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A person gives a power of attorney (PoA) to another person, as he may not have the time, or it may otherwise not be possible for him to do particular things himself. This is quite common in the case of non-resident Indians (NRIs) who invest in India but are not in a position to sign the various documents or do the follow-up on these investments. A PoA authorizes the other person to carry out certain specified acts on behalf of the person giving the PoA. The person in whose favour the PoA is given (the attorney) is, therefore, merely acting as the agent of the person giving the PoA (the grantor), and in law, all actions taken by the attorney under the PoA are the actions of the grantor.

Therefore, one presumes that even under tax laws, the attorney is not taxable for the acts done or receipts or incomes received by him on behalf of the grantor, and the grantor alone should be liable for such receipts or incomes. Unfortunately, while that is true, in practice, as a recent income tax tribunal decision demonstrates, at times tax authorities do create problems for the attorney and raise tax demands on him.

This was a case of a well-known classical musician, who had given a PoA to a resident Indian to make investments on his behalf. For this purpose, the musician transferred 25 lakh from his bank account to her bank account. She then invested the money in a portfolio management scheme with a bank. From the facts as stated in the tribunal’s order, it is not clear whether the investments were made in the name of the musician or of the attorney. However, the musician offered to include the capital gains and dividends received on such investments through the portfolio management scheme in his income tax return.

In the course of income tax assessment proceedings of the attorney, the attorney filed a confirmation from the musician to the effect that the money was given to her to invest on his behalf, and filed a copy of his tax return. The tax officer refused to accept the explanation, and added the amount of 25 lakh as the income of the attorney, treating it as an amount received by her without consideration. Since all amounts received without consideration, including gifts, are taxable as income if the total of such receipts exceeds 50,000 in a year, the tax officer treated the receipt of 25 lakh as a taxable income.

The tribunal analysed the powers of the attorney given under the PoA, and noted that it included the power to make investments in the name of the musician. Under the PoA, the musician agreed that all acts, deeds or things lawfully done by the attorney by virtue of such PoA, would be treated as acts, deeds and things done by him and he agreed to ratify and confirm these.

The tribunal noted that the tax officer had not expressed any reservations regarding the confirmation of the musician or the other documents filed with him, but had merely brushed aside the explanations given by the attorney. According to the tribunal, the tax officer could have asked for further explanation and details from the attorney or the musician, if he so wanted, before making any such addition. It also noted that the entire redemption proceeds of the investments were returned to the musician.

The tribunal, therefore, came to the conclusion that the investments made by the attorney were from the funds of the musician, and that the sum of 25 lakh never belonged to the attorney, which would be necessary if it were to be taxed as income of the attorney as an amount received without consideration. The tribunal, therefore, held that this amount would not have been taxed as the income of the attorney.

This case demonstrates how important it is that funds of the grantor be kept separately by the attorney, and not be mixed up with her own funds. All investments should be made in the name of the grantor, and under the Permanent Account Number (PAN) of the grantor. Ideally, the funds should remain in the grantor’s bank account, which can be operated by the attorney under the PoA. Of course, the grantor needs to file his income tax return disclosing the income from such investments.

One needs to keep in mind that, unfortunately, tax officers do not always take a balanced view, but generally an aggressive view in favour of the tax department, in their efforts to maximize tax collections. Therefore, a taxpayer always needs to ensure that he takes preventive measures to the extent possible. If these precautions outlined above are taken, then the risk of such amounts being treated as income of the attorney is minimized, and unnecessary litigation can be avoided.

Gautam Nayak is a chartered accountant.

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