no further deduction shall be made in respect of any expenditure

by the assessee as cultivator or receiver of rent in kind.

For the purpose of the above market value shall be deemed to be:

a. Where the agricultural produce is ordinarily sold in the market,

The average price at which it has been sold, during the relevant previous year; or

b. Where the agricultural produce is not ordinarily sold in the market,

The aggregate of the following shall be its market value:i. The expenses of cultivation;

ii. The rent paid for the land on which it was grown and

iii. Reasonable profit determined by Assessing Officer.

Disintegration of income in specific composite business

Nature of business Non-agricultural income Agricultural incomeGrowing and manufacturing Tea 40% 60%Growing and manufacturingRubber

35% 65%

Growing and manufacturingCoffee 25% 75%

Growing , cured and roased ofcoffee

40% 60%

Income for above businesses, first income is computed under the PGBP as if the entire

business is non-agricultural business and then 40/35/25 of such amount is treated as the

taxable income.

Partial Integration of agricultural income with non-agricultural income

If (i) Non-agricultural income exceeds exemption limit and

(ii) Agricultural income exceeds Rs.5,000

Then tax shall be calculated in the following manner:-

Step1: Add agricultural with non-agricultural income and calculate the tax on the aggregate as if

it is the total income


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Step2: Compute the tax on [Exemption limit+ Agricultural income]as if it is the total income

Step3: Step1-Step2 will be the tax payable

Step4: Add surcharge@10%

Step 5: Add Education Cess @2%+1%% SHEC

Example: For the assessment year 2012-13, the net agricultural income of an assessee is Rs.500000 and non agricultural income is Rs.285000. compute the tax liabity if person is an maleindividual (Age less than 60 Years).

(1)Taxability on agricultural and non agricultural income (785000) - 89000

(2) Taxability on agricultural and Exempted income (660000) - 64000

(1)-(2) 25000

add: surcharge NillEDUCATION CESS 500

SHEC 25025750


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CHAPTER

15

PROPERTY DOCUMENTATION


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(A)Power of attorney

Introduction

A Power of Attorney is a formal arrangement by which one person gives another personauthority to act on his behalf and in his name. The person who gives Power of Attorney "thedonor" and the person who acts on the behalf of donor is referred as "the attorney". A Power ofAttorney is an instrument in writing whereby one person, as principal, appoints another as his

agent and confers authority to perform certain specified acts or kinds of act on behalf ofprincipal. A Power of Attorney includes any instrument empowering a specified person to act forand in the name of the person executing it. A Power of Attorney may be a general power or aspecial power. What one has to look at before one decides whether a power is general orspecial is what is the subject matter in respect of which this power is conferred; if the Courtcomes to the conclusion that the subject matter is not general, that it is restricted to somethingspecific, something particular, then the Power of Attorney would not be a general Power ofAttorney.

Power of Attorney & Estate planning

Example

What happens if Hari loses the ability to manage his affairs and make important decisions? Whowill take charge? Although his assets will be protected, there will be a cost associated withdealing with the legal issues. In addition, as the legal issues are resolved, important financialdecisions may not be made on a timely basis. By drafting a Power of Attorney, he will be able tochoose the person who is best qualified to manage his affairs when he becomes mentallyincapacitated. A Power of Attorney gives written authority to this person to deal with estate onHari's behalf If Hari doesn't give a Power of Attorney; laws will govern who is responsible formanaging his affairs. Although interested parties can generally apply to the courts to be grantedthe right to conduct Hari's affairs, this can be a time consuming and expensive process. Thefamily members cannot act on Hari's behalf on short notice.

Even a couple can make separate Power of Attorney and appoint an attorney to one another for

managing their business and any other deal in the absence, death or incapability of anotherpartner .

Types of Power of Attorney

General Power of Attorney: A Power of Attorney may be a general power or a specialpower. General Power of Attorney It is a document by which one person appoints anotherperson to represent him/her and act on behalf of himself to manage, attend or carry out certainworks like management, sale of property and dealings in the court, etc.

Special Power of Attorney: A power of authority conferring on the agent or attorney the

authority to act in a Single or specified transaction in the name of principal or donor is known asspecial Power of Attorney. E.g. Special Power of Attorney for a particular court case.

Risks Associated with Power of Attorney

The risks of appointing an agent are small. The most important way to reduce any risk is tocarefully choose an agent. Select someone whom the client trusts completely. The Power of


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Attorney does not mean that the agent owns any of client's property. It allows the agent to makefinancial decisions when client can't. The client can withdraw a Power of Attorney whenever hewants as long as the client is competent. Appointing someone as agent doesn't mean client giveup the right to manage his own affairs.

Responsibility

An individual can select the responsibilities, or powers, he want his agent to have. He canauthorize his agent to do one thing, such as sell his car. Or he can give his agent the authorityto do any legal act he could do himself. He can give a wide range of powers, such as havingaccess to bank accounts, selling stocks, and managing real estate. He may want his agent tosign his income tax return, apply for benefits, and make gifts. He should design his Power ofAttorney to fit his anticipated needs and evenwhen he gets incapacitated, he can gives right tothe agent to the alter his will on his behalf.

Some examples of legal powers contained in the Power of Attorney are the following: (they areonly inclusive, not exhaustive)

Real estate

To execute all contracts, deeds, bonds, mortgages, notes, checks, drafts, money orders.

To lease, collect rents, grant, bargain, sell, or borrow and mortgage.

To manage, compromise, settle, and adjust all matters pertaining to real estate.

Contracts, agreements

To enter into contacts.

To make, sign, execute, and deliver, acknowledge any contract, agreement.

Perform any contract, agreement, writing, or thing.

Stocks, bonds, and securities

To sell any and all shares of stocks, bonds, or other securities.

To make, execute, and deliver any assignment, or assignments, of any such shares of stock,bonds, or other securities.

Bank accounts, certificates of deposit, money market accounts

To add to or withdraw any amounts from any of the client's bank accounts, Certificates ofDeposit, money Market Accounts, etc.

To make, execute, endorse, accept and deliver any and all cheques and drafts.

Deposit and withdraw funds.


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To acquire and redeem certificates of deposit, in banks, savings and loan.

To execute or release such deeds of Trust or other security agreements as may be necessary.

Tax returns, insurance and other documents

To file, sign all tax returns, insurance forms and any other documents.

To represent in all matters concerning the foregoing.

What Type of Power of Attorney is best?

The best way to draft a Power of Attorney is to state the broadest range of powers you feelcomfortable giving to your agent. This will allow your agent to take care of all matters, eventhose you cannot foresee now.

Who can give a Power of Attorney?

Individual

Any person who is competent to appoint an agent can appoint an attorney. Any person:

Who is of the age of majority according to the law to which he is subject Who is of sound mind, may employ an agent. It therefore follows that any person who is

of the age of majority and who is of sound mind can give a Power of Attorney. Married women can execute powers of attorneys even if they are minors

Partnership firms

A partner in a partnership is an agent of the firm, but he cannot bind the firm as regulated by thepartnership Act. In the absence of any usage or custom trade to the contrary, the impliedauthority of a partner does not extend to:

Submit a dispute relating to business of the firm to arbitration; Open a banking account on behalf of the firm in his own name; Compromise or relinquish any claim or portion of a claim by the firm; Withdraw a suit or proceeding filed on behalf of the firm; Admit any liability in a suit or proceeding against the firm; Acquire immovable property on behalf of the firm; Transfer immovable property belonging to the firm; or

Enter into partnership on behalf of the firm.

From the above, it follows that in case the firm intends to confer any of these powers to apartner, though there is no usage or custom of trade to the contrary, he would need a Power ofAttorney from all the partners of the firm in his favour, specifying the authority conferred.

It is therefore desirable to insist in all cases where a Power of Attorney is being given by apartnership firm that all partners constituting the firm should sign the Power of Attorney.


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Companies

Section 48 of the Companies Act, 1956 provides that a company may, by writing under itscommon seal, empower any person, either generally or in respect of any specified matters, asits attorney to execute deeds on its behalf in any place either in or outside India. A deed signedby such an attorney on behalf of company and under his seal, where sealing is required, shallbind the company and shall have the same effect as if it were under its common seal. In allcases, the important point to be noted is that authorization by a Resolution of the Board is

necessary for affixing the seal to any instrument. Where there is no such authorization, theaffixing of the seal will not bind the company.

One trust therefore ensure that in cases where a Power of Attorney is given by a company toany person, the power is given pursuant to a resolution passed by the Board of Directors of thecompany given under its common seal.

Who can be appointed as an attorney?

As between the principal (donor) and third persons, any person may become an agent

(attorney), but no person who is not of the age of majority and of sound mind can become anagent (attorney), so as to be responsible to his principal (donor). A person who has no capacity,or only a limited capacity, to contract on his own behalf, is competent to contract so as to bindhis principal. But, such a person is not responsible to his principal for the acts done by him forand on behalf of his principal.

Authentication

Under Section 85 of [The Indian] Evidence Act, 1872, there is a presumption that everydocument purporting to be a Power of Attorney, and to have been executed before andauthenticated by, a Notary public or any Court, Judge, Magistrate, Consul, or Vice-Consul or

representative of the Central government was so executed and authenticated. Theauthentication is not merely attestation, but something more. It means that the personauthenticating has assured himself of the identity of the person who has signed the instrumentas well as the fact of execution. It is for this reason that a Power of attorney bearing theauthentication of a Notary Public or an authority mentioned in Section 85 of [The IndianEvidence Act, 1872 is taken as sufficient evidence of the execution of the instrument by the whoappears to be the executant on the face of it.

Duration

A general Power of Attorney, unless expressly or impliedly limited for a particular period,

continues in force until revoked or determined by the death of either party. A special Power ofAttorney to do a certain act or acts is determined when the act or acts is or are completed. If it isdesired that the power should continue for a particular period or until a certain event happens,an express provision to that effect should be made.

A power of Attorney appointing attorneys without in terms limiting the duration of their power butwith a recital that the principal was going abroad and was desirous of appointing attorney during


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his absence, was held to be an appointment limited to the time during which the principal wasabroad.

Where principal just before leaving India executed a Power of Attorney authorizing the agent toact in his absence from India and subsequently came to India and again left it but did notexecute a new power before so leaving, held that the power of the agent did not terminate thenthe agent had power to act for the principal during his absence.

Revocation

Power of Attorney can be revoked or would stand revoked if: Revoked by the principal himself The principal dies or becomes insane or becomes bankrupt The business for which the agent was appointed is over Mutually agreed upon by the principal and agent The right under the Power of Attorney is renounced by the agent

Registration

Registration of Power of attorney is not compulsory, it is optional,

In India, where the Registration Act, 1908 is in force, the Power of Attorney should beauthenticated by a Sub Registrar only (whenever a person signs the document and his attorneypresents/ admits execution).

In other areas, attestation should be by a Notary or diplomatic agents.

In case an attorney under a valid Power of Attorney himself signs a document, he may, asexecuting (signing) parties present/admit execution of a document though it is attested by aNotary, unless the text of the power specifically excludes. Such powers.

Foreign Power of Attorney should be got stamped by the Collector alter its receipt in India withinprescribed time of 3 months.

Registration of Power of Attorney authenticates the deed of Power of Attorney

Power of Attorney shall be attested by two or more adult independent witnesses who are ofsound mind.

If a Power of Attorney is in respect of an immovable property of value more than Rs100, it mustbe registered.

Stamp Duty

Power of Attorney is chargeable to stamp duty under Article 48 of Schedule 1 to the IndianStamp act subject to state intervention if any.

Points to remember


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The general rule of Power of Attorney is that it should be strictly construed unless an expresspower is conferred on an agent to enter into contracts of guarantees on behalf of his principal orto execute or negotiate negotiable instruments for his principal jointly with others.

An agent cannot, by his acts, bind the principal to a larger extent than he is empowered to dounder the Power of Attorney.

Fraud by the power agent does not bind the principal. He cannot be sued or otherwise heldresponsible for fraud by the agent.

If the power does not authorize the agent to carry on a business except with limitations, any actdone by him in excess of such power will not bind the principal. For example, power to disposeoff property does not confer a power to mortgage the property.

Power to manage immoveable property cannot permit principal's ornaments which are amoveable property.

Model forms

GENERAL POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS that, I, RP slolate GR, rlo.., dohereby appoint Mr. PK, Advocate, slo Late SN rlo as my attorney andauthorise them to do all or any of the thing jointly or severally on my behalf.

That the said attorney shall demand, collect and receive in my name and on my behalf all debt,advances, loans advantages and other claims due to me . They are further empowered to takeall lawful proceedings and means to recover and receive the said loans advances and debts etc.They are further empowered to prosecute and defend to lawful action suits and claims and referthe matter to arbitrators, File the suit, compromise the suit and execute such instruments asthey think proper and necessary.

The said attorneys are empowered to borrow such loans and advances as they think proper in

my interest and furnish security of movable and immovable property on such terms andconditions as they think proper. The said attorneys are empowered to sell, exchange, surrender,transfer, lease or depose of any houses and buildings, lands, etc, which belong to me in suchmanner as they think proper and expedient.

The said attorneys are empowered to invest my monies as the think proper and expedient.

The said attorneys are empowered jointly and severally to deposit the money they collect onmy behalf in my bank account.

The said attorneys are authorised to draw, accept, endorse, negotiate, retire, and pay any billsof exchange, promissory note cheques, and other negotiable instruments, as they think proper

and expedient in my interest

The said attorneys are authorised to operate to my bank account, close the bank account, andopen bank account in some other bank as they think proper and expedient in my interest.

The said attorneys are authorised to let out or to give on lease my properties to the personsthey think proper, recover rent, already due, and recover the rent as may due in future from time


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to tirne. They are further authorised to sue the persons for recovery to rent, to compromise thesue and do all other works concerning with it.

The said attorneys are authorised to take the property on lease and execute lease deed for andon my behalf as my attorneys.

They are authorised to call upon shares belonging to me and attend the meetings of anycompany of which I am the shareholder.The said attorneys are authorised to appoint, or remove the agents to look after my estate and

fix the salaries etc. of the agent on my behalf.

The said attorneys are authorised to do generally of all such things and acts as may attorneysor attorney, which shall be binding on me.

IN WITNESS WHEREOF I have signed this deed of Power of Attorney in the presence of thefollowingWitnesses: Signature.1..2.

SPECIALPOWER OF ATIORNEY FOR A COURT CASE

BYTHIS POWER OF ATTORNEY I,. son of residing at. .plaintiff incivil suit No of ..hereinafter referred to as the said suit, pending in the court of the.. hereby nominate, constitute and appoint Shr.ison of Shri.................. resident of as my attorney for me, in my name and on my behalf to do orexecute all or any of the following acts or things in connection with the said suit:

1. To represent me before the said court or in any other, where the said suit is transferredin connection with the said suit.

2. To engage or appoint any solicitor, counsel, advocate, pleader or lawyer to conduct thesaid suit.

3. To prosecute the said suit and proceedings, to sign and verify ad plaints, pleadings,

applications, petitions or documents before the court and to deposit, withdraw andreceive document and any money or moneys from the court or from the defendant eitherin execution of the decree or otherwise and sign and deliver proper receipts for me anddischarges for the same.

4. To apply for inspection and inspect documents and records, to obtain copies ofdocuments and papers.

5. To compromise the suit in such manner as the said attorney shall think fit.6. To do generally all other acts and things for the conduct of the said suit as I could have

done, if I was personally present.

And I hereby for myself, my heirs, executors, administrators and legal representatives, ratify andconfirm and agree to ratify and confirm whatsoever our said attorney shall do or purport to do by

virtue of these presents.

IN WITNESS WHEREOF, I the said.. has hereunto set and subscribed my handthis..day of 2000.

Signed and delivered by the within namedWITNESSES;


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Roots Institute of Financial Markets (RIFM)

Every effort has been made to avoid any errors or omission in this book. In spite of this error

may creep in. Any mistake, error or discrepancy noted may be brought to our notice, which,

shall be taken care of in the next printing. It is notified that neither the publisher nor the authoror seller will be responsible for any damage or loss of action to anyone of any kind, in any

manner, therefrom.

ROOTS Institute of Financial Markets, its directors, author(s), or any other persons involved in

the preparation of this publication expressly disclaim all and any contractual, tortuous, or other

form of liability to any person (purchaser of this publication or not) in respect of the publication

and any consequences arising from its use, including any omission made, by any person in

reliance upon the whole or any part of the contents of this publication.

No person should act on the basis of the material contained in the publication without

considering and taking professional advice.


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