Column: Legal

LEGAL
Going By The Book

Amount up to Rs 5 lakh received under voluntary retirement schemes are exempt from income tax.

By Diljeet Titus, Titus & Co. Advocates

What tax incentives apply to the Voluntary Retirement Scheme compensation received by an employee?

The entire amount received by an employee of a public sector company, central or state government, or a co-operative society under a Voluntary Retirement Scheme (VRS) is exempt from of income tax. However, to qualify for this exemption, the following conditions should be fulfilled: (i) The VRS should apply to all employee(s) who have completed 10 years of service or 40 years of age, including workers and executives except directors; (ii) the VRS should result in overall reduction in the existing strength of employees; (iii) the vacancy pursuant to the VRS should not be filled up and the retiring employee should not be employed in another company or concern belonging to the same management; (iv) the employee should not have availed tax incentives for any other VRS compensation in the past; (v) in case of companies/ co-operatives societies, the VRS should have been approved by either the Chief Commissioner or the Director General of Income Tax; (vi) the VRS compensation should not exceed three months salary for each completed year of service or salary at the time of retirement multiplied by the remaining months of service before the date of retirement subject to a maximum amount of Rs 5 lakh for each employee. In case the amount received exceeds Rs 5 lakh, only the excess above Rs 5 lakh will be liable to tax.

We are entering into a franchise agreement and wish to restrain our franchisee from engaging in any competitive business. What legally enforceable method can we adopt?

You may, under the franchise agreement, restrain the franchisee from engaging in any business of a competing nature during the period of the franchise agreement. Negative covenants operative during the subsistence of the agreement are generally upheld by courts, unlike restrictions which are to operate after termination of the agreement, which are held as void, against public policy and, therefore, unenforceable. The restraint during the duration of the franchise agreement will need to be carefully worded, as even the restraints, which operate only during the pendency of the franchise agreement may be subject to the doctrine of restraint of trade, if the restraints are such that the franchisee is so fettered that the franchise agreement loses its character of a contract for the regulation of promotion of transfer and acquires the predominant character of a contract in restraint of trade. The Supreme Court of India has stated that a restriction, even though reasonable, will be declared void if it restrains trade or business of any kind.

In what circumstances can the corporate veil be lifted under Indian laws, particularly in the case when both the holding company and the subsidiary are incorporated under Indian laws?

Indian courts generally respect the corporate identity of an incorporated company and are cautious in lifting the corporate veil, unless the statute itself contemplates lifting the veil or where associated companies are inextricably connected as to be, in reality, forming one company.

With regard to the relationship between the holding company and a subsidiary company, judicial precedents suggest that courts may disregard their distinct corporate identity and pierce the corporate veil in any of the following circumstances viz., (i) when the holding company owns all the shares of the subsidiary company so that it substantially controls the internal management and day-to-day working of the subsidiary company, and the subsidiary company has no autonomy of its own; (ii) when the subsidiary company has the same directors as the holding company; (iii) when both the holding company as well as the subsidiary company have no separate business operations; (iv) when the retention of the separate legal entity of the subsidiary company is used by the holding company as a device for some illegal or improper purpose, to avoid contractual obligations or otherwise.

The view expressed here should not be construed as legal opinion and is for reference only. Business Today and/or the author will not be responsible for any decision taken by readers on the basis of these views. Please send in your queries to legal.bt@intoday.com or Going By The Book, c/o Business Today, F-26, Connaught Place, New Delhi-1

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