Punishment for cooked book stays

Company loans to employees to be exempt from new gift tax provisions

The finance ministry has decided to retain the powers given in the Budget to the Income-Tax department to punish those caught for falsifying documents, despite protests by chartered accountants who have said the provisions were too sweeping.

It has also decided to introduce an amendment to the Finance Bill to specifically exempt company loan to employees from the purview of the new provisions of gift tax.

Finance Minister P Chidambaram has introduced Section 27-A in the Income Tax Act, 1961, to provide for punishment with rigorous imprisonment for up to three years for what is termed as falsification of books or documents to evade tax liability.

Chartered accountants and other tax professionals say the powers could be easily used by the department to harass them since there was now no need for the officials to prove any specific instance, where the tax would have been skipped. Instead, it would be sufficient for an official to claim that there was a general intent to enable someone to evade a tax liability. It would also apply even where there was no case with the department on the assessee for tax evasion.

The 'Explanatory Memorandum' accompanying the Finance Bill says, "it shall be sufficient for the tax department to allege that the general intent was to enable another person to evade any tax, penalty or interest, without naming any specific case, to support the argument."

The provisions would come into force from 1 October, 2004. The new clause in the Finance Bill comes in addition to the provisions of Section 278 of the Income Tax Act. Under this provision, those who manufacture false documents to escape tax liability, cannot be prosecuted unless the charges against the persons who have used such papers are established in a court.

Ministry officials said they have given the tax department powers similar to those laid down in the Indian Penal Code, to track down a flourishing trade in production of false vouchers and other trade receipts that has become rampant, especially in Mumbai.

The decision on gift tax would clear the apprehensions expressed by several companies in their representations to the ministry, on whether loans given by them to their employees could fall under the purview of the new Section 2(24) of the Income Tax Act, 1961, introduced by Finance Minister P Chidambaram in the Budget.

The ministry would move an amendment when Chidambaram moves the Finance Bill in Parliament, after it reassembles on August 16. The passage of the Bill through Parliament represents the last stage in the Budget process.

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Pros & cons

• The finance minister has introduced Section 27-A in the Income Tax Act, 1961, to provide for punishment with rigorous imprisonment for up to three years for what is termed as falsification of books or documents to evade tax liability
• Chartered accountants and other tax professionals say the powers could be easily used by the department to harass them since there was now no need for the officials to prove any specific instance