How Insolvancy laws can Help the people drowned heavily in Debts.

Drowned in debt, what do you do?

When RV, the car racer from the movie Tara Rum Pum, has a fateful accident, his whole life changes. His inability to continue racing after the accident leaves him penniless. He loses his home, for which he had taken a loan, and all his possessions.

In reality, it could happen to anyone (of course, in a much lesser magnitude). Things could go terribly wrong due to some medical emergency or job retrenchment. It could also be the result of poor money management.

With easy credit available, the lure to spend beyond one's means has also led to many people finding themselves un-able to repay loans, which is leading to increased defaults.

For example, HDFC Bank has curtailed two-wheeler loan disbursement in Uttar Pradesh, North Karnataka, Rajasthan and Haryana. SBI Cards, the second largest credit card issuer in India, has run up a net loss of Rs 186.61 crore (Rs 1.87 billion) in the quarter ended December. Reason: customer defaults.

A recent study by rating agency Crisil suggests that gross non-performing assets in retail loans are likely to increase to 4 per cent over the next two years, from 2.7 per cent as of March 2007. While the figure is not alarming, it definitely signals the possibility of an increase in defaults.

The other side of the coin is the borrower who is not able to repay the loans. The inability of borrowers to communicate their financial issues to their lenders only adds to their mounting debts. As a result, borrowers continue to borrow to pay off their existing debts and find themselves in a vicious cycle. Debts keep mounting and so does creditor harassment.

Spotting bankruptcy

Says Gaurav Mashruwala, a Mumbai-based financial planner: "At the time of repayment of loan, if one does not have the money or assets that can be liquidated, then the individual is bankrupt."

To get out of this situation, the debtor has to seek help at the right time and from the right source. "Unfortunately, this does not happen and a person realises he is in deep trouble only when he reaches a point of no return," says S Rangarajan, a counsellor at the Chennai centre of Abhay, a credit counselling trust sponsored by Bank of India.

How to exit a debt trap

Get Help.There are a few credit counselling centres operating in the country over the last 18 months. Other than Bank of India's Abhay, Disha is another trust, which is sponsored by ICICI Bank. The number of such counselling centres is bound to increase as the Reserve Bank of India has taken initiatives to spread and formalise the credit counselling mechanism in the country.

Legal recourse

A person who is bankrupt and is way out of the purview of credit counselling can consider legal recourse. But many hesitate. "This is because of ignorance and social and economic boycott that a person suffers," says Mumbai-based consumer lawyer Anand Patwardhan. "This should be the last resort as it has long lasting repercussions," warns Lovaii Navlakhi, managing director and chief financial planner, International Money Matters, a financial planning firm.

Who can file for insolvency?

The debtor (borrower), through his legal advisor, has to file a petition to the concerned insolvency court to declare him insolvent. He can do this if he is unable to pay his debts when due, when he is under arrest or imprisonment in execution of the decree of any court for the payment of money, or when an order of attachment is subsisting against his property.

Similarly a creditor, who has a decree or an award of recovery of a certain amount, can also file a petition against the debtor in case his assets are not enough to pay off the debt. The insolvency laws protect the debtor from harassment by all creditors and the creditors get equitable distribution of the debtor's assets.

The law on insolvency is contained in two enactments - Presidency Towns Insolvency Act, 1909 (which applies to erstwhile presidency towns of Calcutta, Madras, and Bombay of British India) and, Provincial Insolvency Act, 1920 (which applies to the whole of India except the presidency towns mentioned above). Both Acts are similar in content.

Property treatment

When a debtor is declared insolvent, his property vests with the receiver or the official assignee (who is assigned by the court) for the purpose of distribution among the creditors.

He will receive master summons from the court stating when he has to submit his tax papers, bank statements, ledger book, cheque book and all other documents that would prove his net worth.

This will be handed over to the official assignee or receiver who will take charge of the assets, evaluate them and realise them for distribution.

Property would include anything that is in the debtor's name - house, car, shares or any other investments that can be converted into cash. In case the debtor acquires a property, wins a lottery or receives an inheritance during insolvency proceedings and before he is discharged, even that would be used for the purpose of distribution among the creditors.

Debt treatment

Once insolvency proceedings are on, the court will publish the matter of insolvency in its official gazette and local papers so that all creditors have a chance to get their claim. If they do not come forward to claim their share, once the insolvent is discharged, he is under no obligation to pay any creditor(s).

Debts that a creditor can prove to the satisfaction of the official receiver or assignee will be taken into account. There should be books of accounts and banking transactions that can prove the debt. Claims will be scrutinised for genuineness.

Interest takes the last priority in the order of repayment. Moreover, it will be at the rate recognised by the court, usually around 6 per cent. In case of default in credit card payment, the court will not recognise the rate of 36-42 per cent that many credit card companies charge towards late payment, default and so on.

Settlement procedure

After deducting the court's expenses for realisation of money out of the assets, it will be distributed rateably among the unsecured creditors (who have given loans without backing of assets). The secured creditor will first have to realise the security (that is, sell the asset) and for the unrealised balance claim as an unsecured creditor out of the funds realised by the official assignee for payment.

In most cases, the assets of the insolvent cannot satisfy all the debts. So the percentage of the settlement to the creditors will depend upon the amount realised by the official assignee.

Take a case of an individual whose debts have mounted to Rs 1 crore (Rs 10 million), out of which Rs 30 lakhs (Rs 3 million) is secured loan. His total assets are worth Rs 40 lakh (RS 4 million) (house, car, shares and other investments). Rs 30 lakh (Rs 3 million) will be claimed by the secured creditor from the total asset value and the remaining Rs 10 lakh (Rs1 million) will be rateably distributed to all the other unsecured creditors like credit cards payments, personal loans and so on.

Says T C A Shrinivasan, a Chennai-based advocate and a retired professor from Dr Ambedkar Government Law College, Chennai: "If the official assignee has reason to believe that there is scope for further payments from the debtor, then instead of an absolute discharge, only a conditional discharge will be given to the insolvent. The debtor might be directed to settle the dues out of his future earnings. These factors are, however, decided on a case-to-case basis."

Disqualifications of an insolvent

On being declared insolvent, you can neither be a director of a company nor a partner in a firm. You are disqualified from contesting elections or holding any public office. You are also debarred from entering into any contract or agreement. Professional bodies like the Bar Council may also prohibit you from practising if you are declared an insolvent.

An insolvent will not be given credit by any public or finance institutions until the order of insolvency is set aside by the court. S. Vasudevan, senior partner at Chennai-based legal firm Vasudevan & Associates, says, "There are, however, instances where a close relative or friend may contribute for his sustenance. This may not be treated as an income of the insolvent."

These disqualifications are removed when he obtains an order of discharge from the court.

Back to normal

To enable one to start his life afresh, the law on insolvency provides for the discharge of an insolvent from the state of insolvency. This is the last stage of the proceedings and it releases the debtor from all the debts provable in insolvency.

For this, the insolvent has to apply to the court seeking permission to annul the insolvency. Once the court is satisfied with the debt repayment, it will release him from the state of insolvency. This process, however, can be very lengthy and time-consuming.

Says Vasudevan: "If an insolvent intends to resume normal life, he will have to apply to the court seeking permission to continue his livelihood and give an undertaking that out of the future earning, he would contribute to discharge the balance debt due to the debtors whose claims have not been fully settled out of the estate realised by the official assignee or receiver. The court will impose a condition that out of his monthly earnings, he must deposit a major portion towards the balance debt and that he can take a portion for his sustenance."

There certainly is a lack of knowledge among debt-trapped borrowers about the recourses available to them, be it credit counselling or legal recourse. While the RBI has stepped up measures to increase awareness and formalise credit counselling in the country, very little being done on the legal front.

The stigma attached to bankruptcy appears to be taking an upper hand over the recourse it offers to 'genuine' debt trapped individuals. Definitely, a defaulter cannot be rewarded for his defaults. But there has to be a mechanism to help the lender and the borrower out of their tight situation.

Frequently Asked Questions and Answers about PAN-IT Department

1. What Is PAN?

Permanent Account Number (PAN) is a ten-digit alphanumeric number, issued in the form of a laminated card, by the Income Tax Department.

A typical PAN is AABPS1205E.

{Section 139A(7) Expln (b) and (c)}

2. Why Is It Necessary To Have PAN?

It is mandatory to quote PAN on return of income, all correspondence with any income tax authority. From 1 January 2005 it will be mandatory to quote PAN on challans for any payments due to Income Tax Department.

{Section 139A (5) (a) and (b)}

It is also compulsory to quote PAN in all documents pertaining to financial transactions notified from time-to-time by the Central Board of Direct Taxes. Some such transactions are sale and purchase of immovable property or motor vehicle or payments in cash, of amounts exceeding Rs. 25,000/-to hotels and restaurants or in connection with travel to any foreign country. It is also mandatory to mention PAN for obtaining a telephone or cellular telephone connection. Likewise, PAN has to be mentioned for making a time deposit exceeding Rs. 50,000/- with a Bank or Post Office or depositing cash of Rs. 50,000/- or more in a Bank.

{Section 139A (5) (c) read with Rule 114B}

3. How does Income Tax Department ensure that PAN is quoted on transactions mentioned above?

It is statutory responsibility of a person receiving document relating to economic or financial transactions notified by the CBDT to ensure that PAN has been duly quoted in the document.

{Section139A (6)}

4. Is it compulsory to quote PAN on return of income?

Yes, it is compulsory to quote PAN on return of income.

5. How will these authorities verify PAN?

A facility for verifying PAN is available on the website of the Income Tax department.

6. Who must have a PAN?

i. All existing assesses or taxpayers or persons who are required to furnish a return of income, even on behalf of others, must obtain PAN.

{Section 139A (1) and (1A)}

ii. Any person, who intends to enter into financial transaction where quoting PAN is mandatory, must also obtain PAN.

{ Section 139A (5) (c) read with Rule 114B}

iii. The Assessing Officer may allot PAN to any person either on his own or on a specific request from such person.

{Section 139A (2) and (3)}

7. Can a person obtain or use more than one PAN?

Obtaining or possessing more than one PAN is against the law.

{Section 139A (7)}

8. Where to apply for PAN?

In order to improve PAN related services, the Income Tax department has authorized UTI Investor Services Ltd (UTIISL) to set up and manage IT PAN Service Centers in all cities or towns where there is an Income Tax office and National Securities Depository Limited (NSDL) to dispense PAN services from TIN Facilitation Centers. For convenience of PAN applicants in big cities, UTIISL has set up more than one IT PAN Service Center and likewise there are more than one TIN Facilitation Centers.

9. How to apply for a PAN? Can an application for PAN be made on plain paper?

PAN application should be made only on Form 49A. A PAN application (Form 49A) can be downloaded from the website of Income Tax department or UTIISL or NSDL (www.incometaxindia.gov.in,www.utiisl.co.in or tin.nsdl.com) or printed by local printers or photocopied (on A4 size 70 GSM paper) or obtained from any other source. The form is also available at IT PAN Service centers and TIN Facilitation centers.

10. Can an application for PAN be made in Form 49A obtained from anywhere?

Yes, PAN application may be made on Form 49A obtained from any source other than IT PAN Service Centers or TIN Facilitation Centers. For instance, a PAN application may be made on form downloaded from the website of Income Tax department or UTIISL or NSDL; or on form printed by local printers or a photocopy of downloaded or printed form.

11. Can an application for PAN be made through Internet?

Yes, application for fresh allotment of PAN can be made through Internet. Further, requests for changes or correction in PAN data or request for new PAN card (for an existing PAN) may also be made through Internet. For more details visit (www.tin-nsdl.com)

12. How do I get a PAN allotted quickly (TATKAL)?

If an application for allotment of PAN is submitted through Internet and payment made through a 'nominated' credit card, the PAN is allotted on priority and communicated through email.

13. How to find an IT PAN Service Center or TIN Facilitation Center?

Location of IT PAN Service Centers or TIN Facilitation Centers in any city may be obtained from local Income Tax Office or any office of UTI/UTIISL or NSDL in that city or from websites of the Income Tax department (www.incometaxindia.gov.in or UTIISL(www.utiisl.co.in) or NSDL (http://tin.nsdl.com)

14. What services are provided by these IT PAN Service Centers or TIN Facilitation Centers?

IT PAN Service Centers or TIN Facilitation Centers will supply PAN application forms (Form 49A) and forms for 'Request For New PAN Card Or/ And Changes In PAN Data', assist the applicant in filling up the form, collect filled form and issue acknowledgement slip. After obtaining PAN from the Income Tax department, UTIISL or NSDL as the case may be, will print the PAN card and deliver it to the applicant.

15. What if I submit incomplete Form 49A?

IT PAN Service Centers or TIN Facilitation Centers shall not receive any incomplete and deficient PAN application. However, these centers will assist applicants to correctly fill up form 49A or 'Request For New PAN Card Or/ And Changes In PAN Data', as the case may be.

16. What documents and information have to be submitted along with the application for Form 49A?

a. Individual applicants will have to affix one recent, coloured photograph (Stamp Size: 3.5 cms x 2.5 cms) on Form 49A;

b. Any one document listed in Rule 114 must be supplied as proof of 'Identity' and 'Address'; and

c. Designation and code of the concerned Assessing Officer of Income Tax department will have to be mentioned in Form 49A.

17. Which documents will serve as proof of 'Identity' in case of Individual applicants, including minors and HUF applicants?

Copy of school leaving certificate or matriculation certificate or degree of a recognized educational institution or depository account or credit card or bank account or water bill or ration card or property tax assessment order or passport or voter identity card or driving license or certificate of identity signed by a MP or an MLA or a Municipal Councilor or a Gazetted Officer;

In case the PAN applicant is a minor, any of above documents of any of the parents or guardian of such minor shall serve as proof of Identity;

In case PAN application is made on behalf of a HUF, any of above documents in respect of Karta of the HUF will serve as proof of Identity.

18. What is proof of 'Address' for Individual applicants, including minors and HUF applicants?

Copy of electricity bill or telephone bill or depository account or credit card or bank account or ration card or employer certificate or passport or voter identity card or property tax assessment order or driving license or rent receipt or certificate of address signed by a MP/ MLA/Municipal Councilor / a Gazetted Officer;

In case the PAN applicant is a minor, any of above documents of any of the parents or guardian of such minor shall serve as proof of Address;

In case PAN application is made on behalf of a HUF, any of above documents in respect of Karta of the HUF will serve as proof of Address.

19. What documents will serve as proof of Identity and Address for other applicants?

Copy of Certificate of Registration issued by the Registrar of Companies or Copy of Certificate of Registration issued by the Registrar of Firms or Copy of Partnership Deed or Copy of Trust deed or Copy of Certificate of Registration Number issued by Charity Commissioner or Copy of Agreement or Copy of Certificate of Registration Number issued by Charity Commissioner or Registrar of Co-operative Society or any other Competent Authority or any other document originating from any Central or State Government Department establishing Identity and Address of such person.

20. How to find 'Assessing Officer code'?

Assessing Officer code may be obtained from Income Tax Office where you submit your return of income. Applicants who have never filed return of income may find out Assessing Officer code with the help of IT PAN Service Center or TIN Facilitation Center or jurisdictional Income Tax Office.

21. Is a photograph compulsory for making an application for PAN?

A photograph is compulsory only in case of 'Individual' applicants.

22. What is the procedure for applicants who cannot sign?

In such cases, Left Hand Thumb impression of the applicant should be affixed on Form 49A or 'Request For New PAN Card Or/ And Changes In PAN Data' at the place meant for signatures and got attested by a Magistrate or a Notary Public or a Gazetted Officer, under official seal and stamp.

23. Is father's name compulsory for female (including married/divorced/widow) applicants?

Only father's name is required to be filled in the PAN application (Form 49A). Female applicants, irrespective of marital status, should write only father's name in the PAN application

24. Is it compulsory to mention telephone numbers on Form 49A?

Telephone number is not compulsory, but if provided it may help in faster communication.

25. Who can apply on behalf of non-resident, minor, lunatic, idiot, and court of wards?

Section 160 of IT Act, 1961 provides that a non-resident, a minor, lunatic, idiot, and court of wards and such other persons may be represented through a Representative Assessee. In such cases, application for PAN will be made by the Representative Assessee.

26. I had applied to the department but I do not know my PAN?

Please contact the Aaykar Sampark Kendra (ASK) at 0124-2438000 (or 95124-2438000 from NCR) or visit the www.incometaxindia.gov.in and go to 'know your PAN'.

27. Are there any charges to be paid at IT PAN Service Centers or TIN Facilitation Centers?

UTIISL and NSDL have been authorized to collect Rs.60 + Service Tax as applicable, per PAN application and this includes cost of a tamper proof PAN card. This amount will have to be paid in cash at IT PAN Service Center or the TIN Facilitation Center.

28. Do you need to apply for a PAN when you move or transfer from one city to another?

Permanent Account Number (PAN), as the name suggests, is a permanent number and does not change during lifetime of PAN holder. Changing the address or city, though, may change the Assessing Officer. Such changes must, therefore, be intimated to nearest IT PAN Service Center or TIN Facilitation Center for required correction in PAN databases of the Income Tax department. These requests will have to be made in a form for 'Request For New PAN Card Or/ And Changes In PAN Data'

29. I had applied to UTITSL/ NSDL a month ago but I have not received my PAN card and I have to file my return of income.

Please contact Aaykar Sampark Kendra (0124-2438000 or 95124-2438000 from NCR) or www.incometaxindia.gov.in or send an email to pan@incometaxindia.gov.in.

30. Will the existing PAN cards issued by the Department remain valid?

All PAN allotted and PAN card issued by the Department will remain valid. All persons who have been allotted a PAN need not apply again.

31. Income Tax Department has issued me a PAN card; can I obtain a new tamper proof PAN card?

For obtaining the tamper proof PAN card an application will have to be made in the form for 'Request For New PAN Card Or/ And Changes In PAN Data' to IT PAN Service Center or TIN Facilitation Center, in which existing PAN will have to be indicated and old PAN card surrendered. The payment of Rs.60 + Service Tax as applicable, will also have to be made.

32. I had applied for PAN and received PAN number but have not received the PAN Card?

Apply in the form for 'Request For New PAN Card Or/ And Changes In PAN Data' at any IT PAN Service Center or TIN Facilitation Center quoting the PAN allotted to you.

33. How will the new PAN card be delivered to me?

The UTIISL or NSDL, as the case may be, will ensure delivery of new PAN card at the address indicated by you in the PAN application form or form for 'Request For New PAN Card Or/ And Changes In PAN Data'

34. I want to pay taxes today but I do not have a PAN?

It takes about 15 days to get a new PAN allotted. However, PAN can be obtained in around 5 days if application is made through Internet and processing fee paid through credit card. It is advisable to initiate action for obtaining PAN will in time.

35. Who should be contacted for inquiries regarding PAN applications?

All such inquiries should be addressed to:

For UTIISL The Vice President IT PAN Processing Centre, UTI Investor Services Ltd Plot No. 3, Sector - 11 CBD_ Belapur Navi Mumbai-400 614 e-mail.- utiisl-gsd@mail.utiisl.co.in Tel No. 022-27561690 Fax No. 022-27561706

For NSDL The Vice President Income Tax PAN Services Unit, NSDL 4th Floor, Trade World, A Wing Kamala Mills Compound, S. B. Marg, Lower Parel, Mumbai-400 013 e-mail.- tininfo@nsdl.co.in Tel No. 022-2499 4650 Fax No. 022-2495 0664

Coupon number or Acknowledgement number, as the case may be, should be mentioned in all communications

Why and how to have a PAN

B. Vijaya Kumar

26, Feb 2007

Permanent Account Number (PAN) has become a very important tool to the Income Tax Department in tracking high value transactions and ensuring compliance with the tax laws.

Mentioning of PAN has become mandatory in many financial transactions, particularly in the following areas:

• Operating demat accounts
• Deposit of Rs 50,000 and above in the banks
• Investments in shares, mutual funds and post office savings in excess of Rs 50,000 each
• Sale or purchase of motor vehicles, excluding two wheelers
• Sale or purchase of immovable properties valued at Rs 5 lakhs and above
• Applying for a new telephone connection (landline or mobile)
• Payment of Rs 25,000 or more against hotel bills

Even if you may not fall under these categories you need to file Income Tax Return for which PAN is required.

Benefits of having a PAN card

If you have a PAN card, it can be used as a proof of your identity, particularly when you have to check-in on the basis of your air tickets purchased online.

You can check whether the taxes paid by you are updated in the database of the Income Tax Department.

• How safe are mobile phones?

Further you can now also verify whether your employer or the institution has indeed remitted to the Income Tax Department the tax deducted from the payments made to you.

Is it necessary to file Income Tax return if you have PAN?

Just because you have PAN, it is not necessary to file Income Tax Return. Income Tax Return needs to be filed only when you have taxable income or you need to claim refund of tax deducted by your employer or the institution making payments to you towards interest or professional services or commission or rent or winnings from lottery / game shows or horse races or contracts etc.

However, the converse is true: you need PAN to file an Income Tax Return.

How to get PAN?

It is very simple. You need to submit your details in Form No. 49A to any of the PAN Facilitation centers, located in all cities and major towns, wherever Income Tax offices are located.

• Have a PAN number but no card?

The UTI Investors Services Ltd (UTIISL) and National Securities Depository Limited (NSDL) are the authorised agencies to accept and process PAN application forms.

You may also apply for PAN online through UTIISL's web site http://www.utiisl.co.in/pan/ or NSDL's web site http://tin.nsdl.com/.

It will normally take about 2 to 3 weeks to get your PAN card delivered at your doorstep.

If you need a PAN card urgently, you may also get Tatkal PAN by applying online using your credit card. You will get your PAN on priority basis and the same will be communicated to you through email.

The fees payable is only Rs 60 plus service tax presently @ 12.24 per cent, totaling Rs 67.

What are the details to be submitted for applying PAN?

Only very few details like the following need to be given in the case of individuals:

• Name including your other names, if any
• Father's name to be given even in the case of married women
• Date of birth
• Address � both official and residential
• Main source of your income � salary or professional/business or any other income
• Designation and code of your assessing officer. You may obtain this information from the facilitation centers of UTIISL or NSDL or from the web site of the income Tax Department at http://incometaxindia.gov.in/ao/Firstlevel.asp

You need to submit the following documents along with your application:

• Proof of identity
• Proof of address
• A recent colour photograph (3.5 cm X 2.5 cm)

You may submit copies of your passport/credit card/bank statement/voter's identity card/depository account/driving license/ration card/property tax assessment order to establish proof of identity and address. In addition, there are number of other documents like school leaving certificate/matriculation certificate/degree of a recognised educational institution/water bill for proof of identity.

• Getting a credit card? Beware

Likewise, you may use electricity bill/telephone bill/employer certificate/rent receipt for proof of address. Even if you don't have any of these documents, you may obtain a certificate of identity and/or address signed by a MP or MLA or a Municipal Councilor or a Gazette Officer.

How can I obtain PAN if I don't stay in India?

Non-Resident Indians may obtain PAN by applying through their representative assessee, who has to be an individual residing in India.

Recently, non-residents are permitted to apply for PAN by giving their present address, even though it is not in India. In such a case, the non-resident individual has to submit copy of passport for proof of identity and address and bank statement for proof of address (if the address mentioned in the passport is different from the present address).

In the case of non-residents, who are foreign citizens, these documents will have to be attested by the Indian embassy in their country. Detailed guidelines are available at the web site http://tin.nsdl.com/downloads/AdditionalguidelinesNRPAN_newPAN.pdf.

Other issues related to PAN

A person can have only one PAN and duplicate PANs, if any, must be surrendered. It is illegal to have duplicate PANs.

Even if a PAN is obtained from one place, return of income can be submitted at a different place, in case of change of address or jurisdiction.

If you wish to correct the particulars given in the PAN, you may submit an application for making modifications in the PAN. This will ensure that the information in the database of the Income Tax Department is updated.

For additional information and FAQs, you may visit the following web site:

http://incometaxindia.gov.in/PAN/Overview.asp