Sensys Blog.

Who is minor?

Section 3 of the majority act provides that – “

Every person domiciled in India shall attain the age of majority on his completing the age of eighteen years and not before.”

In computing the age of any person, the day on which he was born is to be included as a whole day and he shall be deemed to have attained majority at the beginning of the eighteenth anniversary. (w.e.f. 16-12-1999).

Role of minor in business:

1. Section 11 of Indian contract act – who are competent to contract – Every person is competent to contract who is of the age of majority according to the law to which he is subject, and who is of sound mind and is not disqualified from contracting by any law to which he is subject. Thus, a minor is not capable of entering into a contract. This principle is based on –
   1. Law must protect minor against their own inexperience – thus, agreement with minors are void and unoperational.
   2. Law should not cause hardship to an adult who deals fairly with minors.

Effect of a contract done with minor:

• A minor can not make an agreement operational after attaining majority.
• However, a minor can be a beneficiary under the contract.
• A minor can not be held liable under the contract even when the minor has misrepresented his age to induce other parties to enter into the contract.
• There can not be specific performance of the contract against the minor.
• A contract entered into by guardian or manager on the minor’s behalf can be specifically enforced if – the contract is within his authority and the same for the benefit of a minor.

2. Section – 184 of Indian Contract Act – minor as an agent – As between the principal and third persons, any person may become an agent, but no person who is not of the age of majority and of sound mind can become agent, so as to be responsible to his principal according to the provisions in that behalf therein contained.

Thus, An agent merely a connecting link, a minor can be appointed as an agent. But he can not personally liable for any acts done as an agent. However, the principle will be liable to the third persons for the acts of the minor’s agent which he does in the ordinary course of dealings.

3. Section – 30 of Indian Partnership Act – minor as a partner – A person who is a minor according to the law to which he is subject may not be a partner in a firm, but, with the consent of all the partners, for the time being, he may be admitted to the benefits of a partnership.

Thus, a minor can be admitted only for the benefits of the firm with the consent of all others partners.

4. Section – 21 of Trade Unions Act – Any person who has attained the age of fifteen years may be a member of a registered Trade Union subject to any rules of the Trade Union to the contrary, and may, subject as aforesaid, enjoy all the rights of a member and execute all instruments and give all acquittances necessary to be executed or given under the rules.

5. Minor as director of a company – For being appointed as a director in any company that person should possess a valid DIN (Director Identification Number) and for obtaining DIN, he/she shall have obtained majority. Therefore a minor can neither hold DIN nor can be a director in an Indian Company.

6. Minor as a shareholder of a company – The company act 2013 however permits for holding the shares by the minor subject to the consent of his/ her guardian. Also, the shares in a company can be held by the minor if such shares are gifted to him by other persons.

Thus, minors may be admitted as partners/Shareholders with the parent acting as the guardian. However they may not be admitted as Directors/designated partners as for becoming Director/Designated partner, DIN is required and DIN is not given to Minors.

Corporatization of business:

The conversion of a traditional form of business into neo corporate form is commonly known as corporatization. The concept of the corporate form of business can be explained as below:

Transfer of assets and/or liabilities in case of corporatization:

1. Manner of transfer of business (i.e. Business Transfer Agreement): A sale or transfer, as the case may be, the agreement may be entered into. You may transfer only those assets and liabilities. This may be done at book value as per the balance sheet prepared on the date of transfer. Stamp duty for this purpose differs from state to state and ranging between Rs.200/- to Rs.500/- for Business Transfer Agreement (BTA)
2. Transfer of OD and/or loan a/c: The loan can be shifted from proprietor/Partnership to LLP/Company. In the case of family operated business, the same person/persons will become the person–in–charge of the new entity, this is administrative work may be communicated to the bank for fresh documentation. No stamp duty is required to an existing collateral mortgage if any. Only a guarantee deed in favor of a new entity would be enough to shift the loan. However, banks may negotiate the loan freshly if the risk factor in case of corporatization increases to the bank.
3. Transfer of input tax credit: -We have to apply to the GST department in case of business transfer for transferring the input tax credit. This can be done by methods:
   2. Electronic Transfer (Form GST ITC-02): As per Section 18(3) of the CGST and SGST Acts, where there is a change in the constitution of a registered person on account of the sale, merger, demerger, amalgamation, lease, or transfer of the business with the specific provisions for transfer of liabilities, the said registered person shall be allowed to transfer the input tax credit which remains un-utilized in his electronic credit ledger to such sold, merged, demerged, amalgamated, leased or transferred business in the manner prescribed in the CGST / SGST Rules, 2017 by declaring the same, electronically, on the common portal in Form GST ITC-02.
   3. Transfer by invoice: Alternatively a tax invoice from the existing GSTIN can be made for the sale of the stock available with the dealer to the new GSTIN. This may do in case there is no specific provision of transfer of liabilities. This will be unfavorable in case of GST rates in recent times are revised downward as an invoice in the E-way portal is possible only with the latest applicable GST rates and not at the rates at which items are purchased with. However, this method may have some practical difficulties while preparing E way for the transfer of stock.
4. Income tax calculation in case of corporatization:

As per Section 47(xiv) of the Income-tax Act, the following transaction is not regarded as transfer and hence not subject to capital gains:

Sole Proprietor converted to corporate business:

Where a sole proprietary concern is succeeded by a company in the business carried on by it as a result of which the sole proprietary concern sells or otherwise transfers any capital asset or intangible asset to the company :

Provided that—

(a)   all the assets and liabilities of the sole proprietary concern relating to the business immediately before the succession become the assets and liabilities of the company;

(b)   the shareholding of the sole proprietor in the company is not less than fifty percent of the total voting power in the company and his shareholding continues to remain as such for a period of five years from the date of the succession; and

(c)   the sole proprietor does not receive any consideration or benefit, directly or indirectly, in any form or manner, other than by way of allotment of shares in the company;

(xiii) Partnership Firm converted to the corporate organization:

Any transfer of a capital asset or intangible asset by a firm to a company as a result of a succession of the firm by a company in the business carried on by the firm,

Provided that—

(a)  all the assets and liabilities of the firm or of the association of persons or body of individuals relating to the business immediately before the succession become the assets and liabilities of the company;

(b)  all the partners of the firm immediately before the succession become the shareholders of the company in the same proportion in which their capital accounts stood in the books of the firm on the date of the succession;

(c)   the partners of the firm do not receive any consideration or benefit, directly or indirectly, in any form or manner, other than by way of allotment of shares in the company; and

(d)   the aggregate of the shareholding in the company of the partners of the firm is not less than fifty percent of the total voting power in the company and their shareholding continues to be as such for a period of five years from the date of the succession;

Meaning of non-for-profit entities:

Not-for-Profit entities and small educational, medical institutions or hospitals, etc. existing solely for educational and/or philanthropic intentions enjoy tax exemption subject to meeting certain conditions These organizations are highly dependent on donations, as it is the primary source of funding for their activities

Meaning of corpus fund:

The corpus is never meant to be utilized and remains parked separately. Income accruing on such corpus funds is generally utilized towards the organization’s activities.

Taxation of corpus fund in light of FB 2021 amendment:

Existing tax treatment: Donations earmarked as Corpus are excluded from income for the year without any further compliance requirement and/or conditions. There are restrictions regarding the utilization of such funds. It does not matter whether corpus funds are used for activities or for making investments.

The issue in existing treatment: The above treatment leads to double deduction in the case of such organizations. For instance, an NGO received a corpus fund and construct a building out of that fund. Now, NGO for monies expended in the construction of the building would claim deduction two times, firstly at the time of construction of building and utilization of corpus fund for construction of building as monies expended in the construction of the building and secondly, as depreciation on the so constructed building. The Finance Bill, 2021 (the ‘FB’) has proposed significant changes in the provisions governing such institutions to eliminate the possibility of unintended double deduction / double-counting while calculating application or accumulation of funds

Thus, due to the proposed amendment, Corpus contributions received after 1 April 2021 are to be mandatorily invested in a specified manner by such qualifying organizations. This is a pre-requisite to avail tax exemption in respect of Corpus contributions.

Some of the key features of the proposed changes are:

These changes will affect corpus donations received after 1 April 2021. Thus, Corpus donations received up to 31 March 2021 are not required to be statutorily invested and can be used in any manner whatsoever.

Difference between Fresh Claim and Revision in the claim:

Revision in return and amendment in return:

A revised return is not for an amendment in return. In case the assessee deliberately omitted the particulars of income and made wrong statements in the original return, then the revised return will not serve the purpose.

In the above circumstances, the Assessing Officer has the power to treat the revised return as non-est.

It is pertinent to mention here that Assessing Officer is competent to reject the revised return only during the course of assessment proceedings. The consideration of the revised return is part of a composite exercise of an assessment and the Assessing Officer, therefore, can reject or accept the revised return during the assessment proceeding.

Fresh claim in revised return:

Section 139(5) is applicable when there is a “discovery of any omission” or “wrong statement” by the assessee in the original return of income. The word ‘discovers’ used in section 139(5) connotes discovery of some omission or wrong statement in return of income of which the assessee was not aware at the time of filing the original return of income.

The provisions of section 139(5) contemplated that the assessee could file the revised return:

• when the assessee ‘discovered any omission or any wrong statement.

The word ‘omission’ means an unintentional act or include performing what the law required; the word ‘wrong statement’ includes in its scope ‘a statement which was not observant to the knowledge of the person making it; and the word ‘discover’ would take in its ambit ‘that which was hidden, concealed or unknown’.

• If the assessee deliberately omitted the particulars of income and made wrong statements in the original return, the revised return would not bring the case within the scope of section 139(5).
• Further, the requirement is that this omission and wrong statement in the original return must be due to bona fide inadvertence or mistake on the part of the assessee on the basis of evolution or material on record.

Conclusion:

It was therefore, necessary to ascertain as to whether there was any wrong statement made in the return of income originally filed by the assessee and whether the assessee was not aware of such wrong statement at the time of filing the original return. For this purpose, the claim made by the assessee in revised return of income, vis-à-vis the return of income filed originally to be examined on merit to ascertain whether there was any wrong statement made in the original return of income of which the assessee was not aware at the time of filing the original return of income.

Up-to assessment year 2020-21:

There was no upper cap on the employer’s contribution to the various employee welfare schemes. Separate provisions were available in the Income-tax Act to tax such contribution, i.e.,

1. Superannuation fund was taxable as perquisite under Section 17(2)(vii)in the hands of the employee only if such contribution exceeded Rs. 1,50,000 during the year.
2. The employer’s contribution to the NPS is taxable in the hands of the employee and included in his salary income. However, a corresponding deduction is allowed to the employee for such contribution to the extent of the lower of the amount contributed by the employer to NPS, or 14% of salary in case of Central Government employee or 10% of salary in case of any other employee.
3. Employer’s contribution, exceeding 12% of salary, in EPF account is charged to tax in the hands of employees.

Finance Act 2020:

The substituted Section 17(2)(vii) introduce an overall cap on the maximum contribution an employer can make towards Recognized Provident Fund (PF), National Pension Scheme (NPS), and Superannuation Fund (hereinafter referred to as ’employee’s welfare Funds’).

This clause provides that the aggregate contribution to employee’s welfare funds in excess of Rs. 750,000 shall be taxable as perquisite in the hands of the employees. However, the existing provisions relating to the contribution to NPS and PF remain the same.

Reason for amendment – to curb the benefits of high-income employees:

All the employee’s welfare funds enjoy the EEE status (Exempt-Exempt-Exempt) whereby no tax is levied at the time of contribution, accretion, and withdrawal if the same is within a certain limit. Thus, the employees with high salary income were obtaining the undue advantage of this taxation regime by designing their salary package in a manner in which a substantial part of the salary is paid by the employer by way of contribution to these funds and, consequently, that portion of salary does not suffer tax at any point.

Manner of computation:

A new sub-clause (viia) has also been inserted to Section 17(2) that the annual accretion by way of interest, dividend or any other amount of similar nature during the previous year, relating to contribution in excess of Rs. 750,000, shall also be taxed as a perquisite in the hands of the employee. Hence, the CBDT has inserted a new Rule 3B to prescribe the manner for computation of such annual accretion by giving the following formula in this regard:

Taxable perquisite under section 17(2)(viia) for the current previous year , i.e., TP = (PC/2)*R + (PC1+ TP1)*R

Where,

Where, PC1+ TP1 > aggregate of balance to the credit of the specified fund or scheme on the first day of the current previous year = the amount in excess of the aggregate of amounts of the said balance shall be ignored to compute the aggregate of amounts of TP1 and PC1.

To put in simple terms,

The perquisites arising from the annual accretion on the employer’s contribution to welfare funds shall be the average return (I/Favg) on the sum of:

If the sum of (b) and (c) exceeds the opening balance of the fund, it shall be restricted to such opening balance.