The forfeiture of shares refers to loosing the right in the shares by the Share Holders for non-payment of call money or balance amount. Any action in this regard has tax implications for the company forfeiting the shares. Moreover, it should be carefully planned and executed with due compliance and consideration of the provisions of Companies Act.

Regulation  28
If a member fails to pay any call, or installment of a call, on the day appointed for payment thereof, the Board may, at any time thereafter during such time as any part of the call or installment remains unpaid, serve a notice on him requiring payment of so much of the call or installment as is unpaid, together with any interest which may have accrued. 

Regulation 29 
The notice aforesaid shall mention -  
(a) Name a further day (not being earlier than the expiry of fourteen days from the date of service of the notice) on or before which the payment required by the notice is to be made; and 

(b) State that, in the event of non-payment on or before the day so named, the shares in respect of which the call was made will be liable to be forfeited. 

Regulation  30        
If the requirements of any such notice as aforesaid are not complied with, any share in respect of which the notice has been given may, at any time thereafter, before the payment required by the notice has been made, be forfeited by a resolution of the Board to that effect.

Regulation 31         
A forfeited share may be sold or otherwise disposed of on such terms and in such manner as the Board thinks fit. At any time before a sale or disposal as aforesaid, the Board may cancel the forfeiture on such terms as it thinks

Procedure For Forfeiture Of Shares
1. A forfeiture of any share must be done on the authority of the Board of Directors, or of committee thereof, if authorised by articles of associations for the purpose, by its resolution. The resolution should provide for a notice to be given to the shareholder concerned before the forfeiture is actually effected in pursuance of the resolution, requiring payment of so much of the calls as is unpaid, together with any interest which may have accrued.

2. The notice threatening forfeiture in pursuance of the Board Resolution must be given in accordance with the provisions of the articles. The notice aforesaid shall:

* name a further day (not being earlier than the expiry of 14 days from the date of service of notice) on or before which the payment required by the notice is to be made; and
* state that, in the event of non-payment on or before the day so named, the shares in respect of which the call was made will be liable to be forfeited.

3. The Notice Must:
* specify clearly the amount payable on account of unpaid call money as well as interest accrued , if any, and other expenses.

* mentioned the day on or before which the amount specified ought to be paid, not being earlier than 14 days from the date of service of notice

* contain an unambiguous statement to the effect that in the effect of failure to pay the specified amount latest on the appointed day, the shares in respect of which the amount remain un paid would be liable to be forfeited.

4. The notice threatening forfeiture as contemplated in regulation must be served in accordance with the provisions of section 20 of the Companies Act, 2013.

5. If the call money is not paid in response to such notice threatening forfeiture, the company may, at any time thereafter, before the payment required by the notice has been made, forfeit the shares by a resolution of the Board to the effect.

6. It is common practice to publish a notice of forfeiture in newspapers so that the members of the public are made aware of the forfeiture and cautioned not to deal in the forfeited shares.

7. A further notice after the shares are forfeited is not necessary. However, it is advisable and a common practice to give a notice of the shares having been forfeited to the concerned shareholders by registered post.

8. Regulation 33     
* A duly verified declaration in writing that the declarant is a director, the manager or the secretary, of the company, and that a share in the company has been duly forfeited on a date stated in the declaration, shall be conclusive evidence of the facts therein stated as against all persons claiming to be entitled to the share. 

*The company may receive the consideration, if any, given for the share on any sale or disposal thereof and may execute a transfer of the share in favor of the person to whom the share is sold or disposed of.

* The transferee shall thereupon be registered as the holder of the share.

* The transferee shall not be bound to see to the application of the purchase money, if any, nor shall his title to the share be affected by any irregularity or invalidity in the proceedings in reference to the forfeiture, sale or disposal of the share.

9. The fact of the forfeiture will be entered in the Register of Members and the name of the concerned shareholder as a member of the company will be deleted from the register.

10. Notify the Stock Exchange at which the securities of the Company are listed about such forfeiture of shares.

Time within which shares are to be made fully paid-up

(i) As per the SEBI Guidelines, capital issues henceforth have to be made fully paid-up within 12 months.

(ii) Where the total issue size exceeds Rs. 500 crores:-
(a) It is not necessary to make the capital issue fully paid-up within 12 months.
(b) The amount to be called up on application, allotment and on various calls should not each exceed 25 per cent of the total quantum of the issue.
(c) The company should make arrangements for monitoring of the use of proceeds of the issue by one of the financial institutions.
(d) A copy of the monitoring report must be filed with SEBI by the financial institution and by the company for the purpose of record.

Forfeiture Notice & Resolutions 

Notice for Board Meeting 

Notice is hereby given that the Board of directors of the company at their meeting held on …………… have forfeited …………… Equity Shares of Rs. 10 each on account of non-payment of amount due on First Call from the concerned shareholders.

You are advised that please do not transact on any partly paid up shares and return the same to the company for record. Company have also canceled all such shares after forfeiture. If anybody transact in those forfeited shares the company shall not be responsible to such transactions.

By Order of the Board
Date: ……………….

Declaration in respect of forfeiture of shares
I, SKJ Director of ABC Ltd. solemnly and sincerely declare that:—

1. The persons whose names and addresses are given in Annexure 1 were on ....... the registered shareholder of the Company (hereinafter referred to as "defaulting Equity Shareholders")

2. On ................ a call for unpaid allotment money on shares to be paid on or before ....... was made and accordingly notice of such call was duly given to the defaulting Equity Shareholder.

3. On ........……. reminder letters to pay the allotment money were sent to all the defaulting shareholders who failed to pay the allotment money before the due date.

4. The defaulting Equity Shareholders having failed to pay the call by the appointed day notices in writing were given to them on followed by a reminder dated ...... informing them that on their failure to pay the allotment money their shares would be forfeited.

5. The defaulting Equity Shareholders having failed to pay such unpaid allotment money, their shares were duly forfeited by the Board of directors at its meeting held on .......... and notices of such forfeiture were given to the defaulting Equity shareholders.

6. The Company is now entitled by Articles .......... of its Articles of Association to sell such forfeited shares. AND as per Article........ of  Articles of Association of the Company, I make this solemn declaration conscientiously having the same to be true.

Board Resolution for forfeiture of Shares -    
RESOLVED THAT pursuant to Article No…. of the Articles of Association of the company and other applicable provisions of the Companies Act, 2013, if any, consent of the Board of Directors of the Company be and is hereby accorded for forfeiture of ………….. partly paid up Equity Share of Rs. 10 each on which total Rs. ……………. at the rate of Rs. …. per share remains unpaid on account of Share Capital & Share Premium account due to failure to pay the balance amount of allotment money due thereon as per list of partly paid up shares placed before the Board, duly initialed by the Chairman for the purpose of identification, reproduced hereunder:

Folio NO.                    No. of Shares               Name of Shareholder

“RESOLVED FURTHER THAT the Share Transfer Agent M/s ……………… be and is hereby authorised to make entries in the register of members for giving effect to forfeiture of all the ……………….. partly paid up Shares.”

 “RESOLVED FURTHER THAT Shri ………. and Shri…………DSJ, Directors of the Company be and are hereby severally and / or jointly authorised to inform to the Stock Exchanges, SEBI and all such authorities about the decision of the Board for forfeiture of ………………. partly paid up equity shares of the company and to do all such acts, deeds and things as may be necessary, expedient and desirable to give effect to the above resolution.”

Forfeiture & Income Tax Law:
Income Tax Act does not provide any provision for dealing with forfeiture of share or debenture issue application money. Share application money or money received for debentures are common source of money for companies. It happens many times that the share applicant does not subscribe to shares after initial application for issue of shares or debentures. In that case the companies may forfeit the initial share or debenture money receipt.

Majority decision of tribunal and courts have suggested that such forfeiture of money by company is not taxable as it is capital receipt . Following three judgments are analysed DCIT vs Brijlaxmi Leasing and Finance Ltd. (2008) 12 DTR 150 Deepak Fertilisers and Petrochemicals Corpn. Ltd. vs DCIT 116 ITD 372 Prism Cement Ltd. vs JCIT 285 ITR 43 ITAT, of Mumbai 1. Deepak Fertilisers and Petrochemicals Corpn. Ltd. vs DCIT 116 ITD 372 

The next issue relates to the addition on account of forfeiture of the application money received against issue of partly convertible debentures. The assessee had issued partly convertible debentures in Financial Year 1989-90 against which it received application money. However, after the allotment the applicants could not make the payments as per the terms of the issued debentures. In the Assessment Year 1999 2000, the assessee forfeited the sum of Rs. 87.22 lakhs on account of non-payment of call moneys and credited the sum to the Profit and Loss A/c. Similarly, the sum of Rs. 6,36,949/- was forfeited in Assessment Year 2000-01.            

This amount was not offered for taxation by the assessee. In the course of assessment proceedings the assessee was asked to show cause why such amount should not be treated as income in view of the Supreme Court judgment in the case of K.V. Sundaram Iyengar and Sons Ltd. 222 ITR 344. In response to the same, it was submitted before the Assessing Officer that the said judgment is applicable only when the money was initially received from the customers as trading receipt i.e. during the course of carrying on its business. Therefore, the said judgment cannot be applied where the money is not received as a trading receipt. Since, the forfeiture is related to debentures, the amount received was capital in nature and therefore it cannot be treated as Revenue receipt when such amount is forfeited.  

Not satisfied with the explanation of the assessee, the Assessing Officer made the additions in computing the total income of the above assessment years. Held as under: Similar view has been taken by the Tribunal in the case of Prism Cement Ltd. 101 ITD 103 (Mum) In that case, the company issued certain non-convertible debentures and some of which were forfeited due to non-payment of call money. The Bench held that forfeiture amounted to capital receipt and the same could not be charged to tax.

This case was decided after considering the Supreme Court judgment in the case of T.V. Sunderam Iyer and Sons Ltd.(supra) The facts of the present case are similar to the facts before the Tribunal in the case of Prism Cement Ltd.. Therefore, following the same, the orders of the learned CIT(A) are upheld.2. DCIT vs Brijlaxmi Leasing and Finance Ltd. Download I.T.A. No. 515/Ahd/200, Assessment year 1999-2000 The facts The brief facts of the case are that the assessee-company made public issue of shares against which it received share application money from the shareholders.   

The allotment money of these shares was to be paid according to the terms of offer of the public issue. Some of the shareholders had not paid the allotment money as stipulated within the time allowed as per the terms of offer and further time offered by the assessee. Subsequently, since no payment against allotment money were received, the assessee forfeited the shares and credited the sum of Rs.1, 23, 31,000 to the capital reserve account. The Tribunal held as under we have heard the rival submissions and per used the orders of the lower authorities and the material available on record. In the instant case the assessee was to receive call money in respect of share as per the terms of prospectus and the allotment letters, but the same were not received from some of the shareholders. In this case, the share application money was forfeited as per the terms of the prospectus. The above facts are not in dispute.        

The short question which falls for our consideration is whether the above forfeiture amount is taxable under the provisions of the Income-tax Act, 1961, or not. The learned Departmental representative vehemently placed reliance on the decision of the Hon’ble Supreme Court in the case of CIT v. T. V. Sundaram Iyengar and Sons Ltd. [1996] 222 ITR 344 for his contention that forfeited amount is taxable as revenue receipt. However, we find that the facts of the case that were before the Hon’ble Supreme Court are distinguishable from the facts before us. In the instant case no security deposit or advance received for performance of the contract was forfeited. In fact, the amount received was against issue of shares and issue of shares is not the business of the assessee. The same cannot be treated as a receipt in the normal course of the business of the assessee which is engaged in financing and leasing business. Further, the assessee has also not credited the forfeited amount in its profit and loss account but in contradistinction to that it has credited the same in capital reserve account.           

In the above facts, in our considered opinion the decision of the Tribunal in the case of Prism Cement Ltd. v. Joint CIT [2006] 285 ITR (AT) 43; [2006] 103 TTJ (Mum) 63 is more applicable which was rendered by the Tribunal after duly considering the aforesaid decision of the Hon’ble Supreme Court in the case of CIT v. T. V. Sundaram Iyengar and Sons Ltd. [1996] 222 ITR 344. The Tribunal in the said case has held as under (page 54 of 285 ITR (AT)): “15. Thus, the earnest money or an advance amount received on account of issuance of NCDs, if forfeited on account of non-payment of call money, the loan liability would only convert into a capital receipt. It would not assume the character of revenue receipt or business receipt because NCDs were not issued in the course of regular business of the assessee as evident from the facts of the case. The assessee’s main business is of cement and it was in the process of set up of cement manufacturing plant at Satna during the impugned assessment year. In these circumstances, we are constrained to hold that the amount received by the assessee in lieu of issuance of NCDs which were forfeited later on account of non-payment of call money assumes the character of capital receipt which earlier was shown as a loan liability in the books of account of the assessee.

If we consider this receipt to be business receipts even then it would not be taxable to tax under the provisions of section 41(1) of the Act, inasmuch as there was no allowance or deduction of this liability in the earlier years.” In view of the above, respectfully following the aforesaid decision of the Mumbai Bench of the Tribunal we find no reason to interfere with the order of the learned Commissioner of Income-tax (Appeals). It is confirmed and the ground of appeal of the Revenue is dismissed. In the result, the appeal of the Revenue is dismissed.  

The order signed, dated and pronounced in the open court on February 29, 2008. 3. Prism Cement Ltd. vs JCIT 285 ITR 43 [ITAT, of Mumbai in] the assessee has issued 38 lakhs debentures, 13.5 per cent non-convertible debentures of Rs. 150 each. During the previous years relevant to the impugned assessment year, 62,250 non-convertible debentures (NCDs) were forfeited due to non-payment of call money. This can be re-issued at the option of the assessee. On account of forfeiture of debentures, the amount paid earlier on such debentures have been written back. In “Schedule D” of the Audited Accounts, the assessee credited an amount of Rs. 14.19 lakhs being the amount written back on forfeiture of debentures and set it off against the expenditure of Rs. 6,482.59 lakhs.

According to the Assessing Officer, though the commercial production had not been commenced by 31-3-1993 the monies were borrowed through non-convertible debentures for the purpose of business. As NCD’s holders defaulted in making payment of the call money, they lost the right to retrieve the amount paid and the forfeited NCDs can be re-issued upon the option of the assessee only. Thus, the benefit has been derived by the assessee-company in monetary terms and the same was liable to be taxed as income of the assessee. The Tribunal Held as under Thus, the earnest money or an advance amount received on account issuance of NCDs, if forfeited on account of nonpayment of call money, the loan liability  would only convert into a capital receipt. It would not assume a character of revenue receipt or business receipt because NCDs were not issued in the course of regular business of the assessee as evident from the facts of the case.

Assessee’s main business is of cement and it was in the process of set up of cement manufacturing plant at Satna during the impugned assessment year. In these circumstances, we are constrained to hold that the amount received by the assessee in lieu of issuance of NCDs which were forfeited later on account of non-payment of call money assumes a character of capital receipt which earlier was shown as a loan liability in the books of account of the assessee. If we consider this receipt to be a business receipts even then it would not be taxable to tax under the provisions of section 41(1) of the Act, inasmuch as there was no allowance or deduction of this liability in the earlier years. We also do not find any provision in this Act according to which this type of receipts are chargeable to tax. We, therefore, are of the considered view that the revenue was not justified in treating this receipt as revenue receipt. We therefore, set aside the order of CIT(A) and delete the addition. In the result, the appeal of the assessee is allowed. This order is announced in the open court on this 23rd day of March, 2006.

Income Tax Law & High Court Judgments – Forfeiture       
Forfeiture of share application money gives rise to a short-term capital loss

The assessee company applied for allotment of shares in a public issue and paid share-application money. A proportionate allotment was done and the assessee was called upon to pay the balance sum. The Company failed to remit the balance allotment money, due to which the share-application money was forfeited. The assessee’s claim of short-term capital loss on account of the forfeiture of the share application money was rejected by the AO and the CIT (A). The ITAT allowed the claim of the assessee against which the Department filed an appeal to the HC.         

The HC held that consequent to the assessee’s default in not paying the balance money on allotment, its right in the shares stood extinguished on account of the forfeiture. The HC also held that the loss suffered by the assessee on account of non-recovery of share
application money, consequent to the forfeiture of its rights in the shares, was within the scope and ambit of transfer and hence the ITAT was justified in holding that it would amount to short-term capital loss to the assessee. 

DCIT v. BPL Sanyo Finance Ltd. 312 ITR 63 (Kar) Loan to subsidiary company written off is not an allowable expenditure. The assessee company, solely engaged in the business of mining, gave a loan to its wholly owned subsidiary, also engaged in the same business, for the purpose of constructing a jetty. In the following years, the subsidiary company suffered heavy losses and was not in a position to repay the loan. In the relevant assessment year, the assessee accepted a sum of money as full and final settlement of the loan and the balance amount was written off. The assessee claimed a deduction for the said sum on the ground that the loss was incidental to its business, which claim was rejected by the AO and confirmed by the CIT(A) and the ITAT. The HC observed that there were concurrent findings given by the lower authorities that the assessee was not  into the business of money lending and that the money was lent to the subsidiary company to construct a jetty which was a capital asset of the subsidiary company.

Hence, the HC agreed with the conclusion of the lower authorities that the loan granted did not spring directly from the business of the assessee company nor was it  incidental to it. Salem Magnesite (P) Ltd. v. CIT, 180 Taxman 545 (Bom)        

In more than one decision forfeiture of share application/call money is held as a capital receipt. The Mumbai bench of ITAT in dept appeal in Deputy Commissioner of Income-tax Vs. Deepak Fertilizers and Petrochemicals Corporation Ltd (304ITR AT 367) held that the amounts forfeited due to non-payment of call money could not be charged to tax. In this case the assessee had issued partly convertible debentures against which it received application money. However, after the allotment the applicants could not make the payments as per the terms of the issued debentures.          

The Ahmedabad bench of ITAT in Deputy Commissioner of Income-tax Vs. Brijlaxmi Leasing and Finance Ltd. (309ITR AT 211) held that the share application which had been forfeited as per the terms of the prospectus could not be treated as a receipt in the normal course of the business of the assessee, which was engaged in financing and leasing business. In this case too the assessee had not credited the forfeited amount in its profit and loss account but had credited the amount to capital reserve account. The Mumbai bench of ITAT in Prism Cement Ltd. Vs. Joint Commissioner of Income-tax (285ITR AT 43/101ITD103) held that the amount received by the assessee in lieu of issuance of debentures which were forfeited later on account of non-payment of call money would assume the character of a capital receipt which was shown earlier as a loan liability in the books of account of the assessee.        

The Mumbai bench in Jaikishan Dadlani v. ITO (4SOT138) held that there is no, and there cannot be any, dispute about the position that the share capital forfeiture receipts are in the nature of capital receipts. More so the Tribunal held that share forfeiture account is also not available for distribution of dividend hence any lending of money out of such account would not be treated as deemed dividend either.        

Companies Act & Legal Pronouncements – Forfeiture          
* The shares can be forfeited only of non-payment of calls and not for any other debt due from a member. Non-payment of calls is not the only reason for which shares can be forfeited; a company by its articles may provide for other grounds also. [Naresh Chandra Sanyal v Calcutta Stock Exchange Association Ltd. (1971) 41 Comp Cas 51 (SC)].      

* Shares of the shareholders who were running business of the company, cannot be forfeited for losses suffered by company. [Dilbhajan Singh v New Samundri Transport Co. (P) Ltd. (1985) 58 Comp Cas 247 (P&H)].

* CLB (now Tribunal) cannot direct forfeiture of shares acquired in  violation of Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations. [Aska Investments (P) Ltd. v Grob Tea Co. Ltd. (2005) 61 SCL 134 (Cal)]. 

* Forfeiture will be affected by means of a Board resolution. Notice  precedent to forfeiture must be given to the defaulting shareholder. In the matter of forfeiture of shares, technicalities must be strictly observed. "The defect in the notice, though slight, invalidates it and is fatal to the forfeiture", as held by the Supreme Court in Public Passengers Service Ltd. v Khadar AIR 1966 SC 439. 

* In Sulochana Nathany v Hindustan Malleables & Forgings Ltd. (2001) CLC 448 (CLB), it was held that to constitute a valid forfeiture articles should give such powers to the directors. There should be notice of forfeiture and power should be exercised following the procedure prescribed in the articles.

* Further, articles generally provide that after the shares have been forfeited, an intimation is sent to the shareholder concerned and for sufficient reasons, the forfeiture may be annulled at the discretion of the Board of directors.Whether High Court has jurisdiction to entertain a shareholder's application questioning the action of company?
There is no provision in the Companies Act enabling the High Court to entertain an application relating to forfeiture of shares. [Tej Prakash Dangi v Coramandal Pharmaceuticals Ltd. (2001) 43 CLA 21 (AP)]. 

* The forfeiture must be bona fide and in the interest of a company. The power of forfeiture must be exercised bona fide and in the interest of the company. It should not be collusive or fraudulent. In Re. Esparto Trading Co. (1879) 12 Ch. D. 791, the forfeiture of shares was set aside, because it was found to have been carried out at the request of a shareholder to relieve him of liability. Such a forfeiture amounts to an abuse of power to forfeit and a fraud on other shareholders.    

* The Board may cancel the forfeiture of shares. In case defaulting shareholder approaches after forfeiture to cancel the forfeiture, the Board has been empowered to cancel such a forfeiture and claim due amount with interest.A forfeiture solemnly resolved upon and enforced for a long time, should not be set aside, nor can ex-member be reinstated without his consent. [Dhunraj Keshrimal v N. H. Wadia (1933) 57 ILR Bom 413].

* Once forfeiture has been enforced, the contract between the company and the member comes to an end; there can be no subsequent recession of forfeiture without the shareholder's consent. [Exchange Trust Ltd., In re (1903) 1 Ch. 711].        

* If shares were forfeited for non-payment of a call which was invalid, the company could withdraw forfeiture and issue a fresh call. [Bhagirath Spg. & Wvg. Co. Ltd. v Balaji Bhavani Power AIR 1930 Bom. 267].    

* Mere waiver, acquiescence or laches does not disentitle a shareholder from challenging forfeiture. [Sha Mulchand & Co. v Jawahar Mills Ltd. (1953) 23 Comp Cas 1 (SC)].
Original shareholders shall be liable for unpaid calls  

* In case of re-issue / disposal of forfeited shares, no allotment return to be filed. According the Companies Act, 2013, a company is required to file a return of allotment of shares and not for-reissued of forfeited shares. Allotment is, appropriation of the previously un appropriated capital of the company, of a certain number of shares to certain person. Till such allotment, the shares do not exist as such. However, in the case of forfeited shares, they had already been allotteed and they had come into existence at the time of their allotment and their forfeiture is a proof of their existence. Therefore, no return of allotment is required to be filed with ROC by a company at the time of re-issue or disposal of forfeited shares. [Sri Gopal Jalan and Co. V. Calcutta Stock Exchange Association ( 1963) 33 Com. Case 862: AIR 1964 SC 250].     

* Provision for payment of call in installments can be made only by a resolution of Board. [East & West Insurance Co. Ltd. v Kamla Jayantilal Mehta (1956) 26 Comp Cas 313 (Bom)]       

Finance Bill 2014 & Forfeiture    
The Finance Bill, 2014 presented by Mr. Arun Jaitley has reversed the tax provisions and hence forth with effect from 1 April, 2014. The receipts from the forfeiture will be subject to tax as any other business income. With this the tax position stands clarified in unambiguous terms.


Note: Information placed here in above is only for general perception. This may not reflect the latest status on law and may have changed in recent time. Please seek our professional opinion before applying the provision. Thanks.
Income Tax Weapon of Search & Seizure Becoming Stingless
By Shailendra Kumar

In general public perception, the Income Tax Department is better known for its 'Raids' on corporate houses or politicians, falling out of the 'good books' of the Government. Even if we leave aside the controversial 'use' of such powers by the Government of the day, the purposive object of Search, Seizure and Surveys is to 'google' undisclosed income or assets and gather evidence which is otherwise not collectible by using other means. So, in other words, whether it is a Survey or a Search & Seizure, it is merely a tool to detect undeclared income or black money and is certainly not an end in itself. Such invasive powers contrary to the doctrine of privacy have been vested in the Department (and also upheld by various courts), is to achieve the larger goal of being an effective deterrent against tax evasion. In simple words, the power to search & seize is theoretically expected to act like a hanging sword which would in turn ensure voluntary compliance with the tax laws. So, it is very clear that it is not a direct tool for revenue augmentation.

With this background, a soul-searching attempt was recently made at the Annual Conference of the CCITs & DGITs to study the effectiveness of the tool of Survey, Search & Seizure and also to find out how judiciously such a tool has so far been used by the Investigation Wing of the Department. As per the records, the last fiscal of 2013-14 witnessed 5300 Surveys, highest in the past four fiscals, that detected unreported income of as colossal a figure as Rs. 90,390.00 Crore from a mere Rs. 5,894.00 Crore detected in 2010-11. Such a figure may be attributed to one particular Survey in Delhi which alone accounted for as much as Rs. 71,200.00 Crore. For search & seizure, the peak was seen in 2011-12 when as many 620 corporate groups were raided and more than Rs. 15,000.00 Crore was surrendered under Section 132(4). During the last fiscal, about 570 Groups were searched and Rs. 10,800.00 Crore of undisclosed income was detected. In this backdrop let's take an eagle-like look at some of the findings of the introspective sessions of the revenue top brass:

A large number of searches are conducted in those cases where a search had earlier taken place. Let's hope the CBDT pans its attention to the eroding value of Search & Seizure tool which is globally seen as the most effective tool to sustain the fight against tax cheats.

TIOL Adds: This is an absolutely correct finding which goes to prove the growing ineffectiveness of the tool of Search & Seizure. When the objective is to be efficient deterrence to tax evasion, the glaring fact is that the earlier search operations had not deterred even the searched persons and they continued to entertain themselves by indulging in tax evasion. Therefore its impact on other taxpayers can be easily guesstimated. In too many cases, it is reliably learnt, the Department was forced to conduct raids at higher frequency. If that is the case, it certainly amounts to bad news for the fiscal policy makers who are pitted against hardened tax evaders entertaining no fear at all against tax evasion charges. But the larger question is - Do such statistics indicate that the Department has been conducting only routine raids to generate dumb statistics? Or, there are too many flaws in the investigation and filing of appraisal reports post-search?

Let's move to other findings to find solutions to such questions.

The final realisation of taxes in search cases did not constitute substantial portion of the overall tax mop-up, and therefore, the emphasis on voluntary admission of undisclosed income was misplaced.

TIOL Adds: This is indeed yet another legitimate observation coming out of the process of 'manthan' from inside! Although the CBDT does not maintain a separate head to keep track of revenue realised under this HEAD but knowledgeable sources indicate that it may not be even one percent of the total revenue collected. If that is so, all the tall claims made at the time of carrying out search and seizure operations and the consequential surrender of income are at best hollow. There may be thousands of raids and surrender of undisclosed income in thousands of crores but only a paltry sum finally gets translated into tangible addition to the Consolidated Fund of India. This also reveals the malady of excessive stress on admission of undisclosed income during searches. A series of flaws can be pointed out in the Investigation of evidence and filing of unrealistic appraisal reports. Such a malady also tells us the tale of retraction of undisclosed income surrendered at the time of search in a huge number of cases.

A large number of high-pitched assessments are done towards the end of time barring period without undertaking proper probe and without marshalling the evidence adequately.

TIOL Adds: This happens to be yet another honest admission of the disease ailing the system. In a number of cases, particularly transfer pricing disputes, when the time barring inches closer, a state of panic prevails in the field formations and in most cases, the officers' end up making high-pitched assessments. And when such demands are appealed against, they fall face down as they suffer acute dearth of 'legs' of evidence and materials on record. In case of petitions to higher judiciary, the High Courts do not spare them from serious indictment and there are also instances of costs being imposed (See a recent decision of Bombay High Court 2014-TIOL-1226-HC-MUM-IT). Earlier the courts used to ignore the Board and the higher revenue officials but it can quite often be seen that some observations are made about them. For instance, in this latest decision, the HC observed: "Why higher officials do not have the courage to take bold decisions?"

Large number of assessments made under Sections 158BD &
153C of the Income Tax Act, 1961 were quashed for failure to record reasons.

TIOL Adds: Such a finding evidently indicates the sorry state of affairs in the Department where all the efforts made by a part of the Department are set off for the failure like not paying attention to record reasons. When it comes to the levy of penalty, the quality of work is often found to be woefully stinking and poor. In many cases when cases are transferred to Central Charge, such a decision has been quashed for either not giving an opportunity of being heard or not complying with the dictum of passing speaking orders.

There are many more reasons pointing towards the prevailing malady which calls for an immediate remedy in terms of a new approach. The focus must shift from targeting disclosure to producing deterrence value. Extra efforts and monitoring are required in penalty cases, followed by launching of prosecution. To suggest a roadmap, the CBDT has set up two Committees headed by DGITs but what is badly required is what the Bombay High Court has rightly suggested - Top Revenue officers need to muster the required courage for bold decisions and timely action in case of dereliction of duty. This can be seen as half of the solution and the other half can be the recommendations from such committees. 

Finance Minister Presents Indian Budget For 2014-2015

The Current Economic Situation And The Challenges 

The state of world economy has been the most decisive factor affecting the fortunes of every developing country. The world economy has been witnessing a sliding trend in growth, from 3.9 percent in 2011 to 3.1 percent in 2012 and 3 percent in 2013.  The economic situation of major trading partners of India, who are also the major source of our foreign capital inflows, continues to be under stress. United States has just recovered from long recession, Euro zone, as a whole, is reporting a growth of 0.2 per cent, and China’s growth has also slowed down. The economic challenges faced by our country are common to all emerging economies. Despite these challenges, we have successfully navigated through this period of crisis.  Apart from embarking on the path of fiscal consolidation, the objectives of price stability, self sufficiency in food, reviving the growth cycle, enhancing investments, promoting manufacturing, encouraging exports, quickening the phase of implementation of projects and reducing a stress on important sectors were the goals set in 2012-13.

Deficit and Inflation

  • The fiscal deficit for 2013-14 contained at 4.6 percent.
  • The current account deficit projected to be at USD 45 billion in 2013-14 down from USD 88 billion in 2012-13.
  • Foreign exchange reserve to grow by USD 15 billion in this Financial Year
  • No more talk of down grade of Indian Economy by Rating Agencies.
  • Fiscal stability at the top of the Agenda.
  • Government and RBI have acted in tandem to bring down inflation.
  • WPI inflation down to 5.05 percent and core inflation down to 3.0 percent in January 2014.
  • Food inflation down to 6.2 percent from a high of 13.8 per cent.

  • Agricultural sector has performed remarkably well.
  • Food grain production estimated for the current year is 263 million tonnes compared to 255.36 million tonnes in 2012-13.

  • Agriculture export likely to cross USD 45 billion higher from USD 41 billion in 2012-13.
  • Agricultural credit to exceed the target of Rs. 7 lakh crores.
  • Agricultural GDP growth for the current year estimated at 4.6 percent compared to 4.0 percent in the last four years.
  • Savings rate at 30.1 percent and investment rate of 34.8 percent in 2012-13.

  • Government set up a Cabinate Committee on investment and the Project Monitoring Group to boost investment. By end of January 2014, Projects numbering 296 with an estimated project cost of Rs. 660,000 crore cleared.
Foreign Trade

  • Despite a decline in growth of global trade, our export have recovered sharply.

  • The estimated merchandise export is estimated to reach USD 326 billion indicating a growth rate of 6.3 percent in comparison to the previous year.

  •  The sluggish import is a matter of concern for manufacturing and domestic trade sector.
  • Due to deceleration in investment, the manufacturing sector has witnessed a sluggish growth.
  • The National Manufacturing Policy has set the goal of increasing the share of manufacturing in GDP to 25 percent and to create 100 million jobs over a decade.

  • 8 National Investment and Manufacturing Zones (NIMZ) along Delhi Mumbai Industrial Corridor (DMIC) have been announced. 9 Projects had been approved by the DMIC trust.
  • 3 more Industrial Corridors connecting Chennai and Bengaluru, Bengaluru and Mumbai & Amritsar and Kolkata are under different stages of preparatory works.
  • Additional capacities are being installed in major manufacturing industries.
  • Notification of a public procurement policy, establishing technology and common facility centres, and launching the Khadi Mark are steps taken to promote Micro Small and Medium Enterprises.

  • In 2012-13 and in nine months of the current financial year, 29, 350 MW of power capacity, 3, 928 Kms of National Highways, 39, 144 Kms of Rural Roads, 3,343 Kms of New Railway track and 217.5 milliion tonnes of capacity per annum in our ports have been created to give a big boost to infrastructure industries.

  • 19 Oil and Gas blocks were given out for exploration and 7 new Air ports are under construction.
  • Infrastructure debt funds have been promoted to provide finances for infrastructure Projects.
Exchange Rates

  • Rupee came under pressure following indications by US Federal Reserve of reduction in asset purchases in May 2013.
  • Government, RBI and SEBI undertook a number of measures to facilitate capital inflows and stablize the foreign exchange markets. As a result among emerging economy currencies rupee was least affected when actual reduction took place in December 2013.
GDP Growth

  • The GDP slow-down which began in 2011-12 reaching 4.4 percent in Q1 of 2013-14 from 7.5 percent in the corresponding period in 2011-12 has been controlled by numerous measures taken by the Government. Growth in the third and fourth quarter of the current year is expected to be 5.2 percent and that for the whole year has been estimated at 4.9 percent.
  • The declining fiscal deficit, stable Exchange Rate and reducing Current Account Deficit, moderation in inflation, increasing exports are reflection of a more stable economy today.
UPA’s record of Growth

  • In India growth is an imperative but sustainable and inclusive growth model must address the concerns of environment, inter generational equity, indebtedness etc.
  • Unparalleled record of growth in 10 years of UPA Government.
  • Production of food grains up from 213 million tonnes to 263 million tonnes, installed power capacity up to 2,34,600 MW from 1,12,700 MW, coal production 554 million tonnes from 361 million tonnes, 3,89,578 Kms of Rural Roads under PMGSY from 51,511 Kms, over a period of 10 years.
  • The expenditure on Health & Family Welfare has reached Rs. 36,322 crore from Rs. 7,248 ten years ago.
  • The expenditure on Education has reached Rs. 79,451 crore from Rs. 10,145 ten years ago.
  • UPA-I & UPA-II Governments have delivered above the trend growth of 6.2 percent, which prevailed over a period of 33 years.
Report Card of 2013-14

  • De-controlling sugar, gradual correction of diesel prices, rationalization of railway fares, were some of the courageous and long over due decisions taken by the Government.
  • Applications were invited for issue of new bank licenses.
  • DISCOMS, mostly sick are being restructured with generous central assistance.

  • 12.8 lakhs land titles covering 18.80 lakh hectare were distributed under the Scheduled
  • Tribes and Other traditional Forest Dwellers Act.
  • The oppressive colonial law of 1894 was substituted with the Right to Fair Compensation and Transparency in Land Acquisition Rehabilitation and Resettlement Act.
  • National Food Security Act was passed assuring food to 67 percent of the population/ households.
  • The new companies Act replaced a law of 1956 vintage.
  • The PFRDA Act was passed to establish a statutory regulator for the New Pension Scheme.
Economic Initiative

  • Centrally Sponsored Schemes were restructured into 66 Programs for greater Synergy.
  • Funds under these programs will be released as Central assistance to State Plan, thus giving greater authority and responsibility. As a result, Central assistance to plans of States & UTs will rise substantially from Rs. 36,254 crore in BE 2013-14 to Rs. 338,562 crore in 2014-15.
  • Record Capital expenditure of Rs. 257,641 crores in 2013-14 by public sector enterprises.

  • About 50,000 MW of Thermal and Hydel Power capacity is under construction after receiving all clearances and approvals. 78,000 MW of power capacity have been assured coal supply.
  • Liberalised FDI policy in tele-communication, pharmaceuticals, civil aviation, power trading exchange, and multi brand retail to attract large investment.
  • Approval to establish 2 semi conductor wafer fab units.
  • Approval of IT modernization project of Department of Post.
  • Kudankulam Nuclear Power Plant Unit-I achieved criticality and is generating 180 Milliion Units of power.
  • Fast breeder Reactor at Kalpakkam and 7 Nuclear Power Reactors under construction.
  • National Solar Mission to add 4 Ultra Mega Solar Power Projects each with the capacity of over 500 MW in 2014-15.
  • Ministry of MSME will create the ‘India Inclusive Innovation Fund’ to promote grass root innovations with social returns to support enterprises in the MSME sector with an initial contribution of Rs. 100 crore to the corpus of the fund.
Social Sector Initiative

  • A Venture Capital Fund to provide concessional finance to Scheduled Caste will be set up by IFCI with an initial capital of Rs. 200 crore which can be supplemented every year.
  • The restructured ICDS, under implementation in 400 districts, will be rolled out in remaining districts from 1.4.2014

  • A National Agro-Forestry Policy 2014 has been approved.
  • A mechanism for marketing minor Forest produce has been introduced and an allocation of Rs. 444.59 crore has been made to continue the Scheme in 2014-15.
  • A new Plan Scheme with an allocation of Rs.100 crore has been approved to promote community radio station
  • New technologies such as JE vaccine, a diagnostic test for Thalassaemia and Magnivisualizer for detection of Cervical cancer have been delivered to people.
Additional Central Assistance to some States

  • A sum of Rs. 1200 crore as additional central assistance to North Eastern states, Himachal Pradesh and Uttarakhand in this financial year.

  • India joined a handful of countries when it launched the Mars Orbiter Mission.
  • The Country has acquired capability in launch vehicle technology, cryogenics and navigation , meteorological and communication satellites.
  • Several flight tests, navigational satellites and space missions are planned for 2014-15
Redeeming Promises

  • A Corpus has been created for ‘Nirbhaya Fund’ with a non lapsable grant of Rs. 1000 crore. 2 Proposals to ensure the dignity and safety of women have been approved which will be funded from the Nirbhaya Fund. A sum of Rs. 1000 crore has again been provided in FY 2014-15
  • The National Skill Certification and monetary reward schemes launched in August 2013 with an allocation of Rs. 1000 crore has been widely hailed as a success. A sum of Rs. 1000 crore is proposed to be transferred to the NSD Trust to scale up its programme rapidly.
  • Government remains fully committed to Aadhar under which 57 crore Unique Numbers have been issued so far and to opening bank accounts for all Aadhar holders to promote financial inclusion.
  • Through the Direct Benefic Transfer (DBT) Scheme, a total of Rs. 628 crore (54, 20,114 transactions) has been transferred directly to the beneficiaries till 31st January 2014 under 27 Schemes.
Overview Of The Interim Budget

  • In order to sustain the pace of plan expenditure, it has been kept at the same level in 2014-15 at which, it was budgeted in 2013-14.
  • Ministries/Departments which run key flagship programmes have been provided adequate funds in 2014-15 either equal to or higher than in the BE 2013-14. These include Ministries namely, Minority Affairs, Tribal Affairs, Housing & Poverty Alleviation, Social Justice & Empowerment, Panchayat Raj, Drinking Water and Sanitation, Women & Child Development, Health & Family Welfare, Human Resource Development and Rural Development.
Budget at a Glance

(In crore of Rupees) 


Budget Estimates
Revised Estimates
Budget Estimates

Revenue Receipts

Tax Revenue

(net to centre)

Non-Tax Revenue

Capital Receipts (5+6+7)$

Recoveries of Loans

Other Receipts

Borrowings and other liabilities *

Total Receipts (1+4)$

Non-Plan Expenditure

On Revenue Account of which,

Interest Payments

On Capital Account

Plan Expenditure

On Revenue Account

On Capital Account

Total Expenditure (9+13)

Revenue Expenditure (10+14)

Of Which, Grants for creation
of Capital Assets

Capital Expenditure (12+15)

Revenue Deficit (17-1)


Effective Revenue

Deficit (20-18)

Fiscal Deficit


Primary Deficit (22-11)





Actuals for 2012-13 in this document are provisional.

$  Excluding receipts under Market Stabilisation Scheme.
* Includes draw-down of Cash Balance.


1. GDP for BE 2014-2015 has been projected at Rs. 12839952 crore assuming 13.4% growth over the advance estimates of 2013-2014 (Rs. 11320463 crore) released by CSO.

2. Individual items in this document may not sum up to the totals due to rounding off.


  • Budgetary support to Railways has been increased from Rs. 26,000 crore in BE 2013-14 to Rs.  29,000 crore in 2014-15.
  • It is proposed to identify new instruments and new mechanisms to raise funds for Railway Projects.
SC Sub-Plan and Tribal Sub-Plan, Gender Budget and Child Budget

  • Rs. 48,638 crore and Rs. 30,726 crore are allocated to the SC Sub-Plan and Tribal Sub- Plan respectively.
  • Gender Budget and Child Budget has Rs.  97,533 crore and Rs. 81,024 crore respectively.
Non Plan Expenditure

  • Non Plan expenditure is estimated at Rs. 12, 07,892 crore.
  • The expenditure on subsidies for food, fertilizer & fuel will be Rs. 246,472 crore slightly higher than the revised estimates of Rs. 245,453 crore in 2013-14.
  • Rs. 15,000 crore has been allocated for food subsidies taking in to account, Government‘s firm and irrevocable commitment to implement the National Food Security Act throughout the country.

  • 10 per cent hike in Defence allocation has been given in comparison to BE 2013-14.

  • Government has accepted the principle of one rank one pension for the Defence Forces which will be implemented prospectively from the FY 2014-15. A sum of Rs. 500 crore is proposed to be transferred to the Defence Pension Account in the current Financial Year itself.
Central Armed Police Forces
  • A modernization Plan at a cost of Rs. 11,009 crore has been approved to strengthen the capacity of Central Armed Police Forces and to provide them the state-of-art, equipment and technology.
Financial Sector

  • All the announcements concerning the financial sector made in the Budget Speech of February 2013 have been implemented.
  • Rs. 11,300 crore is proposed to be provided for Capital infusion in Public Sector Banks.
  • 5,207 new branches have been opened against the target of 8,023.
  • Bhartia Mahila Bank has been established.
  • Rs. 6,000 crore and Rs. 2,000 crore have been provided to Rural and Urban Housing Funds respectively.
  • The target of Rs. 700,000 crore of Agricultural Credit is likely to be exceeded by the Banks. The target for 2014-15 is Rs. 800,000 Crore.
  • Rs. 23,924 crore has been released under the Interest Subvention Scheme on farm loans, with effective rate of interest on farm loans at 4 percent including subvention of 2 percent and incentive of 3 percent for prompt payment.
  Credit to Minority Communities

  • The number of bank accounts of minorities has increased to 43,52,000 at the end of March 2013 from 14,15,000 ten years ago. The volume of lending has soared to Rs. 66,500 crore from Rs. 4,000 crore in the same period.
  • Loans to minorities stood at Rs. 211,451 crore at the end of December 2013.
Self-Help Groups (SHGs) Loans

  • Ten years ago, only 9,71,182 women Self-Help Groups (SHGs) had been credit linked to banks. At the end of December 2013, 4,11,6000 women SHGs had been provided credit and the outstanding amount of credit was Rs. 36,893 crore
Education Loans

  • A moratorium period is proposed for all education loans taken up to 31.3.2009 and outstanding on 31.12.2013. Government will take over the liability for outstanding interest as on 31.12.2013 but the borrower would have to pay interest for the period after 1.1.2014. An amount of Rs. 2,600 crore has been provided this year and it will benefit nearly 9 lakh student borrowers.

  • LIC and the four public sectors general insurance companies have opened around 3000 offices in towns with a population of 10,000 or more to serve peri-urban and rural areas.
Financial Markets

  • Steps envisaged to deepen the Indian Financial Market :
  • ADR/GDR Scheme revamp, an enlargement of the scope of depository receipt

  • Liberalization of rupee denominated corporate bond market.
  • Currency Derivatives Market to be deepened and strengthened to enable Indian Companies to fully hedge against foreign currency risk
  • To create one record for all financial assets of every individual
  • To enable smoother clearing and settlement for international investors looking to invest in Indian bonds.
Commodity Derivatives Markets

  • Swift action taken to sequester National Spot Exchange Limited (NSEL) after the payment crisis in the NSEL, this prevented spill over of the crisis to the other regulated segment of the financial markets.
  • Proposal to amend the Forward Contracts (Regulation) Act.
Key Pending Bills

  • The Insurance Laws (Amendment) Bill and the Securities Laws (Amendment) Bill have not been passed by Parliament for reasons that have nothing to do with the merits of the Bills.
Public Debt Management Agency

  • Public Debt Management Agency Bill is ready with the Government. It is proposed to establish a non statutory PDMA that can begin work in 2014-15.
Vision for Future

  • India poised to be third largest economy along with US and China, to play a leading an important role in global economy.
  • 10 Tasks as part of the road map ahead include :
  • Fiscal consolidation : We must achieve the target of fiscal deficit of 3 percent of GDP by 2016-17 and remain below that level always.
  • Current Account Deficit : CAD will be inevitable for some more years which can be financed only by foreign investment. Hence, there is no room for any aversion to foreign investment.

  • Price Stability and Growth : In a developing economy, a high growth target entails a moderate level of inflation. RBI must strike a balance between price stability and growth while formulating the monetary policy.
  • Financial Sector reforms to be completed as laid down by Financial Sector Legislative Reforms Commission.
  • Massive investment in infrastructure : to be mobilized through the Public Private Partnership.
  • Manufacturing sector to be the base of India’s development: All taxes, Central and State that go into an exported product should be waived or rebated. There should be a minimum tariff protection to incentiwise domestic manufacturing.
  • Subsidies, which are absolutely necessary should be chosen and targeted only to the absolutely deserving.
  • Urbanisation to be managed to make cities governable and livable.
  • Skill development must be given priority at par with secondary and university education, sanitation and universal health care.
  • States to partner in development so as to enable the Centre to focus on Defence, Railways, National Highways and Tele-communication.

  • Government appeals to all political parties to resolve to pass the GST Laws and the Direct Tax Code in 2014-15
Funding Scientific Research

  • It is proposed to set up a Research Funding Orgnaisation that will fund Research Projects selected through a competitive process. Contribution to that organisation will be eligible for tax benefits. The required legislative changes can be introduced at the time of regular Budget.
Off-shore Accounts

  • The Government has succeeded in obtaining information on illegal off-shore accounts held by Indians in 67 cases and action is under way. Prosecution for willful tax evasion have also been launched in 17 other cases. More enquiries have been initiated in to accounts reportedly held by Indian entities in no tax or low tax jurisdictions.
Changes in Tax Rates

Following changes in some indirect tax rates are proposed:

  • States to partner in development so as to enable the Centre to focus on Defence, Railways, National Highways and Tele-communication.
  • The Excise Duty on all goods falling under Chapter 84 & 85 of the Schedule to the Central Excise Tariff Act is reduced from 12 percent to 10 percent for the period upto 30.06.2014. The rates can be reviewed at the time of regular Budget.
  • To give relief to the Automobile Industry, the excise duty is reduced for the period up to 30.06.2014 as follows:

    Small Cars, Motorcycle, Scooters                  -         from 12 % to 8%
    and Commercial Vehicles

    SUVs                                                             -           from 30% to 24%

    Large and Mid-segment Cars                          -         from 27/24% to 24/20%

  • It is also proposed to make appropriate reductions in the excise duties on chassis and trailors - The rates can be reviewed at the time of regular Budget
  • To encourage domestic production of mobile handsets, the excise duties for all categories of mobile handsets is restructured. The rates will be 6% with CENVAT credit or 1 percent without CENVAT credit.
  • To encourage domestic production of soaps and oleo chemicals, the custom duty structure on non-edible grade industrial oils and its fractions, fatty acids and fatty alcohols is rationalized at 7.5 percent.
  • To encourage domestic production of specified road construction machinery, the exemption from CVD on similar imported machinery is withdrawn.
  • A concessional custom duty 5 percent on capital goods imported by the Bank Note Paper Mill India Private Limited is provided to encourage domestic production of security paper for printing currency notes.
  • The loading and un-loading, packing, storage and warehousing of rice is exempted from Service Tax.
  • The services provided by cord blood banks is exempted from Service Tax.
Budget Estimate

  • The current financial year will end on a satisfactory note with the fiscal deficit at 4.6 percent (below the red line of 4.8 percent) and the revenue deficit at 3.3 percent.
  • Fiscal Deficit in 2014-15 estimated to be 4.1 percent which will be below the target set by new Fiscal Consolidation Path and Revenue Deficit is estimated at 3.0 percent.
  • The estimate of Plan Expenditure is Rs. 555,322 crore. Non Plan expenditure is estimated at Rs. 12, 07,892 crore.