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Month: April

Letter To The Editor

To,

The Editorial Board,

BCAJ.

Subject: Article “परोपदेशेपांडित्यम्” in the March 2025 issue

Thank you for publishing C.N. Vaze’s deeply thought-provoking article “परोपदेशेपांडित्यम्” in the March 2025 issue. It struck a powerful chord. The observation that we are often eloquent in advising others yet lax in applying those very principles to our own lives is not only accurate but uncomfortably familiar.

Mr. Vaze has written with great clarity on professional ethics in the past, and this piece continues that important reflection. A typical case in this context is when a peer, who shares the same ethical vows, enables the filing of frivolous complaints—not out of a sense of duty, but from rivalry, resentment, or plain indifference. These aren’t just baseless grievances; they are missiles launched from the silos of personal angst, and once fired, they initiate a procedural chain reaction. Long-drawn ethical proceedings are set in motion. Time, energy, and resources are drained not in pursuit of justice, but in managing shadows. And while these cases often crumble under scrutiny, their residue lingers—on reputations, on mental health, on the very fabric of professional dignity.

Genuine breaches must be pursued with rigor—I fully support that. But unchecked misuse erodes trust. Ethics and values must be more than just talk; they should guide our choices, especially when faced with personal agendas.

The line चित्तेवाचिक्रियायांचसाधूनाम्एकरूपता encapsulates a rare ideal—that of harmony between thought, speech, and action. As professionals, that alignment should be our guiding star. And though we may falter, striving toward that integrity gives our journey its meaning.

Warm regards,

CA Rajeev Joshi

Mumbai

 

The Editor

BCAJ

Mumbai

Dear Sir,

I refer to Ms. Kunjal Parekh’s article “ A Chartered Accountant’s guide to writing…”. She has written like a veteran writer and not as some one who is writing her first article. With liberal doses of humour (self-deprecating at times), the article is a good read. Having made a start, hope Ms. Parekh writes more often. After all, writing, as the author says, is about starting.
Congratulations to the author for scoring a century on debut.

Warm regards.

S.Viswanathan

Bangalore

Article 7(3) of India-UAE and Section 44Cof the IT Act – Prior to amendment with effect from 1st April, 2008, while computing the profits of PE, expenses incurred by HO were allowable without any restriction as per domestic tax law governing computation of income

1- [2025] 171 taxmann.com 230 (SB)

Mashreq Bank Psc vs. DCIT

ITA No:1342 (MUM) of 2006

A.Y.:2002-03Dated: 6th February, 2025

Article 7(3) of India-UAE and Section 44Cof the IT Act – Prior to amendment with effect from 1st April, 2008, while computing the profits of PE, expenses incurred by HO were allowable without any restriction as per domestic tax law governing computation of income

FACTS

The Assessee, a tax resident of the UAE, was engaged in banking business in India through branches. The branch claimed deduction towards expenses incurred by HO without any restriction on the quantum of deduction. Further, it claimed certain expenses that were directly incurred outside India by HO as they were related to business operations of Indian branch.

Applying Section 44C, the AO restricted deduction of HO expenses to 5% of average adjusted total income. Further, the AO denied deduction for certain expenses (such as, SWIFT charges and global accounting software maintenance expenses) that were directly incurred by HO for branch operations.

CONSTITUTION OF SPECIAL BENCH

In Assessee’s case for AY 1996-97, ITAT held that Article 25(1) provided for computation of income and Article 7(3) of India-UAE DTAA should not be interpreted in a manner to restrict the application of domestic law. For AY 1998-99 and 2001-02, ITAT did not follow its earlier order and held that Article 7(3) did not restrict deduction of head office expenses. Therefore, provisions of DTAA should prevail over domestic law. ITAT further noted that amendment to Protocol to India-UAE DTAA with effect from 01 April 2008 restricted allowability of HO expenses.
Given the conflicting view in the Assesses’ own cases and other cases, a Special Bench was constituted at department’s request.

HELD

Head Office Expenses

Article 7(3) deals with determination of profits of PE. It provides for deducting all expenses incurred for PE business, including general and administrative expenses. Prior to amendment of India-UAE DTAA vide Protocol (Notification no. SO 2001(E) (NO) 282/2007, dated 28-11-2007), the Article did not restrict quantum of deduction or provide for reference to domestic law.

The first part of Article 25(1) provides that domestic law provisions deal with income and capital taxation arising in respective states. The later part provides that if any express provision under DTAA is contrary to domestic law, taxation shall be governed by DTAA and not by domestic law. This position aligns with interpretation of Section 90(2) namely, DTAA provisions shall override domestic law provisions to the extent beneficial to Assessee.

The scope of Article 25(1) as regards computation of business profits cannot be interpreted in a way that imposes restrictions on the manner of computing tax liability under Article 7(3), or to read restrictions under domestic law into DTAA. There was no need to introduce limitation via the Protocol if Article 25(1) was to be interpreted otherwise. Article 25(1) and Article 7(3) operate differently as the former deals with eliminating double taxes and later deals with determining business profits.

Provisions contained under DTAA must be interpreted in good faith in accordance with the terms employed by the contracting states. Prior to its amendment, Article 7(3) did not restrict allowability of expenses. This position was changed after re-negotiation of India-UAE DTAA. The amended Article 7(3) was intended to be applied w.e.f. 1st April, 2008. Hence, in absence of an express provision, it could not be applied retrospectively.

India has entered into certain DTAAs, such as those with UK and Germany, which impose restrictions on allowability of expenses, and certain DTAAs, such as those with France, Mauritius, and Japan, which do not impose any such restrictions. This indicates that conditions imposed under respective DTAAs are based on bilateral negotiations between the partners and consideration of economic and political factors.

Therefore, Article 7(3) is an express provision that overrides the provisions of Section 44C of the Act.

DIRECT EXPENSES BY THE HO FOR BRANCH OPERATIONS

Section 44C defines the term ‘head office expenditure’. These are common expenses incurred by HO for HO and various branches and are subsequently allocated to respective branches.

Circular No. 649 dated 31st February, 1993, provides that while computing business profits, the expenditure covered by Section 44C must be allowed without imposing any restriction.

Therefore, an expenditure exclusively incurred outside India for Indian branches must be allowed as a deduction without any limits.

Unravelling The Forensic Accounting And Investigation Standards

1. INTRODUCTION:

Investigations in the corporate landscape are referred to by a multitude of typologies, such as workplace, fraud, forensic or ethics investigations, to name a few and these typologies are representative of the myriad methods, techniques and processes deployed to achieve a singular objective i.e. discovery and determination of facts relating to an alleged violation. Given this context, the Forensic Accounting and Investigation Standards (“FAIS” or “Standards”)1 issued by the Institute of Chartered Accountants of India (“ICAI”) is a salient endeavor as it seeks to amalgamate a multitude of complex and divergent topics to provide a simple and unified framework for practitioners. However, applying a reductive approach to a complex matter can sometimes introduce unforeseen challenges. This note explores issues which stakeholders ought to consider apropos the services which fall within the ambit of FAIS.

1 Paragraph 1.2 of the Framework governing Forensic Accounting & Investigation 
(“FAIS Framework”) read with Paragraph 1.2 of FAIS 110 – Nature of Engagement

2. SCOPE:

The FAIS which took effect on 1st July, 2023, comprise of 20 standards addressing core topics such as fraud risk and fraud hypothesis, engagement acceptance, planning, and reporting and apply when a Professional renders services falling within the definition of Forensic Accounting, Investigation or Litigation Support services (“FAIS Services”). The definition of “Professional”2 encompasses not only members of ICAI but also other professionally qualified accountants engaged in forensic accounting and investigation. However, while compliance with the FAIS is mandatory for Chartered Accountants (“CA”), whether in practice or employment, it remains voluntary3 for qualified professionals who are not members of the ICAI.

2  Paragraph 3.1 of FAIS Framework
3  Paragraph 3.1.2. of the Implementation Guide on FAIS No 000


3. DEFINING & DISTINGUISHING FAI SERVICES: OVERLAPPING BOUNDARIES AND CONSEQUENCES

Formulating a precise definition can be especially challenging when a term aims to cover a wide range of scenarios or straddles multiple domains. This difficulty is apparent in the FAIS, which seeks to capture all possible subject matter and objectives of investigations, including investigations into financial, operational matters or in connection with litigation. As discussed further, while striving to remain sufficiently broad, these definitions run the risk of being so expansive that they become unwieldy.

3.1. FAIS DEFINITIONS

  •  Forensic Accounting4 :This term is defined as “gathering and evaluation of evidence by a professional to interpret and report findings before a Competent Authority5” and is further explained as “The overriding objective of Forensic Accounting is to gather facts and evidence, especially in the area of financial transactions and operational arrangements, to help the Professional6 report findings, to reach a conclusion (but not to express an opinion) and support legal proceedings”.
    4 Paragraph 3.2.1 of FAIS Framework read with Paragraph 3.3.1 of FAIS 
Framework
    5 Competent Authority is defined as “Competent Authority refers to a court of law 
(or their designated persons), an adjudicating authority or any other judicial 
or quasi-judicial regulatory body empowered under law to act as such” - 
Refer Page 155 of FAIS - Glossary of Terms
    6 Professional is defined as a professionally qualified accountant, 
carrying membership of a professional body, such as the ICAI, 
who undertakes forensic accounting and investigation assignments using accounting, 
auditing and investigative skills. Refer Paragraph 3.1 of the FAIS Framework.
  •  Investigation7: Investigation is defined as “the systematic and critical examination of facts, records and documents for a specific purpose” and is explained as “a critical examination of evidences, documents, facts and witness statements with respect to an alleged legal, ethical or contractual violation. The examination would involve an evaluation of the facts for alleged violation with an expectation that the matter might be brought before a Competent Authority or a Regulatory Body8”.
    7 Paragraph 3.2.2 of FAIS Framework read with Paragraph 3.3.2 of FAIS Framework.

8 Regulatory Body is defined as “Regulatory Bodies are established to govern 
and enforce rules and regulations for the benefit of public at large”.- 
Refer Page 160 of FAIS – Glossary of Terms
  •  Litigation Support9: While this term is undefined, it has been explained as “may include mediation, alternative dispute resolution mechanisms or the provision of testimony”10. Litigation is defined as “a process of handling or settling a dispute before a Competent Authority or before a Regulatory Body. Litigation could include mediation and alternative dispute resolution mechanism11”. Examples of Litigation Support include scenarios where a CA is asked to provide evidence in support of the observations made in a forensic report to an Investigation Agency or Competent Authority or a valuation exercise which may be used in settlement negotiations in context of a dispute12.
    9 Paragraph 3.2.3 of FAIS Framework – Page 17

    10  Paragraph 1.2.(c) of FAIS 110 – Nature of Engagement

    11  Paragraph 3.2.3 of FAIS Framework

    12 Paragraph 5.4 of the Implementation Guide on FAIS 110 –
      Nature of Engagement

While at first blush, Forensic Accounting and Investigation appear to be similar in coverage as they envisage evaluation of evidence in connection with reporting to a Competent Authority. However based on a conjunct reading of FAIS 11013 – Nature of Engagement read with the Implementation Guide on FAIS 11014 it appears that matters involving review of transactions and accounts with a definitive objective to report to a Competent Authority would be classified as Forensic Accounting. The clear implication here is that this exercise should be taken to gather evidence which is admissible in front of a Competent Authority. On the other hand, considering that Forensic Accounting presupposes reporting to a Competent Authority, it appears that any internally initiated exercise including review of financial transactions, would be classified as an Investigation, even though the underlying issue may be subject to the jurisdiction of a Competent Authority or Regulatory Body.

13  Paragraph 3.2, 3,3,4.2 & 4.3 of FAIS 110 – Nature of Engagement.

14  Paragraph 3.2, 3.3 and 3.4 of the Implementation Guide on FAIS 110 – 
Nature of Engagement

However, the examples cited in the FAIS15 do not appear to support the aforesaid reasoning. For instance, the estimation of loss of assets or profits for an insurance claim or the assessment of pilferage of inventory, which would not necessarily entail reporting to a Competent Authority are classified as Forensic Accounting, whereas alleged manipulation of stock prices or an exercise to identify misutilisation of funds consequent to loan defaults, are placed under the umbrella of Investigations. Furthermore, although the term Litigation Support suggests services where a CA represents a client in legal proceedings, its broad scope and varied applications, as can be inferred from the inclusive meaning and examples, can blur the lines between Litigation Support and Investigation.

15 Paragraph 5.2 and 5.3 of the Implementation Guide on FAIS 110 –
 Nature of Engagement

In conclusion, the imprecision and overlap in the definitions of Forensic Accounting, Investigation, and Litigation Support create an interpretational haze that is difficult to resolve.. Without more precise and harmonized guidelines, these definitions risk being stretched to a point where they offer little functional clarity, thereby leaving CA uncertain about the exact nature of their engagements and the requirements to be met before a Competent Authority or a Regulatory Body.

3.2. BROADENING THE SCOPE: BEYOND FRAUDULENT ACTS

Although fraud16 has been defined in the FAIS, the definitions of Forensic Accounting and Investigation (“Forensic Investigation”) do not explicitly reference it. The Implementation Guide on FAIS 110 – Nature of Engagement, which is advisory, notes that an Investigation aims to “uncover potential fraud…” and “check for fraudulent intent…”17, yet the definition of Investigation, which refers to “legal, ethical or contractual violation”, strongly suggests that fraud is not a predicate element. Collectively this implies that even matters where fraud, misrepresentation, or misappropriation (collectively “Fraudulent Acts”) is not suspected might fall under the FAIS.

16  Paragraph 3.2.4 of FAIS Framework

17  Paragraph 3.3 of Implementation Guide on FAIS 110 – Nature of Engagement

The Cambridge dictionary describes the term Forensic as “related to scientific methods of solving crimes”18. The American Institute of Certified Public Accountant’s Statement on Standards for Forensic Services (“AICPA FS”) specifies wrong doing 19 as predicate element of an investigation. On a similar note, SEBI’s LODR which mandate reporting of Forensic Audits by listed companies reference an element of wrongdoing by referring to “mis-statement in financials, mis-appropriation / siphoning or diversion of funds” as a prerequisite element20. Collectively, this implies that wrongdoing or misconduct ought to be an essential aspect of a Forensic Investigation.

18 Cambridge Dictionary, https://dictionary.cambridge.org/dictionary/english/forensic?q=Forensic, 
Last accessed on March 25, 2025.

19  Para 1 of AICPA FS

20 “Frequently Asked Questions (FAQ) On Disclosure of Information Related 
to Forensic Audit of Listed Entities”, SEBI, https://www.sebi.gov.in/sebi_data/faqfiles/nov-2020/1606474249513.pdf, 
Last Accessed on March 25, 2025.

As such, it appears that FAIS diverges from the norm. To cite an example, the AICPA FS stipulate that valuation exercises not rendered in context of a litigation or investigation, would not be considered as a forensic service21. However, the examples cited in the FAIS22 suggest that exercises in nature of valuations and loss estimations are classified as Forensic Accounting, including even where litigation is not anticipated or wrongdoing is not suspected.

21 Para 2 of AICPA FS

22 Annexure 1 of FAIS 210 – Engagement Objectives read with Paragraph 5.2

 and 5.3 of the Implementation Guide on FAIS 110 – Nature of Engagement

By not requiring Fraudulent Acts as a starting point and by using undefined terms like “operational arrangements” or broad phrases such as “legal, ethical or contractual violations,” the FAIS potentially and may be inadvertently extend their scope to a wide array of fact-finding engagements. Even routine engagements can fall under the FAIS definition of an Investigation. For instance, if GST authorities flag discrepancies in sales data, hiring a CA to verify these discrepancies, even without any suspicion of wrongdoing could fall within the ambit of FAIS, as it involves a critical examination of records for a potential legal violation. Similarly, if a buyer alleges discrepancies in supply of goods, any assistance provided in evaluating the claims, may qualify as an Investigation, given the alleged breach of contract.

The decision not to explicitly require an allegation or indication of fraudulent activity in the definitions of Forensic Accounting and Investigation under the FAIS has significant practical implications. Although this breadth appears designed to accommodate a wide range of factual inquiries, it can lead to confusion and dissonance among both CAs and stakeholders as to whether a particular engagement would fall within the ambit of FAIS.

CAs are bound to assess whether an engagement falls within the FAIS and report compliance in their reports23. However, clients would be wary of labelling ordinary fact-finding exercises as a “forensic” exercise as this characterisation may lead to an inference of suspected misconduct triggering governance and reporting obligations as well as potential reputational risks. This approach may translate into more extensive documentation, enhanced reporting standards, and greater administrative overhead, placing a disproportionate burden on clients for lower-risk assignments. The same poses practical challenges which the CAs and client will have to proactively work together to address appropriately.

23  Paragraph 4.3 of FAIS 510 – Reporting Results

Furthermore, if Fraudulent Acts are not a predicate element, then the application of topical standards relating to fraud (such FAIS 120 – Fraud Risk) would be irrelevant. And since fraud is the predicate theme which binds the various FAIS, this incongruity may lead to potential complexities in the application of the FAIS leading to deficient outcomes.

3.3. DETERMINING FAIS APPLICABILITY

The FAIS ties its applicability to the purpose for which a service is rendered, yet its broad definitions may make it difficult to classify engagements. In particular, the terms “alleged legal, ethical or contractual violations” and “expectation” of litigation remain undefined, allowing multiple interpretations of whether an engagement qualifies as an Investigation or a general fact-finding exercise.

For instance, examining financial records for improper payments can serve markedly different objectives; from a straightforward risk assessment to probing suspected impropriety. If the client’s stated goal is merely to assess risk, the FAIS may not apply. However, if concerns of wrongdoing trigger the exercise, then FAIS could be applicable. In practice, determining which scenario applies can be challenging and, while dependent on the Client’s stated objectives, would also require a CA to assess the potential outcomes which would arise thereon.

Making a consistent and defensible classification often calls for legal expertise to interpret complex facts and predict potential outcomes; tasks that may extend beyond the CA’s traditional skill set. In high-stakes situations with uncertain or evolving circumstances, this lack of clarity poses a significant risk of non-compliance, underlying the need for more precise guidance in the FAIS.

4. INDEPENDENCE – UNREALISTIC PRESCRIPTIONS

The Basic Principles of FAIS (“Principles”) mandate that a CA should be “independent” and should “be free from any undue influence which forces deviation from the truth or influences the outcome of the engagement”24 and that the CA “needs to resist any pressure or interference in establishing the scope of the engagement or the manner in which the work is conducted and reported”25. A CA who is unable to establish the scope or the way the work is conducted would be violating the principle of independence26, which in turn would necessitate a qualification in the CA’s report27 or withdrawal by the CA from the engagement. At the same time ‘FAIS 210 – Engagement Objectives’ indicates that scope should be agreed upon with the client. Based on a conjunct reading, it appears that a CA should primarily determine the scope but with the consent of the client.

This strict independence requirement would be reasonable where the mandate to investigate is derived under law, such as an investigation initiated by regulators like SEBI but would appear to be excessive in case of client-initiated mandates, such as internal investigations, where a CA is rendering a contractual service at the client’s request. It may be noted that he AICPA FS do not prescribe independence as a requisite standard for forensic service28.

24 Paragraph 3.1 of Basic Principles of Forensic Accounting
 and Investigation (“Basic Principles”)

25  Paragraph 3.1 of Basic Principles

26  Paragraph 3.1 of the Basic Principles

27Paragraph 5.3 of the Preface to the Forensic Accounting 
and Investigation Standards (“Preface”)

28  Paragraph 6 of AICPA FS

5. ADHERENCE TO FAIS BY IN-HOUSE CAs

As explained above, the Basic Principles of FAIS (“Principles”) mandate that a CA should be “independent” and “needs to resist any pressure or interference in establishing the scope of the engagement or the manner in which the work is conducted and reported”29. FAIS appear to be mandated for CAs in employment (“CA-E”) and it is obvious demonstrating this extent of independence in an employer-employee relationship is infeasible given the nature of the relationship.

29  Paragraph 3.1 of Basic Principles

CA-Es operate in a different work construct when compared to CAs in practice. In fact, independence standards stipulated in the Code of Ethics issued by the ICAI apply to CAs in practice only. If FAIS are considered to be applicable to CA-Es, the potential conflicts and issues which would arise, may discourage CA-Es in undertaking any task in the nature of a FAIS Service. To illustrate, FAIS presupposes that the lifecycle of a FAIS engagement would be structured starting with engagement acceptance and culminating with a report, a structure which may not be practical or realistic in certain respects in the context of Forensic Investigations performed by a CA-E. As such, FAIS Services rendered by CA-E may be challenged as being non-compliant with FAIS and this deficiency may be used to discredit the outcome or findings of FAIS Services.

6. ATTORNEY CLIENT PRIVILEGE – DISHARMONIOUS CONSTRUCTION

Attorney-client privilege, in the context of investigations, is a legal doctrine that protects communications, including the work product, between a client and their legal counsel from disclosure to third parties including regulators, ensuring that sensitive information exchanged for obtaining legal advice remains confidential. In many Forensic Investigations, a CA may be retained under the direction of legal counsel specifically to maintain this protective umbrella, thus preserving privileged communications and related work products from forced disclosure.

However, the FAIS presupposes that the CA independently determines the scope and procedures of the engagement, without explicitly acknowledging the role of legal counsel over the investigatory process. This oversight can create tension: on one hand, the CA must comply with the FAIS; on the other, she is expected to operate under legal counsel’s instructions to maintain privilege. The resulting ambiguity raises serious questions about whether adherence to FAIS could inadvertently undermine attorney-client privilege, potentially compelling a CA to disclose information that would otherwise remain protected.

While the FAIS provides that CAs should consider the applicability of privilege while sharing evidence, the application of independence standards prescribed under FAIS may mean that umbrella of privilege may not be available, even if the CA is working under the directions of legal counsel. It is suggested that the ICAI should provide clarification that in relation to all work products protected by privilege, CA engaged through legal counsel may heed to the advice of the legal counsel, especially considering the applicable law which confers privilege on persons engaged by advocates under Section 132 (3) of Bhartiya Sakshya Adhiniyam, 2023.

7. SHARING INFORMATION WITH GOVERNMENT AGENCIES: BALANCING OBLIGATIONS AND CONFIDENTIALITY

“FAIS 240 – Engaging with Agencies” (“FAIS 240”) prescribes the standards in connection with interactions with Law Enforcement Agencies30 and Regulatory Bodies31 (collectively referred to as “Agencies”) in connection with FAIS Services. FAIS 240 clarifies that testimony32 is a statement provided to a Competent Authority33 such as a court, and is not included in the scope of FAIS 240. As such, it appears that any interaction with Agencies such as CBI or the ED, which are distinct from a Competent Authority, would fall under the scope of FAIS 240.

FAIS 24034, when read with Implementation Guide on FAIS 24035, appears to stipulate that a CA should provide information and / or clarifications to Agencies in connection with FAIS Services when called upon do so. FAIS 240 also stipulates that CAs should, in their engagement letters36, include clauses relating to sharing of information with Agencies without prescribing any guardrails on the nature or extent of information which is to be shared or any due processes to be followed, such as approval of or communication to the client, before sharing such information.

30 Defined in Paragraph 1.3 of FAIS 240 – Engaging with Agencies as 

“typically Central or State agencies mandated to enforce a particular law with the power to prevent,

 detect and investigate non-compliances with those laws. Their powers may be restricted

 by jurisdiction or by the law they are entrusted to enforce.”
31 Defined in Paragraph 1.3 of FAIS 240 -- Engaging with Agencies as

 “established to govern and enforce rules, laws and regulations for the benefit of public at large”

32 Defined in Paragraph 1.3(b) of FAIS 360 – Testifying before a Competent Authority - 

 as “A statement of the Professional whether oral, written or contained in electronic form,

 testifying before the Competent Authority on the facts in relation to a subject matter.”

33 Defined in Paragraph 1.3(d) of FAIS 360 – Testifying before a Competent Authority as 

“Competent Authority refers to a court of law (or their designated persons), an adjudicating 

authority or any other judicial or quasi-judicial regulatory body empowered under law to act as such.”

34 Paragraph 1.4(b) FAIS 240-Engaging with Agencies

35 Paragraph 3.2 of Implementation Guide on FAIS 240

36 Paragraph 4.4 FAIS 240-Engaging with Agencies

It also appears that FAIS 240 conflicts with the Basic Principles which prohibit the sharing of confidential information without the approval of the client, unless there is a legal or professional responsibility to do so and it can be argued that FAIS 240, which is specific, would take precedence over the Basic Principles, which are generic. Agencies can potentially use this argument to seek information from CAs, including that protected by attorney-client privilege, as refusal to share may be construed as non-compliance with FAIS which would in turn may lead to grounds for initiating disciplinary action against the CA.

It would be beneficial for the FAIS to explicitly provide exemptions for CAs from disciplinary action in situations where they refrain from sharing information to uphold attorney-client privilege, as outlined in FAIS 240. This clarification would further reinforce the principle of client primacy established in the Basic Principles.

8. CONCLUSION

While the FAIS are a laudable initiative to standardize and elevate forensic engagements, certain ambiguities and unrealistic requirements risk creating confusion and compliance challenges. The likely outcome and forum of a FAIS Service is litigation where it would be subject to extensive rigor and scrutiny. However, as discussed, the inherent ambiguities and sometimes, incompatible standards may impact the defensibility of a FAIS Service in a legal setting. Greater precision in defining key terms, a more realistic approach to independence in client-engaged scenarios, explicit accommodation for attorney-client privilege, and clearer guidance for in-house CAs are needed. By addressing these issues, the ICAI can ensure that the FAIS supports effective and credible investigative work.

Sec. 48 r.w.s. 50A & 55A.: Assessing Officer has no right to replace Government approved valuer’s opinion with his own.

7 [2024] 116 ITR(T) 261 (Mumbai – Trib.)

Piramal Enterprises Ltd. vs. DCIT

ITA NO.:3706 & 5091(MUM.) OF 2010

AY.: 2005-06

Dated: 11th January, 2024

Sec. 48 r.w.s. 50A & 55A.: Assessing Officer has no right to replace Government approved valuer’s opinion with his own.

FACTS I

The assessee had sold a flat at Malabar Hills during the year under consideration and for computing the cost of Acquisition of the said flat the assessee adopted the fair market value as on 1-4-1981 based on valuation report of government valuer. The AO after rejecting the valuation made by the valuer, calculated the cost of acquisition by assessing the rate at ₹1480 per sq. ft. as compiled in the reference book and thereby made an addition of ₹2,98,680/-.

Aggrieved by the order, the assessee preferred an appeal before the CIT(A). The CIT(A) upheld the addition. Aggrieved by the CIT(A) order, the assessee preferred an appeal before ITAT.

HELD I

The ITAT observed that for the year under consideration, the AO had no power to refer the matter for valuation to the Department Valuation Officer (DVO) but rather had power under section 50A of the Act to refer the case to the valuation officer in case the valuation adopted by the assessee was lower than the fair market value. But at the same time section 50A of the Act inserted by Finance Act, 2012 is prospective in nature as has been held by Hon’ble Jurisdictional High Court in case of CIT vs. Puja Prints[2014] 43 taxmann.com 247/224 Taxman 22/360 ITR 697 (Bom.).

The ITAT held that when the assessee had calculated the cost of acquisition on the basis of fair market value determined by the government valuer the AO had no right to replace the government approved valuer’s opinion on his own.

Thus, the appeal of the assessee was allowed to the extent of this ground.

Sec. 24.: Where assessee continued to be owner of part premises of House, rental income should be assessed only under the head income from house property and assessee would be entitled for statutory deduction @30% under section 24(a) for same.

FACTS II

The AO had treated the rental income earned by the assessee during the year under consideration from the let out portion of the property named “RP house” as income from other sources instead of income from house property on the ground that the assessee was not the owner of the property. The CIT(A) had confirmed the action of AO.

Aggrieved by the CIT(A) Order, the assessee preferred an appeal before ITAT.

HELD II

The ITAT followed the order passed by the co-ordinate Bench of the Tribunal on the identical issue in its own case for A.Y. 2003-04 & 2004-05 wherein rental income earned by the assessee from let out portion of RP house was treated as income from house property and directed the AO to assess the rental income of let out portion of RP house as income from house property.

S. 115BBC – Where the tax department had recognized the assessee-trust as both charitable and religious in terms of approvals granted under section 80G and section 10(23C)(v) and therefore, its case was covered by exception under section 115BBC(2), it cannot be held that the Assessing Officer had formed a legally valid belief for the purpose of section 147 that the cash donations received by the assessee were taxable under section 115BBC. S. 11(1)(a) – Accumulation under section 11(1)(a) is allowable on the gross receipts of the assessee and not on net receipts. S. 11(2) – Any inaccuracy or deficiency in Form No. 10 would not be fatal to the claim of accumulation under section 11(2).

6 (2025) 171 taxmann.com 392 (Mum Trib)

Sai Baba Sansthan Trust vs. DCIT

ITA Nos.: 932 & 935(Mum) of 2023

A.Ys.: 2013-14

Dated: 17th January, 2025

S. 115BBC – Where the tax department had recognized the assessee-trust as both charitable and religious in terms of approvals granted under section 80G and section 10(23C)(v) and therefore, its case was covered by exception under section 115BBC(2), it cannot be held that the Assessing Officer had formed a legally valid belief for the purpose of section 147 that the cash donations received by the assessee were taxable under section 115BBC.

S. 11(1)(a) – Accumulation under section 11(1)(a) is allowable on the gross receipts of the assessee and not on net receipts.

S. 11(2) – Any inaccuracy or deficiency in Form No. 10 would not be fatal to the claim of accumulation under section 11(2).

FACTS – I

The assessee was a charitable organisation registered under section 12A, section 80G and section 10(23C)(v). It was having a temple complex in the town of Shirdi consisting of Samadhi of a popular Saint fondly called as “Shri Sai Baba” and also other deities. The assessee usually receives huge amount of cash donations by way of hundi collections / charity box collections from the followers/devotees of Shri Sai Baba where the name and address of the contributor is not maintained. The assessee filed its return of income for A.Y. 2013-14 declaring NIL income which was processed under section 143(1).

Taking note of the Annual Information Report (AIR) for A.Y. 2013-14 and based on the stand taken by him for A.Y. 2015-16, the AO sought to reopen the assessee’s assessment by issuing notice under section 148 dated 23.3.2018 on the basis that cash deposits of ₹257 crores received by the assessee were taxable as anonymous donations under section 115BBC.The writ petition filed by the assessee against the notice was rejected by the High Court. SLP against the said High Court judgment was also rejected by the Supreme Court. Accordingly, the AO proceeded to pass the reassessment order wherein he determined the total income of the assessee at ₹67.01 crores, besides bringing the anonymous donations of ₹175.53 crores to tax @ 30% under section 115BBC.

On appeal, CIT(A) held that the reopening of the assessment was valid. On merits, CIT(A) held that the assessee was both charitable and religious trust and hence it would fall within the exceptions provided under section 115BBC(2). Consequently, he held that the anonymous donations received by the assessee were not taxable in the hands of the assessee. However, on other issues, CIT(A) confirmed the additions.

Aggrieved, both the parties filed appeals before the Tribunal.

HELD – I

The Tribunal observed that-

(a) At the time of recording of reasons for reopening, the AO should have been aware of the approval granted to the assessee under section 10(23C)(v) which is granted to a trust existing wholly for public religious purposes or wholly for public religious and charitable purposes. If the approvals under section 80G and section 10(23C)(v) granted by the income tax authorities were read together, there should not have been any doubt that the tax department has recognized the assessee trust as existing “wholly for charitable and religious purposes” which was covered by the exception listed in section 115BBC(2). Accordingly, had the AO considered both these approvals, he would not have entertained the belief that the assessee would be covered by section 115BBC.

(b) The AO had relied upon the approval granted under section 80G only and had chosen a document which would suit his requirement and ignored another important document which went in favour of the assessee, which is not permitted in law.

(c) Even on merits, in the appeals for AY 2015-16 to 2018-19, the Tribunal had held that the assessee was a charitable and religious trust, which order was upheld by the Bombay High Court vide its order dated 8.10.2024 in (2024) 167 taxmann.com 304 (Bombay).

Thus, the Tribunal held that the belief entertained by the AO, without considering the record in totality, could not be considered as a legally valid belief under section 147 and accordingly, the reopening of assessment was not valid.

HELD – II

On the issue of accumulation under section 11(1)(a), following the decision of the Supreme Court in CIT vs. Programme for Community Organisation,(2001) 248 ITR 1 (SC), the Tribunal held that accumulation under section 11(1)(a) is to be allowed on the gross receipts and not on the net receipt.

FACTS – III

In the return of income, the assessee had claimed accumulation of income under section 11(2) to the tune of ₹183.26 crores. During the course of assessment proceedings, it came to light that the assessee had omitted to disclose receipts from educational and medical activities to the tune of ₹78.84 crores. The assessee agreed to the addition of said amount and prayed that the deduction under section 11(1)(a) @ 15% of the above receipts should be allowed and further claimed enhanced accumulation under section 11(2) for the balance amount of ₹67.01 crores.

The AO noticed that the Form No. 10 filed by the assessee during assessment proceedings had certain deficiencies such as (a) it did not mention the date;(b) it did not quantify the amount to be accumulated; (c) the Board resolution passed for accumulation mentioned all types of objects; and (d) the amount to be accumulated was incorrectly mentioned as ₹575 crores. Therefore, he rejected the claim for enhancement of accumulation under section 11(2). However, he allowed the claim of accumulation of ₹183.26 crores as was originally claimed in the return of income.

CIT(A) upheld the action of the AO.

HELD – III

The Tribunal observed that the AO, even after pointing out the deficiencies in Form No. 10, had allowed the claim of accumulation under section 11(2) as originally claimed in the return of income. Therefore, such deficiencies should not come in the way of allowing the enhanced accumulation claimed by the assessee during assessment proceedings. In any case, as held by Gujarat High Court in CIT (E) vs. Bochasanwasi Shri Akshar Purshottam Public Charitable Trust, (2019) 102 taxmann.com 122 (Gujarat), any inaccuracy or lack of full declaration in the prescribed format by itself would not be fatal to the claimant for the purpose of section 11(2). Accordingly, the Tribunal directed the AO to allow the enhanced amount of accumulation claimed under section 11(2).

In the result, the appeal filed by the assessee was allowed and the appeal of the Revenue was dismissed.

S. 270A – Where the Assessing Officer had not specified in the assessment order or in the notice issued under section 274 read with section 270A as to under which limb of section 270A(2) or section 270A(9) the case of the assessee fell, no penalty under section 270A was leviable. S. 270A – Where the profit of the assessee had been estimated by resorting to section 145(3), no penalty under section 270A was leviable

5 (2025) 171 taxmann.com 133(Pune Trib)

DCIT vs. Chakradhar Contractors and Engineers (P.) Ltd.

ITA No.:1939 & 1940(Pun) of 2024

A.Y.: 2020-21 & 2021-22.

Dated: 26th December, 2024

S. 270A – Where the Assessing Officer had not specified in the assessment order or in the notice issued under section 274 read with section 270A as to under which limb of section 270A(2) or section 270A(9) the case of the assessee fell, no penalty under section 270A was leviable.

S. 270A – Where the profit of the assessee had been estimated by resorting to section 145(3), no penalty under section 270A was leviable

FACTS

The assessee was a company engaged in the business of construction. It filed its return of income declaring total income by estimating the income from contract work at 7.37% of the turnover. The AO completed scrutiny assessment by estimating the income from contract work at 10 per cent of the turnover, which the assessee accepted and paid the due taxes thereon.

Subsequently, the AO initiated penalty proceedings under section 270A. Referring to section 270A(9), he levied penalty @ 200% of the tax payable on the under-reported income in consequence of misreporting.

On appeal, CIT(A) cancelled the penalty on the ground that the AO had not specified the sub-limb under section 270A(9)(a) to (g) and therefore, the penalty was not sustainable.

Aggrieved, the tax department filed appeals before ITAT.

HELD

The Tribunal held that where the Assessing Officer had not specified, either in the assessment order or in the notice issued under section 274 read with section 270A, as to under which limb of provisions of section 270A(2) or section 270A(9) the case of the assessee falls, no penalty under section 270A was leviable.

Further, applying the various decisions under erstwhile section 271(1)(c) that penalty was not leviable when the profit was estimated, the Tribunal held that since the profit of the assessee had also been estimated by resorting to the provisions of section 145(3), no penalty under section 270A was leviable.

Accordingly, the appeals of the tax department were dismissed.

S. 12AB – Absence of registration under Rajasthan Public Trusts Act, 1959 cannot be a ground to deny registration under section 12AB since such non-registration did not prohibit the assessee to carry out its objects.

4 (2025) 171 taxmann.com 569 (Jaipur Trib)

APJ Abdul Kalam Education and Welfare Trust vs. CIT(E)

ITA No. 567 (Jpr) of 2024

A.Y.: N.A.

Date of Order: 15th January, 2025

S. 12AB – Absence of registration under Rajasthan Public Trusts Act, 1959 cannot be a ground to deny registration under section 12AB since such non-registration did not prohibit the assessee to carry out its objects.

FACTS

The assessee was running a hostel. It obtained provisional registration under section 12A(1)(ac)(vi) on 3.8.2022. Thereafter, it applied for final registration on 30.9.2023.

CIT(E) rejected the application for final registration and cancelled the provisional registration on the grounds that (a) non-registration under the Rajasthan Public Trusts Act, 1959 (RPT) was in violation of section 12AB(1)(b)(ii)(B); (b) it was not specifically mentioned in the trust deed that foreign donations will be taken only after prior approval under Foreign Contribution (Regulation) Act, 2010 (FCRA); and (c) the assessee was not able to prove genuineness of its activities.

Aggrieved with the order of CIT(E), the assessee filed an appeal before ITAT..

HELD

Distinguishing Aurora Educational Society v. CCIT, (2011) 339 ITR 333 (Andhra Pradesh) and New Noble Educational Society vs. CCIT, (2022) 448 ITR 594 (SC) on the ground that the said cases applied to educational institutions only, the Tribunal observed that a plain reading of section 12AB (1) (b) (ii) (B) shows that compliance of requirement of any other law is required if compliance under such other law is material for achieving its objects. Section 17 of the RPT Act, 1959 requires that trustees of the trust have to apply for registration of a public trust. However, there is no section in the RPT Act, 1959 which prohibits a trust to carry out its objects if it is not registered under the RPT Act, 1959. Both the statutes, namely Income-tax Act and RPT Act, have their own provisions and implications and none of them have overriding effect. Even if the assessee trust was not registered with the RPT Act, 1959 and the concerned officials under the RPT Act, 1959 deemed it necessary to get the entity registered under section 17 of the RPT Act, 1959, appropriate action could be taken against the trustees of the trust. However, this issue cannot be a hurdle in getting registration under section 12AB of the Income-tax Act. Accordingly, the Tribunal directed the CIT(E) to not deny registration on this ground.

Considering the provisions of FCRA, the Tribunal directed the assessee trust to incorporate the relevant amendment in the trust deed mentioning that prior to receiving any foreign remittance whatever may be the form or nomenclature, prior approval will be taken from the Ministry of Home Affairs, Govt. of India, and produce the same for verification (in original) before CIT (E). Accordingly, the Tribunal restored the matter back to the file of CIT(E).

Since the assessee had furnished all the information and documents such as Income an Expenditure Account, note on activities etc. and the observations of the CIT(E) were either wrong or self-contradictory in nature, the Tribunal held that the CIT(E) was wrong in rejecting the registration on the ground of genuineness of activities and directed him to accept the reply of the assessee in toto.

Accordingly, the appeal of the assessee was allowed.

Reassessment Notice issued beyond the surviving time limit would be time-barred. Surviving time limit can be calculated by computing number of days between the date of issuance of deemed notice u/s 148A(b) of the Act and 30thJune, 2021. The clock of limitation which has stopped w.e.f. date of issuance of S. 148 notices under the old regime (which is also the date of issuance of deemed notices) would start running again when final to the notice deemed to have been issued u/s 148A(b) of the Act is received by the AO.

3 Addl CIT vs. Ramchand Thakurdas Jhamtani

ITA No. 3553/Mum./2024

A.Y.: 2014-15

Date of order: 28th February, 2025

Section: 149

Reassessment Notice issued beyond the surviving time limit would be time-barred. Surviving time limit can be calculated by computing number of days between the date of issuance of deemed notice u/s 148A(b) of the Act and 30th June, 2021. The clock of limitation which has stopped w.e.f. date of issuance of S. 148 notices under the old regime (which is also the date of issuance of deemed notices) would start running again when final to the notice deemed to have been issued u/s 148A(b) of the Act is received by the AO.

FACTS

For AY 2014-15, a notice u/s 148 of the Act (old regime) was issued to the Assessee on 07.06.2021 (i.e., after the expiry of 4 years but before the expiry of 6 years from the end of AY 2014-2015). Subsequently, in compliance with the judgment of the Apex Court, dated 4.5.2022, in the case of UOI vs. Ashish Agarwal [444 ITR 1 (SC)], communication, dated 25.05.2022, was sent to the Assessee intimating that the aforesaid notice issued u/s 148 of the Act (under old regime) would be treated as the show-cause notice issued in terms of Section 148A(b) of the Act (under new regime introduced by the Finance Act, 2021 w.e.f. 01.04.2021). The Assessing Officer (AO) also shared with the Assessee material / information on the basis of which he had formed a belief that income had escaped assessment.

The Assessee filed reply on 09.06.2022. Thereafter, order u/s 148A(d) of the Act was passed on 24.07.2022 after taking approval from the Principal Commissioner of Income Tax (PCIT), Mumbai. This was followed by issuance of notice on 24.07.2022 u/s 148 of the Act (new regime). The reassessment proceedings culminated into passing of the Assessment Order, dated 26.05.2023, passed u/s 147 r.w.s. 144B of the Act.

Aggrieved by the assessment, the Assessee preferred an appeal to CIT(A) who vide Order dated 16.05.2024 allowed the appeal.

Aggrieved, the Revenue preferred the present appeal before the Tribunal challenging the relief granted by the CIT(A), while the Assessee has filed cross-objection challenging the validity of the re-assessment proceedings.

The contention, on behalf of the Assessee was that the AO has passed order u/s 148A(d) of the Act and has issued notice u/s 148 of the Act (new regime) after the expiry of surviving period as computed according the judgment of the judgment of the Apex Court in the case UOI vs. Rajeev Bansal [(2024) 469 ITR 46]. Therefore, both, the order u/s 148A(d) of the Act and the notice u/s 148 of the Act (new regime) are barred by limitation.

HELD

The Tribunal observed that the issue which arises for consideration is whether the order, dated 24.07.2022, passed u/s 148A(d) of the Act and notice, dated 24.07.2022, issued u/s 148 of the Act (new regime) were passed / issued within the prescribed time. It noted that there is no dispute as to facts. It is admitted position that the notice issued u/s 148 of the Act (old regime) on 24.07.2022, was treated as notice issued u/s 148A(b) of the Act by the Assessing Officer (AO). Thereafter, order u/s 148A(d) of the Act, was passed on 24.07.2022, and the same was followed by issuance of notice dated 24.07.2022, u/s 148 of the Act (new regime). Thus, the notice u/s 148 of the Act (new regime) was issued after the expiry of 6 years from the end of the relevant assessment year.

The Tribunal noted the observations of Apex Court in the case of UOI vs. Rajeev Bansal [(2024) 469 ITR 46] which have been made in relation to the interplay between the judgment of the SC in the case of UOI vs. Ashish Agarwal [444 ITR 1] and TOLA.

The Tribunal held that on perusal of the observations of the Apex Court it becomes clear that the assessing officer was required to complete the procedures within the ‘surviving time limit’ which can be calculated by computing the number of days between the date of issuance of the deemed notice u/s 148A(d) of the Act and 30th June 2021 (i.e. the extended time limit provided by TOLA for issuing reassessment notices u/s 148, which fell for completion from 20.03.2020 to 31.3.2021).

The clock of limitation which has stopped with effect from the date of issuance of S. 148 notices under the old regime (which is also the date of issuance of the deemed notices), would start running again when final reply to the notice deemed to have been issued u/s 148A(b) of the Act is received by the AO. It was clarified that a reassessment notice issued beyond the surviving time limit would be time-barred.

The Tribunal observed that, in the present case, notice u/s 148 of the Act (old regime) was issued on 07.06.2021 and was deemed to be notice issued u/s 148A(b) of the Act (new regime). Thus, the surviving time limit can be calculated by computing the number of days between the date of issuance of the deemed notice (i.e., 07.06.2021) and 30.06.2021, which comes to 23 days. The clock started ticking only after Revenue received the response of the Assesses to the show causes notices on 09.06.2022. Once the clock started ticking, the AO was required to complete these procedures within the surviving time limit of 23 days which expired on 02.07.2022. Since notice u/s 148 of the Act was issued on 24.07.2022 which fell beyond the surviving time limit that expired on 02.07.2022, the Tribunal held that the notice issued u/s 148 of the Act to be time-barred and therefore, bad in law.

The Tribunal quashed notice dated 24.7.2022 issued u/s 148 of the Act (new regime), the consequential reassessment proceedings and the Assessment Order, dated 26.5.2023, passed u/s 147 r.w.s. 144B of the Act.

Thus, Cross-Objection raised by the Assessee was allowed and accordingly, all the grounds raised by the Revenue in the departmental appeal in relation to the relief granted by the CIT(A) on merits were dismissed as having been rendered infructuous.

In view of the First Proviso to S. 149(1)(b) of the Act a notice u/s 148 of the Act (new regime) cannot be issued if the period of six years from the end of the relevant assessment year has expired at the time of issuance of the notice. This also ensures that the new time limit of ten years prescribed u/s 149(1)(b) of the Act (new regime) applies prospectively. The said Proviso limits the retrospective operation of S. 149(1)(b) to protect the interests of the assesses.

2 Addl CIT vs. Ramchand Thakurdas Jhamtani

ITA No. 3552/Mum./2024

A.Y.: 2015-16

Date of Order: 28th February, 2025

Section: 149

In view of the First Proviso to S. 149(1)(b) of the Act a notice u/s 148 of the Act (new regime) cannot be issued if the period of six years from the end of the relevant assessment year has expired at the time of issuance of the notice. This also ensures that the new time limit of ten years prescribed u/s 149(1)(b) of the Act (new regime) applies prospectively. The said Proviso limits the retrospective operation of S. 149(1)(b) to protect the interests of the assesses.

FACTS

For AY 2015-16, notice u/s 148 of the Act was issued to the Assessee on 30.06.2021 (i.e., after the expiry of 4 years but before the expiry of 6 years from the end of the relevant AY). Subsequently, in compliance with the judgment of the Apex Court, dated 4.5.2022, in the case of UOI vs. Ashish Agarwal [444 ITR 1 (SC)], communication, dated 25.05.2022, was sent to the Assessee intimating that the aforesaid notice issued u/s 148 of the Act (under old regime) would be treated as the show-cause notice issued in terms of Section 148A(b) of the Act (under new regime introduced by the Finance Act, 2021 w.e.f. 01.04.2021). The Assessing Officer (AO) also shared with the Assessee material / information on the basis of which he had formed a belief that income had escaped assessment. Thereafter, order u/s 148A(d) of the Act was passed on 27.07.2022 which was followed by issuance of notice u/s 148 of the Act on 27.07.2022.

The reassessment proceedings culminated into passing of the Assessment Order, dated 29.05.2023, passed u/s 147 r.w.s. 144B of the Act.

Aggrieved by the assessment made, the assessee preferred an appeal to CIT(A) who allowed the appeal videhis Order dated 16.05.2024.

Aggrieved, the Revenue preferred the present appeal before the Tribunal challenging the relief granted by the CIT(A), while the Assessee filed cross-objection challenging the validity of the re-assessment proceedings.

HELD

The Tribunal, first dealt with the cross objections of the Assessee. It noted that the issue which arises for consideration is whether notice, dated 27.07.2022, issued u/s 148 of the Act (new regime) is barred by limitation specified in S. 149 of the Act as contended, on behalf of the Assessee.

The Tribunal observed that it is admitted position that the notice, dated 30.06.2021, issued u/s 148 of the Act (old regime) was treated as notice issued u/s 148A(b) of the Act by the AO. Thereafter, order u/s 148A(d) of the Act was passed on 27.07.2022, and the same was followed by issuance of notice, dated 27.07.2022, issued u/s 148 of the Act (new regime) (i.e. after the expiry of 6 years from the end of the Assessment Year 2015-2016).

The Tribunal noted the contention made on behalf of the Assessee that as per First Proviso to S. 149(1) of the Act, no notice u/s 148 of the Act (new regime) could have been issued after 31.03.2022.

The Tribunal noted the relevant portions of the decision of the SC, in the case of UOI vs. Rajeev Bansal [(2024) 469 ITR 46], dealing with notice issued u/s 148 for AY 2015-16 and in relation to first proviso to section 149(1) of the Act (new regime). On perusal of the relevant extracts of the said decision of the SC, the Tribunal held that the SC has clarified as under –
(a) a notice could be issued u/s 148 of the new regime for AY 2021-2022 and assessment years prior thereto only if the time limit for issuance of such notice continued to exist u/s 149(1)(b) of the old regime;

(b) in view of the First Proviso to S. 149(1)(b) of the Act a notice u/s 148 of the Act (new regime) cannot be issued if the period of six years from the end of issuance of the notice. This also ensures that the new time limit of ten years prescribed u/s 149(1)(b) of the Act (new regime) applies prospectively. The said Proviso limits the retrospective operation of S. 149(1)(b) to protect the interests of the assesses.

Having noted that, in the present case, the time limit of 6 years from the end of AY 2015-2016 expired on 31.03.2022, the Tribunal held that, as per S. 149(1)(b) read with First Proviso to S. 149(1) of the Act (new regime), notice u/s 148 of the Act could not have been issued for the AY 2015-2016 after 31.03.2022. It held that notice, dated 27.07.2022, issued u/s 148 of the Act was barred by limitation.

The Tribunal also noted that before the Apex Court in the case of Rajeev Bansal [(2024) 469 ITR 46], the Revenue has conceded that for the AY 2015-16, notices issued on or after 01/04/2021, would have to be dropped and this has been recorded by the SC in para 19 of the decision of the Apex Court.

In view of the above, the Tribunal quashed the notice, dated 27.07.2022, issued u/s 148 of the Act and the consequent the Assessment Order, dated 29.05.2023, passed u/s 147 read with Section 144B of the Act as being bad in law.

Thus, Cross-Objection raised by the Assessee was allowed and accordingly, all the grounds raised by the Revenue in the departmental appeal in relation to the relief granted by the CIT(A) on merits were dismissed as having been rendered infructuous.

Non-compliance by the AO with the provisions contained in S. 148A(d) r.w.s. 151(ii) of the new regime affects the jurisdiction of the AO to issue a notice u/s 148 of the Act. Since the order u/s 148A(d) dated 30.7.2022 and also notice u/s 148 were issued with approval of Principal Commissioner of Income-tax instead of Principal Chief Commissioner of Income-tax or Chief Commissioner of Income-tax, the consequential reassessment proceedings and also the order dated 25.5.2023 passed u/s 147 r.w.s. 144B of the Act were quashed as bad in law and were held to be violative of the provisions contained in Ss. 148A(d), 148 and 151(ii) of the Act.

1 Addl CIT vs. Ramchand Thakurdas Jhamtani

ITA No. 3551/Mum./2024

A.Y.: 2017-18

Date of Order: 28th February, 2025

Sections: 148, 148A, 151

Non-compliance by the AO with the provisions contained in S. 148A(d) r.w.s. 151(ii) of the new regime affects the jurisdiction of the AO to issue a notice u/s 148 of the Act. Since the order u/s 148A(d) dated 30.7.2022 and also notice u/s 148 were issued with approval of Principal Commissioner of Income-tax instead of Principal Chief Commissioner of Income-tax or Chief Commissioner of Income-tax, the consequential reassessment proceedings and also the order dated 25.5.2023 passed u/s 147 r.w.s. 144B of the Act were quashed as bad in law and were held to be violative of the provisions contained in Ss. 148A(d), 148 and 151(ii) of the Act.

FACTS

A notice u/s 148 of the Act (old regime) was issued to the Assessee for the AY 2017-2018 on 28.06.2021 (i.e., after the expiry of 3 years but before 30.06.2021 — extended period time granted by TOLA1 ). Subsequently, in compliance with the judgment of the Apex Court, dated 4.5.2022, in the case of UOI vs. Ashish Agarwal [444 ITR 1 (SC)], communication, dated 27.05.2022, was sent to the Assessee intimating that the aforesaid notice issued u/s 148 of the Act (under old regime) would be treated as the show-cause notice issued in terms of S. 148A(b) of the Act (under new regime introduced by the Finance Act, 2021 w.e.f. 01.04.2021). The AO also shared with the Assessee material/information on the basis of which he had formed a belief that income had escaped assessment.

1 Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020

Thereafter, order u/s 148A(d) of the Act was passed on 30.07.2022 after taking approval from the Principal Commissioner of Income Tax (PCIT), Mumbai. This was followed by issuance of notice on 30.07.2022 u/s 148 of the Act (new regime). The reassessment proceedings culminated into passing of the Assessment Order, dated 25.05.2023, passed u/s 147 r.w.s. 144B of the Act.

The appeal preferred by the Assessee against the aforesaid Assessment Order was allowed by the CIT(A) vide Order, dated 16.05.2024.

Aggrieved, the Revenue preferred the present appeal before the Tribunal challenging the relief granted by the CIT(A), while the Assessee filed cross-objection challenging the validity of the re-assessment proceedings.

HELD

The Tribunal, at the outset, observed that the issue which arises for consideration is whether the PCIT or the PCCIT was the Specified Authority for seeking approval for passing order u/s 148A(d) of the Act and issuance of notice u/s 148 of the Act (new regime) for the AY 2017-18.

The Tribunal having considered the decision of the Apex Court in the case of UOI vs. Rajeev Bansal [(2024) 469 ITR 46], to the extent it has dealt with issue of approval from Specified Authority in terms of section 151 of the Act, noted that the Supreme Court has clarified as under –

(a) under new regime introduced by the Finance Act, 2021 Assessing Officer was required to obtain prior approval or sanction of the ‘Specified Authority’ at four stages – at first stage under Section 148A(a), at second stage under Section 148A(b), at third stage under Section 148A(d), and at fourth stage under Section 148. In the case of Ashish Agarwal [444 ITR 1] the Apex Court waived off the requirement of obtaining prior approval u/s 148A(a) and u/s 148A(b) of the Act only. Therefore, the AO was required to obtain prior approval of the ‘Specified Authority’ according to Section 151 of the new regime before passing an order u/s 148A(d) or issuing a notice u/s 148;

(b) under new regime if income escaping assessment is more than ₹50 lakhs a reassessment notice could be issued after expiry of three years from the end of the relevant previous year only after obtaining the prior approval of the Principal Chief Commissioner(PCCIT) or Principal Director General (PDGIT) or Chief Commissioner (CCIT) or Director General (DGIT);

(c) the test to determine whether TOLA will apply to Section 151 of the new regime is this: if the time limit of three years from the end of an assessment year falls between 20th March, 2020 and 31st March, 2021, then the ‘Specified Authority’ under Section 151(i) has an extended time till 30th June 2021 to grant approval;

(d) S. 151(ii) of the new regime prescribes a higher level of authority if more than three years have elapsed from the end of the relevant assessment year. Thus, non-compliance by the AO with the strict time limits prescribed u/s 151 affects their jurisdiction to issue a notice under section 148;

(e) grant of sanction by the appropriate authority is a precondition for the assessing officer to assume jurisdiction under section 148 to issue a reassessment notice.

The Tribunal held that, in the present case, the period of 3 years from the end of the AY 2017-2018 fell for completion on 31.3.2021. The expiry date fell during the time period of 20.3.2020 and 31.3.2021, contemplated u/s 3(1) of TOLA. Resultantly, the authority specified u/s 151(i) of the new regime could have granted sanction till 30th June, 2021.

On perusal of the order, dated 30.07.2022, passed u/s 148A(d) of the Act the Tribunal found that the aforesaid order was passed after taking approval from PCIT. The Tribunal held that since the aforesaid order was passed after the expiry of 3 years from the end of the AY 2017-2018, as per the new regime, the authority specified under Section 151(ii) of the Act (i.e. PCCIT or CCIT) was required to grant approval. The Tribunal also noted that even the notice, dated 30.07.2022, was issued u/s 148 of the Act (new regime) after obtaining the prior approval of the PCIT.

The Tribunal concluded that, in the present case, the approval has been obtained by authority specified u/s 151(i) of the new regime instead of the authority specified u/s 151(ii) of the new regime.

The Tribunal held that non-compliance by the AO with the provisions contained in S. 148A(d) r.w.s. 151(ii) of the new regime affects the jurisdiction of the AO to issue a notice u/s 148 of the Act. Accordingly, the order, dated 30.07.2022 passed u/s 148A(d) of the Act, the consequential reassessment proceedings and the order, dated 25.05.2023, passed u/s 147 r.w.s. 144B of the Act were quashed as being bad in law as being violative of the provisions contained in Ss. 148A(d), 148 and 151(ii) of the Act.

The Tribunal allowed the cross objections filed by the assessee and dismissed, as infructuous, all the grounds raised by the Revenue in the appeal in relation to the relief granted by CIT(A) on merits.

The Judgement Of The Supreme Court In The Case Of Radhika Agarwal And Its Implication On Arrest Under The Goods And Service Act, 2017

1. INTRODUCTION

The laws regarding the prosecution of economic offences are evolving at a rapid pace. With the multitude of special acts governing commercial transactions growing and evolving over the years, it is but natural that even the enforcement of penal provisions would occur. The structure of taxation for indirect tax saw a marked change with the introduction of the Goods and Service Tax Act, 2017 (‘GST’) in all its various avatars. Almost a decade later, the field of direct taxation seems to be headed for a complete overhaul in the year 2026. These new laws, which have financial consequences and also impose criminality on certain transactions will interact with laws that were enacted prior in time to them and shall also try and find a place within the existing framework of criminal law jurisprudence. The subject of tracing the interplay between various acts has justifiably become a blockbuster headline for many articles and seminars. With a variety of laws being triggered by a singular transaction, the implication in the commercial world can be that of a complication. While it is true that ignorance of the law cannot be a defence against legal action, the plethora of laws that can potentially get triggered and the consequent multitude of proceedings (both civil and criminal) can weigh very heavily on the shoulders of a businessman or a professional. As if the interplay between various special laws by themselves was not complicated enough, the interplay of these special acts with traditional acts and codes has given rise to significant litigation in recent days.

The recent judgment of the Supreme Court in the case of Radhika Agarwal vs. UOI [2025] 171 taxmann.com 832 (SC) is a landmark judgment that sheds light on certain aspects of summons and arrest under the Customs Act, 1972, as well as the Goods and Service Tax Act, 2017. For the purposes of this discussion, we will explore the implications it has on proceedings under the latter.

A BRIEF INTRODUCTION TO PROSECUTION UNDER THE GST

Chapter XIX of the GST deals with offences and penalties under the central act and its counterpart in each State. The various offences under the act are contained primarily under section 132 of the GST. While Section 132(1) lists the various offences that are punishable under the act, all of them are not equal.

Section 132(4) states that “Notwithstanding anything contained in the Code of Criminal Procedure, 1973,  all offences under this Act, except the offences referred to in subsection (5), shall be non-cognizable and bailable.”

Section 132(5) states, “The offences specified in clause (a) or clause (b) or clause (c) or clause (d) of sub-section (1) and punishable under clause (i) of that sub-section shall be cognizable and non-bailable.”

For the sake of convenience, let us call the non-cognizable and bailable offences minor offences and the cognizable and non-bailable offences major offences. The major offences are as follows:-

Whoever commits, or causes to commit and retain the benefits arising out of, any of the following offences

(a) supplies any goods or services or both without the issue of any invoice, in violation of the provisions of this Act or the rules made thereunder, with the intention to evade tax;

(b) issues any invoice or bill without supply of goods or services or both in violation of the provisions of this Act, or the rules made thereunder leading to wrongful availment or utilisation of input tax credit or refund of tax;
(c) avails input tax credit using the invoice or bill referred to in clause (b) or fraudulently avails input tax credit without any invoice or bill;

(d) collects any amount as tax but fails to pay the same to the Government beyond a period of three months from the date on which such payment becomes due;

Only when they are punishable under sub-section (i) – which reads as follows –

“In cases where the amount of tax evaded or the amount of input tax credit wrongly availed or utilised or the amount of refund wrongly taken exceeds five hundred lakh rupees, with imprisonment for a term which may extend to five years and with fine”.

The term five hundred lakh refers to a sum of ₹5,00,00,000/- (Rupees five crore only). Therefore, even if the above offences are committed, and the sum involved is ₹5,00,00,000/- or less, then the offence shall be non-cognizable and bailable. It is important to note that the monetary limit in this case, therefore, is an indicator not of the threshold for prosecution but more of the severity of the consequences that follow. There are three different monetary limits prescribed in Section 132, with the thumb rule being that the lower the threshold, the lesser the severity of the sentence. However, if the accusation is of the aforementioned offences for more than a sum of Rupees Five Hundred Lakh, then the GST department officers are clothed with significant powers of arresting without a warrant, and bail is not available as a matter of right.

WHAT IS THE DIFFERENCE BETWEEN A BAILABLE AND A NON-BAILABLE OFFENCE?

A bailable offence is one in which Bail is available as a matter of right. Section 436(1) of the Code of Criminal Procedure, 1973 (‘CRPC’) and Section 478(1) of the BharatiyaNagrik Suraksha Sanhita,2023 (‘BNSS’) are parimateria in as much they mandate that if a person other than one detained or arrested for the non-bailable offence without a warrant, then the officer in charge of the police station or the Court shall release such person on bail. The word shall signify that in the case of a bailable offence, bail is available as a matter of right.

For a non-bailable offence, bail is not available as a matter of right and is at the discretion of the Court as per Section 437 of the CRPC and Section 480 of the BNSS. The term non-bailable does not signify that there is an absolute bar on the grant of bail but signifies that the grant of bail will not be a matter of course or a matter of right.

WHAT EXACTLY IS A COGNIZABLE OFFENCE?

Section 2(c) of the CRPC defines a cognizable offence. In the BNSS, the same is defined in Section 2(1)(g). The words used in the definition are ‘parimateria’ to each other and read: “cognizable offence” means an offence for which, and “cognizable case” means a case in which a police officer may, in accordance with the First Schedule or under any other law for the time being in force, arrest without warrant”.

In short, for a cognizable offence, the police officer does not require a warrant to arrest an accused.

DO GST OFFICERS HAVE THE POWER TO ARREST?

The Supreme Court, in the case of Om Prakash v. Union of India (2011) 14 SCC 1, while examining the powers of officers of the Central Excise Department to effect arrest, had held that “In our view, the definition of “non-cognizable offence” in Section 2(l) of the Code makes it clear that a non-cognizable offence is an offence for which a police officer has no authority to arrest without warrant. As we have also noticed hereinbefore, the expression “cognizable offence” in Section 2(c) of the Code means an offence for which a police officer may, in accordance with the First Schedule or under any other law for the time being in force, arrest without warrant. In other words, on a construction of the definitions of the different expressions used in the Code and also in connected enactments in respect of a non-cognizable offence, a police officer, and, in the instant case, an Excise Officer, will have no authority to make an arrest without obtaining a warrant for the said purpose. The same provision is contained in Section 41 of the Code which specifies when a police officer may arrest without order from a Magistrate or without warrant.” However, the statutory scheme under the GST is different from what the scheme under the Central Excise Act 1944 was at the time of ‘Om Prakash’.

In the case of GST, Section 69 explicitly deals with the power to arrest and vests the discretion to authorize an officer to effect arrest based on his ‘reasons to believe’ that a person has committed any offence specified in Section 132(1) a, b, c or d as read with Sub-section (1) or (2) thereof.

The power of the GST officers to arrest has been upheld by the Supreme Court in the case of Radhika Agarwal. This power had been challenged in the said Petition on the grounds of legislative competency. The position canvassed was that Article 246-A of the Constitution, while conferring legislative powers on Parliament and State Legislatures to levy and collect GST, does not explicitly authorize the violations thereof to be made criminal offences. The Court held that “The Parliament, under Article 246-A of the Constitution, has the power to make laws regarding GST and, as a necessary corollary, enact provisions against tax evasion. Article 246-A of the Constitution is a comprehensive provision and the doctrine of pith and substance applies.. .. a penalty or prosecution mechanism for the levy and collection of GST, and for checking its evasion, is a permissible exercise of legislative power. The GST Acts, in pith and substance, pertain to Article 246-A of the Constitution, and the powers to summon, arrest and prosecute are ancillary and incidental to the power to levy and collect goods and services tax.”

The Supreme Court has, therefore, upheld the power of GST officers to effect arrests as provided by the GST.

CAN ANTICIPATORY BAIL BE SOUGHT FOR OFFENCES UNDER THE GST?

The power of the Courts to grant anticipatory bail under Section 438 of the CRPC (predecessor to Section 482(1) of the BNSS) was not available in the cause of a person summoned under Section 69 of the GST Act.

In State of Gujarat vs. Choodamani Parmeshwaran Iyer, (2023) 115 GSTR 297, a two-judge Division Bench of the Supreme Court had held that “The position of law is that if any person is summoned under section 69 of the CGST Act, 2017 for the purpose of recording of his statement, the provisions of section 438 of the Criminal Procedure Code, 1973 cannot be invoked. We say so as no first information report gets registered before the power of arrest under section 69(1) of the CGST Act 2017 is invoked, and in such circumstances, the person summoned cannot invoke section 438 of the Code of Criminal Procedure for anticipatory bail. The only way a person summoned can seek protection against the pre-trial arrest is to invoke the jurisdiction of the High Court under article 226 of the Constitution of India.” The decision was then later followed in the case of Bharat Bhushan v. Director General of GST Intelligence, (2024) 129 GSTR 297 by another two-judge Division Bench of the Supreme Court.

However, Radhika Agarwal marks a departure from this line of Judgements in as much as the three-judge bench of the Supreme Court has held that the power to seek anticipatory bail shall be available to a person who is apprehensive of arrest under the GST. The Supreme Court held that

“The power to grant anticipatory bail arises when there is apprehension of arrest. This power, vested in the courts under the Code, affirms the right to life and liberty under Article 21 of the Constitution to protect persons from being arrested. Thus, in Gurbaksh Singh Sibbia (1980) 2 SCC 565, this Court had held that when a person complains of apprehension of arrest and approaches for an order of protection, such application, when based upon facts which are not vague or general allegations should be considered by the court to evaluate the threat of apprehension and its gravity or seriousness. In appropriate cases, application for anticipatory bail can be allowed, which may also be conditional. It is not essential that the application for anticipatory bail should be moved only after an FIR is filed, as long as facts are clear and there is a reasonable basis for apprehending arrest. This principle was confirmed recently by a Constitution Bench of Five Judges of this Court in Sushila Aggarwal and others vs. State (NCT of Delhi) and Another (2020) 5 SCC 1. Some decisions State of Gujarat vs. Choodamani Parmeshwaran Iyer and Another, 2023 SCC OnLine SC 1043; Bharat Bhushan v. Director General of GST Intelligence, Nagpur Zonal Unit Through Its Investigating officer, SLP (Crl.) No. 8525/2024 of this Court in the context of GST Acts which are contrary to the aforesaid ratio should not be treated as binding.”

Therefore, anticipatory bail can be applied for and granted in the case of offences under the GST, where there is a reasonable basis for apprehending arrest.

ARE THERE SAFEGUARDS OF THE POWER TO ARREST?

Though the Supreme Court has upheld the power of GST officers to arrest, it has deemed fit to elucidate and clarify certain aspects of this power. Some key takeaways are listed below:-

(a) The GST Acts are not a complete code when it comes to the provisions of search and seizure and arrest, for the provisions of the CRPC (and now the BNSS) would equally apply when they are not expressly or impliedly excluded by provisions of the GST Acts.

(b) To pass an order of arrest in case of cognizable and non-cognizable offences, the Commissioner must satisfactorily show, vide the reasons to believe recorded by him, that the person to be arrested has committed a non-bailable offence and that the pre-conditions of sub-section (5) to Section 132 of the Act are satisfied. Failure to do so would result in an illegal arrest. On the extent of judicial review available with the court viz. “reasons to believe”, in Arvind Kejriwal vs. Directorate of Enforcement, (2025) 2 SCC 248, it was held that judicial review could not amount to a merits review.

(c) The exercise to pass an order of arrest should be undertaken in right earnest and objectively, and not on mere ipse dixit without foundational reasoning and material. The arrest must proceed on the belief supported by reasons relying on material that the conditions specified in sub-section (5) of Section 132 are satisfied and not on suspicion alone. Such “material” must be admissible before a court of law. An arrest cannot be made to merely investigate whether the conditions are being met. The arrest is to be made on the formulation of the opinion by the Commissioner, which is to be duly recorded in the reasons to believe. The reasons to believe must be based on the evidence establishing —to the satisfaction of the Commissioner — that the requirements of sub-section (5) to Section 132 of the GST Act are met. In Arvind Kejriwal it was held that “reasons to believe” are to be furnished to the arrestee such that they can challenge the legality of their arrest. Exceptions are available in one-off cases where appropriate redactions of “reasons to believe”
are permissible.

(d) The power of arrest should be used with great circumspection and not casually. The power of arrest is not to be used on mere suspicion or doubt or for even investigation when the conditions of subsection (5) to Section 132 of the GST Acts are not satisfied.

(e) The reasons to believe must be explicit and refer to the material and evidence underlying such opinion. There has to be a degree of certainty to establish that the offence is committed and that such offence is non-bailable. The principle of the benefit of the doubt would equally be applicable and should not be ignored either by the Commissioner or by the Magistrate when the accused is produced before the Magistrate.

(f) The Supreme Court reiterated certain principles laid down in Arvind Kejriwal with regard to arrest by the Directorate of Enforcement and held that they shall be applicable to arrest under GST as well. These safeguards include the requirement to have “material” in the possession of the Commissioner, and on the basis of such “material”, the authorised officer must form an opinion and record in writing their “reasons to believe” that the person arrested was “guilty” of an offence punishable under the PML Act. The “grounds of arrest” are also required to be informed forthwith to the person arrested.

(g) The Court reiterated that the courts can judicially review the legality of arrest. This power of judicial review is inherent in Section 19, as the legislature has prescribed safeguards to prevent misuse. After all, arrests cannot be made arbitrarily on the whims and fancies of the authorities. This judicial review is permissible both before and after criminal proceedings or prosecution complaints are filed. Courts may employ the four-part doctrinal test as observed in the case of Arvind Kejriwal with regard to the doctrine of proportionality in their examination of the legality of arrest, as arrest often involves contestation between the fundamental right to life and liberty of individuals against the public purpose of punishing the guilty.

(h) The investigating officer is also required to look at the whole material and cannot ignore material that exonerates the arrestee. A wrong application of law or arbitrary exercise of duty by the designated officer can lead to illegality in the process. The court can exercise judicial review to strike down such a decision.

(i) The authorities must exercise due care and caution as coercion and threat to arrest would amount to a violation of fundamental rights and the law of the land. It is desirable that the Central Board of Indirect Taxes and Customs promptly formulate clear guidelines to ensure that no taxpayer is threatened with the power of arrest for recovery of tax in the garb of self-payment.  In case there is a breach of law, and the Assessees are put under threat, force or coercion, the Assessees would be entitled to move the courts and seek a refund of tax deposited by them. The department would also take appropriate action against the officers in such cases.

(j) A person summoned under Section 70 of the GST Acts is not per se an accused protected under Article 20(3) of the Constitution.

(k) It is obvious that the investigation must be allowed to proceed in accordance with law and there should not be any attempt to dictate the investigator, and at the same time, there should not be any misuse of power and authority.

(l) Relying on Instruction No. 02/2022-23 [GST – Investigation] dated 17th August, 2022, the Court held that the procedure of arrest prescribed in the circular has to be adhered to and that the Principal Commissioner/Commissioner has to record on the file, after considering the nature of the offence, the role of the person involved, the evidence available and that he has reason to believe that the person has committed an offence as mentioned in Section 132 of the GST Act. The provisions of the Code, read with Section 69(3) of the GST Acts, relating to arrest and procedure thereof, must be adhered to.

(m) The arrest memo should indicate the relevant section(s) of the GST Act and other laws. In addition, the grounds of arrest must be explained to the arrested person and noted in the arrest memo as per Circular No. 128/47/2019-GST dated 23.12.2019 and the format prescribed by it.

(n) Instruction No. 01/2025-GST dated 13.01.2025 now mandates that the grounds of arrest must be explained to the arrested person and also be furnished to him in writing as an Annexure to the arrest memo.

(o) Instruction 02/2022-23 GST (Investigation) dated 17.08.2022 further lays down that a person nominated or authorised by the arrested person should be informed immediately, and this fact must be recorded in the arrest memo. The date and time of the arrest should also be mentioned in the arrest memo. Lastly, a copy of the arrest memo should be given to the person arrested under proper acknowledgement. The circular also makes other directions concerning medical examination, the duty to take reasonable care of the health and safety of the arrested person, and the procedure of arresting a woman, etc. It also lays down the post-arrest formalities which have to be complied with. It further states that efforts should be made to file a prosecution complaint under Section 132 of the GST Acts at the earliest and preferably within 60 days of arrest, where no bail is granted.

(p) The arresting officer shall follow the guidelines laid down in D.K. Basu vs. State of West Bengal. (1997) 1 SCC 416.

TO CONCLUDE

The Judgement of the Supreme Court in the case of Radhika Agarwal is a giant leap forward in the realm of GST prosecutions. While it does not divest the GST officers of their powers to effectively investigate and prosecute offences under the GST, it also clarifies and reiterates the important safeguards to be kept in place to ensure that these provisions are not abused.

However, in a separate and concurring Judgement Justice Bela Trivedi, while agreeing with the Judgement of Chief Justice Sanjeev Khanna and Justice M.M. Sunderesh, expressed that she thought it expedient to pen down her views on the jurisdictional powers of judicial review under Article 32 and Article 226 of the Constitution of India when the arrest of a person is challenged.

She held that “When the legality of such an arrest made under the Special Acts like PMLA, UAPA, Foreign Exchange, Customs Act, GST Acts, etc. is challenged, the Court should be extremely loath in exercising its power of judicial review. In such cases, the exercise of the power should be confined only to see whether the statutory and constitutional safeguards are properly complied with or not, namely to ascertain whether the officer was an authorized officer under the Act, whether the reason to believe that the person was guilty of the offence under the Act, was based on the “material” in possession of the authorized officer or not, and whether the arrestee was informed about the grounds of arrest as soon as may be after the arrest was made. Sufficiency or adequacy of material on the basis of which the belief is formed by the officer, or the correctness of the facts on the basis of which such belief is formed to arrest the person, could not be a matter of judicial review.” She further held that “Sufficiency or adequacy of the material on the basis of which such belief is formed by the authorized officer, would not be a matter of scrutiny by the Courts at such a nascent stage of inquiry or investigation.”

Reiterating the principle that was invoked in the case of Vijay Madanlal Choudhary and Others vs. Union of India and Others 2022 SCC OnLine SC 929 while weighingthe constitutional validity of certain provisions of the Prevention of Money Laundering Act, 2005 (‘PMLA’) that special Acts are enacted for special purposes and must be interpreted accordingly, it was held that:-

“Any liberal approach in construing the stringent provisions of the Special Acts may frustrate the very purpose and objective of the Acts. It hardly needs to be stated that the offences under the PMLA or the Customs Act or FERA are offences of a very serious nature affecting the financial systems and, in turn, the sovereignty and integrity of the nation. The provisions contained in the said Acts therefore must be construed in a manner which would enhance the objectives of the Acts and not frustrate the same. Frequent or casual interference of the courts in the functioning of the authorized officers who have been specially conferred with the powers to combat serious crimes may embolden the unscrupulous elements to commit such crimes and may not do justice to the victims, who in such cases would be the society at large and the nation itself. With the advancement in Technology, the very nature of crimes has become more and more intricate and complicated. Hence, minor procedural lapses on the part of authorized officers may not be seen with a magnifying glass by the courts in the exercise of the powers of judicial review, which may ultimately end up granting undue advantage or benefit to the person accused of very serious offences under the special Acts. Such offences are against the society and against the nation at large and cannot be compared with the ordinary offences committed against an individual, nor can the accused in such cases be compared with the accused of ordinary crimes. To sum up, the powers of judicial review may not be exercised unless there is manifest arbitrariness or gross violation or non-compliance of the statutory safeguards provided under the special Acts required to be followed by the authorized officers when an arrest is made of a person prima facie guilty of or having committed offence under the special Act.”

The last word on this subject may not yet have been spoken. The application of the law laid down in this judgement, as always, shall depend upon the facts and circumstances of each case. However, with this Judgement, an accused under the GST who is apprehensive of arrest is no longer without safeguards.

Learning Events at BCAS

1. Suburban Study Circle Meeting on “Navigating the New Income Tax Bill, TDS, Deductions & Critical Provisions” on Thursday, 13th March, 2025 and at C/o SHBA & Co. LLP, Andheri (E), Mumbai.

Suburban Study Circle Meeting on “Navigating the New Income Tax Bill, TDS, Deductions & Critical Provisions”, was led by CA Upamanyu Manjrekar & CA SnehalMayacharya, where they delved into critical amendments in the Income Tax framework, with a focus on TDS, deductions, and key provisions. The discussion highlighted changes in terminology, procedural updates, and practical implications for businesses and professionals.

Key changes discussed included:

  • Modifications in Income Tax Bill Wording – Minor yet impactful changes in phraseology, altering interpretation and compliance requirements.
  • TDS Revisions – Updates on applicability, rates, and compliance, including sector-specific changes.
  • Procedural & Compliance Changes – New filing requirements, reporting obligations, and penalty structures.
  • Impact on Business & Professionals – Discussion on how the amendments affect different taxpayer categories.
  • Group Interpretation & Case Studies – Open discussion on ambiguous provisions and their practical implementation.
  • Retrospective vs. Prospective Amendments – Debate on whether certain provisions apply retrospectively or prospectively.
  • Practical Challenges & Solutions – Addressing common compliance difficulties and suggested best practices.
    The session was highly interactive, with participants engaging in insightful discussions and real-world case studies. CA Upamanyu Manjrekar & CA SnehalMayacharya provided clear explanations, ensuring attendees left with a well-rounded understanding of the amendments and their implications.

2.  HRD Study Circle on The Secret Formula of Successful ENTREPRENEURS on Tuesday, 11th March, 2025 @ Virtual.

The Human Resources Development Committee Organised a Talk on Topic “The Secret Formula of Successful ENTREPRENEURS” on 11th March, 2025.
Faculty Mr. Walter Vieira

The takeaways from the workshop are briefly given below:

  1.  Comparing entrepreneur with a turtle he quoted James Byrant Conant who said – “Behold the turtle. He makes progress only when he sticks his neck out.”All cannot be entrepreneurs. Those who stick their neck out — take risk, have perseverance, conviction in their idea and believe in themselves could become excellent entrepreneurs
  2.  Entrepreneurship is a process of creating something new and needs deep study of business environment backed up by Fundable business plan.
  3.  There is a certain degree ofaptitude and attitude that is needed to do business and move further as Entrepreneur

They are

a) Creativity and flexibility
b) Resilience
c) Humility to accept success and failure
d) Perseverance
e) Spirit of adventure
f) People skills with a back-up technical knowledge in the subject

There were 167 participants who attended the meeting and good number of them asked questions which were well answered by the faculty.

3. Indirect Tax Laws Study Circle Meeting on Tuesday, 25th February, 2025, @ Virtual

The Group Leader & the Group Mentor introduced the participants to the topic and dealt with the relevant provisions & clarifications before proceeding to the case studies covering the following contentious & practical issues on the topic:

  1. Can an application be filed u/s 128A filed when there is a demand for only interest & penalty?
  2. Distinction between self-assessed liability and whether section 128A can be invoked if an Order is passed confirming demand for such self-assessed liability?
  3. Practical challenges in adjusting liability when payment is made in GSTR-3B / pre-deposit while filing an appeal / third party recovery against DRC-13.
  4. In case of appeal Order, section 128A application to be filed against the appeal Order or adjudication order?
  5. Is section 128A option available if the Appeal Authority remands the matter?
  6. Can application for rectification of order for demand confirmed for multiple points, including section 16 (4) be filed?
  7. Can the rectification order for demand confirmed u/s 16 (4) go beyond the scope of the original notice?
  8. Availability of refund of pre-deposit paid in case of successful appeal order for demand u/s 16 (4)

The meeting was attended by 50 members. The participants appreciated the efforts of the Group Leader and Group Mentors.

4. Tarang 2K25 – The 17th Jal ErachDastur CA Students’ Annual Day on Saturday, 22nd February, 2025 @ M M Pupils Own School — Khar.

The completion of the November 2024 CA exams commenced the preparations for the grand Tarang 2k25. The stage was set for the awe-inspiring event to happen, and it was when the Students’ Team and members of the Human Resource Development Committee (HRD) met to re-write the success story of the marvellous legacy of the past 16 years.

The 17th year of Jal ErachDastur CA Students’ Annual Day under the brand of ‘Tarang’ had to be engaging, enthralling, and magnificent. With this mission in mind, the Students’ Team started upon the journey for delightful Tarang 2k25 under the requisite guidance of CA MihirSheth, CA DnyaneshPatade, CA Jigar Shah, and CA Utsav Shah. MsPrachi Shah and Mr Paras Doshi were appointed as the student coordinators.

Tarang, when described, is an ecstatic annual CA students’ celebration mainly intended to provide a platform for CA students to unleash their talent and creativity in areas of public speaking, writing skills, performing arts, business, technical, and innovative skills. Additionally, the event also intends to act as an insight and potential gateway into the real world outside academic books by providing access and tutelage by skilled and experienced leaders in the form of participation in various fields with a view to building interpersonal and team-building skills with an opportunity to fraternize and network with hundreds of like-minded students.

The event was organized under the auspices of the HRD Committee of BCAS. All meetings were held in offline and online format. The event was supported by a total of 30 volunteers. Tarang 2k25 completely changed the dull and monotonous perception regarding CA students when they were witnessed as event managers, anchors, talented dancers, and photographers too!

As intended, it was truly an event ‘Of CA Students, By CA Students and For CA students.’

Tarang 2k25, to our surprise, saw a huge enrollment of around 350 students despite the pending due dates. There were an overall 165 participants in Tarang 2k25, along with the highest number of participants in the ‘Treasure Hunt’ too. The event became very popular, and we received huge enrollments along with amazing ideas that were pitched to the judges, which were worth the watch.

Also for the very first time Mock Stock exchange was organised specially for CA students where around 75 students participated.

The 17th Jal ErachDastur CA Students’ Annual Day – ‘Tarang 2K25’ elimination rounds were held at the BCAS Hall on the 15th and 16th of February 2025, To keep the fun going and the crowd engaged, the students’ team had organized various online games and networking sessions, This provided a unique opportunity for all the participants to build a productive and constructive network along with a lot of fun too.

The Grand Finale of Tarang 2k25 was held at MM Pupils School, Khar on the 22-2-25 from 3 pm onwards. We were delighted to have Bank of Baroda as the sole sponsor for the prizes of the winners of the various games and quizzes held offline. Arrangements for various exciting games were made to engage and build excitement among the audience before the event’s commencement.

The grand finale commenced at 3 pm with the lighting of the divine lamp by the HRD Committee with the Ganesh Vandana and Saraswati Vandana being played in the background to seek blessings and express gratitude to Lord Ganesh and Maa Saraswati.

The winners of the competition representing their firms were announced as follows:

Invest, Conquer, Compete (Mock Stock Exchange) – Winning Team – Dikshant Pandiyan, Jainil Sheth and Priyansh Jindal

Reel Making Competition ‘Shutter Stories’ – Sushil Khubchandani

Photography Competition ‘The Capture Challenge ’ – Anjali Vaishya

Antakshari Competition – ‘Suronke Maharathi’
Winning Team – NikunjPatel ,Harshita Dave and Rahul Jaiswar

Debate Competition – ‘The Battle Of Perspectives’ Winning Team – Sanjog Shah, Jainam Doshi, Vedant Agarwal and Madhur Bhartiya

Best Debater – Vedant Agarwal

The Rotating Trophy went to – Vedant Agarwal (SRBC and Co)

Talk Tastic – Winner – Piyush Gupta

2nd – Neha Agnihotri

3rd – Sejal Bagda

The Rotating Trophy went to – Piyush Gupta (DBS Bank)

Essay Writing Competition – ‘Pen- Power- Play’ 1st Prize Winner – Dhairya Thakkar

2nd Prize Winner – Neha Agnihotri

3rd Prize Winner – JesikaSahaya

The Rotating Trophy went to – Dhairya Thakkar (JHS Associates)

Talent Show ‘CA’s Got Talent’ Best Performer – Music Category – YashLadha

Best Performer – Instruments Category – Mithil Category

Best Performer – Dancing Category – The JDians

Best Performer – Other Performing Arts Category – Param Savijani and Rishit Raithatha

Pirates Plunder (Treasure Hunt) winners – Rushi Ghuge, Siddharth Gada and Yash Khalse

Hearty Congratulations to all the winners and their firms.

The euphoric evening was superbly anchored by the Master of Ceremony with their unmatched energy and mind-boggling acts to keep the audience engaged throughout the event.

With the 17th edition reaching new milestones and the scale increasing, all eyes are now set on what the anticipated 18th edition would have to offer. One thing is clear, the sky will not be the limit for the goals set to be achieved.

II. BCAS Quoted in News & Media

BCAS has been quoted in various esteemed news and media platforms, reflecting our thought leadership and commitment to the profession. For details

Link: https://bcasonline.org/bcas-in-news/

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Rights Issue Simplified (SEBI ICDR Amendments, 2025)

CONCEPTUAL FRAMEWORK FOR RIGHTS ISSUE

A Rights Issue is a well-established capital-raising mechanism that enables companies to generate additional funds while preserving the pre-emptive rights of existing shareholders. The legal foundation for Rights Issue in India is enshrined in section 62(1)(a) of the Companies Act, 2013 (“Companies Act”), which mandates that any further issuance of capital must initially be offered to existing shareholders.

Unlike preferential allotments or public offerings, Rights Issue confer a distinct advantage by allowing companies to raise capital swiftly without requiring shareholder approval in a general meeting. Instead, the Board of directors is vested with the authority to approve and execute the Rights Issue under Section 179(3) of the Companies Act, subject to compliance with the statutory offer period, which must range between 15 to 30 days as stated in Rule 13 of the Companies (Share Capital and Debentures) Rules, 2014.

For listed companies, the regulatory landscape extends beyond the Companies Act, with additional oversight by the Securities and Exchange Board of India (SEBI) under the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (“ICDR Regulations”). In view of cumbersome procedure, companies usually do not consider Rights Issue as preferred mode. Following chart below depicts that in past Issuers have preferred QIP and Preferential Allotment over Rights Issue.

The other major factor was that of involvement of the timelines to complete the process of Rights Issue. The chart below shows the time taken for Rights Issue process for listed companies:

As shown above, issuers have preferred fund raising mode like preferential issues or QIP which usually takes lesser time vis-à-vis Rights Issue. It was also observed that even though the existing shareholders have the first right to participate in fund raising activity of the issuer, the listed entities have preferred to raise fund though preferential issue by offering it to select few investors including promoters’ reason being swift fundraising, attracting strategic investors and increase in promoter’s stake.

SEBI CONSULTATION PAPER DATED 20th AUGUST 2024

To enable faster Rights Issue and to simplify procedures, SEBI initiated a comprehensive review of the Rights Issue framework and released the consultation paper on 20th August, 2024. This consultation paper aimed to address key inefficiencies, including extended timelines, disproportionate compliance costs, and structural constraints, which made Rights issues less attractive compared to alternative fundraising methods.

Some of the key Issues which were needed attention were-

  •  Rights Issue below ₹50 crore were exempt from the ICDR Regulations, creating an uneven compliance burden across different categories of issuers.
  •  high cost associated with mandatory merchant banker engagement, which was often disproportionate to the size of the issue.
  •  inefficiencies stemmed from challenges in handling unsubscribed shares, which restricted issuers from effectively managing excess demand or reallocating unclaimed shares.

In addition to above, the proposed Rights Issue guidelines also addressed the other shortcoming associated with the prevalent Rights Issue process such as lengthy time-period, requirements of filing detailed Draft offer letter, appointment of intermediaries, etc.

Following extensive industry feedback on this consultation paper, SEBI made significant amendments to ICDR Regulations on 3rd March, 2025, effective from 4th April, 2025 designed to streamline processes, enhance transparency, and improve overall market efficiency. These changes aim to ensure that Rights Issue remain a viable and competitive method of capital raising while fostering greater investor participation.

KEY AMENDMENTS RESHAPING THE RIGHTS ISSUE FRAMEWORK & THEIR LIKELY IMPACT

  •  Application of ICDR Regulations to Rights Issue Below ₹50 Crore

Prior to the amendments, Rights Issue below R50 crore were exempt from ICDR Regulations, creating regulatory disparities between small and large issuers. SEBI has now mandated uniform compliance with ICDR Regulations for all Rights Issue, irrespective of size, ensuring transparency, investor protection, and a level playing field across the market.

This amendment brings additional compliance requirements, particularly in terms of enhanced disclosures, financial reporting, and regulatory approvals. While this may increase regulatory costs for smaller issues, it also enhances investor confidence and credibility, potentially improving subscription rates.

  •  Reduction of Rights Issue Timeline from 317 Days to 23 Working Days

Prior to the Recent ICDR Amendments, while a fast-track Rights Issue typically took 12-14 weeks, a non-fast-track Rights Issue used to take approximately 6-7 months from the date of the board meeting approving the Rights Issue until the date of closure of the Rights Issue leading to valuation mismatches, investor resistance, and a lack of responsiveness to market conditions. The Recent ICDR Amendments provide that the Rights Issue may be completed within 23 working days from the date of the board of directors of the issuer approving the Rights Issue (except in case of Rights Issue of convertible debt instruments which require prior shareholders’ approval).

Reduction in timeline for completing a Right Issue from 317 days to just 23 working days will enhance efficiency, predictability, and responsiveness to market conditions, allowing companies to raise capital in a shorter timeframe and minimizing exposure to price fluctuations and the Investor will also get benefit that it will counter the volatility and enhance liquidity in the secondary market.

  •  Elimination of Mandatory Merchant Banker Requirement

SEBI has done away with the requirement of compulsory merchant banker involvement in Rights Issue, allowing issuers to self-manage the process or engage advisors selectively.

This will result in reduction in compliance costs and timelines, particularly for mid-sized and smaller companies, which previously incurred substantial fees for engaging merchant bankers and taking time for completing the process. This amendment will grant companies with greater control over the Rights Issue process, enabling them to structure offerings in a cost-effective and efficient manner.

  •  Improved Treatment of Unsubscribed Shares

Historically, the inability to effectively manage unsubscribed shares has been a significant challenge for issuers. SEBI’s amendment now permits issuers to reallocate unsubscribed portions to specified investors, thereby increasing the likelihood of full subscription and reducing the risk of undercapitalization. This change introduces greater flexibility for companies, allowing them to strategically distribute shares based on market demand. This amendment enhances the overall attractiveness of Rights Issue, as companies are now better equipped to manage excess demand and prevent subscription shortfalls. The companies need to ensure efficient allocation of unsubscribed shares while complying with SEBI’s revised guidelines, its legal enforceability. Also, companies must exercise due diligence to ensure compliance with the evolving framework, failing which it can lead to regulatory scrutiny and potential legal ramifications.

For professionals, this regulatory shift present both Challenges and Opportunities. The opportunity for compliance and advisory services shall witness a rise, as the role of Merchant Banker has substantially reduced at one hand and on the other hand regulatory environment has become more complex. This change opens opportunities for legal, accounting, and regulatory advisory services which includes preparation of comprehensive offer documents, ensure regulatory compliance, and reviewing disclosures. The compressed timeline necessitates faster regulatory filings, due diligence, disclosures, etc. which will open new opportunities for Chartered accountants (CAs) and Auditors.

FUTURE OF RIGHTS ISSUE IN THE CONTEXT OF INDIA’S CAPITAL MARKET

SEBI has effectively streamlined the Rights Issue process, contributing to a more predictable and efficient capital-raising environment, making Rights Issue a more attractive option for corporate Issuers.

To further strengthen the Rights Issue framework, adopting of digital platforms to streamline the application process, reducing the paperwork, and integrating blockchain technology for real-time subscription tracking, can improve transparency and allow for more effective monitoring of fund utilization.

For companies which are fully compliant having strong financials and credibility, expedited regulatory approvals may be granted under the concept of Green Route Channel, which could further enhance market efficiency. This would encourage greater participation from a diverse range of companies, making the Rights Issue process more accessible and attractive. Further relaxation of disclosure requirements for smaller issues may be provided in case companies adhere to stringent investor protection policies.

As capital markets evolve, various developments will also unfold but continued vigilance and proactive adaptation will be crucial for maintaining a competitive and investor-friendly capital-raising mechanism and retaining the trust in the integrity of the capital market ecosystem. These amendments reinforce SEBI’s emphasis on transparency, particularly through stricter fund utilisation monitoring mechanisms and enhanced investor protection measures.

Report On BCAS 58th Members’ Residential Refresher Course

The flagship event of the Bombay Chartered Accountants’ Society (BCAS), the Members’ Residential Refresher Course (RRC), was held in the city of Nawabs, Lucknow between Wednesday, 26th February, 2025 and Saturday, 1st March, 2025.

Keeping pace with the theme “ReImagining the Profession” of the immensely successful three-day mega conference, held in January 2024, the theme of the 58th RRC was finalised as “Profession Today And Tomorrow”. The Committee was seized of the need to deliver an event that would be both contemporary and forward looking. The topics and speakers were carefully selected and fitted in the time-tested mix of panel discussion, paper presentations and group discussions.

The annual RRC is nothing short of a yearly pilgrimage for her die-hard bhakts (devotees), and the consecration ceremony of Shree Ram Mandir in January 2024 had triggered the desire to hold the next year’s RRC in Ayodhya. This would provide the members a chance to pay obeisance to Ram Lalla and seek His blessings. With no hotel in Ayodhya large enough to accommodate a contingent of 175+, the Seminar, Membership & Public Relations (SMPR) Committee of the BCAS and the Office Bearers zeroed in on Lucknow — less than 160 kms from Ayodhya and, more importantly, with hotels large enough to accommodate the mammoth RRC contingent. The recce in October 2024 helped decide the venue — the newly constructed hotel, The Centrum, Lucknow.

Respecting the natural desire to visit Shree Ram Mandir along with their significant other, for the second time in history, a decision was taken to permit member spouse and children to register for the RRC. The response was immediate — it was houseful by the time the Early Bird stage ended! A total of 187 participants, drawn from 14 states and 31 cities and towns, including 11 non-residential members registered for the event. A heartening realisation was that for 76 members, this would be their very first RRC! Participants also included 2 newly wed couples, 5 member couples including a couple who gifted the BCAS Life Membership to their recently qualified daughter and enrolled her for the RRC as well.

The excitement in the air on the afternoon of 26th February was there for all to see as delegates checked in from all corners of the country. Day 1 began with the group discussion on “Case Studies in Direct Taxes on Assessment, Reassessment, Reviews and Appeals” which saw the break-out groups discuss the challenging and compelling case studies threadbare. This was followed by the formal inaugural session, with CA Preeti Cherian, Convenor, SMPR Committee, extolling everyone with the city’s tagline, “Muskuraiye! Aap Lucknow Mein Hain!”.

The President, CA Anand Bathiya, in his address, thanked the Committee for delivering on its promise to make the dream of visiting Shree Ram Mandir into a reality. He spoke about how the “Members’ only” flagship event of BCAS, the RRC has stood the test of time and continues to have its devoted following; the RRC serves as a confluence of like-minded members, with each one bringing a certain uniqueness to the table. The Chairman of the Committee, CA Chirag Doshi elaborated on the relevance of the RRC, selection of the venue, detailed schedule and RRC statistics.

It was then the turn of the unbeaten RRC champion (with 38 RRCs Not Out), Past President, CA Uday Sathaye to take centre stage and to formally introduce the Chief Guest, Past President CA Govind G Goyal to the audience. Past Presidents of ICAI, CA Mukund Chitale and CA Ved Jain joined the Chief Guest, the President CA Anand Bathiya, the Vice President CA Zubin Billimoria, the Past Presidents CA Anil Sathe,CA Ashok Dhere, CA Pranay Marfatia, CA Rajesh Muni and CA Uday Sathaye, the Chairman CA Chirag Doshi and the Convenors of the Committee, CA Ashwini Chitale,CA Mrinal Mehta and CA Preeti Cherian in lighting the ceremonial lamp. The esteemed Chief Guest and Past President, CA Govind G Goyal spoke in chaste Hindi about his association with BCAS in general and with RRCs in particular.

 

 

The inaugural session was followed by the curtain raiser — the fireside chat on the contemporary topic “Journey of CA Firms (Investible Firms, Mergers and Alliance of Firms)” with CA Manish Modi and CA Vaibhav Manek. The chat was moderated by Managing Committee member, CA Samit Saraf. The panelists spoke frankly of the challenges and opportunities their individual journeys had posed / opened up for them.

 

Day 2 started with the participants experiencing the mehman-nawaazi (hospitality) of our local member, CA Pradeep Kumar who made special arrangements to make available a huge cauldron of the winter speciality Malai Makhan at the breakfast table.

Suitably satiated, the participants were greeted by Convenor, CA Rimple Dedhia as they sat down to listen to the Past President of ICAI, the erudite Adv. CA Ved Jain discuss in detail the intricacies of the case studies which had been deliberated upon a day prior by the groups. The session was chaired by CA Pankaj Agarwal.

The Presentation Paper I “Role of Chartered Accountants in IPO Process” by CA Sumith Kamath helped the audience realise the opportunities available to CAs in this otherwise less explored terrain. The session was chaired by Past President CA Rajesh Muni. The Presentation Paper II “Practical Use of Technology in Professional Firms” by CA Rahul Bajaj had the audience captivated as they experienced for themselves the power of AI through his live demonstrations. The session was chaired by Joint Secretary, CA Kinjal Shah. The fact that the participants were reluctant to allow the session to close for the lunch break (despite it being way past 2 pm!) speaks volumes.

Post a sumptuous meal, Convenor, CA Mrinal Mehta invited all gathered to the Multi-Disciplinary Brains Trust session on the topic “Interplay of Direct Tax, GST Law and Audit on issues relating to Real Estate and Health Care Industry”. The esteemed panel comprising the Past President of ICAI, CA Mukund Chitale, Past President CA Anil Sathe and Shri Vishal Agarwal presented their views on the case studies at hand. The session was ably moderated by Adv CA Kinjal Bhuta and CA Mandar Telang. The day had been long; however, given that the dawn held the promise of fulfilling their dream of a lifetime, the participants felt doubly energised as they retired for the night.

Day 3 found a super enthusiastic group of devotees dressed in traditional attire, gather in the hotel foyer, eagerly waiting for the buses to take them to Ayodhya. The Committee Organisers had pulled out all stops to ensure that all the logistic arrangements, permissions, etc to transport the 190+ devotees from Lucknow to Ayodhya and back, were in place. The recently concluded Maha Kumbh Mela had resulted in unprecedented crowds flooding Ayodhya after taking the holy dip. The strain on the infrastructure had been tremendous — and yet, despite all this, through divine intervention undoubtedly, the entire contingent travelled to Ayodhya in a seamless manner.

The Sugam Darshan of Ram Lalla organised by the Committee brought tears of joy to many an eye and the group returned to Lucknow late afternoon, suitably invigorated. After a refreshing coffee break, the break-out groups for the group discussion on “Case Studies on Practical Implementation of Auditing Standards” retired to their designated areas to discuss the interesting case studies.

Day 4 was kick-started by Convenor, CA Ashwini Chitale inviting Past President CA Ashok Dhere to chair the session by CA Himanshu Kishnadwala as he replied to the case studies debated a day prior by the groups. This was followed by a presentation on the New Income Tax Bill by CA Uttamchand Jain. The session was chaired by Past President CA Pranay Marfatia.

The presence of BCAS through its annual RRC in the city of Lucknow had not gone unnoticed by the powers-that-be. A special session with none other than the Deputy Chief Minister of Uttar Pradesh, Shri Brajesh Pathak ji formed part of the concluding session. In his address, the Deputy CM acknowledged the vital role played by Chartered Accountants in the nation building process and spoke at length about the various domestic and international industries that are now housed in Uttar Pradesh. Shri Mukesh Singh, Executive Council Member & Chairman UP Coordination Committee Indo American Chamber of Commerce then addressed the audience on the topic “Challenges & Opportunities for Business in UP”. The address by the Deputy CM was extensively covered in the news by the 10+ media channels who were in attendance.

In the concluding session, both the President CA Anand Bathiya and Chairman of SMPR Committee, CA Chirag Doshi acknowledged all those who had worked towards delivering a successful RRC, especially the support extended by the local members, CA Anshul Agarwal and CA Pankaj Agarwal. And as the curtains came down on yet another successful RRC – one which had the participants wear their thinking caps and deliberate on where the profession is today and what the future holds, one was reminded of the ghazal penned by shaayar Nida Fazli:

सफ़र में धूप तो होगी, जो चल सको तो चलो

सभी हैं भीड़ में, तुम भी निकल सको तो चलो

किसी के वास्ते, राहें कहाँ बदलती हैं

तुम अपने आप को,

ख़ुद ही बदल सको तो चलो…..

यही है ज़िंदगी, कुछ ख़्वाब, चंद उम्मीदें

इन्हीं खिलौनों से तुम भी बहल सको, तो चलो l

 

 

 

 

 

 

 

 

Regulatory Referencer

DIRECT TAX: SPOTLIGHT

  1.  Due date for filing of Form No. 56F required to be filed under section 10AA(8) for Assessment year 2024-25 extended to 31st March, 2025 — Circular No. 2/2025 dated 18th February, 2025
  2.  Income tax deduction from Salaries during the financial year 2024-25 under section 192 of the Act — Circular No. 3/2025 dated 20th February, 2025
  3.  Frequently Asked Questions (FAQs) on Guidelines issued for Compounding of Offences under the Income-Tax Act, 1961 dated 17th October, 2024 — Circular No. 4/2025 dated 17th March, 2025
  4.  Ten Year Zero-Coupon Bond of Power Finance Corporation Ltd. notified for the purpose of section 2(48) — Notification No. 19/2025 dated 11th March, 2025

FEMA:

1. IFSCA replaces Fund Management Regulations of 2022 with IFSCA (Fund Management) Regulations, 2025.

IFSCA, along with the Fund Management Advisory Committee (FMAC) of IFSCA, senior industry leaders and through public consultations, has reviewed and replaced Fund Management Regulations of 2022 in order to enhance the ease of doing business and to develop the GIFT IFSC as a hub for International financial activities. Key reforms have been made in following areas:

i. Non-Retail Schemes (Venture Capital Schemes and Restricted Schemes)

ii. Manpower requirements for FMEs

iii. Registered FME (Retail) and Retail Schemes

iv. Portfolio Management Services

v. Other Key matters

Significant relaxations have been made including by way of reduction in minimum corpus; carve-outs from the regulatory requirements for fund of funds schemes; dispensation of prior approval for appointment of KMPs; streamlining and broadening the requirements regarding educational qualification and work experience of the KMPs; clarifications on several requirements; and reduction in compliance burden among several other measures. It will be worthwhile to read the new Fund Management provisions in detail for those interested in Fund Management activities in IFSCA.

[International Financial Services Centres Authority (Fund Management) Regulations, 2025 Notification No. IFSCA/GN/2025/002 and Press Release dated 19th February, 2025]

2. IFSCA sets procedure for ‘Fund Management Entity’ (FME) to appoint or change KMPs post-registration

The IFSC Authority has prescribed the manner and procedure to be followed by a Fund Management Entity for effecting the appointment of or change to the Key Managerial Personnels (KMPs) subsequent to the grant of registration by the Authority to the FME. The FME shall file an intimation to the Authority regarding the proposal to appoint or change a KMP in the prescribed format. This circular shall come into force with immediate effect.

[International Financial Services Centres Authority (Fund Management) Regulations, 2025 Press Release No. IFSCA-IF-10PR/1/2023-Capital Markets/6, dated 20th February, 2025]

3. IFSCA amends Aircraft Lease (“AL”) framework — restricts IFSC Lessors from leasing solely to Indian residents

Clause O.2 of AL Framework is replaced with O.2

“Transactions with person(s) resident in India”. As per this circular, lessor shall not purchase, lease or otherwise acquire the assets covered under this framework, where post-acquisition the asset will be operated or used solely by persons resident in India or to provide services to persons resident in India. The amendments to AL Framework shall come into force with immediate effect.

[Circular No. F. No. 172/IFSCA/Finance Company Regulations/2024-25/02 dated 26-2-2025]

4. IFSCA issue guidelines on ‘Cyber Security and Cyber Resilience’ for Regulated Entities in IFSCs

IFSCA has issued guidelines on ‘Cyber Security and Cyber Resilience’ for Regulated Entities in IFSCs. The guidelines intend to lay down IFSCA’s broad expectations from its Regulated Entities (REs). For these guidelines, REs must include any entity which is licensed, recognised, registered or authorised by IFSCA. The key components of the guidelines are categorised into (a) Governance, (b) Cyber security and cyber resilience framework, (c) Third party risk management, (d) Communication and (e) Audit.

[International Financial Services Centres Authority Circular No. IFSCA-CSDOMSC/13/2025-DCS, dated 10th March, 2025]

5. RBI permits settlement of Indo-Maldives trade in INR and MVR, alongside the existing ACU mechanism

In the wake of signing of Memorandum of Understanding (MoU) between RBI and Maldives Monetary Authority in November 2024, the Reserve Bank of India (RBI) has now allowed bilateral trade transactions between India and Maldives to be settled in Indian Rupees (INR) and Maldivian Rufiyaa (MVR) in addition to the existing Asian Clearing Union (ACU) mechanism. These instructions shall come into force with immediate effect.

[Foreign Exchange Management (Manner of Receipt and Payment) Regulations, 2023 A.P. (DIR Series) Circular No. 22 under FEMA, 1999, dated 17th March, 2025]

Recent Developments in GST

A. NOTIFICATIONS

i) Notification No.10/2025-Central Tax dated 13th March, 2025

Above notification seeks to amend Notification  No. 2/2017-Central Tax dated 19th June, 2017  which is regarding revision of the Territorial  Jurisdiction of Principal Commissioner/Commissioner of Central Tax, etc.

B. CIRCULARS

(i) Clarification on Rate of tax and Classification of various items under GST – Circular no.247/04/2025-GST dated 14th February, 2025.

By above circular, the clarifications are given about GST Rates and Classification for various products including SUVs, Popcorn, Raisins, Pepper, and AAC Blocks based on the recommendations of the GST Council in its 55th meeting.

C. ADVISORY

i) Vide GSTN Advisory dated 12th February, 2025, information is given regarding guidelines on GST registration under Rule 8 of the CGST Rules, 2017.

ii) Vide GSTN Advisory dated 15th February, 2025, information about introduction of Form ENR-03, allowing unregistered dealers to generate E-Way Bills using unique Enrolment ID, effective 11th February, 2025, is given.

D. ADVANCE RULINGS

Lease of land vis-à-vis Exemption Anmol Industries Ltd. (AAR Order No. 03/WBAAAR/2024 Dated: 30th August, 2024 DT. 26th November, 2024 (WB AAAR)

Earlier there was AR order no.24/WBAAR/2023-24 dated 20th December, 2023 passed by WBAAR, holding that long-term lease transaction effected by Shyama Prasad Mukherjee Port, Kolkata (SMPK) is not exempted from GST.

The ld. WBAAAR set aside said order and remanded matter back to AAR vide appeal order dated 18th April, 2024. Thereafter, fresh AR passed by AAR.

This appeal was against fresh AR No. 06/WBAAR/2024-25 dated 29th July, 2024-2024-VIL-143-AAR. By the said order, the ld. WBAAR ruled that Services by way of grant of long-term lease of land by SMPK to the appellant for the purpose of “setting up commercial office complex’ is not to be covered under entry 41 of Notification No.12/2017 Central Tax (Rate) dated 28th June, 2017 and, therefore, cannot be treated as an exempt supply.

The facts are that the appellant entered into a leasing agreement with SMPK to take on lease a plot of land at Taratala Road for thirty (30) years for the purposes of setting up a commercial office complex. The appellant was to pay upfront lease premium along with GST @ 18% on consideration of `30,90,11,000/-. The question before AAAR was:

“Whether the upfront premium payable by the appellant towards the services of by way of granting of long-term lease of thirty years, or more of industrial plots or plots for development of infrastructure for financial business by SMPK is exempted under entry 41 of Notification No. 12/2017-CGST (Rate) dated 28th June, 2017?”

Based on use for infrastructure for financial business, the crux of the contention of the appellant was that the appellant being an industrial unit has fulfilled all the conditions as specified in entry number 41 of Notification No. 12/2017- Central Tax (Rate) dated 28th June, 2017 from the end of the recipient and hence SMPK should take exemption and should not charge any GST.

The conditions of aforesaid entry 41 are reproduced as under:

“I. The lease period should be of thirty years or more;

II. The property leased should be industrial plots or plots for development of infrastructure for financial business;

III. Service provider must be a State Government Industrial Development Corporations or Undertakings or by any other entity having 20 per cent. or more ownership of Central Government, State Government, Union territory (either directly or through an entity wholly controlled by the Central Government, State Government, Union territory);

IV. Service recipient must be an Industrial Unit.”

The ld. AAAR held that AAR has not discussed the condition mentioned in the first proviso in entry 41 i.e. whether the lease plot is being used for industrial or financial activity in an industrial or financial business area, which is substantial condition for grant of exemption.

The ld. AAAR examined the said issue in detail and found that the appellant is going to set up Commercial Office by setting up such commercial office complex and all the corporate activities including accounting and financial activities will be undertaken there and that such office will be planned to maintain and monitor all the financial records and transactions of the appellant company. The ld. AAAR found that the appellant is contemplating use of plot for financial business based on use of plot for such financial activity. Though finding on above aspect was not there in AR, the ld. AAAR held that under power u/s.101(1), the AAAR can modify AR order and accordingly considered itself as competent to go into above aspect of use for financial business.

In this respect, the ld. AAAR referred to Notice Inviting Tender, NIT No. SMP/KDS/LND/03-2022 dated 15th March, 2022, in which in para 8.7 the definition of setting up of a Commercial office complex is given as under:

“Setting up of a commercial office complex in a particular plot may be allowed where the listed purposes in the tender include Assembly, Business and Mercantile Buildings and the said land shall be used by the original lessee for own Corporate use and excess vacant space of the said office complex to be let out on lease to other corporate entities who will use the complex for setting up of Business Centre, Business Chambers, Conference Rooms, Office Infrastructure, Cafeteria, Restaurant, Gymnasium, Guest House, hotel accommodation, recreation facilities, pharmacies, diagnostic clinics, retail outlets etc. In other words, the original lessee will be a business integrator where various other stake holders /investors /retailers /service providers will operate under the business integrator (original lessee) as sub-lessees.”

As per clause 8.8 in NIT, it was also found that the plot is not allowable for Industrial building defined as “Any building or structure or part thereof used principally for fabrication, assembly and or processing of goods and materials of different kinds. Such building shall include laboratories, power plants, smoke houses, refineries, gas plants, mills, dairies, factories and workshops”.

Based on above facts, the ld. AAAR observed that when Industrial building itself is not allowed, no stretch of imagination can conclude that industrial activity is allowed under the instant tender. Accordingly, the ld. AAAR held that setting up of commercial office complex has a specific purpose and the same cannot be equated to industrial activity.

Regarding use for “financial activity”, the ld. AAAR observed that “Financial activity” is not defined in the GST Laws and hence meaning to be seen as per common business parlance. The ld. AAAR held that mere maintenance and monitoring of all the required financial records and transactions of a company does not mean financial activity. The ld. AAAR held that every business aims to achieve a profit which occurs because of increase in income and decrease in expenses and for this purpose obviously every business entity undertakes activities which have financial implications. The ld. AAAR held that it is a normal activity for a business and cannot be considered as financial activity implied in NIT. Elaborating this aspect, the ld. AAAR referred to meaning of Financial Service in IBC which indicates financial activity as services like acceptation of deposits and other such independent financial activities. SAC Code 9971 specifying financial services also referred to gather meaning of ‘financial activity’.

Noting above, the ld. AAAR came to the conclusion that the appellant is not providing any of the above Finance Services and hence cannot be considered as carrying out financial activity in a financial business area.

In respect of SMPK being Government Undertaking the ld. AAAR held that though SMPK is audited by the office of the Comptroller and Auditor General of India, it cannot be conclusively regarded as an entity having 20% or more ownership of Central Government.

Accordingly, the ld. AAAR confirmed AR of the AAR and rejected the appeal.

GST on Canteen Facility for Contractual Workers Troikaa Pharmaceuticals Ltd. (AAR (Appeal) Order No. GUJ/GAAAR/APPEAL/2025/07 (in Appl. No. Advance Ruling/SGST & CGST/2022/AR/09) dt.28th February, 2025)(Guj)

The present appeal was filed against the Advance Ruling No. GUJ/GAAAR/R/2022/38 dated 10th August, 2022 – 2022-VIL-231-AAR.

The facts are as under:

♦ “the appellant is engaged in the manufacture, sale & distribution of pharma products and is registered with the department;

♦ the appellant has appointed a CSP [Canteen Service Provider];

♦ the appellant provides subsidized canteen facilities to its employees & contractual workers;

♦ the appellant recovers 50% of the amount from the employees;

♦ that as far as security service contract workers is concerned, the canteen service provider raises bill for only 50% of the amount as the rest of the amount is being directly paid by the individual workers to the service provider.”

Based on above facts, the appellant had sought Advance Ruling on the following questions:

  1. “ Whether GST shall be applicable on the amount recovered by the company,Troikaa Pharmaceuticals Limited, from employees or contractual workers,when provision of third-party canteen service is obligatory under section 46 of the Factories Act, 1948?
  2.  Whether input tax credit of GST paid on food bill of the Canteen Service Provider shall be available, since providing this canteen facility is mandatory as per the Section 46 of the Factories Act, 1948?”

The ld. AAR gave following ruling:

  1. “ GST, at the hands of M/s Troikaa, is not leviable on the amount representing the employees portion of canteen charges, which is collected by M/s Troikaa and paid to the Canteen service provider.
  2.  GST, at the hands of M/s Troikaa, is leviable on the amount representing the contractual worker portion of canteen charges, which is collected by M/s Troikaa and paid to the Canteen service provider.
  3.  ITC on GST paid on canteen facility is admissible to M/s Troikaa under Section 17(5)(b) of CGST Act on the food supplied to employees of the
    company subject to the condition that burden of GST have not been passed on to the employees of the company.
  4.  ITC on GST paid on canteen facility is not admissible to M/s Troikaa under Section 17(5)(b) of CGST Act on the food supplied to contractual worker supplied by labour contractor.”

This appeal was filed in respect of denial of ITC on canteen services provided by the appellant to contractual workers and levy of GST on food charges recovered from contractual workers.

To decide the issue, the ld. AAAR referred to provision of Section 17(5) about blocking of ITC and also Circular No.172/04/2022-GST-dated 6th July, 2022 in which clarifications are given about various issues of section 17(5) of the CGST Act.

Regarding question about levy of GST on receipts for Contractual Workers, the ld. AAAR referred to provisions of Factories Act, 1948 as well as sections 20 and 21 of CTRA,1970.

The appellant was canvassing that statutorily it is the contractor who is required to provide the amenity to the contractual workers in terms of section 16 and the onus shifts on the principal employer i.e. the appellant in case the contractor is not providing the same. The ld. AAAR concurred with above situation that though statutorily it is the contractor on whom the CLRA Act has entrusted the task of providing the amenity and the responsibility shifts on the principal employer i.e. appellant in case the contractor is not providing the same. However, the ld. AAAR observed that section of CLRA provides also that all expenses incurred by the principal employer in providing such amenity may be recovered from the contractor either by deduction from any amount payable under any contract or as a debt payable by the contractor.

From documents submitted the ld. AAAR found that the contractor has been paid the gross amount which includes salary, allowances such as canteen facility, provident fund, etc. The ld. AAAR also did not found averment by the appellant that the contractor has failed to fulfil his statutory obligation so as to shift primary requirement for providing facility on appellant.

The ld. AAAR also noted terms in agreement with Labour Contractor which explicitly states that no relationship of employer-employee is created between the appellant and the workers engaged by the contractor. The ld. AAAR, therefore, held that the clarification at serial no.5, vide circular no. 172/4/2022-GST dated 6th July, 2022 relied upon by the appellant to aver that no GST amount is leviable on the amount recovered from contractual workers for canteen services is incorrect since the clarification states that GST will not apply when perquisites are provided by the employer to its employees and not in other cases. The ld. AAAR also held that clarification at serial no. 3 of the said circular dated 6th July, 2022, regarding availment of ITC, would also not be applicable since it is available only in respect of the goods supplied to the employees of the appellant in terms of section 46 of the Factories Act, 1948, which mandates provision of canteen facilities to the employees.

In view of the above, the appeal was rejected, confirming the AR given by AAR.

Classification – Treated Water

Palsana Enviro Protection Ltd. (AAR (Appeal) Order No. GUJ/GAAAR/APPEAL/2025/08 (in Appl. No. Advance Ruling/ SGST & CGST/2023/AR/04) dt.28th February, 2025)(Guj)

The present appeal was against the Advance Ruling No. GUJ/GAAR/R/2022/47 dated 30th December, 2022 – 2023-VIL-09-AAR.

The facts are that the appellant, who has been promoted by a cluster of textile processing industries, has set up a CETP [Common Effluent Treatment Plant]. In the said CETP, the appellant recycles & thereafter supplies treated water to its member units for use in their activities. This treated water can be used in non-potable activity. Though the CETP treated water is made free from various impurities, however, even after carrying out the said physical and biological processes the said water is not pure water& cannot be termed as purified water.

The further fact is that CETP treated water is supplied to industries through pipelines. The appellant further claimed that their activity falls within the ambit of Sr. No. 99 of notification No. 2/2017-CT (R), as amended vide notification No. 7/2022-CT (Rate) dtd 13th July, 2022, as the water obtained from CETP is not ‘purified water’. To substantiate this claim, they have also relied on circulars No. 52/26/2018 dated 9th August, 2018 & 179/11/2022-GST dated 3rd August, 2022.

With above background appellant posed following questions before the ld. AAR.

  1. “ Whether ‘Treated Water’ obtained from CETP (classifiable under Chapter 2201) will be eligible for exemption from GST by virtue of Sl. No. 99 of the Exemption Notification No. 02/2017- Integrated Tax (Rate), dated 28-6-2017 (as amended) as ‘Water (other than aerated, mineral, purified, distilled, medical, ionic, battery, demineralized and water sold in sealed container)’? or
  2.  Whether ‘Treated Water’ obtained from CETP (classifiable under Chapter 2201) is taxable at 18 per cent b virtue of Sl. No. 24 of Schedule – III of notification No. 01/2017- Integrated Tax (Rate), dated 28-6-2017 (as amended) as ‘Waters, including natural or artificial mineral waters, and aerated waters, not containing added sugar or other sweetening matter nor flavoured (other than Drinking water packed in 20 liters bottles).”

The ld. AAR ruled as under:

  1. “ ‘Treated Water’ obtained from CETP (classifiable under Chapter 2201) is not eligible for exemption from payment of Tax by virtue of Sl. No. 99 of the exemption notification No. 02/2017-CT (Rate) dated 28th June, 2017 (as amended) and Sl. No. 99 of the exemption notification No. 02/2017- Integrated Tax (Rate), dated 28th June, 2017 (as amended).
  2.  ‘Treated Water’ obtained from CETP (classifiable under Chapter 2201) is taxable at 18% by virtue of Sl. No.24 of schedule – III of notification No.01/2017- CT (Rate) (as amended) and Sl. No. 24 of schedule – III of notification No. 01/2017-Integrated Tax (Rate), dated 28th June, 2017 (as amended).”

In essence, the AAR held that CETP water as ‘de-mineralized water’, excluded from exemption.

The appeal was against the above ruling.

In appeal, the appellant has reiterated its stand.

The ld. AAAR referred to relevant entries and averment. The appellant has produced laboratory certificate in course of appeal.

Based on sample water of appellant, in certificate it was stated that the water does not meet parameters of demineralized water.

The ld. AAAR declined to accept the said certificate produced by the appellant because, [a] the same was produced at an appellate stage; [b] the certificate nowhere states that the laboratory is an accredited laboratory and [c] there is no mention about the way the sample was drawn.

The appellant had relied upon certain rulings.

The ld. AAAR did not agree with rulings cited before it on ground that rulings by the Authority for Advance Ruling would be binding only on the applicant who sought it, the concerned officer or the jurisdictional officer in respect of the applicant. The ld. AAAR further observed that the Tamilnadu Authority for Advance Ruling has held that treated water obtained from CETP is de-mineralized water and will
therefore not be eligible for the benefit of the notification Nos. No. 2/2017-CT(R) dated 28th June, 2017 as amended.

In view of above findings, the appeal was rejected confirming the AR passed by GAAR.

Supply of Transportation Service vis-à-vis School Students

Batcha Noorjahan (AAR Order No. 06/ARA/2025 dt.13th February, 2025)(TN)

The applicant is engaged in the business of plying school buses and providing transportation services to the school students in commuting to their school and back home.

Applicant put up following questions to AAR.

  1. “ Whether the services provided by the applicant to the school students by way of transportation of students and staff, shall be considered as the services provided to the school (Educational Institute).
  2.  Whether the services provided by the applicant as mentioned above, shall be considered as exempted from GST as per the Serial No. 66 of Notification No. 12/2017 – Central Tax (Rate) dated 28th June, 2017 or any other applicable provision of the Act.”

The applicant has submitted following aspects of the transaction:

“i) The fees for the transportation of school students are being collected from the students directly as per the agreement with the schools.

ii) There could be a view that since the fees are directly collected from the students, the service recipient is not the school or the Educational Institution.”

As per the provisions of the Act, the services provided to the Educational Institution by way of transportation of students and staff is exempted from GST (Notification No.12/2017). It was further submitted that the applicant is providing services by way of transportation of students and staff though the bus fee is received from the students directly. It was interpretated by applicant that the schools are the service recipients though the consideration is not directly paid by them.

The ld. AAR referred to facts like the applicant has entered into a lease agreement with Alphabet International School vide agreement dated 30.09.2022 for a period of 5 years for the purpose of transporting students and staff of the school only in connection with school activity as provided under clause (8) of Rule 2 of the Tamil Nadu Motor Vehicles Regulations and Control of school buses special rules, 2012.

It was seen from agreement that there was no mention of the consideration part payable by the school to the applicant for providing the vehicle and the services related thereto. There was also no mention in the lease agreement as to how the transportation fees are to be collected, whether by the applicant or by the school.

From the copies of the receipts furnished by the applicant, it was seen that the applicant has directly raised receipt on the student concerned, towards ‘Student Transport Fees’.

The ld. AAR also observed that the applicant is not receiving any payment from the school administration and therefore, no services are rendered to the school by the applicant. The ld. AAR held that the services provided by the applicant to the school students by way of transportation and accordingly, the first question is answered in negative.

Regarding second question the ld. AAR held that the school has outsourced the transport serviceto the applicant and the applicant is directly in receipt of the consideration from the students and accordingly, the service rendered by the applicant to the students is to be considered as ‘Transport of passenger by any motor vehicle’, meriting classification under SAC 9964, attracting GST at 5% without ITC as per Sl.No.8(vi) of Notification No. 11/2017, dated 28th June, 2017, as amended vide Notification No. 31/2017-Central Tax (Rate) dated 13th October, 2017.

Since the transportation services are not suppliedto Educational Institutions as provided under Sl. No.66 of Notification No. 12/2017 – Central Tax (Rate) dated 28th June, 2017, it is not applicable to the applicant. The ld. AAR decided the AR accordingly.

Composite Supply vis-à-vis Mixed Supply

Doms Industries Pvt. Ltd. (AAR (App) Order No. GUJ/GAAAR/APPEAL/ 2025/05 (In Appl. No. Advance Ruling/SGST&CGST/2023/AR/03) dt. 22nd January, 2025) (Guj)

This appeal was filed against the Advance Ruling No. GUJ/GAAR/R/2022/52 dt.30.12.2022-2023-VIL-03-AAR.

The appellant supplies the goods in a combination with other products viz.

[a] DOMS A1 pencil. This consist of 10 pencils along with a sharpener & eraser.

[b] DOMS Smart Kit. This is a gift pack which consists of a colouring book, two pack of pencils,
one pack of colour pencil, one pack of oil pastels, one pack of plastic crayons, one pack of wax crayons, one eraser, one scale and one sharpener.

[c] DOMS my first pencil kit. It consists of a pencil, eraser, scale and a sharpener.

The applicant held view that he satisfies the four conditions to term the aforesaid supply as ‘composite supply’.

With above background, ruling was sought on following questions:

“(i) Whether the supply of pencils sharpener along with pencils being principal supply will be considered as the composite supply or mixed supply?

(ii) What will be the HSN code to be used by us in the above case.

(iii) Whether supply of sharpener along with the kit having a nominal value will have an impact on rate of tax.

If yes, what will be the rate of tax & HSN code to be used by use.”

The ruling of ld. GAAR dated 18th October, 2021 held as under:

“(i) the supply of pencils sharpener along with pencils is covered under the category of ‘mixed supply’;

(ii) as discussed in para 21.1 of the impugned ruling.

(iii) yes, the supply of sharpener along with the kit having a nominal value will have an impact on rate of tax. As discussed in para 21.2 and 21.3 of the impugned ruling.”

The appeal was filed against the above ruling.

Appellant made various submission as well as cited case laws.

In appeal, the ld. AAAR observed that the appellant is aggrieved only in respect of their product ‘DOMS A1 pencil’ which consists of 10 pcs of pencil, one eraser and one sharpener and accordingly AAAR restricted scope of appeal to the ruling on above product only.

The ld. AAAR referred to Guidance in Service Tax Education Guide issued by CBIC.

The ld. AAAR also referred to definition of term ‘composite supply’ and ‘mixed supply’ given in Sections 2(30) and 2(74) of CGST Act respectively.

The ld. AAAR concluded its finding in following terms:

“We find that the CGST Act, defines a composite /mixed supply. Additionally, CGST Act, 2017, thereafter, specifies the tax liability in such case wherein a supply falls within the ambit of either a composite /mixed supply. We have already held that the product ‘DOMS A1 pencil’, is a mixed supply, the product not being naturally bundled, not having a principal supply and not supplied in conjunction with each other in the ordinary course of business. Now, for the sake of argument, even if we were to examine the claim of the appellant, we find that the product of the applicant, in question, would not fall either within Rule 3(a) or 3(b) of the GIR, leaving us with the only alternative of resorting to Rule 3(c). The question then which would arise is whether Rule 3(c) of the GRI or Section 8(b), of the CGST Act, 2017, would prevail. It is a trite law that when the section is unambiguous, the averment of the appellant to take the assistance GRI for deciding the nature of supply, classification and rate of tax, is not legally tenable. We therefore, reject this submission of the appellant.”

Accordingly, the ld. AAAR rejected the appeal and confirmed AR given by AAR.

Goods And Services Tax

HIGH COURT

1. [2025] 172 Taxmann.com 66 (Madras) Madhesh @ Madesan Vs. State Tax Officer Dated 21st December, 2024

Once the goods are detained under section 129, detention order passed beyond the period of seven days from the date of show cause notice is liable to be set aside and detention of goods based on such time-barred order is illegal.

FACTS

In this case, the goods were detained on 29th October, 2024 and notice under section 129(3) of the Act, 2017 in Form GST MOV-07 was also issued on 29th October, 2024. However, no order of detention made in Form GST MOV-09 till date of filing writ, thereby violating the time-line stipulated under section 129(3) of the Act. The short question was whether the proceedings under section 129(3) can be sustained in the absence of complying with the time-line mandated under section 129(3).

HELD

The Hon’ble Court noted that under section 129(3) of the Act, the order ought to have been passed within a period of seven days from the date of service of such notice and hence held that the impugned proceedings are beyond the timelines stipulated under section 129(3) of the Act. Consequently, the impugned proceedings are set aside and the vehicles / goods in question were directed to be released forthwith.

2. [2025] 172 taxmann.com 100 (Allahabad) Kei Industries Ltd vs. State of U.P dated 4th February, 2025

Where goods not covered under the requirements of an E-way bill were transported, they could not be seized under section 129 for not being accompanied with an E-way bill.

FACTS

The petitioner was aggrieved by an order directing a seizure of the vehicle and the goods on the ground that the E-way Bill was not present with the goods. The department admitted in the Court that during the period under consideration, the goods that were being transported by the petitioner were not covered by the requirement of the E-way bill.

HELD

Based on the admission of the department that during the period under consideration, goods which were being transported by assessee, were not covered by the requirement of the E-way bill and relying on the decision in the case of Godrej & Boyce Manufacturing Co. Ltd. vs. State of U.P. — [2018] 97 taxmann.com 552 (Allahabad), the Hon’ble Court held that the impugned order was bad and is therefore, liable to be set aside.

3. [2025] 172 taxmann.com 133 (Gujarat) Patanjali Foods Ltd. vs. Union of India dated 12th February, 2025

Notification No. 9/2022, effective from 18th July, 2022, has a prospective effect and did not apply to refund claims of prior period, even if the claim of refund is made after 18th July, 2022. Further, once the refund application filed by the assessee is adjudicated and order is passed sanctioning the same, it is not open for the department to recover the said refund by issuing another SCN and passing different order and not by challenging the earlier order which has become final.

FACTS

The petitioner is inter-alia, engaged in the manufacture and sale of edible oil. According to the petitioner, the rate of tax applicable to input supplies of the petitioner exceeded the rate of tax on output supplies. Therefore, the petitioner qualified for a refund under the inverted duty structure scheme as per section 54(3) of the Central / Gujarat Goods and Services Tax Act, 2017. Notification No.9/2022-Central Tax dated 13th July, 2022, was issued by the Central Government, notifying certain goods, including edible oil, as ineligible for a refund under the inverted duty structure. The said Notification was made effective from 18th July, 2022. The petitioner submitted a refund application dated 5th December, 2023 for the period from February 2021 to March 2021 under section 54(3) of the GST Act.

The petitioner received a show cause notice proposing to reject the refund application on the ground that there was an existing demand against the petitioner on the GST portal. The petitioner replied to the said show cause notice, pointing out that the demands had been withdrawn pursuant to the direction of the NCLT. Thereafter, the respondent accepted the petitioner’s explanation and granted the refund after passing a sanction order.

However, subsequently, the respondent issued a notice under section 73 of the Act in Form GST-DRC-01, claiming that the earlier refund was erroneously granted in terms of application of the aforesaid notification read with Circular No.181/13/2022-GST dated 10th November, 2022 wherein it was clarified that said restriction shall apply in respect of all refund applications filed on or after 18th July, 2022.

HELD

The Hon’ble Court relied upon the decision in the case of Ascent MeditechLtd. vs. Union of India, wherein the Court struck down para 2(1) of the same Circular dated 10th November, 2022 on the ground that an artificial class of assessees cannot be created on the basis of date of filing of refund application. By that exact logic, the Hon’ble Court held that Para 2(2) of the impugned Circular dated 10th November, 2022 insofar as it provides that the restriction contained in notification no. 13th July, 2022 will apply to all the refund applications filed after 13th July, 2022, even though they are pertaining to a period prior to the date of notification, is wholly arbitrary, discriminatory and ultra-vires Article 14 as well as section 54 of the CGST Act. The Court held that as the notification is prospective in nature, the refund pertaining to period prior to 13th July, 2022 cannot be affected by such notification.

The High Court also noted that against the petitioner’s refund application dated 5th December, 2023, there has been an adjudication by the order dated 12th January, 2024, by which the petitioner’s refund application was accepted and the refund was granted. No appeal under section 107 or revision under section 108 of the CGST Act, 2017 was preferred by the department, challenging the adjudication of the petitioner’s refund application and the consequent order sanctioning the refund. Therefore, the Hon’ble Court, opined that the grant of refund to the petitioner by order dated 12th January, 2024 had become final and no show cause notice could be issued by the respondents to take away the benefits of a quasi-judicial order in the petitioner’s favour. Thus, the subsequent Order-in-Original dated 10th September, 2024, by which the show cause notice dated 2ndMay, 2024 was adjudicated, was held to be illegal and unsustainable and was quashed and set aside.

4. [2025] 172 taxmann.com 105 (Jharkhand) Steel Authority of India Ltd vs. State of Jharkhand dated 30th January, 2025.

Inadmissible ITC of VAT regime cannot be disallowed in the GST regime which is carried forward through TRAN-1 and must be adjudicated under the pre-GST law.

FACTS

Petitioner, a Public Sector Undertaking is engaged in the manufacture of various steel products. Under the VAT regime, as on 30th June, 2017, Petitioner Company had un-availed input tax credit which was transitioned by it under the GST regime in terms of section 140(1) of JGST Act. However, the petitioner received a show cause notice on the following grounds, namely;

Petitioner availed input tax credit on the purchase of consumables which it was not entitled to avail in terms of section 18(8)(viii) of JVAT Act and accordingly, the transition of said credit under the GST Act was impermissible.

(ii) Petitioner availed input tax credit on capital goods which was also not available to them in terms of provisions of section 18(5) of JVAT Act and thus, transitioning of the same under the GST Act was illegal.

Petitioner filed a detailed reply, however order was passed denying the transitional credit in GST regime on the ground that transitioning of inadmissible input tax credit under the GST Act was illegal. Against the aforesaid order, the petitioner preferred an appeal before the Appellate Authority, but the Appellate Authority, rejected the appeal and confirmed the adjudication order.

HELD

Eligibility of input tax credit under erstwhile VAT Act to be adjudicated under provisions of repealed Act. Proceedings for alleged inadmissible credit under the GST Act is improper and without jurisdiction. Impugned adjudication order and appellate order quashed. Amount recovered to be restored with interest, however, Respondent authorities were allowed to initiate proceedings under repealed VAT Act if so advised.

5. [2025] 172 taxmann.com 129 (Madras) KesarJewellers vs. Additional Director General dated 7th February, 2025

There must be tangible material on record suggesting that it is necessary to provisionally attach the property of the petitioner, for the purpose of protecting the interest of the revenue.

FACTS

The petitioner is registered as a taxable person under the GST Act engaged in the trading of Gold Bullion and Gold Jewellery. The Senior Intelligence Officer, Directorate General of Goods and Service Tax, Intelligence (DGGI), issued a summons to the petitioner under section 70 of the CGST Act, calling upon the petitioner to be present at their office in connection with an investigation. Thereafter, the petitioner’s place of business was searched and certain documents such as purchase / sale invoices, mobile phone, pen drive along with files containing certain papers were seized. Thereafter there was another search of the petitioner’s place of business, during which, gold bars along with computer, mobile phones, loose cash, documents were seized and duly recorded in the Mahazar. Yet another summon came to be issued under section 70 of the CGST Act, calling upon the petitioner to appear for an enquiry. Thereafter, an arrest memo with grounds for arrest was issued. The petitioner was arrested and remanded to judicial custody. The impugned order in Form DRC-22 came to be issued i.e. on the very day when the petitioner was granted bail, thereby attaching provisionally the petitioner’s bank accounts.

Petitioner submitted that the impugned attachment proceeding is bad for want of jurisdiction inasmuch as it did not disclose any tangible material leading to the formation of the opinion, that it is necessary to provisionally attach the property of the petitioner, for the purpose of protecting the interest of the Government warranting exercise of power under section 83 of the Act and that in the absence of tangible material which indicates a live link to the necessity to order a provisional attachment to protect the interest of the Revenue, the exercise of power under section 83 of the Act is without jurisdiction.

HELD

The Hon’ble Court held that the provisional attachment is an extreme measure that must be based on tangible material and must be necessary to protect revenue. The Court held that the attachment order in the present case was mechanical and failed to disclose any specific tangible material or justification for attachment. Since, the pendency of proceedings under Chapter XII, XIV or XV was not sufficient to justify provisional attachment and revenue did not establish that revenue could not be protected without attachment, the impugned order of provisionally attaching multiple bank accounts was to be set aside.

Non-Repatriable Investment by NRIs/OCIs under FEMA: An Analysis – Part 2

NON-REPATRIABLE INVESTMENTS: EASY ENTRY, TRICKY EXIT!

In Part I, we explored how NRIs and OCIs can invest in India under Schedule IV, enjoying the perks of domestic investment while sidestepping FDI restrictions. We saw how this route offers flexibility in entry—with no foreign investment caps, no strict pricing rules, and freedom to invest in LLPs, AIFs, and even real estate (as long as it’s not a farmhouse!). But, much like a long-term relationship, once you commit, FEMA expects you to stay for the long haul.

Now, in Part II, we address the big question: Can you transfer, sell, or gift these investments? Will FEMA allow you a graceful exit? We’ll dive into the rules governing transfers, repatriation limits, downstream investments, and more—so buckle up, because while the non-repatriable entry was smooth, the exit is where the real thrill begins!

TRANSFER OF SHARES/INVESTMENTS HELD ON NON-REPATRIATION BASIS

Just as important as the entry is the ability to transfer or exit the investment. FEMA provides certain pathways for transferring shares or other securities that were held on a non-repatriation basis:

  •  Transfer to a Resident: An NRI/OCI can sell or gift the securities to an Indian resident freely. Since the resident will hold them as domestic holdings, this is straightforward. No RBI permission, pricing guideline, or reporting form is required. For instance, if an NRI uncle wants to gift his shares (held on a non-repat basis) in an Indian company to his resident Indian nephew, it’s permitted and no specific FEMA filing is triggered (aside from perhaps a local gift deed for records). Similarly, suppose an NRI non-repat investor wants to sell his stake to an Indian co-promoter. In that case, he can transact at any price mutually agreed upon (pricing restrictions don’t apply as this is essentially a resident-to-resident transfer in FEMA’s eyes), and no FC-TRS form is required.
  • Transfer to another NRI / OCI on Non-Repat basis: NRIs / OCIs can also transfer such investments amongst themselves, provided the investment remains on non-repatriation. For example, one OCI can gift shares held under Schedule IV to another OCI or NRI (maybe a relative) who will also hold them under Schedule IV. This is allowed without RBI approval, and again, no pricing or reporting requirements apply. The only caveat is that the transferee must be eligible to hold on a non-repat basis (which generally means they are NRI / OCI or their entity). Gifting among NRIs / OCIs on the non-repat route is quite common within families. Note: If it’s a gift, one should ensure it meets any conditions under the Companies Act or other laws (for instance, if the donor and donee are “relatives” under Section 2(77) Companies Act, as required by FEMA for certain cross-border gifts – more on that below).
  •  Transfer to an NRI / OCI on a repatriation basis (i.e., converting it to FDI): This scenario is effectively an exit from the non-repatriable pool into the repatriable pool. For instance, an NRI with non-repat shares might find a foreign investor or another NRI who wants those shares but with repatriation rights. FEMA permits the sale, but since the buyer will hold on a repatriation basis (Schedule I or III), it must conform to FDI rules. That means sectoral caps and entry routes must be respected, and pricing guidelines apply to the transaction. If it’s a gift (without consideration) from an NRI (non-repat holder) to an NRI / OCI (who will hold as repatriable), prior RBI approval is required and certain conditions must be met. These conditions (laid out in NDI Rules and earlier in TISPRO) include: (a) the donee must be eligible to hold the investment under the relevant repatriable schedule (meaning the sector is open for FDI for that person); (b) the gift amount is within 5% of the company’s paid-up capital (or each series of debentures / MF scheme) cumulatively; (c) sectoral cap is not breached by the donee’s holdings; (d) donor and donee are relatives as defined in Companies Act, 2013; and (e) the value of securities gifted by the donor in a year does not exceed USD 50,000. These are designed to prevent the abuse of gifting as a loophole to transfer large foreign investments without consideration. If all conditions are met, RBI may approve the gift. If it’s a sale (for consideration) by NRI non-repat to NRI/OCI repatriable, no prior approval is needed (sale is under automatic route) but pricing must be at or higher than fair value (since NR to NR transfer with one side repatriable is treated like an FDI entry for the buyer). Form FC-TRS must be filed to report this transfer, and in such a case, since the seller was holding non-repat, the onus is on the seller (who is the one changing their holding status) to file the FC-TRS within 60 days. Our earlier table from the draft summarizes: Seller NRI-non-repat -> Buyer NRI-repat: pricing applicable, FC-TRS by seller, auto route subject to caps.
  •  Transfer from a foreign investor (repatriable) to an NRI/OCI (non-repatriable): This is the reverse scenario – a person who holds shares as foreign investment sells or gifts to an NRI / OCI who will hold as domestic. For example, a foreign venture fund wants to exit and an OCI investor is willing to buy but keep the investment in India. FEMA allows this as well. Since the new holder is non-repatriable, the sectoral caps don’t matter post-transfer (the investment leaves the FDI ambit). However, up to the point of transfer, compliance should be there. In a sale by a foreign investor to an NRI on a non-repat basis, pricing guidelines again apply (the NRI shouldn’t pay more than fair value, because a foreigner is exiting and taking money out – RBI ensures they don’t take out more than fair value). FC-TRS reporting is required, and typically, the buyer (NRI / OCI) would report it because the buyer is the one now holding the securities (the authorized dealer often guides who should file; it has to be a person resident in India and as non-repat investment is treated as domestic investment, it has to be filed by NRI / OCI acquiring it on non-repat basis). If it’s a gift from a foreign investor to an NRI / OCI relative, RBI approval would similarly be needed with analogous conditions (the NDI Rules conditions on gift apply to any resident outside to resident outside transfer, repatriable to non-repat likely treated similarly requiring approval unless specified otherwise). The draft table indicated: Buyer NRI-non-repat from Seller foreign (repat) – gift allowed with approval, pricing applicable, FC-TRS by buyer, and subject to FDI sectoral limits at the time of transfer.

In all the above cases of change of mode (repatriable vs non-repatriable), one can see FEMA tries to ensure that whenever money is leaving India (repatriable side), fair value is respected and RBI is informed. But when the money remains in India (purely domestic or non-repat transfers), the regulations are hands-off.

Downstream Investment Impact: A critical implication of holding investments on non-repatriation basis is how the investing company is classified. FEMA and India’s FDI policy have the concept of indirect foreign investment – if Company A is foreign-owned or controlled, and it invests in Company B, then Company B is considered to have foreign investment to that extent. However, Schedule IV investments are excluded from this calculation. The rules (as clarified in DPIIT’s policy) state that if an Indian company is owned and controlled by NRIs / OCIs on a non-repatriation basis, any downstream investment by that company will not be considered foreign investment. In other words, an Indian company that has only NRI / OCI non-repat capital is treated as an Indian-owned company. So if it later invests in another Indian company, that target company doesn’t need to worry about foreign equity caps because the investment is coming from an Indian source (deemed). This is a major benefit – it effectively ring-fences NRI domestic investment from contaminating downstream entities with foreign status. This clarification was issued to remove ambiguity, especially in cases where OCIs set up investment vehicles. Now, an NRI / OCI-owned investment fund (registered as an Indian company or LLP) can invest freely in downstream companies without subjecting them to FDI compliance, provided the fund’s own capital is non-repatriable.

From a practical standpoint, when structuring private equity deals, if one of the investors is an NRI / OCI willing to designate their contribution as non-repatriable, the company can be treated as fully Indian-owned, allowing it to invest into subsidiaries or other companies in restricted sectors without ceilings. This has to be balanced with the investor’s interest (since that NRI loses repatriation right). Often, OCIs with a long-term commitment to India might be agreeable to this to enable, say, a group structure that avoids FDI limits.

Summary of Transfer Scenarios: For quick reference:

  •  NRI / OCI (Non-repat)-> Resident: Allowed, gift allowed, no pricing rule, no reporting.
  •  Resident -> NRI / OCI (Non-repat): Allowed, gift allowed, no pricing rule, no reporting (essentially the mirror of above, turning domestic holding into NRI non-repat).
  •  NRI / OCI (Non-repat) -> NRI / OCI (Non-repat): Allowed, gift allowed, no pricing, no reporting.
  •  NRI / OCI (Non-repat) -> Foreigner / NRI (Repat): Allowed, the gift needs RBI approval (with conditions), if sale then pricing applies; report FC-TRS.
  •  Foreigner / NRI (Repat) -> NRI / OCI (Non-repat): Allowed, gift possibly with approval; sale at pricing; report FC-TRS.

The key is whether the status of the investment (domestic vs foreign) changes as a result of transfer, and ensuring the appropriate regulatory steps in those cases.

Comparative Interplay Between Schedules I, III, IV, and VI

To fully understand Schedule IV in context, one must compare it with other relevant schedules under FEMA NDI Rules:

Schedule I (FDI route) vs Schedule IV (NRI non-repat route)

  •  Nature of Investment: Schedule I covers FDI by any person resident outside India (including NRIs) on a repatriation basis. Schedule IV covers investments by NRIs / OCIs (and their entities) on a non-repatriation basis. Schedule I investments count as foreign investment; Schedule IV do not.
  •  Sectoral Caps and Conditions: Schedule I investments are subject to sectoral caps (% limits in various sectors) and sector-specific conditions (like minimum capitalization, lock-ins, etc., in sectors like retail, construction, etc.). By contrast, Schedule IV investments are generally not subject to those caps/conditions because they are treated as domestic. For example, multi-brand retail trading has a 51% cap under FDI with many conditions – an OCI could invest 100% in a retail company under Schedule IV with none of those conditions, as long as it’s on a non-repatriation basis. Similarly, real estate development has minimum area and lock-in requirements under FDI, but an NRI could invest non-repat without those (provided it’s not pure trading of real estate).
  •  Prohibited Sectors: Schedule I explicitly prohibits foreign investment in sectors like lottery, gambling, chit funds, Nidhi, real estate business, and also limits in print media, etc. Schedule IV has its own (smaller) prohibited list (Nidhi, agriculture, plantation, real estate business, farmhouses, TDR) but notably does not mention lottery, gambling, etc. Thus, some sectors closed in Schedule I are open in Schedule IV, and vice versa (as discussed earlier).
  •  Valuation / Optionality: Under Schedule I, any equity instruments issued to foreign investors can have an optionality clause only with a minimum lock-in of 1 year and no assured return; effectively, foreign investors cannot be guaranteed an exit price. Under Schedule IV, these restrictions do not apply – one can issue shares or other instruments to NRIs/OCIs with an assured buyback or fixed return arrangement since it’s like a domestic deal. Likewise, provisions like deferred consideration (permitted for FDI up to 25% for 18 months) need not be adhered to strictly for non-repat investments – an NRI investor and company can agree on different terms as it’s a private domestic contract in FEMA’s eyes.
  •  Reporting: FDI (Sch. I) transactions must be reported (FC-GPR, FC-TRS, etc.), whereas Sch. IV initial investments are not reported to RBI as noted.
  •  Exit / Repatriation: Schedule I investors can repatriate everything freely (that’s the point of FDI), whereas Schedule IV investors are bound by the NRO / $1M rule for exits.

Bottom line: Schedule IV is far more liberal on entry (no caps, any price) but restrictive on exit, whereas Schedule I is vice versa. A legal advisor will often weigh these options for an NRI client: if the priority is to eventually take money abroad or bring in a foreign partner, Schedule I might be preferable; if the priority is flexibility in investing and less regulatory hassle, Schedule IV is attractive.

Schedule III (NRI Portfolio Investment) vs Schedule IV (NRI Non-Repatriation)

Schedule III deals with the Portfolio Investment Scheme (PIS) for NRIs / OCIs on a repatriation basis, primarily buying/selling shares of listed companies through stock exchanges.

  •  Listed Shares via Stock Exchange: Under Schedule III (PIS), an NRI / OCI can purchase shares of listed Indian companies only through a recognized stock broker on the stock exchange and is subject to the rule that no individual NRI / OCI can hold more than 5% of the paid-up capital of the company. All NRIs / OCIs taken together cannot exceed 10% of the capital unless the company passes a resolution to increase this aggregate limit to 24%. These limits are to ensure NRI portfolio investments remain “portfolio” in nature and do not take over the company. In contrast, under Schedule IV, NRIs / OCIs can acquire shares of listed companies without regard to the 5% or 10% limits because those limits apply only to repatriable holdings. An NRI could, for instance, accumulate a larger stake by buying shares off-market or via private placements under Schedule IV.
  •  Other Securities: Schedule III also allows NRIs to purchase on a repatriation basis certain government securities, treasury bills, PSU bonds, etc., up to specified limits, and units of equity mutual funds (no limit). On this front, both Schedule III and Schedule IV allow NRIs to invest in domestic mutual fund units freely if the fund is equity-oriented. So whether repatriable or not, an NRI can buy any number of units of, say, an index fund or equity ETF.
  •  Nature of Investor: Schedule III is meant for NRIs investing as portfolio investors (often through NRE PIS bank accounts), whereas Schedule IV is not limited to portfolio activity – it can be FDI-like strategic investments too.
  •  Trading vs Investment: Under PIS (Sch. III), NRIs are typically not allowed to make the stock trading their full-time business (they cannot do intraday trading or short-selling under PIS; it’s for investment, not speculation). Schedule IV has no such restriction explicitly; however, if an NRI were actively trading frequently under non-repatriation, it might raise questions – usually, serious traders stick to the PIS route for liquidity.

In summary, Schedule III is a subset route for market investments with tight limits, whereas Schedule IV offers NRIs a way to invest in listed companies beyond those limits (albeit off-market and non-repatriable). As a strategy, an NRI who sees a long-term value in a listed company and wants significant ownership may choose to buy some under PIS (repatriable) but anything beyond the threshold under the non-repat route, combining both to achieve a
larger stake.

SCHEDULE VI (FDI IN LLPs) Vs SCHEDULE IV (NRI INVESTMENT IN LLPs)

Schedule VI allows foreign investment in Limited Liability Partnerships (LLPs) on a repatriation basis. It stipulates that FDI in LLP is allowed only in sectors where 100% FDI is permitted under automatic route and there are no FDI-linked performance conditions (like minimum capital, etc.). This effectively bars FDI in LLPs in sectors like real estate, retail trading, etc., because those sectors either have caps or conditions. For example, multi-brand retail is 51% with conditions – so a foreign investor cannot invest in an LLP doing retail. Real estate business is prohibited entirely for FDI – so no LLP can be structured. Even an LLP in construction development is problematic under FDI if conditions (like a lock-in) are considered performance conditions.

However, Schedule IV imposes no such sectoral conditionality for LLPs (apart from the same prohibited list). Therefore, NRIs / OCIs can invest in the capital of an LLP on a non-repatriation basis even if that LLP is engaged in a sector where FDI in LLP is not allowed. For instance, an LLP engaged in the business of building residential housing (construction development) — FDI in such an LLP would not be allowed repatriably because construction development, while 100% automatic, had certain conditions under the FDI policy. Under Schedule IV, an NRI could contribute capital to this LLP freely as domestic investment. Another concrete example: LLP engaged in single-brand or multi-brand retail – FDI in LLP is not permitted because retail has conditions, but NRI non-repat funds could still be infused into an LLP doing retail trade. The only caveat is if the LLP’s activity falls under the explicit prohibitions of Schedule IV (agriculture, plantation, real estate trading, farmhouses, etc., which we already know). As long as the LLP’s business is not in that small prohibited list, NRI / OCI money can be invested on non-repatriable basis.

Thus, Schedule IV significantly expands NRIs’ ability to invest in LLPs vis-à-vis Schedule VI. It allows the Indian-origin diaspora to use LLP structures (which are popular for smaller businesses and real estate projects), which are otherwise off-limits to foreign investors. The outcome is that an LLP which cannot get FDI can still get funds from NRI partners, treated as local funds, potentially giving it a competitive edge or needed capital infusion. As noted earlier, an LLP receiving NRI non-repat investment remains an “Indian” entity for downstream investment purposes as well, so it could even invest in other companies without being tagged as foreign-owned.

SCHEDULE IV Vs SCHEDULE IV (FIRM/PROPRIETARY CONCERNS)

There is also a provision (in Part B of Schedule IV) for investment in partnership firms or sole proprietorship concerns on a non-repatriation basis. There is no equivalent provision under repatriation routes – meaning NRIs cannot invest in a partnership or proprietorship on a repatriable basis at all under NDI rules. Under Schedule IV, an NRI/OCI can contribute capital to any proprietorship or partnership firm in India provided the firm is not engaged in agriculture, plantation, real estate business, or print media. These mirror the older provisions from prior regulations. The exclusion of print media here is interesting, as discussed: an NRI cannot invest in a newspaper partnership but could invest in a newspaper company. This is likely a policy decision to keep sensitive sectors like news media more closely regulated (partnerships are unregulated entities compared to companies which have shareholding disclosures, etc.).

For completeness, Schedule V under NDI Rules is for investment by other specific non-resident entities like Sovereign Wealth Funds in certain circumstances, and Schedule VII, VIII, IX cover foreign venture capital, investment vehicles, and depository receipts respectively.

PRACTICAL CHALLENGES AND LEGAL IMPLICATIONS

While the non-repatriation route offers flexibility, it also presents some practical challenges and considerations for legal practitioners advising clients:

  1.  Exit Strategy and Liquidity: Perhaps the biggest issue is planning how the NRI/OCI will exit or monetize the investment if needed. Since direct repatriation of capital is capped at USD 1 million per year, clients who invest large sums must understand that they can’t easily pull out their entire investment quickly. Case in point: if an OCI invests $5 million in a startup via Schedule IV and after a few years the startup is sold for $20 million, the OCI cannot take $20 million out in one go. They would either have to flip the investment to a repatriable mode before exit (e.g. sell their stake to a foreign investor prior to the main sale, thereby converting to FDI at fair value and then repatriating through that foreign investor’s sale) or accept a long repatriation timeline using the $1M per year route, or approach RBI (which historically is reluctant to approve a big one-shot remittance). This illiquidity needs to be clearly explained to clients
  2.  Mixing Repatriable and Non-Repatriable Funds: Often, companies have a mix of foreign investment – say, a venture capital fund (FDI) and an NRI relative (non-repat). In such cases, accounting properly for the two classes is key. From a corporate law perspective, both hold equity, but from an exchange control perspective, one part of equity is foreign, and one part is domestic. The company’s compliance team must carefully track these when reporting foreign investment percentages to any authority or while calculating downstream foreign investment. Misclassification can lead to errors – e.g., a company might erroneously count the NRI’s holding as part of FDI and think it breached a cap, or conversely ignore a foreign holding, thinking it was NRI domestic. It’s advisable in company records and even on share certificates to mark non-repatriable holdings distinctly. Some companies create separate folios in their register for clarity..
  3.  Corporate Governance and Control: Because Schedule IV allows NRIs to invest beyond usual foreign limits, we see scenarios of foreign control via NRI routes. For example, foreign parents could nominate OCI individuals to hold a majority in an Indian company so that it is “Indian owned” but effectively under foreign control through OCI proxies. Regulators are aware of this risk. The law currently hinges on “owned and controlled by NRIs / OCIs” as the test for deeming it domestic. If an OCI is truly acting at the behest of a non-OCI foreigner, that could be viewed as a circumvention. In diligence, one should ensure OCI investors are bona fide and making decisions independently, or at least within what law permits. If an Indian company with large NRI non-repat investment is making downstream investments in a sensitive sector, one must document that control remains with OCI and not via any agreement handing powers to someone else, lest the structure be challenged as a sham.
  4.  Changing Residential Status: An interesting practical point – if an NRI who made a non-repat investment later moves back to India and becomes a resident, their holding simply becomes a resident holding (no issue there). But if they then move abroad again and become NRI once more, by default, that holding would become an NRI holding on a non-repat basis (since it was never designated repatriable). That person might now wish it were repatriable. There isn’t a straightforward mechanism to “retroactively designate” an investment as repatriable; typically, the person would have to do a transfer (e.g., transfer to self through a structure, which is not really possible) or approach RBI. It’s a corner case, but it shows that once an investment is made under a particular schedule, toggling its status is not simple unless a third-party transfer is involved.
  5.  Evidence of Investment Route: Down the line, when an NRI / OCI wants to remit out the sale proceeds under the $1M facility, banks often ask for proof that the investment was made on a non-repatriation basis (because if it was repatriable, the sale proceeds would be in an NRE account and could go out without using the $1M quota). Thus, maintaining paperwork – such as the board resolution or offer letter mentioning the shares are under Schedule IV, or a copy of the share certificate with a “non-repatriable” stamp, or the letter to AD bank at the time of issue – becomes useful to avoid confusion. If records are lost or unclear, the bank might fear to allow remittance or might treat it as some foreign investment needing RBI permission. So, documentation is a practical must.
  6.  Taxation Aspect: Though not directly a FEMA issue, note that dividends repatriated to NRIs will be after TDS, and any gift of shares etc. might have tax implications (gift to a relative is not taxable in India, but to a non-relative, it could trigger tax for the recipient if over ₹50,000). Also, the favourable FEMA treatment doesn’t automatically confer any tax residency benefit – e.g., just because OCI investment is deemed domestic doesn’t make the OCI an Indian resident for tax

BEFORE WE ALL NEED A REPATRIATION ROUTE, LET’S WRAP THIS UP!

Before we exhaust ourselves—or our dear readers start considering their own non-repatriable exit strategies—let’s conclude. The non-repatriation route under FEMA is like a VIP pass for NRIs and OCIs to invest in India while enjoying the perks of domestic investors. It’s a fine balancing act by policymakers: welcoming diaspora investments with open arms but keeping foreign exchange reserves snugly in place.

For legal practitioners, Schedule IV is both a playground and a puzzle—offering creative structuring opportunities while demanding meticulous planning for exits and compliance. Done right, it’s a win-win for investors and Indian businesses alike, seamlessly blending “foreign” and “domestic” investment. So, whether you’re an NRI looking for investment options or a lawyer navigating these rules—remember, patience, planning, and a strong cup of chai go a long way!

Miscellanea

1. TECHNOLOGY AND AI

# Italian newspaper says it has published world’s first AI-generated edition

An Italian newspaper has said it is the first in the world to publish an edition entirely produced by artificial intelligence. The initiative by Foglio, a conservative liberal daily, is part of a month-long journalistic experiment aimed at showing the impact AI technology has “on our way of working and our days”, the newspaper’s editor, Claudio Cerasa, said.

“It will be the first daily newspaper in the world on newsstands created entirely using artificial intelligence,” said Cerasa. “For everything. For the writing, the headlines, the quotes, the summaries. And, sometimes, even for the irony.” He added that journalists’ roles would be limited to “asking questions and reading the answers”.

The experiment comes as news organisations around the world grapple with how AI should be deployed. Earlier this month, the Guardian reported that BBC News was to use AI to give the public more personalised content. The front page of the first edition of Foglio AI carries a story referring to the US president, Donald Trump, describing the “paradox of Italian Trumpians” and how they rail against “cancel culture” yet either turn a blind eye, or worse, “celebrate” when “their idol in the US behaves like the despot of a banana republic”.

The front page also features a column headlined “Putin, the 10 betrayals”, with the article highlighting “20 years of broken promises, torn-up agreements and words betrayed” by Vladimir Putin, the Russian president.

The final page runs AI-generated letters from readers to the editor, with one asking whether AI will render humans “useless” in the future. “AI is a great innovation, but it doesn’t yet know how to order a coffee without getting the sugar wrong,” reads the AI-generated response.

Cerasa said Il Foglio AI reflected “a real newspaper” and was the product of “news, debate and provocations”. But it was also a testing ground to show how AI could work “in practice”, he said, while seeing what the impact would be on producing a daily newspaper with the technology and the questions “we are forced to ask ourselves, not only from a journalistic nature”.

(Source: www.theguardian.com dated 18th March, 2025)

2 STARTUPS

# Nandan Nilekani predicts that India will have one million startups by 2035

Infosys cofounder Nandan Nilekani predicts that India will have one million startups by 2035. He said that there are 150,000 startups today growing at a compound annual growth rate of 20%. He also noted that among 2000 funded startups, 100 unicorns have been created. He outlined a strategic roadmap for India to achieve an 8% annual growth rate and become an $8 trillion economy by 2035.

He stressed that while a 6% growth rate is commendable, a focused effort is needed to elevate living standards and accelerate progress. He noted that 50% of India’s wealth is in land.

He cautioned that significant headwinds, including income disparity, regional imbalances, and low productivity, threaten to impede progress. Nilekani revealed that only 13 districts contribute to half of India’s GDP, underscoring the stark spatial disparities. He also noted the vast income gap and the challenges posed by a largely informal economy.

Nilekani emphasised the need to leverage AI to bridge the digital divide and reach a billion Indians. He advocated for the development of low-cost, population-scale AI solutions, particularly in regional languages.

Nilekani predicted that India will have one million startups by 2035, driven by a thriving entrepreneurial ecosystem. He highlighted the “binary fission” effect, where successful startups spawn new ventures, creating a ripple effect of innovation.

His key recommendations for an $8 trillion economy included AI for a billion Indians: focus on last mile consumers and MSMEs, and emphasis on health, education and agriculture. His second recommendation was to accelerate capital investments, maximise AA penetration, and land monetisation via tokenisation.

Nilekani also suggested “unshackling” entrepreneurs and MSMEs by funding entrepreneurs outside the eight metros, and enabling credit and market access for 10 million MSMEs. He also recommended “turbocharging” formalisation, via portable credentials and benefits, and suggested deregulation for ease of business.

(Source: www.economictimes.com dated 12th March, 2025)

3. ENVIRONMENT

# ‘Unexpected’ rate of sea level rise in 2024: NASA

Sea levels rose faster than expected around the world in 2024 — the Earth’s hottest year on record, according to new findings from the United States’ NASA space agency, which attributed the rise to warming oceans and melting glaciers.

“With 2024 as the warmest year on record, Earth’s expanding oceans are following suit, reaching their highest levels in three decades,” NASA’s Nadya Vinogradova Shiffer, head of physical oceanography programmes said.

Josh Willis, a sea level researcher at NASA, said the rise in the world’s oceans last year was “higher than expected”, and while changes take place each year, what has become clear is that the “rate of rise is getting faster and faster”.

According to the NASA-led study of the information sourced via the Sentinel-6 Michael Freilich satellite, the rate of sea level rise last year was 0.59cm (0.23 inches) per year — higher than an initial expected estimate of 0.43cm (0.17 inches) per year.

Satellite recordings of ocean height started in 1993, and in the three decades up to 2023, the rate of sea level rise has more than doubled, with average sea levels around the globe rising by 10cm (3.93 inches) in total, according to NASA.

Rising sea levels are among the consequences of human-induced climate change, and oceans have risen in line with the increase in the Earth’s average surface temperature — a change which itself is caused by greenhouse gas emissions.

NASA said trends from recent years showed additional water from land due to melting ice sheets and glaciers to be the biggest contributor, accounting for two-thirds of sea level rise.

In 2024, however, the increased rise in sea levels was largely driven by the thermal expansion of water – when ocean water expands as it warms — which accounts for about two-thirds of the increase.

The UN has warned of threats to vast numbers of people living on islands or along coastlines due to rising sea levels, with low-lying coastal areas of India, Bangladesh, China and the Netherlands flagged as areas of particular concern, as well as island nations in the Pacific and Indian Oceans.

(Source: www.aljazeera.com dated 14th March, 2025)

# Purpose defeated: Brazil cuts thousands of trees to make way for climate summit

Brazil is facing growing criticism after clearing large sections of the Amazon rainforest to build a highway for the upcoming COP30 climate summit, set to take place in Belém, a northern city in Brazil, this November.

The four-lane highway, designed to accommodate tens of thousands of delegates, including world leaders, has sparked concerns about the environmental impact in one of the world’s most biodiverse regions.

The highway project, which was proposed by the state government of Pará over a decade ago, was delayed several times due to concerns about its environmental impact. However, with the summit approaching, the project has moved forward as part of a broader plan to prepare Belém for the influx of visitors. The state is also undertaking other major infrastructure projects, such as expanding the airport, redeveloping the port for cruise ships, and constructing new hotels.

The state government defends the highway, claiming it will be sustainable. They point to features like cycle lanes and wildlife crossings designed to help animals move through the area safely. Adler Silveira, the state’s infrastructure secretary, also highlighted that the road would use solar-powered lighting, further emphasizing its environmental credentials.

Despite these claims, many locals and environmental groups are outraged. Residents like Claudio Verequete, who lives about 200 meters from the new road, argue that the construction is devastating their livelihoods. Verequete, who once made his living harvesting açaí berries, shared his frustration with the BBC, saying, “Everything was destroyed. Our harvest has already been cut down. We no longer have that income to support our family.”

Conservationists have also raised alarms, warning that the deforestation could harm wildlife and disrupt the delicate balance of the Amazon ecosystem. The region is crucial for absorbing carbon dioxide and preserving global biodiversity, and many critics argue that the destruction of the forest for a highway goes against the very purpose of hosting a climate summit in the area.

As the summit draws closer, the debate over the highway and its environmental impact is intensifying, with critics questioning whether the destruction of part of the Amazon can be justified in the name of hosting a global climate event.

(Source: www.timesofindia.com dated 13th March, 2025)

Determination of ALP for Related Party Transactions

INTRODUCTION

“Everything is worth what its purchaser will pay for it”
– Publilus Syrus’ Maxim No. 847

One of the most important roles of the Board of Directors of a listed company and its Audit Committee is the review and approval of Related Party Transactions (RPTs). Related Party Transactions are prescribed under s.188 of the Companies Act, 2013 (“Act”) as well as the SEBI (Listing Obligations and Disclosure Requirements)Regulations, 2015 (“SEBI LODR”). The most crucial element in approving an RPT is determining whether the transaction is on an arms’ length pricing (ALP)? Let us examine some key facets in this respect.

STATUTORY FRAMEWORK

Regulation 2(zc) of the SEBI LODR defines a related party transaction to mean a transaction involving a transfer of resources, services or obligations between a listed entity on one hand and a related party of the listed entity on the other hand, regardless of whether a price is charged and a “transaction” with a related party shall be construed to include a single transaction or a group of transactions in a contract.

Under Regulation 23(2) of the SEBI LODR, all related party transactions and subsequent material modifications, shall require prior approval of the Audit Committee of the listed entity.

S.188 of the Companies Act, 2013 provides that all related party transactions require the approval of the Board of Directors if they are not on an arms’ length basis. The expression “arm’s length transaction” has been defined to mean a transaction between two related parties that is conducted as if they were unrelated, so that there is no conflict of interest.

The Act / SEBI LODR does not provide any further guidance on this expression. Hence, one may refer to other statutes.

DICTIONARY DEFINITIONS

Various Dictionaries have defined the term arm’s length transaction as follows:

(a) The Black’s Law Dictionary, 6th Edition, defines it to mean a transaction negotiated by unrelated parties, each acting in its own self-interest; the basis for a fair market value determination.

(b) The Shorter Oxford English Dictionary, 5th Edition defines it as dealings between two parties where neither party is controlled by the other.

(c) Merriam-Webster’s 11th Collegiate Dictionary states that arm’s length is the condition or fact that the parties to a transaction are independent and on an equal footing.

(d) The Judicial Dictionary by KJ Aiyar, 13th Edition, states that arm’s length transaction is a transaction between unrelated persons in which there is no improper influence exercisable by one party over another and no conflict of interests.

ALP UNDER INCOME-TAX ACT, 1961

The expression “arm’s length price” features prominently in sections 92-92F of the Income-tax Act, 1961 in relation to transfer pricing provisions.

S.92C of this Act deals with the computation of an arm’s length price. It states that the arm’s length price in relation to a transaction shall be determined by any of the following methods, being the most appropriate method, having regard to the nature of transaction or class of transaction or class of associated persons or functions performed by such persons or such other relevant factors.

The methods prescribed under this section to determine ALP are: —
(a) comparable uncontrolled price method;
(b) resale price method;
(c) cost plus method;
(d) profit split method;
(e) transactional net margin method;

The Chennai ITAT in the case of Iljin Automotive Private Ltd vs. ACIT, (2011) 16 taxmann.com 225 has defined ALP as “What would have been the price if the transactions were between two unrelated parties, similarly placed as the related parties in so far as nature of product, conditions and terms and conditions of the transactions are concerned?”

In Arvind Mills Ltd. vs. ACIT [2011] 11 taxmann.com 67 (Ahd. – ITAT), it was held that the arm’s length principle is based on:

(i) a comparison of the conditions in a controlled transaction with the conditions in transaction between two independent enterprises i.e. uncontrolled transaction,

(ii) subject to adjustments to the price of uncontrolled transaction to carve out differences between these two type of transactions.

Hence, locating proper comparables i.e. comparable uncontrolled transactions is at the heart of an ALP.

Paragraph 1 of Article 9 of the OECD’s Model Tax Convention (which is the basis of bilateral tax treaties) provides as follows:

“(where) conditions are made or imposed between the two enterprises in their commercial or financial relations which differ from those which would be made between independent enterprises, then any profits which would, but for those conditions, have accrued to one of the enterprises, but, by reason of those conditions, have not so accrued, may be included in the profits of that enterprise and taxed accordingly”

In Dy. CIT vs. Smt. Baljinder Kaur [2009] 29 SOT 9 (URO), the Chandigarh ITAT held that it was a well settled proposition that the concept of ‘fair market value’ envisaged under the Income-tax Act existence of a hypothetical seller and a hypothetical buyer, in a hypothetical market.

CUP METHOD

The Comparable Uncontrolled Price Method (“CUP method”) is the most direct assessment of whether the arm’s length principle is complied with as it compares the price or value of the transactions. As it is the most direct method, it should, be preferred to the other methods. Under the CUP method, the arm’s length price of an RPT is equal to the price paid in comparable uncontrolled sales including adjustments, if any.

In the case of M/s. Schutz Dishman Biotech Pvt. Ltd., Ahmedabad, ITA 554 / AHD / 2006, the Ahmedabad ITAT held that the CUP method is the most suitable method for determining ALP if market conditions in the territory of sale are the same.

Rule 10B of the Income-tax Rules, 1962 states that in determining the ALP, the comparable uncontrolled price method is a method, by which the price charged or paid for property transferred or services provided in a comparable uncontrolled transaction, or a number of such transactions, is identified. Thus, the steps for determining ALP are as follows:

(i) Identify the price charged or paid for property transferred or services provided in a comparable uncontrolled transaction or a number of such transactions.

(ii) Adjust such price for differences, if any, between the RPT and the comparable uncontrollable transactions. Adjustments required only if these could materially affect the price in open market.

The adjusted price arrived at in (ii) above is to be taken as the arm’s length price.

According to Rule 10A(ab), “uncontrolled transaction” means a transaction between enterprises other than associated enterprises or related parties. For instance, A and B are related parties. C and D are independent parties (non-related). A transaction between C and D is an uncontrolled transaction as both A and B are concerned. A transaction between A and C/A and D is an uncontrolled transaction as far as B is concerned. A transaction between B and C/B and D is an uncontrolled transaction as far as A is concerned.

The Rule further states that the comparability of a transaction with an uncontrolled transaction shall be judged with reference to the following, namely:-

(a) the specific characteristics of the property transferred or services provided in either transaction;

(b) the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions;

(c) the contractual terms (whether or not such terms are formal or in writing) of the transactions which lay down explicitly or implicitly how the responsibilities, risks and benefits are to be divided between the respective parties to the transactions;

(d) conditions prevailing in the markets in which the respective parties to the transactions operate, including the geographical location and size of the markets, the laws and Government orders in force, costs of labour and capital in the markets, overall economic development and level of competition and whether the markets are wholesale or retail.

An uncontrolled transaction shall be comparable to an RPT if —

(i) none of the differences, if any, between the transactions being compared are likely to materially affect the price or cost charged or paid in, or the profit arising from, such transactions in the open market; or

(ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences.

In this respect, the United Nations Transfer Pricing Manual defines ‘comparable’ as under:

  •  To be comparable does not mean that the two transactions are necessarily identical.
  •  Instead it means that either none of the differences between them could materially affect the arm’s length price or profit or, where such material differences exist, that reasonably accurate adjustments can be made to eliminate their effect.
  •  Thus, in determining a reasonable degree of comparability, adjustments may need to be made to account for certain material differences between the controlled and uncontrolled transactions.
  •  These adjustments (which are referred to as “comparability adjustments”) are to be made only if the effect of the material differences on price or profits can be ascertained with sufficient accuracy to improve the reliability of the results.

The UN TP Manual also recognises that perfect comparables are often not available in an imperfect world. It is therefore necessary to use a practical approach to establish the degree of comparability between controlled and uncontrolled transactions.

Comparable uncontrollable transactions are of two types:

♦ Internalcomparables – transactions entered into by related parties with unrelated parties. To be considered as an internal CUP also, a transaction has to be an independent transaction, i.e., between two entities, which are independent of each other – Skoda Auto India (P.) Ltd. vs. Asst. CIT [2009] 30 SOT 319 (Pune – Trib.)

♦ External comparables – transactions between third parties (i.e. transactions not involving any related party).

According to the OECD Guidelines, internal comparables would provide more reliable and accurate data than external comparables. This is because external comparables are difficult to obtain, incomplete and difficult to interpret. Hence, internal comparables are to be preferred over external comparables.

VALUATION UNDER THE CENTRAL EXCISE LAW

The concept of valuation in case of a related person also finds mention under the Central Excise Act. In this respect, the decision of the Supreme Court in the case of CCE vs. Detergents India P Ltd, (2015) AIR SCW 3304 is relevant:

“……transactions at arm’s length between manufacturer and wholesale purchaser which yield the price which is the sole consideration for the sale alone is contemplated. Any concessional or manipulative considerations which depress price below the normal price are, therefore, not to be taken into consideration. Judged at from this premise, it is clear that arrangements with related persons which yield a price below the normal price because of concessional or manipulative considerations cannot ever be equated to normal price. But at the same time, it must be remembered that absent concessional or manipulative considerations, where a sale is between a manufacturer and a related person in the course of wholesale trade, the transaction being a transaction where it is proved by evidence that price is the sole consideration for the sale, then such price must form the basis for valuation as the “normal price” of the goods………………”

Thus, as long as an unrelated price is comparable to a related party price, the related party price has been treated as a normal sale price.

VALUATION UNDER GST LAWS

The GST Laws also provide for determination of open market value in certain cases. For levying GST only that value should be used which is that of an unrelated buyer and supplier. The Central Goods and Services Tax (CGST) Rules, 2017 specify that the value of the supply of goods or services or both between related parties shall be the open market value of such supply.

The term “open market value” of a supply of goods or services or both has been defined to mean the full value in money, excluding GST payable by a person in a transaction, where the supplier and the recipient of the supply are not related and the price is the sole consideration, to obtain such supply at the same time when the supply being valued is made.

ICSI’S GUIDANCE NOTE

In this respect, the Guidance Note on Related Party Transactions issued by the Institute of Company Secretaries of India (ICSI) in March 2019 is relevant.

One of the Issues raised by the Guidance Note is “How do you satisfy the criteria of arm’s length pricing?” The Guidance Note replies as follows:

“One may check if there are comparable products in the market. If yes, check the terms of sale/purchase, etc. of similar transactions and try obtaining quotes from other sources. Price in isolation cannot be the only criteria. Terms of sale such as credit terms should also be considered”

The RPT as a whole and the entire bundle of the terms and conditions needs to be considered for determining whether the transaction is on an arm’s length basis. It further states that a simple way to prove that there is no conflict of interest in the RPT is to prove that existence of special relationship between contracting parties has not affected the transaction and its critical terms, including price, quantity, quality and other terms and conditions governing the transaction, by following industry benchmarks, past transactions entered by the company, etc.

Another issue raised by the Guidance Note is “What are the parameters to be considered by the Audit Committee while considering whether a transaction is on arm’s length basis? How should the Audit Committee decide such an issue?” The Guidance Note replies as follows:

“The Act does not prescribe methodologies and approaches which may be used to determine whether a transaction has been entered into on an arm’s length basis. Audit Committee may consider the parameters given in the company’s policy on transactions with related parties. Transfer pricing guidelines given under the Income-tax Act, 1961 may also be used. Depending on the nature of individual transaction, any appropriate method may be used by the Audit Committee”

Thus, the ICSI recommends obtaining quotations from unrelated parties as a basis for ascertaining the ALP and also using the methods under the Income-tax Act for determining the ALP.

SA 550 ON RELATED PARTIES

SA 550 is a Standard on Auditing issued by the ICAI on Related Parties. This Standard also provides guidance to the Auditor on how to verify whether the pricing for an RPT is indeed at an arm’s length:

  •  Comparing the terms of the related party transaction to those of an identical or similar transaction with one or more unrelated parties.
  •  Engaging an external expert to determine a market value and to confirm market terms and conditions for the transaction.
  •  Comparing the terms of the transaction to known market terms for broadly similar transactions on an open market.

RELIANCE ON QUOTATIONS – VALID

In Toll Global Forwarding India (P.) Ltd. vs. Dy. CIT [2014] 51 taxmann.com 342 (Delhi – Trib.) the validity of bona fide quotations as a means of ascertaining ALP was upheld:

“As long as one can come to the conclusion, under any method of determining the arm’s length price, that price paid for the controlled transactions is the same as it would have been, under similar circumstances and considering all the relevant factors, for an uncontrolled transaction, the price so paid can be said to be arm’s length price. The price need not be in terms of an amount but can also be in terms of a formulae, including interest rate, for computing the amount. In any case, when the expression “price which….would have been charged or paid” is used in rule 10AB, dealing with this method, in this method the place of “price charged or paid”, as is used in rule 10B(1)(a), dealing with CUP method, such an expression not only covers the actual price but also the price as would have been, hypothetically speaking, paid if the same transaction was entered into with an independent enterprise. This hypothetical price may not only cover bona fide quotations, but it also takes it beyond any doubt or controversy that where pricing mechanism for associated enterprise and independent enterprise is the same, the price charged to the associated enterprises will be treated as an arm’s length price”

Accordingly, quotations from unrelated parties could serve as a valid basis for determining the arm’s length pricing. However, the terms of the quotes should be similar. For instance, the wife of the company’s Managing Director is selling a key raw material to the company. She runs her own business. The rate charged to the company is on the same basis as that charged by her to other unrelated customers. However, in the case of the company, the entire payment is received by her upfront whereas she provides a 6 months’ credit period to all other buyers. This would not be an arm’s length price.

SEBI’S NEW MINIMUM STANDARDS

Regulation 23(2), (3)and (4) of SEBI LODR requires RPTs to be approved by the audit committee and by the shareholders, if material. Part A and Part B of Section III-B of SEBI Master Circular dated November 11, 20241 (“Master Circular”) specify the minimum information to be placed before the audit committee and shareholders, respectively,for consideration of RPTs. In order to facilitate a uniform approach and assist listed entities in complying with the above mentioned requirements, the IndustryStandardsForum (“ISF”) comprising of the representatives from three industry associations, viz. ASSOCHAM, CII and FICCI, under the aegis of the Stock Exchanges, has formulated industry standards, in consultation with SEBI,for minimum information to be provided for review of the Audit Committee and shareholders for approval of RPTs. This has been mandated by SEBI’s Circular dated 14th February, 2025.

This SEBI Circular requires that if a valuation or other report of external party has been obtained for an RPT then the same shall be placed before the Audit Committee. If any such report has been considered, it shall also be stated whether the Audit Committee has reviewed the basis for valuation contained in the report and found it to be satisfactory based on their independent evaluation.

Further, in the case of the payment of royalty, information on Industry Peers shall be given as follows:

(i) The Listed Entity will strive to compare the royalty payment with a minimum of three Industry Peers, where feasible. The selection shall follow the following hierarchy:

A. Preference will be given to Indian listed Industry Peers.

B. If Indian listed Industry Peers are not available, a comparison may be made with listed global Industry Peers, if available.

(ii) If no suitable Indian listed/ global Industry Peers are available, the Listed Entity may refer to the peer group considered by SEBI-registered research analysts in their publicly available research reports (“Research Analyst Peer Set”). If theListed Entity’s business model differs from such Research Analyst Peer Set, it may provide an explanation to clarify the distinction.

(iii) In cases where fewer than three Industry Peers are available, the listed entity will disclose, that only one or two peers are available for comparison.

Additional details need to be provided for RPTs relating to sale, purchase or supply of goods or services or any other similar business transaction:

(a) Number of bidders / suppliers / vendors / traders / distributors / service providers from whom bids / quotations were received with respect to the proposed transactionalong with details of process followed to obtain bids – the Circular states that if the number of bids / quotations is less than 3, Audit Committee must comment upon whether the number of bids / quotations received are sufficient.

(b) Best bid / quotation received. If comparable bids are available, disclose the price and terms offered -the Circular states that Audit committee must provide a justification for rejecting the best bid /quotation and for selecting the related party for the transaction.

(c) Additional cost / potential loss to the listed entity or the subsidiary in transacting with the related party compared to the best bid / quotation received – the Audit Committee must justify the additional cost to the listed entity or the subsidiary.

(d) Where bids were not invited, the fact shall be disclosed along with the justification for the same.

(e) Wherever comparable bids are not available, the Company must state what is the basis to recommend to the Audit Committee that the terms of proposed RPT are beneficial to the shareholders.

Similar details are also required for proposed RPTs relating to sale, lease or disposal of assets of the subsidiary or of a unit, division or undertaking of the listed entity, or disposal of shares of the subsidiary or associate.

For proposed RPTs relating to any loans, inter-corporate deposits or advances given by the listed entity or its subsidiary – Comparable interest rates shall be provided for similar nature of transactions. If the interest rate charged to the related party is less than the average rate paid by the related party, then the Audit Committee must provide a justification for the low interest rate charged.

WHAT MUST THE AUDIT COMMITTEE DO?

Considering the above, Audit Committee of a listed entity must carry out the following process when concluding whether or not an RPT is on an arm’s length basis:

(a) Follow the SEBI prescribed industry standards on minimum information to be placed before the Audit Committee.

(b) Ask for independent quotes / bids / tender from non-related parties for the same transaction. The terms and conditions of the transaction must be the same for the related and the non-related parties.

(c) In some cases, such as, rental RPTs, a broker’s opinion on comparable rent instances could also be relied upon.

(d) Sometimes, it may not be feasible or practical to obtain independent quotes / bids either due to the specialised nature of the transaction or limited number of entities offering that service/ goods. In such cases, the Audit Committee could rely upon an expert’s opinion as to the ALP determination. While relying on this opinion, it should verify that the expert has considered relevant factors and has given a speaking, well-reasoned opinion. For instance, in one case, a listed company acquired a very large piece of land from a promoter company. The management furnished two expert opinions, one from an international property consultant and the other from a chartered valuer. Based on various market studies, sale instances, registration details, etc., both of them concluded that the price paid by the listed company was on an arm’s length basis.

(e) If appropriate, reliance may also be placed on statutory valuations, such as, stamp duty ready reckoner rates, customs’ valuation assessment, etc.

(f) In case of acquisition of shares, an expert’s valuation report may be relied upon.

(g) Ask the Internal Auditor to verify RPTs and give a certification that they are on an arm’s length basis. The Auditor should examine the process for determining ALP in the RPTs.

EXAMPLES FROM LISTED COMPANIES

The RPT Policies of listed companies throw some light on how the Boards should determine ALP. A few such policies are discussed below:

(a) Infosys Technologies Ltd – the Board will inter alia consider factors such as, nature of the transaction, material terms, the manner of determining the pricing and the business rationale for entering into such transaction and any other information the Board may deem fit.

(b) Wipro Ltd – All RPTs are at arm’s length and are undertaken in the ordinary course of business, i.e., the relationship with the transacting party should not confer on the Company or the transacting party any undue benefit / advantage or undue disadvantage / onerous obligations, that will be unacceptable if such transacting party was not a related party and / or the Company will not enter into a transaction which it will ordinarily not undertake. It also states that there must be no “conflict of interest” while negotiating and arriving at terms of such Related Party Transactions. For this purpose, “Terms” will not be merely confined to ‘price’ or ‘consideration’ but also other terms such as payment terms, credit period, sale whether ex-factory, FOB, CIF etc.

If in doubt, management shall seek advice on “arm’s length” from the Chief Financial Officer, General Counsel, of the Company and / or the Audit Committee, as appropriate. The Audit Committee’s decision on these aspects shall be final. Audit Committee could seek external advice to assist in decision making on these aspects or for that matter in dealing with any issues connected with RPTs.

(c) Grasim Industries Ltd – Terms will be treated as on ‘Arm’s Length Basis’ if the commercial and key terms are comparable and are not materially different with similar transactions with non-related parties considering all the aspects of the transactions such as quality, realizations, other terms of the contract, etc. In case of contracts with related parties for specified period / quantity / services, it is possible that the terms of one-off comparable transaction with an unrelated party are at variance, during the validity of contract with related party. In case the Company is not doing similar transactions with any other non-related party, terms for similar transactions between other non-related parties of similar standing can be considered to establish ‘arm’s length basis’. Other methods prescribed for this purpose under any law can also be considered for establishing this principle.

(d) Tata Steel Ltd – While assessing a proposal put up before the Audit Committee / Board for approval, the Audit Committee / Board may review the following documents / seek the following information from the management in order to determine if the transaction is at an arm’s length or not:

  •  Nature/type of the transaction i.e. details of goods or property to be acquired / transferred or services to be rendered / availed (including transfer of resources) – including description of functions to be performed, risks to be assumed and assets to be employed under the proposed transaction;
  •  Material terms (such as price and other commercial terms contemplated under the arrangement) of the proposed transaction, including value and quantum;
  •  Benchmarking information that may have a bearing on the arm’s length basis analysis, such as:
  •  market analysis, research report, industry trends, business strategies, financial forecasts, etc.;
  •  third party comparable, valuation reports, price publications including stock exchange and commodity market quotations;
  •  management assessment of pricing terms and business justification for the proposed transaction as to why the RPT is in the interest of the Company;
  •  comparative analysis, if any, of other such transaction entered into by the Company.

It also states that for this purpose, the Company will seek external expert opinion, if necessary.

CONCLUSION

Valuation is a very subjective exercise based on highly objective data! Hence, it is often remarked that “value lies in the eyes of the beholder!” This subjectivity takes a more dramatic turn when faced with a transaction which is between parties who are associated or related. In the famous English case of R vs. Sussex Justices, ex parte McCarthy, [1923] All ER Rep 233, Lord Hewart CJ laid down the principle ~ “Not only must Justice be done; it must also be seen to be done”. Similarly, when determining the ALP in case of related transactions,

“Not only must the value be fair; it must also be seen to be fair!”

This is where the Board’s expertise and experience would come in handy. They would need to examine the facts of the RPT and remember Grabel’s Law in each ALP determination:

“Two is Not Equal To Three, Even for Very Large Values of Two!”

Issues Relating To ‘May Be Taxed’ In Tax Treaties

The term ‘may be taxed’ has been commonly used in tax treaties since before the OECD  Model Tax Convention was first published in 1963. In India, there has been significant litigation on whether the term indicates an exclusive right of taxation. While the CBDT vide Notification in  2008 has clarified the issue, certain ambiguities still exist.

In this article, the authors seek to analyse the said issue on whether the term ‘may be taxed’ in tax treaties refers to an exclusive right of taxation to any Contracting State.

BACKGROUND

The allocation of taxing rights in respect of various streams of income in DTAAs can generally be bifurcated into 3 categories:

a. Category I – May also be taxed:

Some articles provide that the particular income may be taxed in a particular jurisdiction (typically the country of residence) and also states that the income ‘may also be taxed’ in the other Contracting State, typically with some restrictions in terms of tax rates, etc. The articles on dividend, interest, royalty / fees for technical services, generally provide for such type of allocation of taxing right.

For example, Article 10(1) of the India – Singapore DTAA, dealing with dividends provides as follows,

“1. Dividends paid by a company which is a resident of a Contracting State to a resident of the other Contracting State may be taxed in that other State.

2. However, such dividends may also be taxed in the Contracting State of which the company paying the dividends is a resident and according to the laws of that State, but if….” (emphasis supplied);

b. Category II – Shall be taxable only:

Some articles provide that the particular income ‘shall be taxable only’ in a particular Contracting State indicating an exclusive right of taxation to the particular Contracting State (typically the country of residence). Generally, this type of allocation of taxing right is found in the article of business profits (where there is no permanent establishment) or capital gains (in respect of assets other than those specified).

For example, Article 13(5) of the India – Singapore DTAA provides as under,

“Gains from the alienation of any property other than that referred to in paragraphs 1, 2, 3, 4A and 4B of this Article shall be taxable only in the Contracting State of which the alienator is a resident.” (emphasis supplied);

c. Category III – May be taxed:

Some articles simply state that the particular income ‘may be taxed’ in a particular Contracting State (in most cases, the source State) without referring to the taxation right of the other Contracting State.

An example of such taxing right is in Article 6 of the India – Singapore DTAA which provides as under,

“Income derived by a resident of a Contracting State from immovable property situated in the other Contracting State may be taxed in that other State.” (emphasis supplied)

In the above Article, the right of the source State is provided but no reference is made whether the State of residence can tax the said income or not.

While the allocation of taxing right in the first two categories is fairly clear, there is ambiguity in the third category i.e. whether in such a scenario, the country of residence has a right to tax in case the DTAA is silent in this regard.

Given the language in the DTAA, the question which arises is whether the income from rental of an immovable property situated in Singapore by an Indian resident can be taxed in India or would such income be taxed exclusively in Singapore under the India – Singapore DTAA.

DECISIONS OF THE COURTS

While some courts held that the term ‘may be taxed’ in a Contracting State, not followed by the term ‘may also be taxed’ in the other Contracting State meant that exclusive right of taxation was granted to the first-mentioned Contracting State, some courts held that ‘may be taxed’ is to be interpreted differently from ‘shall be taxed only’ and therefore, does not infer exclusive right of taxation. One of the most notable decision which provided the former view i.e. ‘may be taxed’ is equated to ‘shall be taxed only’, is the Karnataka High Court in the case of CIT vs. RM Muthaiah (1993) (202 ITR 508).

The issue before the Hon’ble Karnataka High Court in the above case was whether income earned from an immovable property situated in Malaysia was taxable in India in the hands of an Indian resident under the India – Malaysia DTAA. Article 6(1) of the earlier India – Malaysia DTAA provided,

“Income from immovable property may be taxed in the Contracting State in which such property is situated.”

In the said case, the Revenue argued that the DTAA did not provide for an exclusive right of taxation to Malaysia and India had a right to tax the income. The High Court, while not analysing the specific language of the DTAA, held as under,

“The effect of an ‘agreement’ entered into by virtue of section 90 would be: (i) if no tax liability is imposed under this Act, the question of resorting to the agreement would not arise. No provision of the agreement can possibly fasten a tax liability where the liability is not imposed by this Act; (ii) if a tax liability is imposed by this Act, the agreement may be resorted to for negativing or reducing it; (iii) in case of difference between the provisions of the Act and of the agreement, the provisions of the agreement prevail over the provisions of this Act and can be enforced by the appellate authorities and the Court.”

The High Court, therefore, held that as the DTAA did not specifically provide for India, being the country of residence, to tax the said income, it would be taxable only in Malaysia.

The Mumbai Bench of the Tribunal in the case of Ms. Pooja Bhatt vs. DCIT (2009) (123 TTJ 404) held that,

“Wherever the parties intended that income is to be taxed in both the countries, they have specifically provided in clear terms. Consequently, it cannot be said that the expression “may be taxed” used by the contracting parties gave option to the other Contracting States to tax such income. In our view, the contextual meaning has to be given to such expression. If the contention of the Revenue is to be accepted then the specific provisions permitting both the Contracting States to levy the tax would become meaningless. The conjoint reading of all the provisions of articles in Chapter III of Indo-Canada treaty, in our humble view, leads to only one conclusion that by using the expression “may be taxed in the other State”, the contracting parties permitted only the other State, i.e., State of income source and by implication, the State of residence was precluded from taxing such income. Wherever the contracting parties intended that income may be taxed in both the countries, they have specifically so provided. Hence, the contention of the Revenue that the expression “may be taxed in other State” gives the option to the other State and the State of residence is not precluded from taxing such income cannot be accepted.”

Similarly, the Madras High Court in the case of CIT vs. SRM Firm & Others (1994) (208 ITR 400) also held on similar lines. The above Madras High Court decision was affirmed by the Apex Court in the case of CIT vs. PVAL KulandaganChettiar (2004)(267 ITR 654), albeit without analyzing the controversy of ‘may be taxed’ vs ‘shall be taxed only’. The Supreme Court held that,

“13. We need not to enter into an exercise in semantics as to whether the expression “may be” will mean allocation of power to tax or is only one of the options and it only grants power to tax in that State and unless tax is imposed and paid no relief can be sought. Reading the Treaty in question as a whole when it is intended that even though it is possible for a resident in India to be taxed in terms of sections 4 and 5, if he is deemed to be a resident of a Contracting State where his personal and economic relations are closer, then his residence in India will become irrelevant. The Treaty will have to be interpreted as such and prevails over sections 4 and 5 of the Act. Therefore, we are of the view that the High Court is justified in reaching its conclusion, though for different reasons from those stated by the High Court.”

This view was further upheld by the Supreme Court in the cases of DCIT vs. Torqouise Investment & Finance Ltd. (2008) (300 ITR 1) and DCIT vs. Tripti Trading & Investment Ltd (2017) (247 Taxman 108). In both the above cases, it was held that dividend received by an Indian assessee from Malaysia was exempt from
tax in India by virtue of the India – Malaysia DTAA following the earlier decision of Kulandagan Chettiar (supra).

NOTIFICATION OF 2008 AND SUBSEQUENT DECISIONS

Section 90(3) of the ITA, inserted by the Finance Act 2003 with effect from Assessment Year 2004-05, provides that any term not defined in the DTAA can be defined through a notification published in the Gazette. Subsequently, the CBDT Notification No. 91 of 2008 dated 28th August, 2008 under section 90(3) was issued, which states as under,

“In exercise of the powers conferred by sub-section (3) of section 90 of the Income-tax Act, 1961 (43 of 1961), the Central Government hereby notifies that where an agreement entered into by the Central Government with the Government of any country outside India for granting relief of tax or as the case may be, avoidance of double taxation, provides that any income of a resident of India “may be taxed” in the other country, such income shall be included in his total income chargeable to tax in India in accordance with the provisions of the Income-tax Act, 1961 (43 of 1961), and relief shall be granted in accordance with the method for elimination or avoidance of double taxation provided in such agreement.”

Therefore, the CBDT, vide its above notification, provided that the term ‘may be taxed’ is not required to be equated to ‘shall be taxable only’ and India would still have the right of taxation, unless the tax treaty specifically provides that the income ‘shall be taxed only’ in the other State.

There are two possible views regarding implications of the aforesaid Notification issued by the CBDT.

View 1: The Notification clarifies the right of taxation in respect of ‘may be taxed’

The view is that the Notification now changes the position of taxability and that income of a resident of India shall be taxable in India unless the income is taxable only in the country of source as per the respective DTAA, has been upheld by the Mumbai ITAT in the cases of Essar Oil Ltd. vs. ACIT (2014) 42 taxmann.com 21 and Shah Rukh Khan vs. ACIT (2017) 79 taxmann.com 227, the Delhi ITAT in the case of Daler Singh Mehndi vs. DCIT (2018) 91 taxmann.com 178 and the Jaipur ITAT in the case of Smt. IrvindGujral vs. ITO (2023) 157 taxmann.com 639.

View 2: The Notification does not clarify all situations involving ‘may be taxed’

The alternative view is that Notification No. 91 of 2008 will have application only in a case where the primary right to tax has been given to the state of residence and such state has allowed the source State also to charge such income to tax at a concessional rate.

The relevant provisions in a DTAA could be divided into three broad categories:

i) where the right to tax is given to the State of source (e.g. Article 6 dealing with income derived from immovable property);

ii) where such right to tax is given to the State of residence (e.g. Article 8 dealing with income derived from International Shipping and Air Transport); and

iii) where the primary right to tax is with the State of residence. However, such State has ceded and allowed the State of source also to charge such income to tax, but, at a concessional rate (e.g. Article 7 dealing with business profits, Article 10 dealing with dividends, Article 11 dealing with interest and Article 12 dealing with royalties and fees for technical services).

Under this view, one may argue that the said notification has been issued to clarify the position of the Government of India only with respect to the category (iii) of income as it does not refer to a situation where the right of State of Residence to tax the said income, is silent. The said clarifications should not apply to incomes referred to in category (i) and category (ii) above. This is because, with respect to category (iii) income as explained above, the primary right to tax is with the state of Residence which has partially ceded such right in favour of the State of source by enabling such State to tax the income at a concessional rate of tax. If one reads the said notification in the above context, one may conclude that the Notification only covers income covered in category (iii) above.

Another aspect one may consider is that section 90(3) of the Act, itself provides that the meaning to be assigned to a term in the notification issued by the Central Government shall apply unless the context otherwise requires and such meaning is consistent with the provisions of the Act or the DTAA.

Further, interestingly, readers may refer to the January 2021 edition of this Journal1 wherein the authors of the said article have analysed that while section 90(3) of the ITA empowers the Government to define an undefined term, the above Notification goes beyond the scope of the section as it does not define any term but only clarifies the stand of the Government on the said issue without actually defining the term.

The authors of the said article have also questioned whether ‘may be taxed’ is a term or a phrase.

In this regard, one may also refer to the Mumbai ITAT in the case of Essar Oil (supra), wherein the issue of whether it is a term or a phrase was analysed and concluded as under,

“The phrases “may be taxed”, “shall be taxed only” and “may also be taxed” have a definite purpose and a definite meaning which is conveyed. Whether it is a term, phrase or expression does not make any significant difference because the contracting parties have given a definite meaning to such a phrase and once the Government of India have clarified such an expression, then it cannot be held that it does not fall within the realm of the word “term” as given in section 90(3). Thus, we do not feel persuaded by the argument taken by the learned Sr. Counsel.”

UNILATERAL AMENDMENTS

The India – Malaysia DTAA which was the subject matter of litigation in the matter before the High Courts and Supreme Courts for the meaning of the term, was amended in 2012. Interestingly, the new DTAA now specifically provides the following in the Protocol,

“It is understood that the term “may be taxed in the other State” wherever appearing in the Agreement should not be construed as preventing the country of residence from taxing the income.”

Therefore, in respect of the India – Malaysia DTAA now, there is no ambiguity about the interpretation of the phrase. However, the question does arise as to whether, the fact that this similar language is not provided in any other DTAA (in the main text or in the Protocol), another meaning has to be ascribed to the term in the other DTAAs.

Though the Notification is part and parcel of the Act, a DTAA is a thoughtfully negotiated economic bargain between two sovereign States and any unilateral amendment cannot be read into the DTAA such that the economic bargain is annulled, until and unless the DTAA itself is amended.

As mentioned above, the authorities being aware of the aforesaid fact, amended the India-Malaysia DTAA on 09-05-2012 to incorporate the unilateral amendment put forth by the aforesaid Notification into the DTAA by way of inserting paragraph 3 to the Protocol of the India-Malaysia DTAA. Similarly, paragraph 2 to the Protocol dated 30-01-2014 of the India-Fiji DTAA states that the term “may be taxed in the other State” wherever appearing in the Agreement should not be construed as preventing the country of residence from taxing the income. Paragraph 1 of India-South Africa DTAA provides that ‘With reference to any provision of the Agreement in terms of which income derived by a resident of a Contracting State may be taxed in the other Contracting State, it is understood that such income may, subject to the provisions of Article 22, also be taxed in the first-mentioned Contracting State.

In the earlier India-Malaysia DTAA (Notification No. GSR 667(E), dated 12th October, 2004), Clause 4 of the Protocol was agreed on between the two contracting States with reference to paragraph 1 of Article 6 to the effect that the said paragraph should not be construed as preventing the Country of Residence to also tax the income under the said Article.

It would be relevant to note that Article 6 of the India-Malaysia DTAA and that of other DTAAs on taxation of income from immovable property are worded alike. However, the aforesaid Protocol agreed between India and Malaysia in the India-Malaysia DTAA is not found for example, in the India-UK or India-France DTAA. It becomes all the more conspicuous when protocols under other DTAAs have been signed after the Notification No. 91/2008 issued under Section 90(3). An example can be considered of the India – UK DTAA wherein the Protocol is signed on 30th October, 2012 but there is no agreement with regard to interpretation of the expression “may be taxed”, which is used inter alia in Articles 6, 7, 11, 12 and 13. Thus, one may argue that the expression “may be taxed” required an understanding under the India-Malaysia DTAA that varied with the earlier judicial understanding of the said expression in other DTAAs.

In certain DTAAs where expression ‘may be taxed’ has been used in Article 6 or Article 13, it has been clarified through Protocols that income and capital gains relating to immovable properties may be taxed in both the contracting states. Some of these DTAAs with India are: Hungary, Serbia, Montenegro and Slovenia.

However, in certain other DTAAs where expression ‘may be taxed’ has been used in Article 6 or Article 13, it has been clarified through Protocols that income and / or capital gains relating to immovable properties may be taxed in the Contracting State where the immovable property is situated. For example, India’s DTAAs with Estonia and Lithuania.

A DTAA is a product of bilateral negotiation of the terms between two sovereign States which are expected to fulfill their obligations under a DTAA in good faith. This includes the obligation for not defeating the purpose and object of the DTAA. Therefore, while the amendment to the India-Malaysia DTAA was consciously made on the lines of the Notification, it is apparent that the same was deliberately not extended to other DTAAs in probable consideration of larger macro issues which could have had a bearing upon the bilateral trade relations.

It is to be noted that in the case of Essar Oil Limited (supra), the ITAT was interpreting Article 7 of the India-Oman DTAA and India-Qatar DTAA dealing with business profits. Article 7(1) clearly provides that the profits of an enterprise of a contracting State shall be taxable only in that State. The exception carved out is only to enable the “PE country” to tax the profits attributable to the PE. Profits attributable to a PE may be larger than the profits sourced within the PE State, which is not the case for Article 6 dealing with income from immovable properties, where the source is undisputedly within the State in which the immovable property is located. Contextually, the expression “may be taxed” lends itself to different meanings under Article 7 and Article 6. This distinction has not been brought to the attention of the Hon’ble Tribunal. Clarifications, if any, would serve the intended purpose only when incorporated in the respective DTAA. The same was done through a Protocol entered under the India-Malaysia DTAA in the context of the expression “may be taxed”.

Therefore, one may be able to argue that Notification No. 91/2008 should have no application in respect of cases covered under category I i.e. similar to Article 6.

INTERPLAY WITH ARTICLE ON TAX CREDIT

Another aspect which also needs to be considered is the language of Article 25 of the India – Singapore DTAA, dealing with Elimination of Double Taxation (foreign tax credit or relief). It provides as under,

“2. Where a resident of India derives income which, in accordance with the provisions of this Agreement, may be taxed in Singapore, India shall allow as a deduction from the tax on the income of that resident an amount equal to the Singapore tax paid, whether directly or by deduction.”

In the present case, if one argues that income from immovable property situated in Singapore shall be taxable only in Singapore as the Article states that such income ‘may be taxed’ in Singapore, the question of tax credit does not arise. However, Article 25(2), as discussed above, specifically provides that when the DTAA states that income may be taxed in Singapore, India should grant foreign tax credit to eliminate double taxation. The said credit can be provided only after India has taxed the income in the first place.

It may, however, be highlighted that the Mumbai ITAT in the case of Pooja Bhatt vs. DCIT (2009) 123 TTJ 404 did not accept this argument and held as under,

“8. The reliance of the Revenue on Article 23 is also misplaced. It has been contented that Article 23 gives credit of tax paid in the other State to avoid double taxation in cases like the present one. In our opinion, such provisions have been made in the treaty to cover the cases falling under the third category mentioned in the preceding para i.e., the cases where the income may be taxed in both the countries. Hence, the cases falling under the first or second categories would be outside the scope of Article 23 since income is to be taxed only in one State.”

ROLE OF OECD MODEL COMMENTARY

The OECD Model Commentary has explained the various types of allocation of taxing rights used in a DTAA. The OECD Model Commentary 2017 on Article 23A dealing with Elimination of Double Taxation provides as under,

“6. For some items of income or capital, an exclusive right to tax is given to one of the Contracting States, and the relevant Article states that the income or capital in question “shall be taxable only” in a Contracting State. The words “shall be taxable only” in a Contracting State preclude the other Contracting State from taxing, thus double taxation is avoided. The State to which the exclusive right to tax is given is normally the State of which the taxpayer is a resident within the meaning of Article 4, that is State R, but in Article 19 the exclusive right may be given to the other Contracting State (S) of which the taxpayer is not a resident within the meaning of Article 4.

7. For other items of income or capital, the attribution of the right to tax is not exclusive, and the relevant Article then states that the income or capital in question “may be taxed” in the Contracting State (S or E) of which the taxpayer is not a resident within the meaning of Article 4. In such case the State of residence (R) must give relief so as to avoid the double taxation. Paragraphs 1 and 2 of Article 23 A and paragraph 1 of Article 23 B are designed to give the necessary relief.”

The above Commentary makes it clear that where the Model wanted to provide an exclusive right of taxation to a particular country, it has provided that with the words “shall be taxable only”. In other scenarios both the countries shall have the right to tax the income.

It may be noted that the Hon’ble Supreme Court in the case Kulandagan Chettiar (supra) did not consider the validity of the OECD Model Commentary on the basis of which the DTAAs are entered into. In the said case, the Supreme Court held as under,

“16. Taxation policy is within the power of the Government and section 90 of the Income-tax Act enables the Government to formulate its policy through treaties entered into by it and even such treaty treats the fiscal domicile in one State or the other and thus prevails over the other provisions of the Income-tax Act, it would be unnecessary to refer to the terms addressed in OECD or in any of the decisions of foreign jurisdiction or in any other agreements.”

However, subsequent decisions of the Supreme Court including that of Engineering Analysis Centre of Excellence (P) Ltd vs. CIT (2021) 432 ITR 471 have held that the OECD Model Commentary shall have persuasive value as the DTAAs are based on the OECD Model.

Impact of Multilateral Convention to Implement Tax Treaty related measures to prevent Base Erosion and Profit Shifting [MLI]

India is a signatory to MLI. The DTAAs have to be read along with the MLI. Article 11 of the MLI deals with Application of Tax Agreements to Restrict a Party’s Right to Tax its Own Residents. Article 11(1)(j) provides that a Covered Tax Agreement (CTA) shall not affect the taxation by a Contracting Jurisdiction of its residents, except with respect to the benefits granted under provisions of the CTA which otherwise expressly limit a Contracting Jurisdiction’s right to tax its own residents or provide expressly that the Contracting Jurisdiction in which an item of income arises has the exclusive right to tax that item of income.

India has not reserved Article 11 of the MLI. The following countries have chosen Article 11(1) with India: Australia, Belgium, Colombia, Denmark, Croatia, Fiji, Indonesia, Kenia, Mexico, Mongolia, Namibia, New Zealand, Norway, Poland, Portugal, Russia, Slovak Republic, South Africa and UK. In respect of these countries, in absence of an express provision, the right of the resident country to tax its residents cannot be taken away under the DTAA. However, the same cannot be applied to countries which have not chosen Article 11(1) or which have not signed the MLI.

CONCLUSION

Even after the 2008 Notification under section 90(3), two strong views still exist as to whether the term ‘may be taxed’ grants exclusive right of taxation to the source State particularly in the case of the Article 6 where, unless otherwise expressly stated in the DTAA, it is clearly intended to allocate right of taxation exclusively to the source state where the immovable property is situated. This view would depend on the role of the tax treaties read with MLI in taxation – that is whether one considers that the country of residence always has the right to tax all income unless specifically restricted by the tax treaty or does the right of taxation of the country of residence need to be specifically provided in the tax treaty.

Disclosure of Climate Related Uncertainties

There was a strong concern from multiple stakeholders regarding information about the effects of climate-related risks in the financial statements, which either were insufficient or appeared to be inconsistent with information entities provide outside the financial statements, particularly information reported in other general purpose financial reports.

To address these concerns, the International Accounting Standards Board (IASB) collaborated with the International Sustainability Standards Board, and issued an Exposure Draft (ED) proposing eight examples illustrating how an entity applies the requirements in IFRS Accounting Standards to report the effects of climate-related and other uncertainties in its financial statements. The examples mostly focus on climate-related uncertainties, but the principles and requirements illustrated apply equally to other types of uncertainties.

The IASB expects that these illustrative examples will help to improve the reporting of the effects of climate-related and other uncertainties in the financial statements, including by helping to strengthen connections between an entity’s general purpose financial reports.

The IASB decided to focus the examples on requirements: (a) that are among the most relevant for reporting the effects of climate-related and other uncertainties in the financial statements; and (b) that are likely to address the concerns that information about the effects of climate-related risks in the financial statements is insufficient or appears to be inconsistent with information provided in general purpose financial reports outside the financial statements.

The eight examples, illustrate the application of various IFRS standards, to the extent they are related to climate related disclosures.

Paragraph 31 of IAS 1 Presentation of Financial Statements states “An entity shall also consider whether to provide additional disclosures when compliance with the specific requirements in IFRS is insufficient to enable users of financial statements to understand the impact of particular transactions, other events and conditions on the entity’s financial position and financial performance.”

Consider the example below.

The entity is a manufacturer that operates in a capital-intensive industry and is exposed to climate-related transition risks. To manage these risks, the entity has developed a climate-related transition plan. The entity discloses information about the plan in a general-purpose financial report outside the financial statements, including detailed information about how it plans to reduce greenhouse gas emissions over the next 10 years. The entity explains that it plans to reduce these emissions by making future investments in more energy-efficient technology and changing its raw materials and manufacturing methods. The entity discloses no other information about climate-related transition risks in its general-purpose financial reports.

In preparing its financial statements, the entity assesses the effect of its climate-related transition plan on its financial position and financial performance. The entity concludes that its transition plan has no effect on the recognition or measurement of its assets and liabilities and related income and expenses because: (a) the affected manufacturing facilities are nearly fully depreciated; (b) the recoverable amounts of the affected cash-generating units significantly exceed their respective carrying amounts; and (c) the entity has no asset retirement obligations.

The entity also assesses whether specific requirements in IFRS Accounting Standards—such as in IAS 16 Property, Plant and Equipment, IAS 36 Impairment of Assets or IAS 37 Provisions, Contingent Liabilities and Contingent Assets—require it to disclose information about the effect (or lack of effect) of its transition plan on its financial position and financial performance. The entity concludes that they do not.

In applying paragraph 31 of IAS 1 [paragraph 20 of IFRS 18], the entity determines that additional disclosures to enable users of financial statements to understand the effect (or lack of effect) of its transition plan on its financial position and financial performance would provide material information. That is, omitting this information could reasonably be expected to influence decisions primary users of the entity’s financial statements make on the basis of those financial statements.

Without that additional information, the decisions users of the entity’s financial statements make could reasonably be expected to be influenced by a lack of understanding of how the entity’s transition plan has affected the entity’s financial position and financial performance. For example, users of the entity’s financial statements might expect that some of its assets might be impaired because of its plans to change manufacturing methods and invest in more energy-efficient technology.

The entity reaches this conclusion having considered qualitative factors that make the information more likely to influence users’ decision-making, including: (a) the disclosures in its general-purpose financial report outside the financial statements (entity-specific qualitative factor); and (b) the industry in which it operates, which is known to be exposed to climate-related transition risks (external qualitative factor).

Therefore, applying paragraph 31 of IAS 1 [paragraph 20 of IFRS 18], the entity discloses that its transition plan has no effect on its financial position and financial performance and explains why.

Other examples, include, the applicability of materiality judgements on disclosures, the disclosure of assumptions on impairment of assets, under different standards, such as IAS 36, Impairment of Assets, IAS 1, and IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors, disclosure about decommission and  restoration provisions, under IAS 37 Provisions, Contingent Liabilities and Contingent Assets and disclosure of disaggregated information under IFRS 18 Presentation and Disclosure in Financial Statements.

There is also an interesting requirement relating to disclosure of credit risks under IFRS 7 Financial Instruments: Disclosures. Entities are exposed to significant credit risks arising from climate change. For e.g., a financial institution may be exposed to significant credit risks from its agriculture focussed lending, because of drought or flood. An entity might disclose: (a) information about the effects of particular risks on its credit risk exposures and credit risk management practices; and (b) information about how these practices relate to the recognition and measurement of expected credit losses.

In determining whether the disclosures are required, and the extent of such disclosures, an entity considers(a) the size of the portfolios affected by climate-related risks relative to the entity’s overall lending portfolio. (b) the significance of the effects of climate-related risks on the entity’s exposure to credit risk compared to other factors affecting that exposure. The effects depend on factors such as loan maturities and the nature, likelihood and magnitude of the climate-related risks. (c) external climate-related qualitative factors—such as climate-related market, economic, regulatory and legal developments—that make the information more likely to influence decisions primary users of the entity’s financial statements make on the basis of the financial statements.

The entity considers what information to provide about the effects of climate-related risks on its exposure to credit risk. This information might include, for example: (a) an explanation of the entity’s credit risk management practices related to climate-related risks and how those practices relate to the recognition and measurement of expected credit losses. The information the entity discloses might include, for example, how climate-related risks affect: (i) the determination of whether the credit risk on these financial instruments has increased significantly since initial recognition; and (ii) the grouping of instruments if expected credit losses are measured on a collective basis.

(b) an explanation of how climate-related risks were incorporated in the inputs, assumptions and estimation techniques used to apply the requirements in Section 5.5 of IFRS 9 Financial Instruments. The information the entity discloses might include: (i) how climate-related risks were incorporated in the inputs used to measure expected credit losses, such as probabilities of default and loss given default; (ii) how forward-looking information about climate-related risks was incorporated into the determination of expected credit losses; and (iii) any changes the entity made during the reporting period to estimation techniques or significant assumptions to reflect climate-related risks and the reasons for those changes.

(c) information about collateral held as security and other credit enhancements, including information about properties held as collateral that are subject to flood risk and whether that risk is insured.

(d) information about concentrations of climate-related risk if this information is not apparent from other disclosures the entity makes.

CONCLUSION

Many entities do not disclose sufficient and relevant information relating to climate related risks and the impact on its financial statements. Mostly, the disclosures if made are boiler plated or are outside the financial statements, which are not subject to any scrutiny. The IASB’s ED is a step in the right direction for ensuring better compliance relating to the disclosure of climate related risks. The ED will be followed by similar requirements in India as well. Hopefully, what will follow is better disclosures and effective compliance. Entities in the meanwhile, should consider the above disclosures, on a voluntary basis, without waiting for the ED to become a standard.

Section: 279(2) :Prosecution — Compounding of offence – compounding application could not have been rejected on delay alone — Limitation — CBDT guidelines dated 16th November, 2022

2. M/s. L. T. Stock Brokers Pvt. Ltd. vs. The Chief Commissioner of Income

[W.P. (L) 21032/2024,

Dated: 4th March, 2025 (Bom) (HC)]

Section: 279(2) :Prosecution — Compounding of offence – compounding application could not have been rejected on delay alone — Limitation — CBDT guidelines dated 16th November, 2022

The Petitioner challenged the Chief Commissioner’s order dated 17 January 2024, made under Section 279(2) of the Act, dismissing the Petitioner’s application for compounding the offence.

The Chief Commissioner has dismissed this application on the sole ground that it was filed beyond 36 months from the date of filing of the complaint against the petitioners. The Chief Commissioner has relied upon paragraph 9.1 of CBDT guidelines dated 16 November 2022 for compounding offences under the Income-tax Act 1961.

The Hon. Court referred to the Co-ordinate bench decision of this Court vide order dated 18th July, 2023 disposing of the Writ Petition (L) No.14574 of 2023 (Sofitel Realty LLP and Ors vs. Income-tax Officer (TDS) and Ors) wherein the Hon. Court considered similar CBDT guidelines dated 23 December 2014. In the context of such guidelines and clauses like Clause 9 of the 2022 guidelines, the Court held that since the Income-tax Act, 1961 had provided for no period of limitation to apply for compounding, such period could not have been introduced through guidelines. In any event, no rigid timeline could have been introduced through such guidelines. This Court held that the compounding application could not have been rejected on delay alone.

The court further referred to the Madras High Court decision in the case of Kabir Ahmed Shakir vs. The Chief Commissioner of Income Tax & Ors Writ Petition No.17388 of 2024 dated 30/08/2024 which was rendered in the context of the 2022 CBDT guidelines.

The counsel for the revenue, however, submitted that even where no limitation is prescribed by the State, the application has to be filed within a reasonable period. Further, she referred to the decision of the Hon’ble Supreme Court in the case of Vinubhai Mohanlal Dobaria vs. Chief Commissioner of Income Tax & Anr. [2025] 171 taxmann.com 268 (SC) and submitted that the CBDT guidelines of 2014 were upheld by the Hon’ble Supreme court, including, the paragraph which has prescribed limitation period to file application for compounding.

The Hon. Court observed that the above paragraph states that para 8 of the 2014 guidelines [which had referred to the period of limitation] does not exclude the possibility that in the peculiar case where the facts and circumstances so required, the competent authority should consider the explanation and allow the compounding application. This means that notwithstanding the so-called limitation period in a given case, the competent authority can exercise discretion and allow compounding application.

The Hon. Court observed that the competent authority has treated the guidelines as a binding statute. On the sole ground that the application was made beyond 36 months, the same has been rejected. The competent authority has exercised no discretion as such. The rejection is entirely premised on the notion that the competent authority had no jurisdiction to entertain a compounding application because it was made beyond 36 months. Such an approach was inconsistent with the rulings of this Court, Madras High Court and the Hon’ble Supreme Court decision relied upon by the learned counsel for the revenue.

The impugned order dated 17th January, 2024 was set aside and the Chief Commissioner was directed to reconsider the petitioner’s application for compounding.

Section: 254 (1): Principles of natural justice violated — impugned order passed without hearing the petitioner and / or his representative and without considering the written submissions:

1. Vijay Shrinivasrao Kulkarni vs. Income Tax Appellate Tribunal & Ors.

[WP (C) No. 17572 OF 2024]

AY 2019-20

Dated: 4th February, 2025 (Bom) (HC)]

Arising from ITAT Pune ITA No.1159/Pun/2023 order dated 12th March 2024

Section: 254 (1): Principles of natural justice violated — impugned order passed without hearing the petitioner and / or his representative and without considering the written submissions:

The petitioner assessee in the present case is a 64 year old retired serviceman, who earned income primarily from salary for the Assessment Year 2019-20. He was then an employee of M/s. Pfizer Healthcare India Pvt. Ltd. posted at Aurangabad, from where he derived his salary income.

The petitioner filed his original income tax return for the A.Y. 2019-20 on 1 August 2019 declaring a total income of ₹57,84,740/- The petitioner had claimed relief under section 89(1) of the Act for an amount of ₹ 13,22,187/-. Subsequently, the petitioner’s case was selected for scrutiny. In response to notices, the petitioner submitted copies of computation of income, Form 26AS, Form 16, Form 10E along with other supporting documents.

The AO issued a show cause notice-cum-draft assessment order dated 16 September 2021 to the petitioner directing him to furnish his reply on or before 19 September, 2021. The petitioner filed his submissions / reply dated 16 September 2021 to the show cause notice-cum-draft assessment order issued by AO. The petitioner also requested for the grant of a personal hearing through video conferencing, which was so granted on 23 September 2021.

According to the petitioner, the relief claimed by him under section 89(1) of the Act warranted consideration, as such amount was a salary advance, justifying such relief. However, the petitioner during assessment proceedings withdrew such relief as claimed under section 89(1) and alternatively claimed receipts of Ex-Gratia and other incentives as capital receipts. This was with reference to the amounts received from his employer, i.e., Pfizer Healthcare on account of closure of its plant at Aurangabad and in terms of the settlement to all permanent employees under the financial scheme for employees of Aurangabad 2019, dated 9 January 2019.

The AO proceeded to pass the assessment order dated 29 September 2021. While passing such order, the petitioner’s submissions were rejected on the ground that the amount received by the Petitioner on termination of employment cannot be treated as salary in advance, as claimed by the Petitioner. Thus, the relief claimed by the petitioner under section 89(1) of the Act for an amount of R13,22,187/- was rejected by the assessment order.

The Petitioner being aggrieved by the said assessment order, approached the National Faceless Appeal Centre by filing an appeal. It was during the proceedings initiated by the petitioner before the NFAC that various notices under section 250 of the Act were issued to the petitioner. However, the petitioner’s Chartered Accountant could not respond to the above notices, and sought adjournments, mainly on the ground that a senior CA was intended to be engaged to defend the petitioner in the said proceedings.

The NFAC proceeded to pass an ex-parte order dated 8 September 2023, rejecting the petitioner’s appeal filed before it, thereby confirming the assessment order passed by AO.

The Petitioner, approached ITAT, Pune, by filing an appeal. The appeal filed by the Petitioner was listed for hearing on 11 March 2024 before the Division Bench of ITAT, Pune. The petitioner’s advocate submitted that the matter was required to be remanded to the NFAC, on the ground that the order of the NFAC was an ex-parte order, as it was passed in absence of a hearing being granted to the petitioner / his representative. The Petitioner’s CA also filed an affidavit in this regard. The ITAT rejected the petitioner’s prayer to remand the matter to NFAC and insisted on hearing the appeal on merits. The Petitioner’s advocate then requested for a short adjournment, so that a paper book could be submitted. However, such request was denied. The Petitioner’s advocate then requested to the ITAT to grant one day’s time to submit such paper book and to take up appeal for hearing on merits on the next date. Such request was also rejected by the ITAT. The Petitioner’s advocate was directed to submit written submissions and paper book on the basis of which, the ITAT would pass appropriate orders. The Petitioner through his legal representative accordingly submitted written submissions, along with the paper book and case laws on 12 March 2024, before the ITAT.

It was in the above backdrop that the ITAT proceeded to pass the impugned order dated 12 March, 2024, the Petitioner being aggrieved by such order approached this court by filing a writ petition.

The learned counsel for the Petitioner submitted that the Petitioner is seriously prejudiced by the actions of the ITAT in passing the impugned order dated 12th March, 2024. He further referred to the following orders passed by the ITAT on the same day, i.e., 12th March, 2024, which are summarized below:-

The ITAT had in similar facts and circumstances remanded the matter to the JCIT-A/the NFAC for further consideration on merits. However, ITAT did not adopt the same approach in the present case. According to him, a fair approach ought to have been adopted by the ITAT considering the facts of the case, as no prejudice would have been caused to the Dept.

The Dept contended that the ITAT was justified in concluding, that there was no need to remand the proceedings to AO as such remand would be an exercise in futility. Accordingly, the ITAT was justified in dismissing the appeal of the petitioner.

The Hon. Court observed that this is a case where the violation of the settled principles of natural justice is not just apparent but real, palpable and clearly visible. The Petitioner is deprived of an opportunity to present its case not only before the NFAC but also subsequently before the ITAT. Not affording a reasonable opportunity to the Petitioner to present its case had perpetuated from the ex-parte order passed by NFAC which was not noticed by the ITAT in passing the impugned order.

It was not disputed that the NFAC under the faceless regime passed an ex-parte appeal order, without affording an opportunity to the petitioner of being heard. Thus, evaluation of assessment of the petitioner’s income and rejecting the submissions of the petitioner was undertaken also ought to have been appropriately undertaken by following the natural rules of fairness adhering to the principles of natural justice and such infirmity at least should have been addressed by the ITAT in passing the impugned order.

The Court further observed that on a perusal of the impugned order of the ITAT makes it clear that it proceeded to deal with the case of the petitioner on merits as is evident from the order. The Petitioner submitted that considering the fact that the order impugned before the ITAT itself was passed by NFAC was passed ex-parte, it would be just and proper for the ITAT to remand the matter to NFAC for passing orders on merits, after considering submissions of the petitioner. Also, the written submissions being tendered on behalf of the petitioner before the ITAT on 12th March, 2024 have not being considered in the impugned order being passed by the Tribunal. The Court referred judgment of the Supreme Court in the case of Delhi Transport Corporation vs. DTC Mazdoor Union._AIR 1999 SC 564 wherein it was held that Article 14 guarantees a right of hearing to a person who is adversely affected by an administrative order. The principle of audi alteram partem is a part of Article 14 of the Constitution of India. In light of such decision, the petitioner ought to have been granted an opportunity of being heard which, partakes the characteristic of the fundamental right under Article 14 of the Constitution of India.

The Hon. Court further referred to a decision of the Supreme Court in the case of Commissioner of Income Tax Madras vs. Chenniyappa Mudiliar (1969) 1 SCC 591 wherein the Supreme Court in interpreting the section 33(4) of the Income Tax Act, 1922 has held that the Appellate Tribunal was bound to give a proper decision on question of fact as well as law, which can only be done if the appeal is disposed-off on merits and not dismissed owing to the absence of the appellant. There is no escape from the conclusion that under the said provision, the Appellate Tribunal had to dispose-off the appeal on merits which could not have been done by dismissing the appeal summarily for default of appearance. The Court observed that the principles laid down in the said decision would squarely apply to the facts and circumstances of the present case, in as much as the Petitioner was neither heard nor were his written submissions placed before the ITAT, considered.

The Hon. Court set aside the impugned order of the ITAT dated 12th March, 2024. Accordingly, the proceedings were remanded to the ITAT, for de novo hearing of the appeal filed before it.

Revision — Non-resident — Application by assessee for revision — Provisions of section 155(14) — Claim for tax deducted at source on amount not taxable in India — Credit not reflected in Form 26AS at time when return originally filed for relevant assessment year but reflected in subsequent assessment year — Commissioner cannot reject application on ground revised return not filed — Department to refund tax deducted at source with statutory interest: A.Y. 2015-16

6. Munchener Ruckversicherungs Gesellshaft Aktiengesellschaft In Munchen vs. CIT (International Taxation)

[2025] 473 ITR 53 (Del.):

A. Y. 2015-16

Date of order: 3rd September, 2024

S. 155(14) and 264 of ITA 1961

Revision — Non-resident — Application by assessee for revision — Provisions of section 155(14) — Claim for tax deducted at source on amount not taxable in India — Credit not reflected in Form 26AS at time when return originally filed for relevant assessment year but reflected in subsequent assessment year — Commissioner cannot reject application on ground revised return not filed — Department to refund tax deducted at source with statutory interest:

The assessee was a non-resident. For the A.Y. 2015-16, the assessee declared nil income asserting that its receipt of an amount would not be subject to tax in India in terms of the provisions u/s. 90 of the Income-tax Act, 1961 and claimed refund of tax deducted at source on the basis the tax credit statement being form 26AS, which included the tax deducted by an entity BALIC. The assessee submitted that the tax deducted at source pertaining to the last quarter of F. Y. 2014-15 was credited by BALIC on 21st January, 2016, that consequently, the original tax deducted at source stood increased. In the return for the A. Y. 2016-17 wherein the claim for tax deducted at source credit stood embedded on account of such amount having by then being captured in form 26AS and which amount had remained unclaimed in A. Y. 2015-16.

The Commissioner (International Taxation) was of the view that since the income received from BALIC was offered to tax, the assessee would not be entitled to the grant of tax deducted at source credit. He held that the assessee had failed to file revised return of income and rejected the assessee’s application u/s. 264.

The Delhi High Court allowed the writ petition filed by the assessee and held as under:

“i) Section 155 of the Income-tax Act, 1961 prescribes that where credit for tax has not been given on the ground of either a certificate having not been furnished or filed, but which is subsequently presented before the Assessing Officer, it would be sufficient for the assessment order being amended. Section 155(14) places the Assessing Officer under a statutory obligation to amend the order of assessment once it is established that the contingencies stated in that provision are duly established. Sub-section (14) neither contemplates nor mandates the original return being amended or revised and takes care of contingencies where tax deducted at source is either subsequently credited or is reflected in form 26AS after a time lag. An assessee may face such a spectre on account of a variety of unforeseeable reasons.

ii) Since the tax which was deducted at source by BALIC stood duly embedded in form 26AS which was produced by the assessee and the income earned from that entity had never been held to be subject to tax under the Act, the refusal on the part of the Department to refund that amount was illegal and arbitrary. The factum of tax having been deducted at source by BALIC and pertaining to income transmitted in the A. Y. 2015-16 was not disputed and stood duly fortified from the disclosures which appeared in form 26AS pertaining to that assessment year. It was also not disputed that BALIC had credited the tax deducted at source on 21st January, 2016 and as a consequence of which, the credit was not reflected at the time when the return had been originally filed for the assessment year 2015-16.

iii) The order passed u/s. 264 rejecting the assessee’s application was quashed. The Department was directed to refund the amount of tax deducted at source along with statutory interest.”

Revision — Revision order — Validity — Non-resident — Claim for benefits under DTAA — Opinion of Commissioner that assessee conduit company used for treaty shopping not stated in notice — Assessee not given an opportunity to satisfy Commissioner regarding his view — Order of Tribunal setting side revision order not erroneous: A.Y. 2017-18

5. CIT (International Taxation) vs. Zebra Technologies Asia Pacific Pte. Ltd.

[2025] 472 ITR 745 (Del.):

A. Ys. 2017-18

Date of order: 23rd October, 2024

S. 263 of ITA 1961

Revision — Revision order — Validity — Non-resident — Claim for benefits under DTAA — Opinion of Commissioner that assessee conduit company used for treaty shopping not stated in notice — Assessee not given an opportunity to satisfy Commissioner regarding his view — Order of Tribunal setting side revision order not erroneous:

The assessee was a non-resident and distributed electronic products and services related to after sales, repairs, and technical support services to the customers across the globe. It held tax residency certificate of Singapore and sought to avail of the benefit of India-Singapore Double Taxation Avoidance Agreement ([1982] 134 ITR (St.) 6). In the A. Y. 2017-18, the assessee received a sum for rendition of technical support, repairs and maintenance services under an agreement with an Indian entity and also an amount in USD from offshore sale of products. According to the assessee, since it did not have a permanent establishment in India and also did not make available technical know-how, knowledge, and skill to the Indian entity under the agreement, the receipts were not chargeable to tax in India under the Act by virtue of the Double Taxation Avoidance Agreement. The Assessing Officer accepted the assessee’s explanation in response to the notices u/ss. 142(1) and 143(2) of the Income-tax Act, 1961 during the assessment proceedings which culminated in an assessment order.

The Commissioner was of the view that the Assessing Officer did not conduct the necessary inquiries and verified the facts for accepting the assessee’s claim that its income was not chargeable to tax under the Act by virtue of India-Singapore Double Taxation Avoidance Agreement, that he did not call for the relevant details or verified whether the assessee had a permanent establishment in India during the relevant period, that he did not carry out any inquiry to ascertain whether any commercial substance existed in Singapore and whether the assessee was merely a conduit company and used with an object to obtain the tax benefit under the Double Taxation Avoidance Agreement. Accordingly, he invoked his power u/s. 263.

The Tribunal faulted the Commissioner for not affording the assessee an opportunity to rebut the allegations that it was merely a conduit without any substance and had entered into an agreement for the purposes of taking an advantage of the Double Taxation Avoidance Agreement and allowed the appeal filed by the assessee.

The Delhi High Court dismissed the appeal filed by the Revenue and held as under:

“i) There was no fault with the order of the Tribunal in setting aside the revision order passed by the Commissioner u/s. 263 on the ground that the assessee was not afforded an opportunity to counter the allegation that it was a conduit company without any substance.

ii) In the show-cause notice the Commissioner had faulted the Assessing Officer for not undertaking certain enquiries including verifying whether, (i) the assessee had a permanent establishment in India, (ii) in terms of section 9(1)(vii) of the Act, the income was chargeable as fees for technical services, (iii) tax at source at the rate of 10 per cent. on all the remittances made to the assessee were deducted, (iv) the condition as set out in article 12 of the India-Singapore Double Taxation Avoidance Agreement in regard to taxation of fees for technical services were satisfied, (v) regarding the commercial substance of the assessee in Singapore and (vi) it was a conduit company formed for obtaining the tax benefits under the Double Taxation Avoidance Agreement.

iii) These observations were made only for the purposes of calling upon the assessee to show cause why the proceedings not be initiated u/s. 263 of the Act but, thereafter, the Commissioner had not put the issue regarding treaty shopping to the assessee. The tentative opinion formed by the Commissioner that the assessee was a conduit company for the reasons as articulated in the revision order was not put to the assessee. Hence, the assessee had not been given an opportunity to satisfy the Commissioner regarding such view for the A. Y. 2017-18.”

Recovery of tax — Grant of stay of demand — Stay of recovery pending appeals before Commissioner (Appeals) — Effect of office memorandum issued by CBDT — Rejection of stay of demand for non-deposit of 20% of disputed demand — Application to the Principal Commissioner — Direction to deposit 40% — Authorities failed to consider prima facie merits of the case — Financial hardship and likelihood of success — Orders rejecting stay of demand unsustainable — Matter remanded to the AO with directions to consider in light of earlier decision: A.Ys. 2010-11 to 2020-21

4. Sushen Mohan Gupta vs. Principle CIT

[2025] 473 ITR 173 (Del.)

A. Y. 2010-11 to 2020-21

Date of order: 22nd March, 2024

Ss. 156, 220(1), 220(6) and 246A of ITA 1961

Recovery of tax — Grant of stay of demand — Stay of recovery pending appeals before Commissioner (Appeals) — Effect of office memorandum issued by CBDT — Rejection of stay of demand for non-deposit of 20% of disputed demand — Application to the Principal Commissioner — Direction to deposit 40% — Authorities failed to consider prima facie merits of the case — Financial hardship and likelihood of success — Orders rejecting stay of demand unsustainable — Matter remanded to the AO with directions to consider in light of earlier decision:

A search and seizure action was conducted and subsequently notices u/s. 153A of the Act for the A.Ys. 2010-11 to 2019-20 were issued and on culmination of proceedings so drawn, the assessment orders came to be framed on 30th September, 2021 raising a cumulative demand of ₹ 1,85,62,19,390 for the A.Ys. 2010-11 to 2020-21.

The Assessee filed appeals before the CIT(A) which are pending. Against the enforcement of demand, the Assessee filed application for stay of demand before the Assessing Officer which came to be rejected on the ground that the Assessee had not deposited 20% of the outstanding demand and therefore the application could not be entertained. In rejecting the assessee’s application for stay of demand, the Assessing Officer relied upon the Office Memorandums of the CBDT dated 29-02-2016 and 31-07-2017.

Thereafter, the Assessee filed application for rectification of mistakes which was disposed and the revised demand recoverable from the Assessee was computed at ₹1,81,37,14,107. The Assessee thereafter filed another stay application before the Assessing Officer for the A.Ys. 2010-11 to 2020-21. During the pendency of the said stay application, the Assessee was served with a letter seeking payment of the outstanding demand followed by a demand notice issued u/s. 220(1) of the Act. In response to the aforesaid, the Assessee filed a detailed response stating that the original assessment was wholly arbitrary and rendered unsustainable in the light of the judgment of the Supreme Court in the case of Pr.CIT vs. Abhisar Buildwell Pvt. Ltd. The Assessee also offered to pledge properties owned by an entity in which the Assessee’s family members were directors / shareholders to secure the outstanding demand to the extent of 20%. The Assessee’s prayer was rejected.

Aggrieved, the Assessee approached the Principal Commissioner for grant of interim protection against the outstanding demands. The Principal Commissioner disposed the application by observing that during search operations, various incriminating documents were found and seized and credible evidence were collected. He, thus, disposed of the applications of stay of demand and directed the assessee to deposit demand which was 40 per cent of total outstanding demand within 15 days of receipt of his order.

The Assessee filed a writ petition before the High Court. The Delhi High Court allowed the writ petition and held as follows:

“i) The Central Board of Direct Taxes’ Office Memorandum [F. No. 404/72/93-ITCC], dated 29th February, 2016 could not be read as mandating a pre-deposit of 20 per cent. of the outstanding demand, without reference to the prima facie merits of a challenge that may be raised by an assessee in respect of an assessment order.

ii) The assessee had approached the Principal Commissioner in terms of the provisions made in the Office Memorandum dated 29th February, 2016. The view taken by the second respondent, that applications for stay could neither be countenanced nor entertained till the assessee deposited 20 per cent. of the pending demand was untenable and erroneous. The Principal Commissioner had proceeded to cause even greater prejudice to the assessee by requiring him to deposit 40 per cent. of the outstanding demand.

iii) According to para 4(C) of the Office Memorandum [F. No. 404/72/93-ITCC], dated February 29, 2016 stated to the effect that where stay of demand was granted by the Assessing Officer on payment of 15 per cent. of the disputed demand and the assessee was still aggrieved, he could approach the jurisdictional administrative Principal Commissioner or the Commissioner for a review of the decision of the Assessing Officer. The Principal Commissioner could not be recognised to stand empowered to subject the assessee to more onerous conditions. Rather than examining the challenge raised by the assessee to the assessment orders and evaluating the prima facie merits of the challenge had in one sense placed him under a harsher burden of depositing 40 per cent. of the outstanding demand as opposed to the direction of 20 per cent. deposit by the second respondent as a pre-condition for the consideration of application for stay under section 220(6) .

iv) Both the authorities had failed to consider the aspect of prima facie merits, likelihood of success and undue hardship. Therefore, their orders were unsustainable and hence quashed and set aside. The matter was remitted to the Assessing Officer to examine the applications for stay afresh considering the legal position.”

Reassessment — Exemption u/s. 10B — Newly established hundred per cent. export oriented establishments — Reassessment — Notice — Survey — Denial of claim for deduction u/s. 10B in original assessment — Grant of deduction by Tribunal — Fresh survey during pendency of revenue’s appeal before court — Reassessment on ground of availability of new material would tantamount to getting over anomalous situation — Reassessment proceedings to disallow claim for deduction once again impermissible — Notice and order rejecting assessee’s objections quashed and set aside: A.Y. 2009-10

3. Sesa Sterlite Ltd. vs. ACIT

[2025] 472 ITR 591 (Bom.)

A. Y. 2009-10

Date of order: 4th September, 2024

Ss.10B, 133A, 147 and 148 of ITA 1961

Reassessment — Exemption u/s. 10B — Newly established hundred per cent. export oriented establishments — Reassessment — Notice — Survey — Denial of claim for deduction u/s. 10B in original assessment — Grant of deduction by Tribunal — Fresh survey during pendency of revenue’s appeal before court — Reassessment on ground of availability of new material would tantamount to getting over anomalous situation — Reassessment proceedings to disallow claim for deduction once again impermissible — Notice and order rejecting assessee’s objections quashed and set aside:

The assessee was in the business of manufacturing and production of iron ore and had three units situated at Amona, Chitradurga and at Codli. These units are export-oriented undertakings and for the assessment year 2009-10, the assessee claimed deduction u/s. 10B. A survey u/s. 133A was carried out at the assessee’s premises wherein the authorities sought to ascertain the relevant facts in connection with the claim for deduction u/s. 10B. The Assessing Officer issued a notice dated July 16, 2014 u/s. 148 to reopen the assessment u/s. 147. The Assessees objections were rejected.

The Assessee filed a writ petition and challenged the notice and the order rejecting the objection. The Bombay High Court allowed the writ petition and held as under:

“i) Section 10B(2) provided that section 10B applied to any undertaking which fulfilled all the conditions therein. The assessee had claimed deduction u/s. 10B in respect of the three export-oriented units for the A. Y. 2009-10 and a survey u/a. 133A had been carried out at its premises in connection with the claim for deduction u/s. 10B. The assessment order u/s. 143(3) was passed by the Assessing Officer whereunder the claim for deduction u/s. 10B was disallowed in its entirety for the reasons given by the Assessing Officer. He had held that the assessee’s units were not engaged in the business of manufacture and production of any article or thing, that the assessee had not produced satisfactory evidence with regard to the date of commencement of production, that the approval granted by the Development Commissioner for one unit was not ratified by the Board and that the profits of the units was determined without taking into consideration the cost of the wastage from other units which was utilised in the alleged production that was carried out in the unit under reference, and the units were not new units and the setting up of the units in the old mines which were operated by the assessee could not be regarded as new units and that the assessee had not maintained separate books of account for the export oriented units. The Commissioner (Appeals) had upheld the denial of the claim of deduction under section 10B by the Assessing Officer. The Tribunal had dealt with all the reasons given by the Assessing Officer and had upheld the claim for deduction u/s. 10B. Therefore, entitlement to deduction u/s. 10B had been the subject matter of appeal before the appellate authorities. During the pendency of the tax appeal before this court, a fresh survey was conducted u/s. 133A and on the basis of the materials which were found during the survey in 2014, reassessment u/s. 147 was sought to be justified for the purpose of denying the claim for deduction u/s. 10B. Thus, the reasons of the Assessing Officer in support of his finding could be several but what was relevant was the subject matter of the tax appeal. The third proviso to section 147, which provided that the Assessing Officer could assess or reassess such income, other than the income involving matters which were the subject matters of any appeal, reference or revision, which was chargeable to tax and had escaped assessment, would come into effect.

ii) When the fresh survey u/s. 133A was conducted in the year 2014 during the pendency of the tax appeal before this court, the new materials found by the Assessing Officer were sought to be placed before the Tribunal and this court and the issue under consideration was whether the assessee was entitled to claim deduction u/s. 10B. Assuming that the reassessment proceedings u/s. 147 was allowed to continue on the basis of the new materials a situation could arise to be held that the assessee was entitled to claim deduction u/s. 10B, whereas in the reassessment proceedings, the Assessing Officer on the basis of the new materials could conclude that the assessee was not entitled to claim deduction u/s. 10B.

iii) Reassessment proceedings were obviously to get over such an anomalous situation that the third proviso to section 147 was meant to cover. If the reassessment proceedings were allowed to continue, it would virtually amount to having an effect of sitting in appeal over the orders passed by this court and the Tribunal which could not be countenanced. Though it was the allegation that fresh evidence was unearthed during the course of fresh survey in March 2014, which indicated that the units considered as new units were not new units but an amalgamation of the existing units. The exercise really was to rely on these materials in support of the findings earlier recorded by the Assessing Officer which was already subject matter of challenge before the competent forum. Assumption of jurisdiction to reopen the assessment was without jurisdiction to once again disallow a claim for deduction u/s. 10B. The notice dated 16th July, 2014 issued u/s. 148 to reopen the assessment u/s. 147 for the A. Y. 2009-10 and the order rejecting the assessee’s objections were quashed and set aside.”

Public Interest Litigation — Return of Income — Filing of return in electronic form — Modification of online filing system —Jurisdiction of revenue authorities — Utility not providing for making claim for rebate under section 87A read with proviso to section after 5-7-2024 — Attempt to restrict or prohibit assessee from making particular claim at threshold itself in return of income unconstitutional — No provision under Act which debars assessee to make claim under section 87A qua tax computed at rates specified in provisions of chapter XII other than section 115BAC — Statutory safeguards and remedies in provisions of Act for consequences if claim made in self assessment found to be incorrect or not bona fide — Allowance or disallowance of claim to be deduced by interpretative and adjudicating process — Assessee cannot be debarred from making claim in return of income whether online or manual — Directions issued to modify utility to enable assessees file returns or revised returns of income — NFAC cannot continue assessment proceedings in concluded assessment — Assessment order passed by NFAC set-aside: A.Y. 2024-25

2. Chamber of Tax Consultants & Ors vs. DGIT (Systems)

[2025] 473 ITR 85 (Bom.)

A. Y. . 2024-25

Date of order: 24th January, 2025

Ss. 87A, 115BAC, 139, 139(5) and 139D of  ITA 1961

Public Interest Litigation — Return of Income — Filing of return in electronic form — Modification of online filing system —Jurisdiction of revenue authorities — Utility not providing for making claim for rebate under section 87A read with proviso to section after 5-7-2024 — Attempt to restrict or prohibit assessee from making particular claim at threshold itself in return of income unconstitutional — No provision under Act which debars assessee to make claim under section 87A qua tax computed at rates specified in provisions of chapter XII other than section 115BAC — Statutory safeguards and remedies in provisions of Act for consequences if claim made in self assessment found to be incorrect or not bona fide — Allowance or disallowance of claim to be deduced by interpretative and adjudicating process — Assessee cannot be debarred from making claim in return of income whether online or manual — Directions issued to modify utility to enable assessees file returns or revised returns of income — NFAC cannot continue assessment proceedings in concluded assessment — Assessment order passed by NFAC set-aside:

The Department releases utility for filing income tax returns online every year. The Department published a change in utility with effect from 05-07-2024. The said change unilaterally disabled the assessees from claiming rebate u/s. 87A. As a result, taxpayers, despite being statutorily eligible, were effectively deprived of their entitlements solely due to technical modifications introduced by the revenue.

The Chamber of Tax Consultants filed a petition seeking direction to modify the system and put in place by the Department for filing income tax returns for AY 2024-25 so as to allow the assessees at large to take benefit of rebate available u/s. 87A. It was contended that this unilateral modification is arbitrary, lacks justification, and deprives eligible taxpayers of statutory benefits. The Respondents’ actions violate the principles of fairness and transparency expected from public authorities and seek judicial intervention to ensure compliance with statutory provisions.

The Bombay High Court allowed the petition and held as follows:

“i) The Department could not restrain or prohibit an assessee from claiming section 87A rebate by modifying their utility by which an assessee was forbidden at the threshold itself from making such a claim in the return of income. The provisions of the Act were not so clear as to arrive at a definite conclusion that a rebate under section 87A could not be granted from the tax computed under the other provisions of Chapter XII. Certainly, such a claim whether eligible or not could be examined in the proceedings under section 143(1) or section 143(3). Merely because few selected cases were picked up for scrutiny would not mean and would not authorise any authority under the Act to prevent an assessee from making the claim on which more than one view was possible. Merely because many returns of income were required to be processed and only a few of them were selected for scrutiny assessment under section 143(3) could not be a ground to tweak the utility to prevent at the very threshold, an opportunity to raise a claim on a debatable issue based upon the interpretation of the provisions in sections 87A and 115BAC. Considering the mandates of articles 265 and 300A, ends, howsoever laudable, cannot justify means.

ii) Assuming that the legal provisions were ambiguous, the Department cannot resolve such ambiguity by adopting an interpretation favouring itself through the device of simply tweaking the utility and preventing the assessee from even raising a claim. Therefore, the main question is not whether the interpretation proposed by the learned counsel for the petitioners or that proposed by the learned Additional Solicitor General is correct, but the main question is whether the Department can insist that its interpretation prevails or triumphs because it has the capacity to and has exercised this capacity to tweak the utility and prevent an assessee to even raise a debatable claim. The provisions of the Income-tax Act do not permit the Department to do this without transgressing the constitutional boundaries

iii) The issue raised on the claim u/s. 87A was, at best, highly debatable and contentious. Therefore, the Department would not be justified in assuming that its interpretation was open and shut, and based upon such a conclusion, shut out bona fide claims for rebate under section 87A and could not be done by exercising administrative powers instead of quasi-judicial powers. Disputed claims, except to the limited extent explicitly permitted by the law, could not ordinarily be disposed of by the executive acting in its executive capacity. This is more so when the executive is itself a party to the lis. One of the foundations of our Constitution is the rule of law. This posits that all three organs of governance, the Legislature, the Executive, and the Judiciary function under and in accordance with the law as enshrined in our Constitution.

iv) The Department did not show any provision under the Act which expressly debarred an assessee to raise or make the claim u/s. 87A qua the tax computed at the rates specified in the provisions of Chapter XII other than section 115BAC. There was no rebuttal to the petitioner’s contention that a provision like section 112A(6) had been expressly enacted wherever the Legislature intended to deny such a benefit. Therefore, in so far as the prayers of the petitioners were concerned that the utility should permit an assessee to at least make a claim under section 87A, it could not be rejected at the threshold.

v) Whether rebate u/s. 87A was to be allowed only on the tax calculated in accordance with the provisions of section 115BAC or also on taxes calculated under other provisions of Chapter XII would require interpretation of the interplay of section 87A and section 115BAC To what extent the overriding provisions contained in section 115BAC(1A) would result in allowability or denial of rebate under section 87A would have to be examined by interpretative process. The impact of the phrase “subject to the provisions of this Chapter” would also have to be examined along with other provisions for adjudicating the claim under section 87A. What was the purport of the proviso to section 87A on the claim proposed to be made would have to be interpreted in conjunction with the provisions of section 115BAC(1A) and other connected sections. How the phrase “total income” should be construed for section 87A and section 115BAC along with the definition sections, charging sections and scope of total income and the scheme of the Act, would have to be examined. Whether the provisions of section 115BAC restricted itself only to tax rates or computation of total income would also have to be examined. If such exercise was required to be undertaken before coming to a definite conclusion as to whether the rebate under section 87A was to be granted or denied on the tax computed under the provisions of Chapter XII other than section 115BAC, had to be deduced by interpretative and adjudicating process. Therefore, the Department was not justified in modifying the utility from 5th July, 2024, by which an assessee was debarred at the threshold from making the claim, which claim was contentious or debatable.

vi) A combined reading of section 87 and section 87A would mean an assessee has to make a claim, the entitlement of which is to be examined by processing the return under section 143(1) or section 143(3) and the same should be allowed as a deduction. Section 87 which provides for rebate under section 87A uses the phrase “there shall be allowed from the amount of income tax . . .”. The proviso to section 87A uses the phrase “. assessee shall be entitled to a deduction . . .”. If a claim was not made, the Department could contend that the claim could not be allowed.

vii) In the absence of any concrete case, the petitioner’s prayer to direct the Department to make the utilities for filing the return of income online flexible so as to allow an assessee to self compute the income and there should not be any restriction on making of any claim whatsoever and to not release any utilities or make any changes in the utilities for filing of the return of income under section 139 which would not allow any assessee to raise any claim, could not be granted unless there was a demand for justice which had been rejected or a failure on the part of the Department to exercise its duty under the Act. The court should grant no relief in such broad and general terms because the ramifications would be unclear.

viii) The Department was directed to modify the utilities for filing of the return of income u/s. 139 of the Act immediately, thereby allowing the assessees to make a claim of rebate under section 87A of the Act read with the proviso to section 87A , in their return of income for the assessment year 2024-25 and subsequent years including revised returns to be filed u/s. 139(5).”

Exemption u/s. 10(38) — Long-term capital gains — Book profits — Minimum alternate tax — Amendments in provisions of sections 10 and 115JB — Commissioner (Appeals) and Tribunal not erroneous in allowing exemption u/s. 10(38) on long-term capital gains from sale of shares of amalgamating companies with assessee: A.Y. 2015-16

1. Principle CIT vs. Hespera Reality Pvt. Ltd

[2025] 472 ITR 630 (Del.)

A. Y. 2015-16

Date of order: 24th December

Ss.10(38) and 115JB of ITA 1961

Exemption u/s. 10(38) — Long-term capital gains — Book profits — Minimum alternate tax — Amendments in provisions of sections 10 and 115JB — Commissioner (Appeals) and Tribunal not erroneous in allowing exemption u/s. 10(38) on long-term capital gains from sale of shares of amalgamating companies with assessee:

During the F.Y. 2014-15 relevant to the A.Y. 2015-16, five companies which held shares of the entity IBHFL merged with the assessee and three of these companies sold their shares. Since the said amalgamating companies were merged with the assessee with effect from August 1, 2014, the income earned from the transaction of sale of IBHFL shares were assessed in the hands of the assessee. The Assessing Officer was of the view that the amount of long-term capital gains was required to be added to the book profits u/s. 115JB and that the amount was not entitled to exemption u/s. 10(38).

The Commissioner (Appeals) held that the entire amount of long-term capital gains was not liable to be included as income chargeable to tax u/s. 10(38) and accordingly, deleted the disallowance but upheld the Assessing Officer’s decision regarding the computation of book profits for the purpose of determination of minimum alternate tax u/s. 115JB. On the question, whether the long-term capital gains that arose from the sale of investments were exempted u/s. 10(38), the Tribunal concurred with the decision of the Commissioner (Appeals) and rejected the appeal of the Department.

Delhi High Court dismissed the further appeal by the Department and held as under:

“i) The proviso to section 10(38) of the Income-tax Act, 1961 was introduced by virtue of the Finance Act, 2006 ([2006] 282 ITR (St.) 14). The inclusion of the proviso was corresponding to the amendments to Explanation 1 of section 115JB. By virtue of the Finance Act, 2006, the Explanation to section 115JB was amended and expenditure incurred in respect of the income exempt u/s. 10, with the exceptions of section 10(38) was excluded for the purposes of calculation of book profits and minimum alternate tax under section 115JB. In other words, the expenditure incurred for earning such income as was exempt from taxation by virtue of section 10(38) was required to be accounted for as expenditure for determining the book profits. Correspondingly, income u/s. 10(38) was also included as a part of the book profits but other incomes covered u/s. 10 were excluded.

ii) The proviso to section 10(38) was added by virtue of the Finance Act, 2006 to abundantly clarify that the income from capital gains on certain assets, which are excluded from the income u/s. 10(38) would be included in computing book profits u/s. 115JB. The proviso to section 10(38) cannot be read in the reverse to mean that if the gains are not included as book profits u/s. 115JB they are liable to be included as income for the purposes of assessment to tax under the normal provisions, notwithstanding that the gains are required to be excluded from income chargeable to tax u/s. 10(38).

iii) There was no fault with the decision of the Commissioner (Appeals) and the Tribunal, in rejecting the Department’s contention and holding that the assessee was entitled to exemption u/s. 10(38) of the long-term capital gains on account of sale of shares by the amalgamating companies, which was denied by the Assessing Officer.”

Impact Of The Projects Of BCAS Foundation

We are pleased to inform you that the BCAS Foundation set up a Science Laboratory, a Modern Library and four Smart Classes at M. M. High School, Umbergaon, which is a 125-year-old School, run professionally. These projects will benefit more than 2300 students every year. These projects were inaugurated on 9thAugust 2024 at a grand function organized by the School. Interestingly, that day was an “Adivasi Divas” and also a “Book Lovers Day”. Guests present at the function also planted a tree in their mother’s name and became part of the movement called “Ek Ped MaaKeNaam”, ‘एकपेड़माँकेनाम’.

We are happy to share the impact of the Science Lab in just a few months of its inauguration in the following letter from the M. M. High School addressed to the BCAS Foundation.

TO BCAS FOUNDATION,

“DEEP GRATITUDE FOR THE SCIENCE LABORATORY! IT’S BEEN INVALUABLE TO US.”

We utilized the Science Lab to create outstanding science fair projects, resulting in unprecedented success:- 4 projects selected for district level (A first-time achievement for our school )

The hands-on experience provided by the laboratory has sparked curiosity and enthusiasm among students. Practical learning has made science more engaging and accessible.

Thank you for empowering our students with cutting-edge facilities and fostering a love for science.

OUR SELECTED PROJECTS:-

1. ELECTRICITY GENERATED BY ROTTEN VEGETABLES (INNOVATIVE ENERGY HARVESTING):

Quality food is essential for our health. When vegetables are stored for a long time, their taste changes, and their nutritional value decreases. Such vegetables can lead to stomach aches, vomiting, and other illnesses. Due to the reduction in nutrients in these vegetables, immunity also decreases. The gases emitted from rotten vegetables can cause environmental pollution, and the flies and mosquitoes that gather on them can spread diseases. Therefore, an excellent way to manage stale and rotten vegetables is to generate electricity from them and then produce fertilizer.

2. FLOAT FARMING (SUSTAINABLE AGRICULTURE SOLUTION ):

Because of urbanization and industrialization, agricultural land is decreasing day by day. FLOAT FARMING is one baby step to solve this problem.

This system uses floating beds, which are made from water hyacinths, aquatic algae, water-borne creepers, herbs, plant residues, coconut husk and bamboo.

The system uses a floating bed of rotting vegetation that acts as compost for crop growth. There is no need for artificial fertilizer. We can develop Fish farms in that water, too, which will benefit farmers.

Float farming creates agricultural land areas in a wet area.

3. NIGHT SOLAR CAR (RENEWABLE ENERGY APPLICATION):

Purpose of the Project:-Everyone knows that solar vehicles only run during the day, but there is no option of energy harvesting for the vehicle during the night, so this is the purpose of our project that solar vehicles will harvest solar energy during the day and use the same energy at night using Thermoelectric Principle.

How it works:- The Night Solar Vehicle utilizes a Peltier module charged by hot sand during the day, converting heat into electricity. This energy is then stored in a battery, powering the vehicle at night. Additionally, a carbon solar panel generates electricity, supplementing the Peltier module’s energy.

4. EARTH AIR TUNNEL (ENVIRONMENTAL INNOVATION):

The temperature below the surface of the Earth (at a depth of 6 to 8 meters) remains stable throughout the year, with a variation of around 6°C to 10°C. This project works on that principle.

One end of the pipe is placed above the ground, and then the pipe is taken underground to a depth of 6 to 8 meters and passed through the earth, with the other end entering inside the house. During summer, the hot air from outside enters the pipe, and as it passes through the tunnel, the lower temperature beneath the earth causes a heat exchange, cooling the air. This cool air then enters the house, providing natural cooling. The same system is also useful in winter.

With Deep Gratitude,

M. M. High School, Umbargaon

(Alpesh Patel – Principal) (Jesal Shah – Vice Principal)

Glimpses of Supreme Court Rulings

1. K. Krishnamurthy vs. The Deputy Commissioner of Income Tax

(2025) 171 taxmann.com 413 (SC)

Penalty under section 271AAA — The imposition of penalty is not mandatory – Penalty may be levied if there is undisclosed income in the specified previous year — It is obligatory on the part of the Assessing Officer to demonstrate and prove that undisclosed income of the specified previous year was found during the course of search or as a result of the search – Appellant admitted ₹2,27,65,580/- as income for AY 2011-12 during the search before DDIT (Inv.) as well as substantiated the manner in which the said undisclosed income was derived and paid tax together with interest thereon, albeit belatedly, therefore, penalty under Section 271AAA(1) was not attracted on the said amount of  ₹2,27,65,580 — Appellant had not offered in the declaration before the DDIT(Inv.) any income on land transactions belonging to Mr. Sharab Reddy and Mr. NHR Prasad Reddy — Appellant offered ₹2,49,90,000/- under the head “Income From Other Sources” on account of these land transactions during the course of assessment proceedings only and not at any time during the search — Penalty under Section 271AAA(1) of the Income-tax Act 1961 was therefore leviable on the said amount.

A Memorandum of Understanding (‘MOU’) dated 19th January, 2009 was entered into between Mr. Hashim Moosa on the one hand and the Appellant as well as Mr. Surendra Reddy on the other, for procuring lands at a certain price from the land procurers, i.e. the Appellant and Mr. Surendra Reddy. As per Clause 10 of this MOU, ₹10,00,000/- (Rupees Ten lakhs only) was paid to the procurers for arranging facilitation of transfer of land from the landowners to Mr. Hashim Moosa / his nominees. No other payment, except a reimbursement under Clause 11, was contemplated under this MOU.

A transaction was entered into between Mr. Hashim Moosa and the Space Employees’ Co-operative Society Ltd. (in short ‘Society’) on 26th September, 2009. It was in order to facilitate purchase of land for this transaction that the MOU dated 19th January, 2009 was entered into by the Appellant with Mr. Hashim Moosa.

A search and seizure operation was carried out at the Appellant’s premises on 25th November, 2010, under section 132 of the Act. The Appellant disclosed an income of ₹2,27,65,580/- as a consequence of the search and seizure.

A notice dated 21st August, 2012 under Section 142(1) of the Act was issued to the Appellant calling for return of income for Assessment Year (‘AY’) 2011-2012. The Appellant filed his return of income on 05th November, 2012. The Appellant returned a total income of ₹4,77,11,330/- for Previous Year (‘PY’) 2010-2011, relevant to AY 2011-2012.

The Respondent issued the Assessment Order dated 15th March, 2013 for PY 2010-2011 relevant to AY 2011-2012, in respect of the Appellant. The total income assessed was ₹4,78,02,616/-.

The Assessing Officer noted that Space Employees’s Co-operative Housing Society Limited entered into an MOU on 26-09-2009 with Mr. HashimMoosa for acquiring 120 acres (which was further extended to 150 acres) of lands in Hoskote Taluk for a consideration of ₹74,26,980/- per acre. The Society will pay Mr. Moosa ₹73,26,980/- per acre of registered land to and the balance ₹1 lakh per acre shall be deposited in a Joint Escrow Account till the entire 120 acres of land is registered in favour of the Society.

To procure lands for the Society, Mr. HashimMoosa had entered into an MOU on 19-01-2009 with Mr. K. Krishna Murthy (Appellant) and P. Surendra Reddy for procuring lands @ ₹70,00,000/- per acre.

Mr. Krishnamurthy (Appellant) and Mr. Ananda Reddy had transferred 16.25 acres of lands which are in the names Mr. NHR Prasada Reddy and Mr. Sharab Reddy in favour of the Society.

On the basis of the copies of sale deeds collected from the Society, it was seen that Mr. N.H.R. Prasad Reddy sold 7 acres and 36 guntas of land to the Society and received total sale consideration of ₹4,34,50,000/-. Similarly, his brother Mr. N.H. Sharaba Reddy sold 10 acres and 33 guntas of lands to the Society and received sale consideration of ₹5,95,37,500/-. Overall they had sold 18 acres and 29 guntas of land and received total sale consideration of ₹10,29,87,500/. The consideration received by them works out to ₹55,00,000/- per acre.

Though, the Assessee had admitted that he had undertaken transaction and had promised to get alternative lands to Mr. NHR Prasad Reddy & Sharab Reddy, he had not offered any income on this count before the DDIT (Inv.). The Assessee offered an amount of ₹2,49,90,000/- during the course of assessment proceedings under the head income from other sources (income from assignment of rights) being the difference between the cost of lands which he has acquired on behalf of the brothers and cost of lands at which it is transferred to society.

On 30th September, 2013, an order imposing penalty under section 271AAA of the Act was passed against the Appellant for AY 2011-2012. The Respondent imposed penalty on the Appellant solely on the ground that the Appellant did not make payment of tax and penalty in terms of section 271AAA(2) of the Act after receipt of Show Cause Notice and considering the entire received income as the undisclosed income.

On the same day, another order imposing penalty under Section 271AAA of the Act was passed in respect of AY 2010-2011. Penalty at the rate of 10% (Ten per cent) was imposed on the entire returned income i.e. ₹4,78,02,616/- amounting to ₹47,80,261/-.

The CIT (Appeals), Bangalore allowed the appeal preferred against the Penalty Order dated 30th September, 2013 in respect of AY 2010-2011 accepting the submission of the Appellant that 2009-10 cannot be the ‘specified previous year’ for the purpose of Section 271AAA of the Income-tax Act, 1961.

Appeal preferred against the Penalty Order dated 30th September, 2013 in respect of AY 2011-2012 was however rejected solely relying on Section 271AAA(2) of the Income-tax Act, 1961 holding that the basic condition existing in the section has not been fulfilled.

The Income Tax Appellate Tribunal (‘ITAT’) vide order dated 17th October, 2016 rejected the Appellant’s appeal against the CIT(A) order again on the ground of non-compliance with Section 271AAA(2) of the Income-tax Act, 1961.

The Appellant preferred an appeal under section 260A of the Act.

Before the High Court, it was contended by the Assessee that it had admitted an undisclosed income of ₹2,27,65,580/- and filed returns showing income of ₹4,78,02,616/-. Nothing was found during the course of search. Assessee had voluntarily filed return of income more than what he had admitted before the DDIT. The machinery section had thus failed and therefore, penalty could not have been imposed.

According to the High Court compliance of all three conditions in sub-clause (2) of Section 271AAA of the Act were mandatory and the third condition namely, the payment of tax, together with interest, if any, had not been fulfilled by the Assessee.

On the question as to whether penalty prescribed @10% of undisclosed Income under section 271AAA of the Act can be reduced, if the tax together with interest on the undisclosed income as declared by the Assessee in the course of search in a statement under Section 132(4) is partly complied with, the High Court held that admittedly, the Appellant had not disclosed the income at all. But for search, the same could not have been unearthed. Having filed the returns, the Assessee did not comply with the third condition of sub-section (2). The assessee was therefore not entitled to any relief.

The High Court dismissed the appeal of the Appellant vide the judgment dated 2nd August, 2022.

On 6th January, 2023, the Supreme Court was pleased to issue notice confined to the second question urged before the High Court.

The Supreme Court noted that Section 271AAA(1) of the Income-tax Act 1961 stipulates that the Assessing Officer may, notwithstanding anything contained in any other provisions of the Act, direct the Assessee, in a case where search has been carried out to pay by way of a penalty, in addition to the tax, a sum computed at the rate of 10% (Ten per cent) of the undisclosed income of the specified previous year. The Supreme Court was of the view that the imposition of penalty therefore is not mandatory. Consequently, penalty under this Section may be levied if there is undisclosed income in the specified previous year.

According to the Supreme Court, though under Section 271AAA(1) of the Income-tax Act 1961, the Assessing Officer has the discretion to levy penalty, yet this discretionary power is not unfettered, unbridled and uncanalised. Discretion means sound discretion guided by law. It must be governed by rule, not by humour, it must not be arbitrary, vague and fanciful. [See: Som Raj and Ors. vs. State of Haryana and Ors. 1990:INSC:53 : (1990) 2 SCC 653].

The Supreme Court noted that Section 271AAA(2) of the Act stipulates that Section 271AAA(1) shall not be applicable if the Assessee — (i) in a statement under sub-section (4) of Section 132 in the course of the search, admits the undisclosed income and specifies the manner in which such income has been derived; (ii) substantiates the manner in which the undisclosed income was derived; and (iii) pays the tax, together with interest, if any, in respect of the undisclosed income.

Consequently, if the aforesaid conditions (i) and (ii) are satisfied and the tax together with interest on the undisclosed income is paid up to the date of payment, even with delay, in the absence of specific period of compliance, then penalty at the rate of 10% (Ten per cent) under section 271AAA of the Act 1961 is normally not leviable.

The Supreme Court further noted that the expression ‘Undisclosed Income’ has been defined in Explanation (a) appended to Section 271AAA of the Act. According to the Supreme Court, as Section 271AAA is a penalty provision, it has to be strictly construed. The fact that the Assessee had surrendered some undisclosed income during the course of search or that the surrender was emerging out of the statements recorded during the course of search was not sufficient to fasten the levy of penalty. The onus was on the Assessing Officer to satisfy the condition precedent stipulated in the said Explanation, before the charge for levy of penalty is fastened on the Assessee.

Consequently, it is obligatory on the part of the Assessing Officer to demonstrate and prove that undisclosed income of the specified previous year was found during the course of search or as a result of the search.

The Supreme Court further noted that the expression ‘specified previous year’ has been defined in Explanation (b) appended to Section 271AAA of the Act 1961. Since in the present case, the search was conducted on 25th November, 2010 and as the year for filing returns under Section 139(1) of the Act 1961 which ended prior to that date had expired on 31st July, 2010, Explanation b(i) was not applicable so as to make AY 2010-11 the specified previous year. Consequently, by virtue of Explanation b(ii), AY 2011-12 (the year in which the search was conducted) was the specified previous year in the present case for the purpose of Section 271AAA(1) of the Income-tax Act, 1961.

The Supreme Court further held that in the present case, the Appellant admitted ₹2,27,65,580/- as income for AY 2011-12 during the search before DDIT (Inv.) as well as substantiated the manner in which the said undisclosed income was derived and paid tax together with interest thereon, albeit belatedly.

Consequently, all the conditions precedent mentioned in Section 271AAA(2) stood satisfied and, therefore, penalty under Section 271AAA(1) was not attracted on the said amount of ₹2,27,65,580/-.

However, in the assessment order dated 15th March, 2013 passed under Section 143(3) of the Act, which has attained finality, it was an admitted position that the Appellant had not offered in the declaration before the DDIT(Inv.) any income on land transactions belonging to Mr. Sharab Reddy and Mr. NHR Prasad Reddy. From the assessment order dated 15th March, 2013, it was apparent that the Appellant offered ₹2,49,90,000/- under the head income from other sources on account of these land transactions during the course of assessment proceedings only and not at any time during the search.

The argument that the said transactions had not been found in the search at the Appellant’s premises but had been found due to ‘copies of sale deeds collected from the society’ had no merits as the sale deeds had been collected as a result of the search and in continuation of the search. The Supreme Court was of the view that as the causation for collecting the sale deeds from the Society was the search at the Appellant’s premises, it cannot be said that the said documents were not found in the course of the search.

The Supreme Court further held that the expression ‘found in the course of search’ is of a wide amplitude. It does not mean documents found in the Assessee’s premises alone during the search. At times, search of an Assessee leads to a search of another individual and / or further investigation / interrogation of third parties. All these steps and recoveries therein would fall within the expression ‘found in the course of search’.

The Supreme Court reiterated that since income of `2,49,90,000/- constituted undisclosed income found during the search, penalty under Section 271AAA(1) of the Income-tax Act, 1961 was leviable on the said amount. Also, as the said amount was not admitted in the declaration before the DDIT(Inv.) during the course of search but was disclosed by the Appellant only during the assessment proceedings, and that too, after the Assessing Officer had asked for copies of the sale deeds from the Society, the exception carved out in Section 271AAA(2) was not attracted to the said portion of the income.

The Supreme Court disposed the appeal with a direction to the Appellant to pay penalty at the rate of 10% (Ten per cent) on ₹2,49,90,000/- and not on ₹4,78,02,616.

From Published Accounts

COMPILER’S NOTE

National Financial Reporting Authority (NFRA) had case issued an order in 2023 against a company wherein it had questioned accounting policies followed for Revenue Recognition and disclosure of Operating Segments. Given below are the disclosures in the financial statements of the company for the same.

Mahindra Holidays & Resorts India Ltd (31st March, 2024)

From Boards’ Report

Significant and Material Orders passed by the Regulators or Courts

There were no significant and material orders passed by the Regulators / Courts / Tribunals which would impact the going concern status of the Company and its operations in the future. The Company received an order from National Financial Reporting Authority (“NFRA”) (“the Order”) on 29th March, 2023, wherein NFRA had made certain observations on identification of operating segments by the Company in compliance with the requirements of Ind AS 108 and the Company’s existing accounting policy for recognition of revenue on a straight line basis over the membership period under IND AS 115. In terms of the Order, the Company completed the review of its accounting policies and practices with respect to disclosure of operating segments and timing of recognition of revenue from customers and has taken necessary measures to address the observations made in the Order. Basis the said review, the existing accounting policies, practices and disclosures by the Company are in compliance with the respective Ind AS. Accordingly, the same have been applied by the Company in the preparation of financial results and a report to that effect has been submitted to NFRA.

As at 31st March, 2024, the Management assessed the application of its accounting policies relating to segment disclosures and revenue recognition. Basis the current assessment by the Company after considering the information available as on date, the existing accounting policies, practices and disclosures are in compliance with the respective Ind AS and accordingly, have been applied by the Company in the preparation of the financial statements for the year ended 31st March, 2024.

From Independent Auditors’ Report on Standalone Financial Statements

From Key Audit Matters

Directions by the Regulator (See Note 56 to standalone financial statements)

The key audit matter

Pursuant to a complaint made by a customer against the Company, National Financial Reporting Authority (‘NFRA’) passed an order dated 29th March, 2023 (‘the Order’) providing directions to the Company. As per the order, NFRA has made certain observations in respect of:

  •  the identification and disclosure of segments by the Company; and
  •  Company’s accounting policy for recognition of revenue on a straight-line basis over the period of the membership fees and annual subscription fees. As per the Order, the Company has carried out review of policies and practices in areas of operating segments and timing of recognition of revenue from customers and submitted its response to NFRA.

Given the significance of the findings of NFRA on the policies and practices adopted by the Company, this has been considered as a key audit matter.

How the matter was addressed in our audit

Our procedures included the following:

  •  Reading the Order received by the Company and us from NFRA;
  •  Evaluating the findings in the Order with reference to segment reporting under Ind AS 108 and revenue recognition under Ind AS 115;
  •  Communicating the findings of the Order with those charged with governance;
  •  Inquiring and assessing the Company’s existing practices and policies followed by the Company in respect of the findings made by NFRA;
  •  Reviewing Company’s response to NFRA as required by the Order;
  •  Submitting our report to NFRA, based on our review of Company’s aforesaid response.

Segment Reporting

  •  Inquiring with the Chief Operating Decision Maker (CODM) on the current process of identification of segments;
  •  Obtaining and inspecting the operating results regularly reviewed by Company’s CODM.
  •  Assessing the adequacy of disclosures of operating segments in accordance with Ind AS 108.

Revenue Recognition

  •  Evaluating the accounting policy for recognition of revenue for contracts entered with members against requirements of Ind AS 115 with reference to fulfillment of performance obligations by the Company;
  •  Inspecting and testing, on sample basis, relevant customer contracts and assessing revenue is recognised on satisfaction of performance obligation;
  •  Assessing the adequacy of disclosures in accordance with Ind AS 115.

From Notes to Financial Statements

Note No.56

NFRA order The Company received an order (‘the Order’) from National Financial Reporting Authority (‘NFRA’) on 29th March, 2023 wherein NFRA had made certain observations on identification of operating segments by the Company in compliance with requirements of Ind AS 108 and the Company’s existing accounting policy for recognition of revenue on a straight-line basis over the membership period. As per the order received from NFRA, the Company was required to complete its review of accounting policies and practices in respect of disclosure of operating segments and timing of recognition of revenue from customers and take necessary measures to address the observations made in the Order. The Company had submitted its assessment to NFRA and will consider further course of action, if any, basis directions from NFRA. As at 31st March, 2024, the management has assessed the application of its accounting policies relating to segment disclosures and revenue recognition. Basis the current assessment by the Company after considering the information available as on date; the existing accounting policies, practices and disclosures are in compliance with the respective Ind AS and accordingly have been applied by the Company in the preparation of these financial statements.

Study Circles

Shrikrishna: Arey Arjun, yesterday I called you many times; but you didn’t pick up the phone.

Arjun: Bhagwan, I was attending a lecture in our study circle meeting.

Shrikrishna: Oh! What was the topic?

Arjun: yehi – apna Ethics! Bhagwan, I tell you, the future of the profession seems to be very bleak. Everybody was crying.

Shrikrishna: I am aware. There are many risks and threats. Too many regulations, harassment by Regulators, excessive expectations of clients, no reward ………Right?

Arjun: You said it. On many occasions, I have shared my worries with you. No good staff, no good articles. Can’t really cope up with the work. So many compliances!

Arjun: There is no unity amongst us. We cannot afford to say ‘No’ to any client. Whatever he wants we have to bow down. I am told, even well-established firms also have not much choice

Shrikrishna: True. I wonder whether real independence was ever there in your profession. That way, in all professions, the situation is more or less the same.

Arjun: Clients literally dictate us and take advantage of our lack of unity and solidarity.

Shrikrishna: Therefore, you can never demonstrate your collective strength.

Arjun: Our study circles are also focussing more on academic topics. Yesterday, the speaker suggested that we should have separate informal meetings for brain storming on our professional anxieties and to discuss the future of profession.

Shrikrishna: You can share your peculiar experiences and try to seek solutions. Even you can improve your communication skills to avoid many problems. By timely and effective communication, you can avoid embarrassing situations.

Arjun: The speaker also suggested that we should proactively discuss exposure drafts of Regulations and Standards and send our views. There is no point in shouting after it is passed.

Shrikrishna: So also, there can be many standardised letters that can be used by your members. All of you may not have good drafting skills. But wherever there are recurring compliances, you can use such ready made drafts which you can suitably modify.

Arjun: We can even take expert advice for getting such drafts.

Shrikrishna: Moreover, all firms may not have a ‘knowledge manager’. You can hire expert services to vet your audit reports or submissions. A studycircle can retain such expert for all members so that the cost is shared.

Arjun: That’s a good idea. We are not often updated, we need to depend on our juniors, we don’t get time to check everything as there is always a fire-fighting exercise.

Shrikrishna: Then your study circles can organise workshops for compact groups – not lengthy lectures. Each firm may not be in a position to organise training programmes for its staff. But 5 to 6 firms collectively can arrange trainings in a workshop. Study circles can do it more effectively.

Arjun: Lord, I find growing frustration amongst CAs at all levels. Even the partners of large firms are not happy. They are stressed. Most of them are trying to keep away from audit signing.

Shrikrishna: It’s a tragedy. People want to run away from the core function of the profession.

Arjun: Audit signing is now always very risky. No one is sure what he has seen and not seen! A lot of fear and discomfort, despite such a high academic qualification.

Shrikrishna: And your knowledge becomes outdated so fast! You should collectively keep on expressing your concerns and making representations to the authorities, to the Council, write articles in the press and social media airing your difficulties. Make your voice heard! Groups like study circles can do that.

Arjun: I think, one more thing the study circles can do. Today, there are many management-sponsored frauds rampantly happening. CAs are being held responsible for not detecting those frauds. They are also made co-accused!

Shrikrishna: Yes, the dividing line between the principles of watchdog vs bloodhound is getting blurred. People and Regulators want you to be fraud detectors. And if you apply a few important SAs strictly, frauds can easily come to light, especially, third-party evidence.

Arjun: So, there could be discussions or presentations on frauds, forensic audit and the like. This could be for CAs as well as for audit staff. That will arouse interest in the minds of staff and articles.

Shrikrishna: Actually, there are many more things that can be done. We will discuss them some other time.

Arjun: I agree. I will tell our convener to act on this.

“OM Shanti”

This dialogue is a general discussion on how study circles can add value for the members instead of arranging only academic lectures.

Essay

Editor’s Note : Tarang 2K25 – the 17th Jal ErachDastur CA Students’ Annual Day was held on 22nd February, 2025. The said event included an essay competition and the winning essay titled “The psychology of money: How financial decision shapes our lives” was penned by Dhairya M. Thakkar. Below is the verbatim print of the said essay

It is rightly said that, “Money is just a paper, but is never found in dustbin.” In simple words, from a popper to a multi-billionaire, everyone needs money to fulfill their needs, followed by comforts & desires.

Let us assume that there are 2 friends, Alex & Brian, who both earn Rs 1 Lakh per month. However, inspite of the assumption that everything between the 2 friends is same, the only difference is their choice of to spend money they earn. Alex chooses to purchase a few gifts for his family, uses money with a free-hand, shops a lot & hardly saves. On the other hand, Brian uses a simple yet effective rule which he names as “40-30-20 Rule”, i.e.-

40% of his income – For all the necessities, accommodation, etc.

30% of his income – Investing in stock markets, SIPs, Bonds, etc.

20% of his income – For all the additional luxuries, comforts, etc.

And lastly, he keeps his 10% of his income in form of cash at home or bank so that it can be enchased in case of any emergency.

Now, who do think, 20 years down the line, will be better with finances, money management & financially sound. Of course, it has to be the man who since Day 1 had that discipline to keep his savings aside & invest it constantly (So, in our example, it’s Brian).

It is rightly said by Mr. Robert T. Kiyosaki (who is the author of one of the most famous self-help book Rich Dad, Poor Dad) that: “It is more important how much you save & not how much you earn, So, spend after you save & never save after you spend.”

So, now let us connect the dots of psychological decision & money. In one of the books, which is also called as, ‘Bible for Investors’ – The Intelligent Investor,it’s author Benjamin Graham wrote that money has more to do with discipline while saving or investing.

Thus, if a man is disciplined enough to manage to save a decided component of his income, then he will surely be in a position to invest it & garner money in forms of dividend, capital appreciation, interest, etc. whereas on the other hand, if a man fails to save money, then there would be negligible chances of him earning any returns because he could not accumulate capital in the first place.

In the very famous Marshmallow experiment, two kids were asked to sit alone in a room with one marshmallow in front of them. However, the challenge was that if a kid chooses to not eat it, then he will get 2 marshmallows, instead of 1. One of the kids chose to eat it right away whereas the other kid chose the path of delayed gratification & he got twice the returns.

After decades, it was evident that the kid who chose instant gratification, was suffering in his financial life, social life & had issues in almost all areas of life, whereas the kid who chose delayed gratification was financially independent, successful, had good social status & was respected in the society.

This simple experiment proved that life has pretty less to do with grades, percentages, etc. and has majorly to do with discipline & money is not an exception to it. As correctly said by Mr. Warren Buffet, “Making money multiply is like watching grass grow on field … It requires patience to be rich.”

So, towards the conclusion, financial decision is like sowing a bamboo tree, it will grow just 2 feet in first 5 years but once it shoots up, it results into growing 100 feet in next 2 years. So, money grows at its own pace & person who keeps on investing, gets rich, a bit later but at a larger scale.

Punishable Offenses & Arrests under GST

INTRODUCTION

Since the implementation of the Goods and Services Tax (GST) in India in July 2017, enforcement actions have led to numerous arrests for offenses such as significant tax evasion, fraudulent input tax credit claims, and issuance of fake invoices. Data submitted to the Supreme Court indicates that from July 2017 to March 2024, the number of arrests under the GST framework varied annually, with 3 arrests in 2017-18 and peaking at 460 in 2020-21. In Gujarat alone, central tax officers booked 12,803 GST evasion cases between 2021 and 2024, resulting in 101 arrests. While these enforcement measures aim to deter large-scale fraud, concerns are often raised about potential coercion, especially when recoveries are significantly lower than the detected amounts, highlighting the need for a balanced approach between strict enforcement and maintaining a business-friendly compliance environment. Businesses and impacted individuals are often forced to knock the judicial forums to seek redressal in such situations. In a recent decision (Radhika Agarwal vs. UOI [(2025) 27 Centax 425 (S.C.)]), the Supreme Court has elaborately dealt with the constitutional validity of the provisions concerning power to arrest under the Customs and Goods and Services Tax (GST) law. This article analyses the provisions of arrest under the GST Law and the observations of the Supreme Court in this regard.

CONSTITUTIONAL VALIDITY

The Supreme Court has upheld the constitutional validity of the arrest provisions in Radhika Agarwal on the premise that the parliament, having  powers to make laws relating to levy & collection of GST, as a necessary corollary, has powers to  enact provisions for tax evasion in the form of  powers to summon, arrest and prosecute, which are ancillary and incidental to the power to levy and collect GST.

STATUTORY PROVISIONS RELATING TO ARRESTS

Section 69 of the CGST Act, 2017 deals with the powers to arrest. The relevant provisions are reproduced below:

(1) Where the Commissioner has reasons to believe that a person has committed any offence specified in clause (a) or clause (b) or clause (c) or clause (d) of sub-section (1) of section 132 which is punishable under clause (i) or (ii) of sub-section (1), or sub-section (2) of the said section, he may, by order, authorise any officer of central tax to arrest such person.

A plain reading of the above provisions shows that the provisions of arrest can be invoked only in the following cases:

a) The authorization to arrest must be granted by the Commissioner.

b) There must be reasons to believe that an offense is committed.

c) The offense must be a specified offense for which the powers to arrest can be invoked

REASONS TO BELIEVE

The essential condition for invoking the arrest provisions, as seen above, is that the Commissioner should have reasons to believe that an offense is committed. The phrase “reasons to believe” was recently analyzed by the Hon’ble Supreme Court in the case of Arvind Kejriwal vs. Directorate of Enforcement [(2025) 2 SCC 248] in the context of PMLA and applied on all fours to customs / GST matters in Radhika Agarwal’s case.

In Arvind Kejriwal’s case, the Hon’ble Supreme Court observes that the powers to arrest without a warrant is a drastic & extreme power. Therefore, the legislature had prescribed safeguards in the language of Section 19 (of PMLA) itself which act as exacting conditions as to how and when the power is exercisable. These safeguards include the requirement to have “material” in the possession of DoE, and based on such “material”, the authorised officer must form an opinion and record in writing their “reasons to believe” that the person arrested was “guilty” of an offence punishable under the PMLA. More importantly, the Supreme Court has held that not only the “grounds of arrest”, but the “reasons to believe” must also be furnished to the arrested persons. In simple words, the “reasons to believe” cannot be some concocted grounds at the whims and fancies of the authorities. It must be based on credible evidence admissible before the Court of law.

The court has held the above principles equally applicable to customs / GST matters. More leverage has been accorded to existence of evidence to form a reason to believe for the simple reason that the Commissioner is not only required to establish whether an offense is committed or not, he also needs to classify the offense as cognizable or non-cognizable. In fact, to do so, there must be a computation or explanation, based on various factors, such as goods seized. Such a level of detail is critical during judicial review of the exercise. This requirement is also laid down by the Board vide Instruction 2/2022-23 dated 17th August, 2022 based on the decision in Siddharth vs. State of UP [(2022) 1 SCC 676] wherein para 3 lays down the specific parameters for its’ Officers:

3.2 Since arrest impinges on the personal liberty of an individual, the power to arrest must be exercised carefully. The arrest should not be made in routine and mechanical manner. Even if all the legal conditions precedent to arrest mentioned in Section 132 of the CGST Act, 2017 are fulfilled, that will not, ipso facto, mean that an arrest must be made. Once the legal ingredients of the offence are made out, the Commissioner or the competent authority must then determine if the answer to any or some of the following questions is in the affirmative:

3.2.1 Whether the person was concerned in the non-bailable offence or credible information has been received, or a reasonable suspicion exists, of his having been so concerned?

3.2.2 Whether arrest is necessary to ensure proper investigation of the offence?
3.2.3 Whether the person, if not restricted, is likely to tamper the course of further investigation or is likely to tamper with evidence or intimidate or influence witnesses?

3.2.4 Whether person is mastermind or key operator effecting proxy / benami transaction in the name of dummy GSTIN or non-existent persons, etc. for passing fraudulent input tax credit etc.?

3.2.5 Unless such person is arrested, his presence before investigating officer cannot be ensured.

3.3 Approval to arrest should be granted only where the intent to evade tax or commit acts leading to availment or utilization of wrongful Input Tax Credit or fraudulent refund of tax or failure to pay amount collected as tax as specified in sub-section (1) of Section 132 of the CGST Act 2017, is evident and element of mens rea / guilty mind is palpable.

3.4 Thus, the relevant factors before deciding to arrest a person, apart from fulfillment of the legal requirements, must be that the need to ensure proper investigation and prevent the possibility of tampering with evidence or intimidating or influencing witnesses exists.

3.5 Arrest should, however, not be resorted to in cases of technical nature i.e. where the demand of tax is based on a difference of opinion regarding interpretation of Law. The prevalent practice of assessment could also be one of the determining factors while ascribing intention to evade tax to the alleged offender. Other factors influencing the decision to arrest could be if the alleged offender is co-operating in the investigation, viz. compliance to summons, furnishing of documents called for, not giving evasive replies, voluntary payment of tax etc.

The Supreme Court in Radhika Agarwal’s case reiterates the above requirements and holds that department’s authority to arrest hinges on satisfying these statutory thresholds (para 44). Infact, it is held that the “reasons to believe” can be subject to judicial review as arrest often involves contestation between the fundamental right to life and liberty of individuals against the public purpose of punishing the guilty. However, it has held that it cannot amount to a review on merits. Such an exercise, in all cases, shall be restricted to the review of material in possession that forms the basis for reasons to believe.

In Dharmendra Agarwal vs. UOI [[2025] 170 taxmann.com 558 (Gauhati)], the non-determination of liability by the respondent authorities before executing the arrest was one of the reasons for the grant of bail. In KshitijGhildiyal vs. DGGI [[2024] 169 taxmann.com 446 (Delhi)], bail was granted since the grounds for arrest were not provided while making the arrest. Post the decision in Kshitij Ghildiyal, the CBIC issued instruction 1/2025-GST dated 13th January, 2025 making it mandatory for the arresting officer to provide the grounds of arrest.

PUNISHABLE OFFENSES

Section 69 requires that the Commissioner must have reasons to believe that an offense is committed. While the statute does not define the term “offense”, section 3(38) of the General Clauses Act, 1897 defines it to mean any act or omission made punishable by any law for the time being in force. Such acts, which amount to an offense are covered u/s 132 of the CGST Act, 2017.

A perusal of the first limb of section 132 (1) brings out an important distinction when compared with section 69. It reads as follows:

(1) [Whoever commits, or causes to commit and retain the benefits arising out of, any of the following offences], namely:—

The distinction is vis-à-vis the applicability of the section. Section 69 applies to an offense committed by a person, while section 132 applies to a person committing, or causing to commit and retain the benefits arising out of the listed offenses. In other words, only a person who commits an offense can be arrested u/s 69 and not the person causing the offense to be committed, i.e., an auxiliary to a crime.

The next question that arises is the interpretation of applicability of section 132(1). The above extracts of section 132(1) can be interpreted in two different ways:

While the first interpretation substantially restricts the applicability of section 132, it may not stand judicial scrutiny. The importance of punctuation marks in interpreting statutes was recently examined by the Hon’ble Supreme Court in ShapoorjiPallonji& Company Private Limited [(2023) 11 Centax 180 (S.C.)] as follows:

27. In the present case, the use of a semicolon is not a trivial matter but a deliberate inclusion with a clear intention to differentiate it from sub-clause (ii). Further, it can be observed upon a plain and literal reading of clause 2(s) that while there is a semicolon after sub-clause (i), sub-clause (ii) closes with a comma. This essentially supports the only possible construction that the use of a comma after sub-clause (ii) relates it with the long line provided after that and, by no stretch of imagination, the application of the long line can be extended to sub-clause (i), the scope of which ends with the semicolon. We are, therefore, of the opinion that the long line of clause 2(s) governs only sub-clause (ii) and not sub-clause (i) because of the simple reason that the introduction of semicolon after sub-clause (i), followed by the word “or”, has established it as an independent category, thereby making it distinct from sub-clause (ii). If the author wanted both these parts to be read together, there is no plausible reason as to why it did not use the word “and” and without the punctuation semicolon. While the Clarification Notification introduced an amended version of clause 2(s), the whole canvas was open for the author to define “governmental authority” whichever way it wished; however, “governmental authority” was re-defined with a purpose to make the clause workable in contra-distinction to the earlier definition. Therefore, we cannot overstep and interpret “or” as “and” so as to allow the alternative outlined in clause 2(s) to vanish.

Therefore, the second interpretation seems more plausible. This takes us to the question of the difference between “commit” & “causes to commit”. The term “commit” refers to the person who has committed the offense while “causes to commit” refers to the person who influences or motivates the person committing the offense. As such, a person who supports / sponsors such offenses though does not commit them, will be equally liable. However, the onus to prove that the offense was caused by such a person will be with the Department. It would also be necessary for the Department to demonstrate that the person causing the offense also retains the benefits derived from the offense so caused.

Section 132 lists the following acts as punishable offenses, providing for arrest and imposition of fines.

  •  Supplying any goods or services without the issuance of any invoice, with an intention to evade tax [132(1)(a)]

– The phrase is self-explanatory and is intended to cover situations of clandestine removal of goods, under-reporting of services, etc. it may be noted that the situation covered here deals with supply of goods without issuance of invoice and is not intended to cover situations of interpretation relating to classification, valuation, applicability of tax rate or exemption notification, etc.

– Further, for this clause to trigger, the Commissioner must establish “intent to evade tax”. The ‘intention to evade’ assumes some positive act on the part of the alleged person. It is a settled law that the burden to prove the allegation shall be on the accuser, i.e., the Department.

  •  Issuing any invoice or bill without supply of goods or services or both leading to wrongful availment or utilization of ITC or refund of tax [132(1)(b)]

– This clause refers to a situation where a supplier issues any invoice or bill without the supply of any goods or services, resulting in the wrong availment / utilization of ITC or refund. What is essential for this clause to trigger is that the invoice issued without any underlying supply shall lead to a wrong availment / utilisation of ITC or refund of the tax. If the recipient has not availed / utilized ITC or claimed a refund of such tax, the offense may not arise. Therefore, for the Commissioner to have a reason to believe such an offense is committed, there must exist evidence to that effect. In the absence of such evidence, an allegation under this clause may not survive. It may be noted that intention to evade tax is not a pre-condition for offense under this clause.

  •  Avails ITC using the invoice or bill referred to above or fraudulently avails ITC without any invoice or bill [132(1)(c)]

– This clause is linked with clause (b). While clause (b) is from the supplier’s perspective, this clause is from the recipient’s perspective and provides that when a person avails ITC on an invoice issued by the supplier without any underlying supply or avails ITC without any invoice or bill.

– Let us first look at an offense where ITC is claimed on the strength of an invoice without any underlying supply being received by the recipient. Generally, such offenses are detected based on the investigation undertaken at the suppliers’ end and notices are sent to all recipients of such supplier based on supplier’s statement. In such cases, based on such a statement, the Department proceeds with a preconceived notion that all supplies made by such suppliers are fake and therefore, the recipients have claimed wrong ITC. It is therefore imperative that in such cases, when the investigation starts, the recipient should make available all the evidence to justify the genuineness of the transactions, such as invoices, payment proofs, delivery challans, EWB, etc., The recipient should also invoke his right to cross-examine all such persons, whose statements are relied upon in such proceedings.

– The next situation covered under this clause is one where ITC is claimed without any invoice / bill. One of the conditions for claiming the ITC u/s 16 is that the recipient should have the tax invoice or prescribed document in his possession, which can be either the original copy or in the forms prescribed u/s 145 of the CGST Act, 2017. However, if any person claims ITC in contravention of this provision, an offense under this clause gets committed. The situation might change if the ITC claimed is already reversed, as the reversal of ITC amounts to non-taking of ITC in the first place, as held in Commissioner vs. Bombay Dyeing & Mfg. Co. Ltd. [2007 (215) E.L.T. 3 (S.C.)]

  •  Fails to pay the tax collected within three months from the date on which such payment becomes due [132(1)(d)]

– This clause refers to cases where a supplier collects GST but fails to deposit it with the Government. This can be either self-assessed liability (i.e., liability declared in GSTR-1 but not discharged) or liability not disclosed / discharged in return.

  •  Evades tax / fraudulently obtains refund by committing an offense not covered under (a) to (d) [132(1)(e)]

– This clause refers to a situation of tax evasion / fraudulent refunds (other than cases covered in (a) to (d)). Any instance of non-payment of tax/ fraudulent refund, which is not covered under clauses (a) to (d) may be covered under this clause. However, not all cases of non-payment/ erroneous refunds can be treated as tax evasion / fraudulent. In case of interpretation issues, bona-fide beliefs, etc. where there is no intention to evade / fraud the Government, the said sub-clause may not apply.

  •  Falsifies or substitutes financial records / produces fake accounts or documents or furnishes false information with an intention to evade tax [132(1)(f)]

– This clause specifically covers cases where a person falsifies / substitutes financial records / produces fake accounts or documents or false information with an intention to evade tax. The documentary evidence to support an allegation that a person has committed this act with an intention to evade tax must exist beforehand.

  •  Obstructs or prevents any officer in the discharge of his duties under this Act [132(1) (g)] – omitted w.e.f 1st October, 2023

– As a trade-friendly measure, the above offense has been decriminalized w.e.f 1st October, 2023.

  •  Acquires possession of, or in any way concerns himself in transporting, removing, depositing, keeping, concealing, supplying or purchasing or in any other manner deals with, any goods which he knows or has reasons to believe are liable to confiscation [132(1)(h)]

– This clause refers to cases where goods are liable to be confiscated u/s 130 of the CGST Act, 2017 which is generally triggered in the following cases:

(i) Supply or receipt of any goods in contravention of any of the provisions of this Act or the rules made thereunder with intent to evade payment of tax; or

(ii) Non-accounting of any goods on which he is liable to pay tax under this Act; or

(iii) Supply of goods liable to tax under this Act without having applied for registration; or

(iv) Contravention of any of the provisions of this Act or the rules made thereunder with intent to evade payment of tax; or

(v) Use of any conveyance as a means of transport for carriage of goods in contravention of the provisions of this Act or the rules made thereunder unless the owner of the conveyance proves that it was so used without the knowledge or connivance of the owner himself, his agent, if any, and the person in charge of the conveyance.

– In addition to the above, this clause shall also apply to service providers providing warehousing services if it is found that they are storing goods that are liable to confiscation.

  •  Receives or is in any way concerned with the supply of, or in any other manner deals with, any services which he knows or has reasons to believe are in contravention of any provisions of this Act or rules made thereunder. [132(1)(i)]

– This clause refers to cases where a person either receives or supplies any service in contravention of any provisions of this Act or rules. An example of contravention would be when a person, though liable to register under GST, does not register and continues to supply service. Such a supply would be in contravention of the provisions of section 22.

  •  Tampers with or destroys any material evidence or documents [132(1)(j)] – omitted w.e.f 1st October, 2023

– As a trade-friendly measure, the above offense has been decriminalized w.e.f 1st October, 2023

  •  Failure to supply any information which he is required to supply under this Act or the rules made thereunder or (unless with a reasonable belief, the burden of proving which shall be upon him, that the information supplied by him is true) supplies false information [132 (1)(k)]– omitted w.e.f 1st October, 2023

– As a trade-friendly measure, the above offense has been decriminalized w.e.f 1st October, 2023

  •  Attempts to commit, or abet the commission of any of the offenses mentioned above [[132 (1)(l)].

– This clause covers cases where a person aids or abets in the commission of any offense specified in section 132. In one of the cases, a tax practitioner was arrested alleging he had facilitated registration based on fake & vague documents for evading GST, thus abetting the commission of an offense. (Satya Prakash Singh vs. State of Jharkhand [2025] 170 taxmann.com 684 (Jharkhand)].

A perusal of section 132 makes it clear that all cases of non-payment of tax / short-payment of tax/ wrong availment or utilization of ITC do not trigger the arrest provisions. Only when an offense specified under specific clauses and exceeding specified monetary limit is committed can a person be arrested. Therefore, genuine cases involving interpretation issues, such as rate classification, valuation, exemption eligibility, ITC eligibility, etc. cannot be covered under the offenses prescribed u/s 132 & in such cases, arrest provisions cannot be invoked. This shows that cases involving interpretation issues are given more flexibility and such cases cannot be treated as a punishable offense. This has also been clarified by instruction 2/2022-23-GST dated 17th August, 2022.

PUNISHMENTS

The punishment for the above offenses, based on the tax quantum involved, is prescribed u/s 132(1), as follows:

Section 132(2) further provides that a repeat offender shall be liable to imprisonment for a term that may extend up to 5 years with a fine for each subsequent offense. However, no person shall be prosecuted without the previous sanction of the Commissioner [section 132 (6)].

It is interesting to note that the punishment is prescribed only for offenses specified in clauses (b), (c), (e), and (f). Before 1st October, 2023, sub clause (iii) referred to any other offense, which has been now substituted with an offense under clause (b). Therefore, while the prescribed acts are offenses, no punishment is prescribed for them. Therefore, to that extent, even if the person commits the said acts, he cannot be punished, since no such punishment is prescribed under the law. In this regard, one may refer to Vijay Singh vs. State of UP [2012 (5) SCC 242]:

16. Undoubtedly, in a civilized society governed by rule of law, the punishment not prescribed under the statutory rules cannot be imposed. Principle enshrined in Criminal Jurisprudence to this effect is prescribed in legal maxim nullapoena sine lege which means that a person should not be made to suffer penalty except for a clear breach of existing law. In S. Khushboo v. Kanniammal&Anr., AIR 2010 SC 3196, this Court has held that a person cannot be tried for an alleged offence unless the Legislature has made it punishable by law and it falls within the offence as defined under Sections 40, 41 and 42 of the Indian Penal Code, 1860, Section 2(n) of Code of Criminal Procedure 1973, or Section 3(38) of the General Clauses Act, 1897. The same analogy can be drawn in the instant case though the matter is not criminal in nature.

OFFENSES – COGNIZABLE & NON-COGNIZABLE

In general, all the offenses are declared as non-cognizable &bailable offenses [section 132 (4)] except for the offenses covered under clause (a) to (d) which are punishable under (i) above [section 132(5)].

The Code of Criminal Procedure, 1973 classifies an offense as either “cognizable” or “non-cognizable”. The distinction between cognizable and non-cognizable offenses is in the manner of arrest. An arrest for a cognizable offense can be made without an arrest, i.e., a person can be arrested without a warrant. In contrast, the arrest in case of a non-cognizable offense can be made only based on an arrest warrant. The classification of an offense into cognizable & non-cognizable depends on the gravity of the offense and is provided u/s 132.

SPECIFIED OFFENSES – WHERE A PERSON CAN BE ARRESTED U/S 69

The third limb of section 69, to invoke the arrest provisions, is that the Commissioner should have reasons to believe that a specified offense is committed. While section 132 provides a list of acts as offenses, the arrest provisions can be invoked only in case of specified offenses, as follows:

a) An offense under clauses (a) to (d) of section 132(1) should have been committed.

b) The offense must be punishable under sub-clause (i) section 132, i.e., the tax amount involved exceeds ₹5 crores, making the offense cognizable & non-bailable.
c) The offense must be punishable under sub-clause (i) section 132, i.e., the tax amount involved exceeds ₹2.50 crores but is less than ₹5 crores, making the offense non-cognizable &bailable.

In other words, the powers to arrest by the Commissioner can be exercised in cases of specified cognizable & non-cognizable offenses. However, when a person is authorized for a non-cognizable and therefore, a bailable offense based on the authorization issued by the Commissioner, such person arrested shall be admitted in bail, or in the default of bail, forwarded to the custody of the Magistrate until such time that a bail is furnished.

EXECUTING THE ARREST

Section 4(2) of the IPC, 1860 provides that the offenses covered under laws other than IPC, 1860 shall be investigated, inquired, tried, or otherwise dealt with under the CrPC, 1973 (“code”). Section 5 carves out a savings clause to clarify that the Code shall not affect any special / local law, or any special jurisdiction or powers conferred or special procedure prescribed unless there is a specific provision prescribed. In other words, the provisions of the Code would apply to the extent that there is no contrary provision in the special act or any special provision excluding the jurisdiction and applicability of the Code. In the context of GST, in Radhika Agarwal, it has been held that the provisions of the Code shall equally apply to customs’ offense and by extension, to GST as well.

As stated above, section 69 provides for cases where the Commissioner may authorize any officer of central tax to arrest a person. However, for other offenses, the GST law is silent. Hence, in such cases, the procedure prescribed under the Code shall apply. This takes us to the Code. Chapter V thereof deals with the arrest of persons. A perusal of Chapter V provides for arrest by a police officer. The question that arises is whether the GST officer is a police officer. This issue has been examined by Courts on multiple occasions1 and recently summarised in Radhika Agarwal wherein it has been held that GST officers are not police officers.

1 State of Punjab vs. Barkat Ram, (1962) 3 SCR 338, Ramesh Chandra Mehta vs.
 State of West Bengal, 
(1969) 2 SCR 461, Illias v. Collector of Customs (1969) 2 SCR 613, 
Tofan Singh vs. State of Tamil Nadu [(2s021) 4 SCC 1]

Therefore, while in cases covered u/s 69, the GST officers can execute the arrest, for all other offenses, the arrest can be executed only by a police officer. In such cases, the arrest can be executed by a police officer based on a complaint filed by the GST Officer (section 41 (b) of the code). However, as provided in section 132 (6), no person shall be prosecuted without the prior sanction of the Commissioner. Therefore, even for prosecution in other offenses, a prior sanction of the Commissioner is mandatory.

Once a person is arrested, either u/s 69 by a GST officer or a police officer, the arrested person shall be presented before a Magistrate within 24 hours of the arrest, excluding the traveling time between the place of arrest & the Magistrate’s Court. Even in case of arrests u/s 69, it is incumbent upon the arresting officer to admit the arrested person to bail, or in default of bail, forward it to the custody of the magistrate.

When a person is presented before the Magistrates’ Court, the Magistrate shall, if the investigation is not completed within 24 hours of the arrest and feels that further investigation is required, order that such arrested person must remain in police custody for not more than 15 days. However, in case of GST offenses, custody may be granted to the GST officers, as held in Directorate of Enforcement vs. Deepak Mahajan [(1994) 3 SCC 440].

A person arrested for offenses u/s 132 shall have all the rights, whether arrested u/s 69 by a GST officer / by a police office under Chapter V of the Code, such as:

a) The right to meet an advocate of his choice during the investigation, but not throughout the investigation and have such advocate present within a visual distance but not audible distance during the investigation (section 41D of the code).

b) The right to give information regarding such arrest and place where the arrested person is being held to any of his friends, relatives, or other person as may be disclosed or nominated by the arrested person (section 50A of the code)

c) The guidelines laid down in D K Basu vs. State of West Bengal [(1997) 1 SCC 416] must be stringently followed.

Similarly, the duties and obligations cast on a police officer under the Code shall equally apply to the GST officers. This includes the obligation to maintain a diary of investigation proceedings, taking reasonable care of the arrested persons’ health and safety, etc.,

Double jeopardy – can a person be subjected to simultaneous proceedings u/s 73/74 as well as section 69?

As stated above, there can be instances where proceedings u/s 73 or 74 have already been initiated. The question that arises is whether in such cases, proceedings u/s 69 alleging offenses u/s 132 can be initiated. In other words, can there be simultaneous civil & criminal proceedings for the same offense or not?

This issue has been dealt with in the case of Maqbool Hussain vs. State of Bombay [1983 (13) E.L.T. 1284 (S.C.)] wherein the Constitutional Bench held that sea customs authorities are not judicial tribunals. Therefore, proceedings by sea customs authorities do not constitute prosecution and the Orders passed by them did not constitute punishment. Therefore, separate criminal proceedings can be initiated against the accused for such offense and the same would not be hit by double jeopardy. This view was also followed by the Hon’ble Supreme Court in Leo Roy Frey vs. Superintendent [1983 (13) E.L.T. 1302 (S.C.)] and RadheshyamKejriwal [[2011 (266) ELT 294 (SC)]]. One may also refer to instruction 4/2022-23 dated 1st September, 2022 which deals with this aspect of parallel criminal & adjudication proceedings.

In fact, relying on Makemytrip (India) Private Limited vs. UOI [2016 SCC OnLine Del 4951], one of the arguments raised in Radhika Agarwal was that prosecution can be done only after adjudication proceedings are completed. However, this argument has been rejected and it has been held that there could be cases where even without a formal order of assessment, the department / Revenue is certain that it is a case of offense under clauses (a) to (d) to sub-section (1) of Section 132 and the amount of tax evaded, etc. falls within clause (i) of sub-section (1) to Section 132 of the GST Acts with sufficient degree of certainty. In such cases, the Commissioner may authorise arrest when he is able to ascertain and record reasons to believe. This reiterates that there is no relationship between the adjudication proceedings or prosecution for offenses.

PRE-ARREST PROTECTION

Any person apprehending prosecution and arrest has a right to apply for anticipatory bail. In Radhika Agarwal’s case, it has been held as follows:

70. We also wish to clarify that the power to grant anticipatory bail arises when there is apprehension of arrest. This power, vested in the courts under the Code, affirms the right to life and liberty under Article 21 of the Constitution to protect persons from being arrested. Thus, in Gurbaksh Singh Sibbia (supra), this Court had held that when a person complains of apprehension of arrest and approaches for an order of protection, such application when based upon facts which are not vague or general allegations, should be considered by the court to evaluate the threat of apprehension and its gravity or seriousness. In appropriate cases, application for anticipatory bail can be allowed, which may also be conditional. It is not essential that the application for anticipatory bail should be moved only after an FIR is filed, as long as facts are clear and there is a reasonable basis for apprehending arrest. This principle was confirmed recently by a Constitution Bench of Five Judges of this Court in Sushila Aggarwal and others v. State (NCT of Delhi) and Another (2020) 5 SCC 1. Some decisions State of Gujarat v. ChoodamaniParmeshwaranIyer and Another, 2023 SCC OnLine SC 1043; Bharat Bhushan v. Director General of GST Intelligence, Nagpur Zonal Unit Through Its Investigating officer, SLP (Crl.) No. 8525/2024 of this Court in the context of GST Acts which are contrary to the aforesaid ratio should not be treated as binding.

POST-ARREST STEPS

Once a person is arrested, pending trial, he shall remain in custody unless granted bail. Chapter XXXIII of the Code deals with provisions relating to bail.

Section 436 of the code provides that a person arrested for a bailable offense shall be released on bail. Similarly, for non-bailable offenses, section 437 of the code provides that the bail may be granted subject to the exceptions provided therein (such as cases where the punishment for the alleged offense is death or life imprisonment, or a repeat offender). However, in any case, when a person undergoes detention for more than one-half of the maximum period of imprisonment specified for that offense, he shall be released by the Court on his bond with or without sureties (section 436A of the code).

In addition, there is a settled principle of law that bail is the norm, jail is an exception, which has been upheld for economic offenses (see Prem Prakash vs. UOI).

There are many reported cases where bail has been granted for non-bailable offenses also:

  •  In Ashutosh Garg vs. UOI [[2024] 164 taxmann.com 767 (SC)], the bail has been granted upon having served a substantial time in detention, pending trial.
  •  In yet another case2, the bail was granted since the co-accused was granted bail.
  •  In DGGI vs. Harsh Vinodbhai Patel [Director General of Goods and Service Tax Intelligence, Ahmedabad vs. Harsh Vinodbhai Patel [2024] 164 taxmann.com 410 (SC)], bail was granted since all documentary evidences and other material were seized by the investigation agency, the presence of accused was not necessary for the investigation and trial was unlikely to commence and conclude in near future. Similar view was followed in the case of Ratnambar Kaushik vs. UOI [[2022] 145 taxmann.com 296 (SC)].
  •  In Natwar Kumar Jalan vs. UOI [[2025] 171 taxmann.com 112 (Gauhati)], one of the reasons for a grant of bail was that the accused was not a flight risk.
2 Ronaldo Earnest Ignatio vs. State of Odisha [[2024] 167 taxmann.com 418 (Orissa)]

CONCLUSIONS

The Supreme Court, while upholding the legislative competence of the Parliament to incorporate criminal provisions under GST law, has delivered a balanced judgment reinforcing constitutional safeguards to protect personal liberty. The decision in Radhika Agarwal also imposes a glaring requirement on the tax officers to invoke the arrest provisions only based on substantial evidence, which can be subjected to judicial review and reiterates the rights of the arrested persons, by following the guidelines laid down in D K Basu, Deepak Mahajan, etc, This shows that Courts shall, as they always have, continue to maintain the balance between the curtailment of tax evasion and the liberty of the individual. On the other hand, taxpayers will have to be equivalently vigilant with their tax practices, i.e., filing of returns, responding to department notices and submissions before the department, and so on, and in case of impending prosecution and / or arrests, proactively take preventive steps.

Part A | Company Law

1. SMD STRATEGIC REAL ESTATE LIMITED & ORS.

Before the Regional Director, Western Region

Appeal Order No 454(5)/SMD Strategic/92/AB2222617/2024-25/962

Date of Order: 20th February, 2025

Appeal under Section 454(5) of the Companies Act 2013 (CA 2013) against order passed for offences committed under Section 92 of CA 2013

FACTS

The Registrar of Companies, Mumbai (ROC Mumbai) vide adjudication order dated 26th December, 2023 held the Company and its Officers / Directors, have defaulted and liable for penalty under Section 92(5) of the Act. The said default pertained to the period from 30th November, 2019 to 29th December, 2019 for not filing Annual Return for the Financial Year 2018-19 within sixty days from the date of Annual General Meeting. Adjudicating officer accordingly imposed a penalty of ₹53,000/- each on company and defaulting officer aggregating to ₹1,06,000/.

The Appellants filed appeal against the said order on 20th December, 2024. As per the provisions of Section 454(6) of CA 2013, every appeal u/s 454(5) is required to be filed within 60 days from the date of the receipt of the order. Thus, it was noticed that appeal was not filed within 60 days from the date of receipt of the order.

EXTRACT FROM THE RELATED PROVISIONS OF THE ACT IN BRIEF

Section 454(6):

Every appeal under sub section (5) shall be fled to within sixty days from the date on which the copy of the order made by the adjudicating officer is received by the aggrieved person and shall be in such form, manner and be accompanied by such fees as may be prescribed.

Rule 4(1) of the Companies (Adjudication of Penalties) Rules, 2014:

Every appeal against the order of the adjudicating officer shall be filed in writing with the Regional Director having jurisdiction in the matter within a period of sixty days from the date of receipt of the order of adjudicating officer by the aggrieved party, in Form ADJ setting forth the grounds of appeal and shall be accompanied by a certified copy of the order against which the appeal is sought:

FINDINGS AND ORDER

At the time of personal hearing, with regard to the delay in filing appeal, authorised representative stated that the said Adjudication Order was not received by the appellant.

Taking into consideration, submissions made by the Appellants in their application as well as oral submissions of authorized representative during the hearing, the Regional Director held as under;

“I am of the considered view that the appeal is barred by limitation and hence, is rejected without going in the merit of the matter as the appeal was filed beyond 60 days after the receipt of Adjudication Order dated 26th December, 2023. Accordingly, the Adjudication Order dated 26th December, 2023 passed by ROC, Mumbai is ‘CONFIRMED’ under Section 454(7) of the Act.

Note:We have been covering the orders of the Adjudicating Officers in the past. We thought it appropriate to cover the Appellate orders too. Sections 454(5) and 454(6) of CA 2013, provide that appeal against the order may be filed with Regional Director within a period of 60 days from the date of the receipt of the order setting forth the grounds of appeal and shall be accompanied by a certified copy of the order.

The purpose of such coverage is to have a 360-degree view of the approach of the MCA in handling defaults which are occasionally very trivial in nature too.

2. Tejas Cargo India Limited

Registrar of Companies, Delhi

Adjudication Order ID PO/ADJ/01-2025/DL/00052

Date of Order: 15th January, 2025

Adjudication order for violation of section 56(4) of the Companies Act 2013 (CA 2013): Failure to issue share certificates to subscribers to the memorandum within 2 months of incorporation

FACTS

  •  The company had submitted an application in Form GNL – 1 for adjudication of violation of the provisions of section 56(4)(a) of CA 2013.
  •  As per the said application, company was incorporated on 26th March, 2021 and as per the provisions of Section 56(4)(a) of CA 2013, the company was required to issue share certificates to the subscribers of memorandum within 2 months from the date of incorporation i.e. on or before 25th May, 2021.

The company in its application had further stated that the share certificates were issued on 7th August, 2021 and hence there was a delay of 74 days in issuance of share certificates to the subscribers of the memorandum of association (MoA). The company had further stated that delay occurred since there was a delay in receipt of share application money.

  •  A show cause was issued to the company and company in reply prayed adjudication of the matter on compassionate ground as the default occurred due to an oversight in procedural compliance.

EXTRACT OF THE RELATED PROVISIONS OF THE ACT IN BRIEF

(4) Every company shall, unless prohibited by any provision of law or any order of Court, Tribunal or other authority, deliver the certificates of all securities allotted, transferred or transmitted—
(a) within a period of two months from the date of incorporation, in the case of subscribers to the memorandum;
….
(6) Where any default is made in complying with the provisions of sub-sections (1) to (5), the company and every officer of the company who is in default shall be liable to a penalty of fifty thousand rupees.

FINDINGS AND ORDER

Considering the default and further considering the fact that the company failed to issue share certificate/s to both the subscribers to the MoA within 2 months of incorporation which was not in compliance with the provisions of section 56(4)(a) of CA 2013. The submission of the company for remission in the penalty cannot be considered as the relevant provisions of the act provides for a fixed penalty. The subject company is not a small company as defined u/s 2(85) of CA 2013.

Hence, adjudication officer imposed a penalty of ₹50,000 each on the defaulting company and subscribers to the MoA.

3. In the Matter of ANHEUSER BUSCH INVBEV INDIA LIMITED

Registrar of Companies, Mumbai

Adjudication Order No: ROC (M)/Sec 118/Anneuser/ADJ-ORDER2023-24/2965 to 2974.

Date of Order: 24th December, 2024

Adjudication Order passed imposing penalty under Section 454(3) for not complying with all the provisions of “Secretarial Standards” specified by the Institute of Company Secretaries of India with respect to General and Board Meetings which amount to violation of provisions of Section 118(10) of the Companies Act, 2013

FACTS

M/s ABNIIL filed suo-moto application dated 24.08.2024 for adjudication of offence before the Office of Registrar of Companies, Mumbai i.e. Adjudication officer (AO) under section 454 of the Companies Act, 2013 towards violation of Section 118(10) of the Companies Act, 2013.

M/s ABNIIL in its application stated that the provision of Sec 118(10) of the Companies Act,2013 which states that ” Every company shall observe secretarial standards with respect to general and Board meetings specified by the Institute of Company Secretaries of India constituted under section 3 of the Company Secretaries Act, 1980 (56 of 1980), and approved as such by the Central Government.”

However, M/s ABNIIL could not comply with all the provisions of Secretarial Standards with respect to General and Board Meetings specified by the Institute of Company Secretaries of India (ICSI) with respect to Board meetings for financial years 2020-21, 2021-22 and 2022-23.

Further, it was stated that non-compliance with respect to the Secretarial Standards mainly pertains to failure to furnish the following:-

i. Proof of sending of Notice and Agenda for the Board Meetings.

ii. Proof of sending of Draft Minutes and Copy of signed and certified minutes.

iii. Proof of circulation of some Board Resolutions passed by circulation along with their approval.

iv. Proof of sending Notice of General Meeting to the Directors and Auditors of the Company.

Thus, M/s ABNIIL had admitted that it was not in proper compliance with provisions of Section 118(10) of the Act and Secretarial Standards specified by (ICSI) and therefore, M/s ABNIIL and its officers in default are liable for penal action under Section 118 (11) of the Companies Act, 2013.

PROVISIONS

Section 118

Minutes of Proceedings of General Meeting, Meeting of Board of Directors and Other Meeting and Resolutions Passed by Postal Ballot

(1) Every company shall cause minutes of the proceedings of every general meeting of any class of shareholders or creditors, and every resolution passed by postal ballot and every meeting of its Board of Directors or of every committee of the Board, to be prepared and signed in such manner as may be prescribed and kept within thirty days of the conclusion of every such meeting concerned, or passing of resolution by postal ballot in books kept for that purpose with their pages consecutively numbered.

…

(11) if any default is made in complying total the provisions of this section in respect of any meeting, the company shall be liable to a penalty of twenty-five thousand rupees and every officer of the company who is in default shall be liable to a penalty of five thousand rupees.

ORDER

AO, after considering the facts and circumstances of the case and after taking into account the factors above, and submissions made by M/s ABNIIL in its application, imposed a penalty of ₹25,000/- (Rupees Twenty-Five Thousand only) on the Company for each financial year and a penalty of ₹5,000/- (Rupees Five Thousand only) each on officer in default for respective financial year for failure towards compliance with the provisions of Sec. 118(10) and Secretarial standards specified by the (ICSI) with respect to Board meetings for FY2020-21, 2021-22, 2022-23.

Thus, a total penalty of ₹1,50,000/- was imposed on M/s ABNIIL and its officers in default.

Do Provisions Of S.68 Of Income-Tax Act, 1961 Apply To Donations Received By A Charitable Trust?

ISSUE FOR CONSIDERATION

Charitable or religious trusts are generally funded by donations (voluntary contributions) received from donors. Such donations are taxable as income (subject to exemption in respect of application and accumulation), as they fall within the definition of income under s.2(24)(iia) of the Income Tax Act, 1961 (“the Act”), which reads as under:

“voluntary contributions received by a trust created wholly or partly for charitable or religious purposes or by an institution established wholly or partly for such purposes or by an association or institution referred to in clause (21) or clause (23), or by a fund or trust or institution referred to in sub-clause (iv) or sub-clause (v) or by any university or other educational institution referred to in sub-clause (iiiad) or sub-clause (vi) or by any hospital or other institution referred to in sub-clause (iiiae) or sub-clause (via) of clause (23C) of section 10 or by an electoral trust.”

Such donations are also regarded as income from property held for charitable or religious purposes by virtue of the provisions of section 12(1). Section 12(1) reads as under:

“Any voluntary contributions received by a trust created wholly for charitable or religious purposes or by an institution established wholly for such purposes (not being contributions made with a specific direction that they shall form part of the corpus of the trust or institution) shall for the purposes of section 11 be deemed to be income derived from property held under trust wholly for charitable or religious purposes and the provisions of that section and section 13 shall apply accordingly.”

A charitable or religious trust registered under section 12A of the Act is entitled to exemption under section 11 in respect of its income from property held for charitable or religious purposes, which would include such donations, to the extent of such income applied, accumulated, etc. as provided in section 11. Therefore, such donations are income in the first place, and are thereafter entitled to exemption to the extent permitted by section 11.

Section 68 of the Act provides for taxation of unexplained cash credits. Section 68 provides as under:

“Where any sum is found credited in the books of an assessee maintained for any previous year, and the assessee offers no explanation about the nature and source thereof or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory, the sum so credited may be charged to income-tax as the income of the assessee of that previous year.”

Such unexplained cash credits are taxable at the rate of 60%, plus surcharge at the rate of 25% of such tax, plus education cess of 4% on the tax plus surcharge, i.e. at an effective tax rate of 78%.

An issue has arisen before the High Courts as to whether the provisions of section 68 apply to donations received by charitable trusts; in other words, whether donations received by a charitable trust, which may otherwise qualify for exemption, can be taxed as unexplained cash credits. While the Delhi, Allahabad and Karnataka High Courts have held that such donations received by a charitable trust cannot be brought to tax under section 68, the Punjab & Haryana High Court has held that such donations can be taxed under section 68.

KESHAV SOCIAL & CHARITABLE FOUNDATION’S CASE

The issue first came before the Delhi High Court in the case of DIT(E) vs. Keshav Social & Charitable Foundation 278 ITR 152.

In this case, during the relevant year, the assessee was a charitable trust registered under section 12A. It received donations amounting to ₹18,24,200. The assessee had spent more than 75% of the donations for charitable purposes.

During the course of assessment proceedings, the assessee was asked to furnish details of the donations, i.e. the names and addresses of the donors and the mode of receipt of donations. The assessee was unable to satisfactorily explain the donations. The assessing officer (AO) was of the view that the donations were perhaps fictitious donations, and that the assessee had tried to introduce unaccounted money into its books by way of donations. Therefore, the amount of ₹18,24,200 was treated as cash credit under section 68, and the benefit of exemption under section 11 was denied in respect of such donations.

In first appeal, the Commissioner (Appeals) was of the view that the AO was not justified in treating the donations received as income under section 68. He noted that the assessee had disclosed the donations as its income, and had spent 75% of the amount for charitable purposes. Therefore, in his view, the assessee had not committed any default. The Commissioner (Appeals) therefore directed the AO to allow exemption to the assessee under section 11, holding that the treatment of the donations of ₹18,24,200 as income under section 68 was incorrect.

In second appeal, the Tribunal was of the view that since more than 75% of the donations received by the assessee was spent on charitable purposes, the addition of ₹18,24,200 was not correct. The Tribunal accepted the argument of counsel for the assessee that once a donation was received, it was deemed to be received for a charitable purpose unless the donation was received towards the corpus of the trust.

Before the Delhi High Court, on behalf of the revenue, it was submitted that essentially what the assessee was trying to do was to launder its black money or unaccounted income by converting it into donations, and it should not be permitted to do so.

Referring to the decision of the Supreme Court in the case of S Rm M Ct M Tiruppani Trust 230 ITR 636, the High Court observed that every charitable or religious trust was entitled to exemption for income applied to its charitable or religious purposes in India. It noted that on the facts of the case before it, more than 75% of the donations for charitable purposes had been applied for its objects.

The Delhi High Court observed that to obtain the benefit of the exemption under section 11, the assessee was required to show that the donations were voluntary. The High Court further observed that the assessee had not only disclosed its donations, but had submitted a list of donors. According to the High Court, the fact that the complete list of donors was not filed or that the donors are not produced, did not necessarily lead to the inference that the assessee was trying to introduce unaccounted money by way of donation receipts. This was more particularly so in the facts of the case, where admittedly more than 75% of the donations were applied for charitable purposes.

The High Court held that section 68 had no application to the facts of the case, because the assessee had in fact disclosed the donations of ₹18,24,200 as its income. The High Court observed that it could not be disputed that all receipts, other than corpus donations, would be income in the hands of the assessee. Accordingly, there was full disclosure of income by the assessee, and also application of the donations for charitable purposes.

The High Court therefore upheld the decision of the Tribunal, holding that the provisions of section 68 would not apply to the donations received by the assessee trust.

This decision of the Delhi High Court was followed by the Delhi High Court in DIT v Hans Raja Samarak Society217 Taxman 114 (Del)(Mag), by the Allahabad High Court in the case of CIT v Uttaranchal Welfare Society 364 ITR 398, and by the Karnataka High Court in the cases of DIT(E) v. Sri BelimathaMahasamsthana Socio Cultural & Education Trust 336 ITR 694 and CIT v MBA Nahata Charitable Trust 364 ITR 693.

MAYOR FOUNDATION’S CASE

The issue came up again recently before the Punjab & Haryana High Court in the case of Mayor Foundation v CIT 170 taxmann.com 749.

In this case, the assessee was a company registered under section 25 of the Companies Act, 1956. It was also registered under section 12A and section 80G of the Act. It was running one educational institution, Mayor World School, at Jalandhar. The assessee had filed its income tax return, disclosing Nil income. During the year, it received corpus donations of ₹1,43,40,039.

During the course of assessment proceedings, the AO sought to verify the names and addresses of the donors. Notices were issued u/s 133(6) to some donors. 14 donors could be verified, and 7 were found not genuine as the donors’ identity was doubtful. A show cause notice was issued as to why such doubtful donations amounting to `53 lakh should not be taxed as anonymous donations under section 115BBC.

The assessee responded seeking more time to establish contact with such donors and obtain their due replies. None of the donors were produced before the AO. It was pointed out that such donations were received through bank accounts, and certain confirmations were received from 3 company donors.

The AO noticed the following in respect of these 3 companies:

  1.  In the case of all 3, first notices were first returned unserved. Responses were received to the second notices.
  2.  2 of the companies were located in West Bengal, and the replies were sent by post from Mumbai General Post Office.
  3.  2 of the companies were shown as struck-off in the ROC records, and 1 was reflected as dormant.
  4.  There seemed to be no working directors in all 3 companies.
  5.  The assessee had failed to produce any director or shareholder of all the 3 companies.

The AO therefore concluded that the assessee had received huge donations, the sources of income were not genuine, the companies were not working, and the genuineness, identity, sources and credit worthiness of these companies had not been proved. Besides addition of donations of ₹8,00,000,other donations of ₹40 lakh and ₹8 lakh were added as undisclosed cash credit under section 68, and tax was levied under section 115BBC and 115BBE.

In first appeal, the assessee submitted copies of income tax returns and proved the credit worthiness of 2 donees, who were NRIs, and who had given the rupee donations of ₹48 lakh. These additions of ₹48 lakh were deleted. The addition of donations of ₹8 lakh from the 3 corporate entities under section 68 was sustained in first and second appeals, on account of inability to prove any relationship between the donors and the donee, their whereabouts not being produced in the form of documents, and the companies having been struck off or being defunct.

The reasoning which prevailed with the Tribunal was that these companies had been struck-off the record of the Registrar of Companies, and therefore had to be treated as shell companies. Therefore, their identity was in question, the existence of the corporate body having been duly rejected by the Registrar of Companies. The existence of the donors itself was questioned, and the assessee was unable to produce any document in support of their action to restore the company before a judicial authority.

The questions of law raised before the High Court were:

“a. Whether the Income Tax Appellate Tribunal is justified in concurring with the findings of CIT(A) and in confirming the impugned income of ₹8,00,000 under the provisions of section 115BBC, section 68 read with section 115BBE of the Income Tax Act, 1961 being perverse and against the statutory provisions and as upheld in catena of judgments?

b. Whether the orders of the authorities below are illegal, erroneous, without jurisdiction and thus perverse?”

Before the Punjab & Haryana High Court, on behalf of the assessee, it was argued that there was sufficient material produced on record to show that the three companies existed and had been filing returns at the time of the corpus donations. Reliance was placed upon the documents in support of the publication that the amounts had been received by way of cheque. It was submitted that the companies were incorporated in 1992, and even if they were no longer registered at the time when the matter was inquired, there was no such reason why addition could have been made. It was submitted that the requisite communication had been made by the companies with the tax authorities, Ledger copy of the accounts and the income tax returns for the year and bank statements had been sent to the assessing officer. The three companies had acknowledged the donations that they had given.

The High Court observed that the companies at West Bengal had sought to give the details of the donations from Mumbai, and it was in such circumstances, that the AO came to the conclusion that the expression given was not bona fide. Opportunity was given to produce the directors, which was not done. It was due to this that the tax authorities had taken the view that the companies were no longer functional and not functioning and struck off by the Registrar of Companies. The High Court observed that nothing had been brought on record that these companies were actually functioning at the time of donations, and when they were struck off.

Under such circumstances, the High Court was of the opinion that the genuineness, identity and credit worthiness of these companies was rightly doubted by the AO, and under such circumstances, the additions had been made.

The High Court was therefore of the view that the question of law raised before it did not arise, keeping in view the facts and circumstances, as the appellant could not produce sufficient material before the authorities to dispel the suspicion which had been raised about the donations received from the companies which were not even based geographically close to the educational institution, and the reason to grant the donations were never properly explained.

OBSERVATIONS

It may be noted that in Mayor Foundation’s case (supra), neither before the Tribunal nor before the High Court were the decisions of other High Courts on the issue cited. Therefore, the Tribunal and the High Court merely decided the matter in that case on the basis of the facts before them, without really examining the legal issues involved in respect of the very applicability of section 68. Further, it seems that in that case, both section 115BBC as well as section 68 were invoked, which was patently incorrect, as the same income cannot be subjected to tax twice.

Section 68 seeks to bring to tax receipts which are not offered to tax as income, such as capital or loans received by a taxpayer. When the charitable trust has already included donations received as income in the first place, the question of applicability of section 68 should not arise.

Section 115BBC is a special provision introduced by the Finance Act 2006 with effect from AY 2007-08, to tax anonymous donations received by charitable trusts at the flat rate of 30%. The CBDT, vide Circular No. 14 of 2006 dated 28th December, 2006,has clarified that section 115BBC has been introduced” to prevent channelisation of unaccounted money to these institutions by way of anonymous donations”. An anonymous donation has been defined as a voluntary contribution where the recipient does not maintain details of the identity, indicating name and address of the donor. This is therefore a specific provision to tax donations received by charitable trusts where the donors are bogus entities. As opposed to this, the provisions of section 68 are general provisions to tax all types of cash credits which are unexplained, and apply to all types of assessees.

Section 115BBC is therefore a specific provision, while section 68 is a general provision. It is well-settled law that the specific provision of law would prevail over a general provision. Therefore, section 115BBC would prevail over the provisions of section 68 in the case of donations received by a charitable trust.

The Bombay High Court, in the recent case of Everest Education Society v ACIT 164 taxmann.com 744, while deciding a review petition against its order upholding treatment of donations as anonymous donations under section 115BBC, observed in paragraph 7 of the judgment that:

“Section 68 of the Act was not applicable since the applicant had disclosed the income from donation.”

Further, the Delhi High Court decision in Keshav Social and Charitable Foundation’s case (supra) has been upheld by the Supreme Court in a short decision disposing of the appeal, in the case reported as DIT(E) v Keshav Social and Charitable Foundation 394 ITR 496.

One aspect of the matter which also needs to be considered is that in Keshav Social & Charitable Foundation’s case, the donations were general donations, while in Mayor Foundation’s case, the donations were corpus donations. Would this make any difference to the aspect of applicability of the provisions of section 68?

This should really not make any difference on account of the following:

a. The provisions of section 115BBC apply equally to corpus donations as they do to general donations.

b. In the view of tax authorities, corpus donations are also income as defined in section 2(24)(iia) in the first place, and are thereafter exempt under section 11(1)(d) if the conditions specified therein are fulfilled.

c. In Uttaranchal Welfare Society’s case before the Allahabad High Court, the question before the High Court was in relation to taxability of corpus donations received under section 68. There also, the Allahabad High Court held that section 68 could not be applied to such corpus donations.

Therefore, the provisions of section 68 should not apply to donations received by registered charitable trusts (whether corpus or otherwise), and if at all, the provisions of section 115BBC may apply in such cases where details of the donor are lacking.

There Is Always A Door …

CA Girish Agrawal, a first-time author, embodies versatility. Besides being a Chartered Accountant, he was an avid footballer in his younger days, followed by being the President of the Leo Club in the mid-twenties and studying law in the mid-forties. He has handled the finance functions in an MNC and is currently an Income Tax Appellate Tribunal Member. I had the privilege of interacting twice with him, once professionally and secondly during the launch of the book.

The author initially indicates that the trigger for writing this book is to express his gratitude through leveraging his “word power” since his life has been extremely rewarding from his childhood in spite of experiencing three major near-death experiences (NDEs), which have made him cherish every moment of his life till date. The book goes on to reveal various facets of his personality in diverse roles ranging from academics, sports, leadership, social welfare and public events, professional pursuits, etc., with several achievements and failures on the way, including the NDEs indicated above; each of which has made him a complete person. He also expresses his gratitude to several persons starting with “My Master” my beloved Maharita, who he considers his biggest source of faith and strength, followed by “my Lord Krishna“, whose practised principles like unconditional love, joy, detached engagement, beauty, energy and enthusiasm, amongst others reverberating through Krishna consciousness intrinsically weaves through his life’s journey lived  so far with all its complexities. He goes on to add  that the book has also been motivated by his completing fifty years since his master says that “fifty is the new zero”.

The first and the longest chapter, titled “In Spite of…” narrates the first and by far the closest of NDEs in the form of a horrific road accident which resulted in severe damage to his spine and several other injuries. He then narrates his feelings and experiences, which transcended him from a chaotic state from the outside into an absolutely blissful, sacred and divine state from the inside for the next 60 hours till the successful completion of the surgery, which he refers to as the “point of reference” for the rest of his life. He goes on to compare time to a stationery rail track. In spite of the severe trauma involved, the author conveys that he has reached the most relaxed state with a feeling of freshness since his intentions were very clear to bounce back since he had to add much to life. The chapter is a lesson for all of us to always adopt a positive and never-say-die attitude, howsoever daunting the situation which ultimately helps one to come out as a winner. Another regular feature of the book is the poetic references, which describe various situations. He concludes the chapter with a very profound quote which reads as under to signify his transformation in life:

“Just when the caterpillar thought the world was over, it became a butterfly”

The remaining part of the book is weaved into a series of compact chapters which describe the various stages of his life and the lessons which he has learnt therefrom.

The next chapter, titled “The Inception”, covers his early school days and goes on to narrate his first NDE when he was hospitalised for kidney surgery, which resulted in life-threatening complications during recovery, which helped him very early in life to develop an understanding of the existential state of living in the form of being alone(where one dissolves into one’s self and goes inside) and being lonely (a feeling of lacking something). He goes on to state the various struggles encountered and how they were conquered through persistence and also several learnings.

The remaining part of the book narrates his life’s journey through various chapters (referred to in bold and italics), which touch upon the early influences and values which his paternal grandfather instilled, the spiritual discipline which kept on miraculously working in his life followed by his varied experiences through meeting various people from different walks and in different stages of life. He goes on to narrate how each of these helped “sowing the early seeds in life”, “exploring unchartered territories”, and “doing everything with devotion”. In the midst of various challenges and struggles, he does not forget to mention that he did “experience happiness” in several things like eating “Mishti Doi”, travelling for sports tournaments and studying with a group of friends for his exams, which helped him advance in his career and resulted in “unleashing his true potential“. In the midst of all this, he touches upon the last NDE during the second wave of COVID-19 19 which hit so hard that he had to be in the ICU, where he witnessed seven deaths around him and how he navigated the subsequent recovery phase with fortitude due to his experiences from the earlier NDEs which he refers to as ” I am having an affair with my life”. He wraps up his experiences by stating the effect of “music in his life” in the form of not only his love for music and his encounter with various legends and the immense source of inspiration it has been but also how it shaped his parenting abilities followed by the mantra of “giving and getting” which he refers to as a “win-win “solution wherein the act of giving is done without the willingness of the giver which can at best be termed as fulfilling his obligatory duty without expecting anything in return. The book concludes with a poem titled “Flowing like a Rive, Mantra of My Life…” which was penned by him during a flight from as indicated to me during the launching of his book.

Each of the chapters and sections provides the reader with a solid perspective on life in the form of perseverance, patience and positive thinking which can overcome even the mightiest of challenges and that one should never give up, which aptly sums up the title of the book.

It is interesting to note the author’s analysis and interpretation of each of the words of the title in a tabular form, which provides deep insights into his thinking process.

To conclude, the book sums up a basic philosophy that life needs to be lived to the fullest in the present, and every moment thereof needs to be cherished without carrying any baggage from the past nor thinking and worrying about the future.

Allied Laws

1. Sachin Jaiswal v. Hotel Alka Raje and Ors.

Special Leave Petition (Civil) No. 18717 of 2022

27 February, 2025

Partnership Firm — Contribution – Introduction of property into the firm – Stock/Asset of the firm – Perpetual Property of the firm – Transfer of property in the name of the Partnership Firm by way of a relinquishment deed is valid transfer. [S. 14, Partnership Act, 1932; Transfer of Property Act, 1882].

FACTS

One Mr. Bhairo Jaiswal (deceased) had purchased one plot in 1965. Thereafter, in 1971, the deceased entered into an oral partnership agreement with his brother Hanuman Jaiswal. The same was reduced to writing and ‘M/s. Hotel Alka Raje’ (Respondent No. 1/Partnership Firm) was formed in 1972 wherein, the deceased introduced the plot as part of the firm’s assets. The Partnership Firm subsequently constructed a building on the plot and began operating a hotel business. Due to old age, Mr. Bhairo Jaiswal decided to retire from the firm and, on 9th March, 1983, executed a relinquishment deed stating that the said plot was relinquished in favour of Respondent No. 1 (Partnership Firm) and that his legal heirs shall have no right, title and interest in the said plot. Mr Bhairo Jaiswal died on May 30, 2005. Thereafter, the Appellant (legal heir of Mr. Bhairo Jaiswal) filed a suit for declaration of title over the said plot. It was contended by the Appellant that the plot was purchased in the name of Bhairo Jaiswal. Further, a property cannot be transferred in the name of the Partnership Firm by way of a relinquishment deed. This was for the reason that as per the Transfer of Property Act, 1882, sale, mortgage, gift, and exchange are the only recognised modes of transfer. However, both the learned Trial Court and Hon’ble Allahabad High Court dismissed the suit of the Appellant.

Aggrieved, a special leave petition was filed before the Hon’ble Supreme Court.

HELD

The Hon’ble Supreme Court observed that the plot was introduced as the property of the Partnership Firm by Mr. Bhairo Jaiswal as his contribution to the Partnership Firm. Consequently, the plot became the property of the Partnership Firm and ceased to be the exclusive asset of Mr. Bhairo Jaiswal. Relying on its earlier order in the case of Addanki Narayanappa v. Bhaskara Krishnappa (1966 SCC OnLine SC 6) and Section 14 of the Partnership Act, 1932, the Hon’ble Court reiterated that any property introduced into the Partnership Firm as an asset or stock shall become a perpetual property of the Firm.

The petition was therefore, disallowed and the Order of the Hon’ble High Court was upheld.

2. S. Sasikala vs. The State of Tamil Nadu and Ors.

AIR 2025 (NOC) 154 (Mad)

23 May, 2024

Guardianship – Appointment – Unwell husband – Family unable to sustain – Only option to relive properties of the husband – Wife appointed legal guardian of the husband. [Art. 226, Constitution of India; S. 7, Guardian and Wards Act, 1890].

FACTS

A Writ Petition was filed before the Hon’ble Madras High Court (Single Judge Bench) by one Mrs. S. Sasikala seeking appointment as the guardian of her husband who was unwell and in a vegetative / comatose state. The Petitioner argued that the family was facing financial problems as hospital bills had escalated to several lakhs of rupees, leaving them with no option but to liquidate properties registered in her husband’s name. Therefore, she sought guardianship to facilitate the necessary sale and manage his assets in his best interest. The Hon’ble Court, however, dismissed the said appeal and asked the Petitioner to approach the civil court.

Aggrieved, an appeal was filed before the Division Bench of the Hon’ble Madras High Court.

HELD

The Hon’ble Division Bench, relying on the decision of the Hon’ble Kerala High Court in Shobha Balakrishnan & Anr. vs. State of Kerala [W.P. (C) No. 37278 of 2018], held that although Section 7 of the Guardian and Wards Act, 1890, only allows for the appointment of a legal guardian for minors, the High Court, under its powers conferred by Article 226 of the Constitution, can appoint a guardian in exceptional cases for an unwell person or someone in a comatose state.

The Petition was therefore allowed.

3. Trident Estate Private Limited v. The Office of Joint District Register and Ors.

AIR 2025 Bombay 59

23 October, 2024

Auction – Property – Sold to the highest bidder – Fair Market Value for determination stamp duty payable – Auction conducted and approved by the Hon’ble Supreme Court – Stamp duty authority cannot determine the value of the property – Bound to accept FMV at the price sold to the highest bidder by the Hon’ble Supreme Court. [S. 32A, 33, Maharashtra Stamps Act, 1958; Registration Act, 1908].

FACTS

The Petitioner had purchased a property through auction under the sale-cum-Monitoring Committee constituted by the Hon’ble Supreme Court for liquidation of assets of one Citrus Check Inn Limited and Royal Twinkle Star Club Limited. The Petitioner had emerged as the highest bidder for the said property at ₹ 2,51,00,000/-Accordingly, a sale certificate was issued to the Petitioner. Thereafter, the Petitioner approached the office of Joint District Registrar (Respondent No.1) for registration of the said property under the provisions of the Registration Act, 1908. The Petitioner paid five per cent stamp duty on the consideration price. Respondent No. 1, however, refused to register the property on the ground that the fair market value of the property was at Rs. 16,72,11,000/- and therefore, stamp duty was payable at the rate of five per cent on the fair market value and not consideration price. Accordingly, a demand of ₹83,60,550/- (on account of stamp duty deficit) and ₹23,41,000/- (towards penalty) was raised on the Petitioner.

Aggrieved, a Writ Petition was filed before the Hon’ble Bombay High Court.

HELD

The Hon’ble Bombay High Court observed that the auction was carried out by the Hon’ble Supreme Court (or at least under the aegis of the Hon’ble Court). Further, it was observed that the method followed by the Hon’ble Supreme Court is one of the most open and transparent forms of sale. Further, the auction-based sale involves careful deliberation and multiple steps, including the fixation of a minimum price, assessment of the property’s present value, and ensuring a transparent bidding process. Even then, the Hon’ble Supreme Court also have a right to cancel the entire bid if it is in their opinion, the process was tainted or the property was sold at a very low price. In the present case, the sale was approved by the Hon’ble Supreme Court. Therefore, when a sale is conducted by the Hon’ble Supreme Court, the stamp authority cannot sit on an appeal and proceed to determine the true market value of the property. Therefore, the demand and penalty were deleted.

The Petition was allowed.

4. Balakrishna G. and Ors v. Sub Registrar Jayanagar District (Kengeri), Bangalore and Ors.

AIR 2025 Karnataka 43

19 July, 2024

Auction of property – Sold to the highest bidder – Registration denied by Stamp Authority – Reason – ED directed Stamp Office not to register any sale without its permission – No authority with the ED to give direction to the Stamp authority office [S. 89(4), Registration Act, 1908; Prevention of Money Laundering Act, 2002; Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002].

FACTS

The Petitioner had purchased a property through a public auction conducted by the Bank (Respondent No. 3) under the provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI) for liquidation of debt owed by one Acropetal Technologies Limited. Thereafter, the Petitioner approached the office of the Sub-Registrar (Respondent No. 1) for registration of the property on the strength of the sale certificate issued by the Bank (Respondent No. 3). However, Respondent No. 1 refused to register the said property on the ground that they had received one letter by the Enforcement Directorate (ED) (Respondent No. 2) directing the Sub-Registrar office not to register the said property without their permission.

Aggrieved, a Petition was filed before the Hon’ble Karnataka High Court (Bengaluru).

HELD

The Hon’ble Karnataka High Court after relying on a series of decisions held that the ED have no power under the provision of the Prevention of Money Laundering Act, 2002 (PMLA) to direct Respondent No. 1 to stop the registration of any property. Further, the Hon’ble Court also noted that the rights of a secured creditor under SARFAESI shall always prevail over the claim of ED under the PMLA Act. Further, the Hon’ble Court also observed that as per Section 89(4) of the Registration Act, 1908, it was incumbent upon Respondent No. 1 to register the property upon receipt of the sale certificate. Therefore, the Hon’ble Court directed Respondent No. 1 to register the said property in the name of the Petitioner.
The Petition was therefore allowed.

5. Palaniammal v. Thasi alias Sukkadan

AIR 2025 MADRAS 44

22 November, 2024

Settlement deed – Transfer of title and possession – Unilateral Cancellation deed executed – Challenged validity of Cancellation deed – Maintainability of suit – Suit did not seek declaration of title based on Settlement deed – Not required – Suit maintainable. [S. 31, 34, Specific Relief Act, 1963].

FACTS

A suit was filed for declaration of a ‘cancellation deed’ as null and void. A settlement deed was executed between the Plaintiffs (Appellants) and Defendants (Respondents) wherein, the title of the suit property was transferred over to the Plaintiff along with possession of the land. Thereafter, the Defendants cancelled the ‘settlement deed’ and unilaterally executed a ‘cancellation deed’ on various grounds. Therefore, a suit was filed for declaration of the ‘cancellation deed’ as null and void. However, it was contested by the Respondents, inter alia, that the suit was not maintainable since the Plaintiff had challenged only for declaration of the ‘cancellation deed’ as invalid without seeking any relief for declaration title based on the ‘settlement deed’..

HELD

The Hon’ble Madras High Court observed that the ‘settlement deed’ was mutually executed between the parties. Further, possession and title were given to the Plaintiff. The Hon’ble Court further noted that even after the execution of the unilateral ‘cancellation deed’, the Plaintiff were still in possession of the property. Therefore, the Hon’ble Court held that there was no need for the Plaintiff to seek relief for declaration of title based on the ‘settlement deed’. Therefore, the suit was maintainable.

The suit was therefore allowed.

From The President

Dear Members,

Here comes April! The Romans gave this month the Latin name Aprilis, but the derivation from traditional etymology is from the verb aperire, meaning ‘to open’, in allusion to its being the season when trees and flowers begin to ‘open’, the season of Spring in the northern hemisphere.

Closer home at Bharat, April also coincides with the pious month of Chaitra, signalling the start of the harvesting season as well as a new calendar year, i.e. Shak Samvat 1947.

Even closer in the financial sector, April marks the beginning of a new fiscal year for commercial entities. As the largest economy begins its financial year in April, entities in our nation use April to assess their performance from the previous fiscal year with the objective to establish performance metrics for the new fiscal year.

For Chartered Accountants, April signifies the commencement of the busier period of the year as we undertake our professional duties for the companies and clients we serve. As your partner in learning and professional development, your Society has been organizing numerous learning and development events and will continue to do so, aiming to enhance our members’ capabilities in managing their professional responsibilities.

In addition to organizing learning events, BCAS consistently publishes the BCA journal, self-paced e-courses, books, and thought mailers to enhance professional skills further. In April, 4 (four) publications are being released by your Society:

  1.  The BCA Referencer: As a leader in the Referencer format, the BCA Referencer, now in its 63rd year of continuous publication, is renowned for being a high-quality, practical professional resource that assists chartered accountants in improving their effectiveness with ease. The BCA Referencer, featuring three updated modules on Direct Tax, Indirect Tax, and the latest amendments, is now available for booking through the Society’s website. This comprehensive referencer for Chartered Accountants is the result of extensive efforts by over 20 compilers, 5 senior members, and 3 editors, and it deserves significant recognition for their dedication and hard work.
  2.  A Compilation of Thought Mailers: Over the years, BCAS members have consistently shared their insights on topics related to personal and emotional development with our community. We are pleased to announce that a valuable compilation of these thought mailers is now available for purchase as a hard-bound book. Secure your copy today to experience the enriching perspectives presented by multiple contributors in this unique collection. We extend our gratitude to all the authors who have contributed to these Thought Mailers over the years.
  3.  Laws & Business: The much-awaited 6th edition of the publication on “Laws & Business” is being released by your Society this month. This comprehensive work, authored by Dr. (CA) Anup P. Shah, spans nearly 1500 pages across 2 (two) volumes and demonstrates the author’s dedication and expertise. Dr. (CA) Anup P. Shah’s commitment to distilling complex information into accessible content will undoubtedly benefit professionals navigating these critical areas of law. The Society remains grateful for the author’s contribution to our profession. Through this publication, BCAS reaffirms its mission to equip readers with the knowledge required to stay compliant, make informed decisions, and navigate India’s legal landscape effectively.
  4.  Gita for Professionals: The 7th edition of Gita for Professionals, authored by CA Chetan Dalal, is one of the most widely distributed publications from BCAS. In an era of constant change and evolving professional demands, the timeless wisdom of the Bhagavad Gita provides invaluable guidance for navigating modern complexities. This book, now in its 7th edition, highlights the enduring significance of ancient knowledge in today’s world. Since its initial publication, it has successfully bridged profound spiritual teachings with the practical challenges of professional life. The Society extends its gratitude to CA Chetan Dalal for his dedication to sharing the timeless wisdom of the Gita through his insightful writing.

Over the years, the Society has expanded in size and reach, now addressing the needs of various constituents within the community. To remain relevant and provide value to all stakeholders, three distinct cohorts are taking shape at BCAS:

  1.  BCAS Youth: This cohort is designed for newly qualified Chartered Accountants. The objective of the BCAS Youth cohort is to organize events and initiatives that meet the needs of young Chartered Accountants. One such initiative of CAMBA: A certified Management Program for CAs, is being held on the 11th, 12th, and 13th April, 2025 in three different batches to help Chartered Accountants enhance their management skills.
  2. Women @ BCAS: The progress of our profession and nation relies significantly on the support and strength of our women members. We are fortunate to be in a profession where the representation of women is increasing, and at BCAS, we are committed to advancing this cause. On 24th March, 2025, BCAS commemorated International Women’s Day by celebrating strength, success, and empowerment through an event that showcased the life stories of 3 (three) accomplished women role models.
  3. BCAS Nxt: The BCAS Nxt cohort is an ‘of-for-by’ student collective incubated within the Human Resources Development committee towards learning, networking and growth of budding students of Chartered Accountancy. Fresh on the heels of a remarkably successful ‘Tarang 2025’, these young Turks have now progressed to hosting Bootcamps on topics of importance and learning for CA students. A power-packed session on Bank Branch Audit Bootcamp from an article’s perspective was held on 22nd March, 2025, led by student volunteers.

These dedicated cohorts will continue to strengthen their influence in the coming years, addressing the specific needs of their respective constituencies more effectively.

Separately, your Society had the pleasure of hosting and felicitating President CA Charanjot Singh Nanda, President of The Institute of Chartered Accountants of India (‘ICAI’), Prasanna Kumar D, Vice President of ICAI and members of the central council of ICAI for an interactive meeting with the BCAS Core Group. Year-after-year the BCAS Core Group interactive meeting with the ICAI torchbearers has been a platform for sharing thoughts, suggestions and exchange of ideas for the betterment of our profession. The BCAS community engages closely with and complements the activities and initiatives of ICAI, as both institutions relentlessly work towards the professional development of Chartered Accountants.

Back to April, don’t forget to renew your BCAS memberships for this new financial year as we plan for a professionally enriching new financial year ahead. April is also a month wherein our beautiful nation celebrates diversity through our diverse festivals. Let us celebrate diversity and amplify this unique strength of our nation, leading our countrymen to better, happier and purposeful lives. Festive greetings for Baishakhi, Cheti Chand, Chaitra Navratri, Easter, Eid-ul-Fitr, GudiPadwa, Hanuman Jayanti, Mahavir Jayanti, Ram Navami, and Ugadi, amongst many others.

Warm Regards,

 

CA Anand Bathiya

President

Kalachakra (Impacting People, Peace And Planet)

The tenth Raisina Dialogues 2025, from 17th to 19th March, 2025, organised by the Observer Research Foundation and the Ministry of External Affairs (MEA), was held in New Delhi. It is one of India’s most prestigious conferences, where, every year, many interesting geo-political and geo-economic developments are discussed.

The theme for this year’s conference was “Kālachakra: People, Peace and Planet”. One of the important discussions was on Tariffs and Sanctions, where the Minister of External Affairs of India, Dr S. Jaishankar, informed that India is engaged in three big trade negotiations with the EU, the UK and the USA. These negotiations will have a significant impact on India’s trade and commerce, as these countries are growth markets for India and are strategic partners of India with a large Indian diaspora. It would, therefore, be interesting to track developments in these cross-border trade negotiations. Companies in India will have to gear up for fresh competition, both in India and in these markets, with realignment of tariffs.

Let’s look at the Kalachakra affecting People, Place and Planet in different contexts.

PEOPLE

With an estimated 1.46 billion people1, India is not only the most populous country, but is also the largest democracy in the world. India accounts for 17.78% (2025) of the world population, but its share of the world GDP2 is 9.7% (2024). However, India has a demographic advantage, with the median age of its population at 28.8 years. It is also considered one of the fastest-growing economies in the world, with an estimated 6.5% growth in FY 2025. It is likely to become the 4th largest economy, surpassing Japan, in 2025.

1 https://www.worldometers.info/world-population/india-population/
2 https://www.worldeconomics.com/Share-of-Global-GDP/India.aspx

However, India’s GDP per capita (i.e., GDP/Population) puts it 140th in the world ranking. Even considering Purchasing Power Parity, India ranks 119th in the world ranking.3  Within the growth figures, we also need to address the inequality of income and regional disparities.

3 https://www.businesstoday.in

Thankfully, macro-economic data are favourable, and huge capital spending by the government on infrastructure will give a fillip to industrial and economic growth. However, we need to invest a lot in terms of time and effort in skill building, increasing the employability of youth, education and health care. This was also echoed in the Raisina Dialogues. Coming to the contribution of people to India’s growth, some structural changes are required to arrest the brain drain.

The recent survey by Kotak Private Banking of 150 wealthy individuals across India revealed a startling fact that “1 in 5 Ultra-HNIs surveyed are currently in the process of or plan to migrate, most of whom intend to reside in their chosen host country permanently while retaining their Indian citizenship. Professionals show a higher propensity to migrate than entrepreneurs or inheritors. Among those considering global migration, 69% cited smoothening of business operations as the key driver.”4

4 https://www.kotak.com/content/dam/Kotak/about-us/media-press-releases/2025/media-release-kotak-private-top-of-the-pyramid-report-2024.pdf

This emphasises the need to provide a conducive environment for ease of doing business for entrepreneurs to grow and excel. We need large industries for manufacturing and generating employment.

PEACE

With wars in various parts of the world, peace is elusive. Various kinds of wars are being fought today: physical (political), technological, ideological, economic (through currencies, tariffs, etc.) and so on. One would not be surprised to see the borders of many nations changing in years to come. In any case, borders are losing significance with technological and ideological wars. Social media is enough to create a desired narrative which can topple governments. Data and cyber security assume a lot of significance in this new world order. The use of AI may expedite the work, processes, etc., but may pose a big threat to National Security. Guarding invisible technological and financial borders is, perhaps, more important now than ever before. That’s where we have a positive role to play.

The Prime Minister of India categorically stated that India is not neutral in the Ukraine war, but is on the side of Peace. We have seen the devastating impact on the lives of people in war-torn countries. Only Peace can bring prosperity to the world.

PLANET

India believes in Vasudhaiva Kutumbakam (वसुधैवकुटुम्बकम्), meaning the whole Earth is a Family. During the G20 Presidency of India, it was translated to “One Earth, One Family, One Future” and was chosen as the Motto.

Planet Earth is facing many challenges, the primary of them being climate change. The recent earthquake in Myanmar and Thailand has proven the fragility of human edifices. Frequent changes in climate have impacted human and animal lives. Rising temperatures and melting glaciers are matters of concern. The use of warheads, burning forests, and rampant use of fossil fuels have worsened the situation.

In such a situation, reporting for ESG (Environmental, Social and Governance) assumes significance. “Environmental criteria examine how a company performs as a steward of the planet. Social criteria examine how a company manages relationships with employees, suppliers, customers, and the communities where it operates. Governance defines a set of rules and best practices, along with a series of processes that determine how an organisation is managed and controlled.”5

5 https://www.thecorporategovernanceinstitute.com/

In India, from FY 2023-2024, SEBI has mandated disclosures as per the updated Business Responsibility and Sustainability Reporting (BRSR) format for the top 1000 listed companies (by market capitalisation).6

6 Circular No.: SEBI/HO/CFD/CFD-SEC-2/P/CIR/2023/122 dated Jul 12, 2023

It would be necessary for companies to become more responsible and responsive to the environment in which they are operating. It would be interesting to see the impact these new regulations will generate in times to come. Practitioners of the ESG assurance and auditors of the concerned companies will need to keep track of developments in this field and equip themselves for conducting necessary enquiries, reporting and disclosures.

PROFESSIONAL DEVELOPMENTS

The Finance Act 2025 has introduced a new section 194T applicable w.e.f. 1st April, 2025, which mandates TDS on Payments of any sum (in excess of ₹20,000/- during the financial year) in the nature of salary, remuneration, commission, bonus or interest to a partner of the firm. It will create difficulties for those firms which decide remuneration based on profitability at the year-end, as TDS will be applicable even on ad-hoc withdrawal towards remuneration. Such far-reaching amendments resulting in increased compliance should have been discussed with stakeholders before being enacted.

Recently, the Supreme Court dismissed the SLP filed by the Central Board of Indirect Taxes and Customs against the judgment of the Bombay High Court in the case of Aberdare Technologies Private Limited &Ors. wherein the Hon. High Court had allowed manual or electronic corrections in claiming the input tax credit. The Apex Court held that “Human errors and mistakes are normal, and errors are also made by the Revenue. Right to correct mistakes in the nature of clerical or arithmetical error is a right that flows from right to do business and should not be denied unless there is a good justification and reason to deny benefit of correction. Software limitation itself cannot be a good justification, as software are meant to ease compliance and can be configured. Therefore, we exercise our discretion and dismiss the special leave petition.”

This is a welcome decision giving relief to taxpayers for genuine mistakes and errors. In yet another decision in the case of Radhika Agarwal, the Apex Court clarified and reiterated the important safeguards to be kept in place to ensure that provisions of arrest under the GST laws are not abused. Readers can refer to the detailed Article, as well as in-depth discussion in the “Decoding GST” column on this case, in the subsequent pages of this Journal.

In conclusion, we are living in an exciting time with Kalachakra moving rapidly impacting our profession, businesses, lives and Planet. We shall see many unprecedented developments in times to come, but who knows what is in store for us in the Kalachakra? Let’s hope that whatever comes is best for the People, Peace and Planet.

Best wishes to our readers for the New Financial Year and Festivals.

Best Regards,

 

Dr CA MayurNayak, Editor

GudiPadwa, VikramSamvat 2082: 30th March, 2025

पय:पानं भुजङ्गानां केवलं विषवर्धनम्

This proverbial line describes a very commonly experienced fact of life, especially in the modern times. Although it is an age old reality, it is more prominently observed in last few decades. With the advancement of technology, degeneration of values and pollution of culture, its gravity is increasing day-by-day.

The stanza reads as follows:-

उपदेशो हि मूर्खाणाम्    Advice rendered to a stupid or undeserving person.

प्रकोपाय न शान्तये  results in his anger. (resistance) and not in peace.

पय:पानं भुजङ्गानां  If you feed milk to a snake,

केवलं विषवर्धनम्  It only adds to its poison.

This is from Panchtantra (1.420) and Hitopadesh 3.4

There is another version of this shloka –

उपकारोSपि नीचानाम्  Help offered to a bad person,

अपकारो हि जायते  Is taken otherwise by him (he treats it as a trouble with bad motive.

पय:पानं भुजङ्गानां केवलं विषवर्धनम् !

If any of the readers has not experienced this, please do try it!

Addicted people, drunkards, gamblers, gundas, hooligans, uneducated (uncivilised) people, will never listen to your sound advice. If you advise corrupt people to give up bad practices, they will either ridicule you or frown upon you. If people are unnecessarily quarrelling or fighting on the streets or even in a crowded compartment of a local train and if you request them to stop quarrelling and to ‘forget it’, they will first ask you not to interfere. They may even try to drag you into the dispute or react violently against you. Members in a co-operative housing society are behaving with complete non-co-operation. A trouble making member will raise disputes and will never mend his ways. No consultant can improvethis situation. If you ask naughty or mischievous children to behave themselves, they will react the opposite way.

If anyone advises our neighbouring countries to focus on their own development rather than causing destruction to India or promoting terrorism, they will on the contrary, increase their attempts to cause harm to India. Even if they are in utter poverty, they will import weapons to wage a war against us!

In our epics, Ravana, Duryodhana, other demons/villains are a classic example of this truth. Ravana did not listen to the advice of Bibheeshana to give Seeta back to Ram. Ravana drove him away from his kingdom. Duryodhana did not heed to the advice of Vidura and other elderly persons. Such good advice hardens their ego.

Today’s youth is more obsessed with social media, drugs, movies and many bad things. Our family system is cracking today. Husband wife relations are getting destroyed. The bonding between all relations is breaking. Break-ups and divorces are very common. The couple does not realise the importance of togetherness. They are often short sighted or excessively career oriented, materialistic, ambitious, egoistic, selfish and uncompromising. They cannot digest ‘adjustment’. The counselling has not much impact. If you try to advise them, they will ask you to mind your own business, saying that it is their personal matter. They don’t realise that when such things become rampant, it is no longer a personal matter but a great social menace!

The only solution is the strong moral culture ‘sanskaras’. In today’s rat race, the sanskaaras of parents and teachers are losing efficacy. A narrow minded, individualistic and self-centred approach is developing and people are immune to any words of wisdom. Thus the bhujangas (snakes) in the guise of ‘qualified’ money making machines are increasing. They will improve when they themselves realise it; but not on anyone’s advice!

Book Review

ESG and BRSR Reporting: A Comprehensive Guide by CA Kishore M. Parikh is a remarkable book that delves into the intricate world of Environmental, Social, and Governance (ESG) practices and Business Responsibility and Sustainability Reporting (BRSR). The author introduces innovative theories and presents complex topics in a concise and accessible manner. The book commences with a focus on the environment, where the author defines global risks as adverse circumstances that may lead to loss or injury.

Chapter 1 introduces the concept of ESG, emphasising that it encompasses not only environmental considerations but also broader aspects affecting various stakeholders such as customers, suppliers and employees. The pillars of ESG — environmental, social, and governance factors — are outlined, providing a comprehensive understanding of the framework. In the Environmental Pillar, the author provides examples of ESG considerations, ranging from air and water quality to climate change and nuclear radiation. Social factors, such as community relations, diversity and employee engagement, are also covered, along with governance factors like leadership, corruption and compliance. The book offers insights into environmental awareness in Vedic literature and updates global events such as COP26 and COP27, highlighting the advantages of incorporating ESG standards. Additionally, it explores country-wise ESG disclosure regulations and mandatory reporting worldwide. The book includes classic case examples and studies to enhance understanding. It showcases companies that address ESG issues and concludes with an analysis policy effects that demonstrate leadership in ESG performance.

Chapter 2 focuses on sustainability, covering the Brundtland Commission’s establishment, the triple bottom line (people, planet, profit), and the Circle of Sustainability with its economic, ecological, political and cultural domains. It discusses the benefits of sustainability reporting, a sustainable development timeline and the 5Ps for sustainable development. The book discusses the correlation between eradicating poverty and ensuring planetary conditions for sustainability and growth. It presents a deep understanding of sustainability and climate change on a global scale.

Chapter 3 shifts to the Climate Disclosure Standards Board, highlighting exposure drafts and industry-wise disclosure requirements for various sectors, such as consumer goods, financial, and technology. The author covers several organisations, including CDSB, IIRC, TCFD, SASB, VRF, ISSB, and the Global Reporting Initiative, providing an overview of their roles and impact. The chapter also incorporates government initiatives like the Social Stock Exchange and discusses audit assurance standards and their advantages.

Chapters 4 and 5 focus on the Social Stock Exchange — SEBI and global perspectives and audit and insurance related to ESG practices. They also detail the types of social audits, including economic, environmental, and human rights audits.

Chapter 6 explores BRSR, covering events leading to its development, national voluntary guidelines and principles of responsible business conduct. It discusses the practical challenges of BRSR adoption in India and provides case studies illustrating BRSR standards from various listed companies.

Chapter 7 introduces BRSR Lite for unlisted companies, emphasising its voluntary nature. The book provides a structure for BRSR Lite, including principles related to integrity, sustainability, employee well-being, stakeholder interests, human rights, environment protection, advocacy, inclusive growth and consumer engagement. The concluding section highlights recent regulatory developments, focusing on SEBI’s mandate for BRSR reporting for the top 1,000 listed entities since 2021. The book emphasises the significance of BRSR assurance, mandatory from 1st April, 2024, enhancing transparency, accountability and sustainable business practices.

In conclusion, ESG and BRSR Reporting: A Comprehensive Guide is an invaluable resource for executives, investors and sustainability professionals. With a blend of theoretical analysis, practical guidance and real-world examples, the book serves as a roadmap for organisations committed to integrating BRSR reporting into their operations and fostering positive change worldwide.

Miscellanea

1. INFORMATION TECHNOLOGY

Large Language Models could ‘revolutionise the finance sector within two years’

Large Language Models (LLMs) have the potential to improve efficiency and safety in the finance sector by detecting fraud, generating financial insights and automating customer service, according to research by The Alan Turing Institute.

Because LLMs have an ability to analyse large amounts of data quickly and generate coherent text, there is growing understanding of the potential to improve services across a range of sectors including healthcare, law, education and in financial services including banking, insurance and financial planning.

This report, which is the first to explore the adoption of LLMs across the finance ecosystem, shows that people working in this area have already begun to use LLMs to support a variety of internal processes, such as the review of regulations, and are assessing its potential for supporting external activity like the delivery of advisory and trading services.

Alongside a literature survey, researchers held a workshop of 43 professionals from major high street and investment banks, regulators, insurers, payment service providers, government and legal professions.

The majority of workshop participants (52 per cent) are already using these models to enhance performance in information-oriented tasks, from the management of meeting notes to cyber security and compliance insight, while 29 per cent use them to boost critical thinking skills, and another 16 per cent employ them to break down complex tasks.

The sector is also already establishing systems to enhance productivity through rapid analysis of large amounts of text to simplify decision-making processes, risk profiling and to improve investment research and back-office operations.

When asked about the future of LLMs in the finance sector, participants felt that LLMs would be integrated into services like investment banking and venture capital strategy development within two years.

They also thought it likely that LLMs would be integrated to improve interactions between people and machines; for example, dictation and embedded AI assistants could reduce the complexity of knowledge-intensive tasks such as the review of regulations.

But participants also acknowledged that the technology poses risks which will limit its usage. Financial institutions are subject to extensive regulatory standards and obligations which limit their ability to use AI systems that they cannot explain and do not generate output predictably, consistently or without risk of error.

Based on their findings, the authors recommend that financial services professionals, regulators and policymakers collaborate across the sector to share and develop knowledge about implementing and using LLMs, particularly related to safety concerns. They also suggest that the growing interest in open-source models should be explored and could be used and maintained effectively, but that mitigating security and privacy concerns would be a high priority.

Professor Carsten Maple, lead author and Turing Fellow at The Alan Turing Institute, said: “Banks and other financial institutions have always been quick to adopt new technologies to make their operations more efficient and the emergence of LLMs is no different. By bringing together experts across the finance ecosystem, we have managed to create a common understanding of the use cases, risks, value and timeline for implementation of these technologies at scale.”

Professor Lukasz Szpruch, programme director for Finance and Economics at The Alan Turing Institute, said: “It’s really positive that the financial sector is benefiting from the emergence of large language models and their implementation into this highly regulated sector has the potential to provide best practices for other sectors. This study demonstrates the benefit of research institutes and industry working together to assess the vast opportunities as well as the practical and ethical challenges of new technologies to ensure they are implemented safely.”

(Source: artificialintelligence-news.com dated 27th March, 2024)

2. SCIENCE

Max Planck scientists find ‘Shiva’ and ‘Shakti’, earliest building blocks of Milky Way

The Max Planck Institute for Astronomy on Thursday announced that astronomers have discovered what could be the earliest building blocks of the Milky Way, named “Shiva” and “Shakti”. These seem to be the remnants of the two galaxies that merged between 12 and 13 billion years ago with an earlier version of the Milky Way, contributing to its growth.

Astronomers from the institute named the components Shakti and Shiva and identified them after combining data from the European Space Agency’s Gaia satellite and the SDSS survey. This can be thought of like finding traces of an initial settlement that eventually grew into a metropolitan city, albeit on a cosmic scale.

The collisions and mergers of galaxies put several things in motion. Each galaxy will carry its own reservoir of hydrogen gas and when colliding, these clouds are de-stabilised and many new stars will be formed inside. Of course, both the galaxies will have their own sets of stars before they collide and these “accreted stars” will only account for some of the stellar population that forms the newly combined galaxy. The tricky part is identifying which stars came from which predecessor galaxy when the merger is done.

But basic physics provides the clues. When galaxies collide and their stars mingle, most of the stars retain some basic properties which are linked to the speed and direction of the galaxy they originally came from. Stars that were from the same predecessor galaxies share similar values of energy and what scientists call angular momentum, the momentum associated with their rotation. Both angular momentum and energy are conserved for stars moving in a galaxy’s gravitational field.

For this research, astronomers looked at Gaia data combined with stellar spectra data from the Sloan Digital Sky Survey. SDSS provided detailed information about the stars’ chemical compositions. “We observed that, for a certain range of metal-poor stars, stars were crowded around two specific combinations of energy and angular momentum,” said researcher.

For their present search, Malhan and Rix used Gaia data combined with detailed stellar spectra from the Sloan Digital Sky Survey (DR17). The latter provided detailed information about the stars’ chemical composition.

“We observed that, for a certain range of metal-poor stars, stars were crowded around two specific combinations of energy and angular momentum. Shakti and Shiva might be the first two additions to the ‘poor old heart’ of our Milky Way, initiating its growth towards a large galaxy,” said researcher Khyati Malhan, in a press statement. It was Malhan that named the two constituent galaxies Shiva and Shakti.

(Source: Indianexpress.com dated 26th March, 2024)

3. ENVIRONMENT

Almost one-fifth of all food available to consumers ends up as waste: UNEP Food Waste Index Report 2024

Globally, 1.05 billion tonnes of food waste isgenerated (including inedible parts) which is almostone-fifth of all food available to consumers, and each person, on average, wasted 79 kg of food annually in households in the world compared to 55 kg per capita per year in India, said the United Nations Environment Programme (UNEP) Food Waste Index Report 2024 released recently.

The report that factored in the data of the year 2022 underlined that the toll of both food loss in supply chain and waste on the global economy is estimated at roughly $1 trillion.

It noted that the aggregated households’ food waste amounted to at least one billion meals of edible food worldwide every single day while 783 million people were affected by hunger and a third of humanity faced food insecurity.

The weight of the global food waste in 2022 was, incidentally, more than India’s total production of food grain, oilseeds, sugarcane and horticultural produce, put together, in 2022–23.

Out of the total food wasted globally in 2022, 60 per cent happened at the household level, 28 per cent at food services level and 12 per cent at retails. The country-wise food waste data confirms that such waste is not just a ‘rich country’ problem, with levels of household food waste differing in observed average levels for high-income, upper-middle and lower-middle-income countries by just 7 kg per capita.

At the same time, hotter countries appear to generate more food waste per capita in households, potentially due to higher consumption of fresh foods with substantial inedible parts and a lack of robust cold chains.

This is the second such report of UNEP after the first one in 2021 that factored in the food waste in the year 2019. Its comparison with the latest one, released on Wednesday, shows that the per capita per year food waste at household level globally increased from 74kg in 2019 to 79 kg in 2022. Similarly, it increased in India from 50 kg/capita/year to 55 kg/capita/year during the same period. Per capita per year food waste at household level was the highest in Maldives at 207 kg/capita/year in 2022.

“Food waste is a global tragedy. Millions will go hungry today as food is wasted across the world. Not only is this a major development issue, but the impacts of such unnecessary waste are causing substantial costs to the climate and nature,” said Inger Andersen, executive director of UNEP.

According to recent data, food loss and waste generates 8–10 per cent of annual global greenhouse gas(GHG) emissions — almost five times that of theaviation sector — and significant biodiversity loss by taking up the equivalent of almost a third of the world’s agricultural land.

Still, only 21 countries have included food loss and / or waste reduction in their national climate plans — called nationally determined contributions (NDCs) — under the Paris Agreement. Besides, only four G20 countries (Australia, Japan, UK, the USA) and the European Union have food waste estimates suitable for tracking progress to 2030.

In this context, the Food Waste Index report may serve as a practical guide for countries to consistently measure and report food waste, and also try to integrate it in their next round of NDCs in 2025 to raise their climate ambition.

Currently, many low- and middle-income countries continue to lack adequate systems for even tracking progress to meet Sustainable Development Goal (SDG) of halving food waste by 2030, particularly in retail and food services.

(Source: timesofindia.com dated 28th March, 2024)

Daring

There was a National Award instituted by a reputed organisation. It was for the outstanding courage or valour shown by any person in any field. There were many nominations. People had indeed performed unbelievably fantastic feats in various fields. Their daring was simply amazing.

There was a mountaineer who climbed all the top summits in the world without an oxygen cylinder. Another nominee took a jump into a deep valley from a mountain peak, without a parachute or any other support. Another one swam across the Pacific Ocean without any guard-boat with him.

One nominee had fought successfully with four elephants at a time with only a stick in his hand. There was someone who jumped directly on a station platform from a bullet train running at the highest speed.

One para-commando from the Army fought alone with more than 100 enemy soldiers with only one rifle in his hand and killed many of them. Others ran away.

One fireman jumped into a burning fire without his protective gear and saved dozens of people caught in the fire. There were many who had travelled around the world, across all oceans, in a sailboat, alone! They were in the sea continuously, alone, for more than 60 days! They faced all storms, cyclones and other calamities.

Yet another one stayed in the company of very fierce animals for one full month in a jungle; all by himself! One more amazing feat was hanging upside down on a tree for one full month!!

Then there was another one who ate one truckload of food in one sitting. His friend drank 1000 litres of milk in one sitting. Another hero swallowed many hard materials like blades, and parts of a truck, all materials required for a spacious bungalow within three days.

Everything was unheard of! Unimaginable! All the members of the Jury were highly impressed. But the prizes went to —

One lawyer who won a big court case purely on merits! People took it as a fiction; — Bronze Medal.

Man who stood erect before his wife and tried to raise his voice! — Silver Medal.

But the real winner, who bagged the Gold Medal, was a chartered accountant who showed a willingness to sign large company audits for the next three years.

Statistically Speaking

Learning Events at BCAS

1. HR Conclave was held on 16th March, 2024 in Hybrid Mode @ BCAS.

The HR Development Committee orchestrated a highly informative and engaging HR Conclave on Saturday, 16th March, 2024, meticulously designed to unravel the intricacies of managing human resources within professional services firms. This one-day event, offered in a hybrid format, brought together esteemed industry experts and HR practitioners to delve into various facets of HR management. 49 participants from 7 cities participated in the event.

Among the distinguished speakers was Ms. Falguuni Sheth, who kicked off the day with an insightful session titled “Well Chosen is Half Done,” emphasising the strategic underpinnings of HR management and its alignment with organisational objectives. Following this, CA Saroj Maniar and Ms. Priya Sawant shared invaluable perspectives in their session “Courtship cues. Employee engagements that lead to a long-term marriage,” shedding light on practical approaches to bolstering employee engagement and fostering enduring professional relationships.

The conclave also delved into the critical domain of performance appraisals and feedback, with CA Mehul Shah leading a session titled “Appraisals and Feedback – appreciate the strengths, help in bridging the gaps.” This session provided attendees with actionable insights into conducting fair and constructive performance assessments, essential for nurturing employee growth and development. Furthermore, Ms. Deepti Sheth facilitated a thought-provoking discussion on gracefully managing employee exits in her session “Grace in goodbyes – parting need not be painful,” highlighting the significance of maintaining positive relationships even during times of transition.

A panel discussion on “Remote Working – A reality or just another topic for Over the Coffee discussions,” moderated by CA Dhruv Shah and featuring panelists CA Samit Saraf, CA Sushrut Chitale, and CA Mitesh Katira, a comprehensive exploration of the dynamics, challenges, and opportunities associated with remote work in the professional services landscape. Throughout the day, participants were equipped with practical insights, actionable solutions, and e-kits containing over 150 HR templates, enriching their understanding and empowering them to navigate the complex terrain of HR management effectively. As the event concluded, attendees departed with a deeper understanding of strategic HR management, employee engagement, performance evaluation, effective communication strategies, and the nuances of remote working, poised to drive positive change within their respective organisations.

2. Indirect Tax Laws Study Circle on “Classifications in GST” was held on 14th March, 2024 in Online Mode.

Group leader CA Tapas Ruparelia along with mentor CA S S Gupta had prepared case studies and a presentation covering various issues & challenges faced by taxpayers in regard to the Classification under the GST law. Around 45 participants from all over India benefitted while taking an active part in the discussion. The case studies covered the following aspects for a detailed discussion on the place of supply:

1. Whether an assessee can adopt different classifications for the same product under customs and GST? If a particular classification under which goods are cleared with Customs is disputed, can the GST department also insist that the correct classification sought (for which an appeal has been filed with GST authorities) should be applied for GST as well?

2. Whether raw materials, being chemicals for the pharmaceutical sector qualify as “bulk drugs” or “drugs” to decide classification under Schedule I (5 per cent) or Schedule III (18 per cent)?

3. Whether GST on the interest component of EMI on Credit Card loans liable to GST or is exempted, being interest on loans and advances?

4. Whether renting of e-bikes, where charges are levied on a use basis, is classifiable under “rental services of transport vehicles” taxable at the standard rate of 18 per cent or as “leasing or rental service without operators” in which case, the GST Rate applicable to the e-bikes would be applicable to the service?

5. Whether services provided by naturopathy centres qualify as health care services and are eligible for exemption?

3. The Webinar on “Recent CBDT Circulars in relation to Charitable Trusts and Institutions” was held on 9th March, 2024 in Online Mode.

The Taxation Committee organised a Webinar on Recent CBDT Circulars in relation to Charitable Trusts and Institutions.

CA Ashok Mehta broadly explained the two CBDT critical Circulars in relation to Charitable Trusts and Institutions-

(1) Circular No. 2/2024, dated 5th March, 2024

(2) Circular No. 3/2024, dated 6th March, 2024

The Speaker highlighted the fact that the CBDT has observed instances where trusts and institutions submitted the wrong audit report form (Form No. 10B or 10BB) for the A.Y. 2023-24. To address this, the CBDT has granted an extension for corrective measures. If a trust or institution has submitted Form No. 10B where Form No. 10BB was applicable, or vice versa, on or before 31st October, 2023, the trust is now permitted to rectify this by submitting the correct audit report in the applicable Form No. 10B or 10BB for the A.Y. 2023-24 on or before March 31, 2024.

The Speaker welcomed the Clarificatory Circular No.3/2024 dated 6th March, 2024 pertaining to inter-trust donations which allows the entire donation to be treated as an application of income and not restricted to only 85 per cent of the donation given.

Link to access the session: https://www.youtube.com/watch?v=SkbpXjcXFeI&t=2s

 

4. The Human Resource Development Committee organised “CA Pariksha Pe Charcha” on 2nd March, 2024 in Online Mode.

The event, “CA Pariksha Pe Charcha,” organised by the BCAS Human Resource Development Committee, was a two-hour session held via Zoom, focusing on strategies for success in CA examinations and dealing with failures. The event aimed to guide CA aspirants and provide them with the motivation and tactics needed to excel in their exams.

CA Pritam Mahure led the first hour with a talk on how to achieve success in CA Exams and cope with failures, sharing insights and practical advice.

The second hour featured a panel discussion with Chartered Accountants who have achieved top ranks in recent CA exams. They discussed their experiences, study techniques, and personal journeys.

The interactive session provided attendees with an opportunity to gain valuable knowledge and ask questions about the CA exam process.

Panelists:

CA Akshay Jain (AIR 1 May 2023)

CA Kalpesh Jain (AIR 2 May 2023)

CA Sanskruti Parolia (AIR 2 Nov 2023)

CA Shruti Parolia (AIR 8 Nov 2023)

Moderator: CA Kartik Srinivasan

Link to access the session: https://www.youtube.com/watch?v=cMRGAm8Je4c&t=3s

5. A Panel Discussion “Future Ready Finance Professionals” was held on 1st March, 2024 @ JBIMS Auditorium.

The HRD Committee, in collaboration with Jamnalal Bajaj Institute of Management Studies (JBIMS), organised a discussion on “Future Ready Finance Professionals” on 1st March, 2024 at the JBIMS Auditorium. The event featured a distinguished panel of CFOs from various esteemed organisations, which comprised of CA Sajal Gupta from Rustomjee Group, CA Pinky Mehta from Aditya Birla Capital, Mr. Ramesh Subramanyam from Hinduja Group, and CA NaozodSirwalla from HDFC AMC Ltd, moderated by Dr. CA. Sahrdul Shah. The discussion provided profound insights into the multifaceted responsibilities of CFOs in contemporary business environments.

The panel emphasised the strategic orientation increasingly demanded of CFOs, underscoring the imperative for Chartered Accountants to lead with foresight and agility. Addressing a diverse array of topics, including technological innovation, ethical governance, and sustainability, the panel highlighted the critical role Chartered Accountants play in driving organisational success through astute financial stewardship.

Emphasising the indispensable nature of continuous learning and adaptation, the discussion urged Chartered Accountants to remain abreast of technological advancements and emerging trends. Moreover, it stressed the significance of ethical integrity and professional responsibility in upholding the highest standards of financial practice.

With a focus on preparing Chartered Accountants to navigate the complexities of the modern business landscape, the event served as a platform for knowledge exchange and networking, empowering finance professionals to chart a course toward future readiness.

In summary, the event provided invaluable insights into the evolving role of Chartered Accountants as strategic partners in organisational growth and sustainability. Through collaborative dialogue and shared expertise, the panel reaffirmed the indispensable contributions of Chartered Accountants to the finance profession and underscored their pivotal role in shaping a prosperous future.

6. Direct Tax Laws Study Circle meeting was held on 1st March, 2024 in Online Mode.

CA Manish Dafria covered the newly introduced Section 43B(h) of the Income Tax Act; 1961 (“the Act”)– Analysis and Impact, wherein the speaker provided his perspective and a detailed analysis and shed light on its various aspects as indicated below:

1. The conditions laid down for the applicability of Section 43B(h) of the Act.

2. Classification of enterprises based on the definitions mentioned in the Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act).

3. Time limit as mentioned in Section 15 of the MSMED Act and with the relevant definitions.

4. Clarifications to issues namely:

i. Whether the amount payable to enterprises on account of Capital Expenditure would attract disallowance u/s 43B(h) of the Act.

ii. Whether amounts payable to traders / retailers would attract disallowance u/s 43B(h) of the Act.

iii. Applicability of 43B(h) to charitable organisations for determining “Application of Income”.

iv. Whether the GST component of the expenditure would be included in the amount to be disallowed u/s 43B(h) of the Act.

v. Whether 43B(h) would apply to assessees opting for declaring presumptive income u/s 44AD of the Act.

7. The 21st Leadership Camp “Empowering Relationship” was held on 16th–18th February, 2024 @ Leslie Sawhney Training Centre, Devlali by the Human Resource Development Committee.

The 21st Leadership camp on the topic, ‘Empowering Relationship’ was held at Leslie Sawhney Training Centre at Devlali between 16th and 18th February, 2024. Twenty-three participants which included 7 couples and 9 individuals participated in the programme.

The Trainers: Dr. Sudarshan Iyengar (Retired Vice Chancellor of Gujarat University) and Dr. Ashwin Zalathe, guide and mentors.

In his introductory remarks, the Chief Administrator of the venue, Major General (Retd) Pithawalla shared the real-life experience from his days in the Army. He emphasised that in the Military, as a leader one has to empower the relations with the team as dependability is one of the most critical criteria looked upon in every team member.

Important takeaways to empower the relationship are summarised here.

  • Complete attention to the person not just hearing but listening to him
  • Introspection and reflection: Introspect as to what happened and how one can improve the relations. Express unconditional love.
  • In any interaction conflict is bound to be there. Expectation and attachment result in a gap in relations.
  • Express gratitude to all you interact with including five elements of the Universe.
  • Understand the reasons that bring conflict and neutralise them with opposites. Fourteen reasons for conflict were identified. For instance one of the reasons for conflict is selfishness then neutralising it by unconditional love.
  • Other important concepts discussed were Attitude (values), behaviour (attitude in action) and situation (context) in relations and conflicts.
  • Learn to appreciate yourself through your words and actions. A Word without money is cheap, but money without a word is vulgar.

In the concluding session, questions were raised as to whether conflict is necessary. And the views echoed the sentiment that conflicts could be appropriate for understanding of the matter. One can always channelise the conflict into the opportunity for growth, love, and respect.

The camp concluded with a Vote of thanks and thrilling real life story of his war experience by Major General (Retd.) Cyrus Pithawalla about how the empowered relationship between the army teammates helped avert the major terror attack on India despite almost fatal injuries.

Report on BCAS 57th Residential Refresher Course

The 57th Residential Refresher Course (RRC) organised by the Seminar, Public Relations & Membership Development Committee (SPR & MD) held at Mahabaleshwar from 22nd to 25th February, 2024, marked another significant event in the annals of BCAS. Against the backdrop of BCAS’ 75-year journey, the 57th RRC embraced the theme of “Back to the Roots,” underscoring a commitment to foundational principles that underpin the BCAS’ ethos amidst evolving dynamics. Notably, this marked the 19th RRC hosted at Hotel Dreamland (coinciding with the Hotel’s 80th year) — a testament to enduring partnerships and shared milestones.

With 140 delegates from diverse regions across the country converging at Hotel Dreamland, the stage was set for an enriching experience over four days. The composition of attendees mirrored a balanced mix of youth, experienced professionals, and seasoned experts. This blend promised a diverse exchange of ideas and perspectives, enriching the collective learning experience.

At the inaugural session, CA Uday Sathaye, Chairman of the SPR & MD Committee, set the tone for the event by extending a warm welcome to all attendees and reflecting on the legacy of the past 56 RRCs. He shared nostalgic anecdotes about the long-standing association of RRCs with Mahabaleshwar and Hotel Dreamland. Additionally, he provided an overview of the program scheduled and various other statistics of delegates.

The inauguration witnessed the lighting of the ceremonial lamp by the esteemed Chief Guest, Shri Harshu Ghate, alongside the Committee Chairman, Past Presidents, Office Bearers and Committee Convenors. Shri Ghate, a distinguished Chartered Accountant and Company Secretary, who co-founded & established ESOP Direct as a thought leader & market leader, brought insightful perspectives to the forefront during his presentation on “CA Profession & Entrepreneurship.” His emphasis on cultivating a corporate mindset within firms resonated strongly, urging delegates to envision and build institutions with enduring value having separate identity from its founders which he aptly described as ‘infinite game.’

As the event was unveiled against the scenic backdrop of Mahabaleshwar, it served not only as a platform for knowledge dissemination and camaraderie but also as a celebration of the BCAS’ resilience and adaptability over the years.

The inaugural session was followed by a panel discussion on ‘Multi-Disciplinary Issues on Charitable Trusts’ that delved deep into the intricacies of charitable trusts, encapsulating a comprehensive 360-degree view on prevalent issues in Income Tax, GST, and Charity Law.

The session moderated by CA Mandar Telang and CA E. Chaitanya, provided a symphony of insights from CA (Dr) Gautam Shah, CA S.S. Gupta and CA Sonalee Godbole, addressed critical issues ranging from the application of principal repayments to the doctrine of Mutuality and the compliance regime applicable to Charitable Trusts. Past President CA Anil Sathe, the Chairman of the session, steered the discussion with finesse, supplementing the speakers with his expertise in direct taxes. As queries from participants punctuated the dialogue, the panellists adeptly elucidated each concern, leaving no stone unturned in ensuring clarity and comprehension.

The second day of the RRC witnessed a poignant exchange of ideas as members convened early for group discussions at various breakout venues led by group leaders CA Chaitee Londhe, CA Chintan Shah, CA Chirag Haraniya, and CA Manish Dafria. The focal point of these discussions were the thought-provoking case studies on ‘Taxation Issues in Respect of Non-Resident Indians’ curated by CA Kishore Phadke. In an atmosphere charged with intellectual fervour, participants delved deep into the nuances of the case studies, engaging in spirited deliberations and constructive dialogue. Case-studies in Direct Taxes is an annual feature of the RRC and is an endeavour to make it a great learning experience for all.

As the day unfolded, the RRC members navigated through a myriad of interesting dialogues as the group discussion was followed by the panel discussion on a very relevant topic- ‘Scaling up Professional Practice in a Challenging World’ that was enriched by the insightful contributions of distinguished panellists Past President CA Shariq Contractor and CA Milin Mehta, under the adept chairmanship of Past President CA Narayan Pasari, adding a touch of seasoned wisdom to the proceedings. The session, skilfully moderated by CA Sushrut Chitale, was marked by the exchange of intriguing experiences pertaining to the augmentation of CA practice.

The panel discussed strategies for CA firms to enhance market position and topics such as succession planning, the imperative of scaling up, partner remuneration structures, and others ensued. It was collectively acknowledged by the panel that there exists no singular correct approach to scale up and for a firm to work, and that varied strategies may be warranted based on unique circumstances. Furthermore, deliberations touched upon the significance of human resource management, effective delegation of tasks, and the willingness to part ways with clients not aligned with the firm’s vision or scale.

Following the panel discussion, CA Kishore Phadke offered elaborate responses for case studies concerning taxation issues for Non-Resident Indians (NRIs) which were discussed by participant groups in the morning. Insights on interpretation challenges regarding split residential status, tax implications of work-from-home policies, taxation of unpaid salaries earned as a non-resident but received upon becoming a resident, ramifications under the Black Money Act, influence of citizenship on stateless individuals, taxation of passive income earnings for NRIs within the context of the India-UAE Tax Treaty, etc. were shared at length. This session was expertly chaired by Past President Dr. CA Mayur Nayak.

As the day moved ahead, participants across age groups engaged in evening leisure pursuits/ recreational activities such as cricket and badminton, fostering camaraderie and relaxation. The group later proceeded to the picturesque Mystic Valley for extended delight. Morning discussion groups transitioned into competitive teams for fun-filled activities such as hula hoop passing, dog and bone, and musical chairs, amidst the scenic backdrop of the sunset, accompanied by participant-performed songs;, the atmosphere was imbued with a sense of serenity and camaraderie, creating lasting memories.

The eventful day culminated with an engaging session featuring eight esteemed Past Presidents — CA Ameet Patel, CA Anil Sathe, CA Ashok Dhere, Dr. CA Mayur Nayak, CA Narayan Pasari, CA Pranay Marfatia, CA Rajesh Muni and CA Uday Sathaye; offering a unique opportunity for a reflective dialogue titled ‘Back to the Roots – A Journey Through Time’. During this distinctive tête-à-tête, they reminisced about their experiences attending, presiding over, chairing, and deriving value from RRCs. They shared insights into various aspects such as event statistics, amusing anecdotes, memorable moments, unusual participant requests, revered speakers, attendance records, inaugural years of participation, esteemed chief guests during their tenure, and cherished the RRCs. The session was orchestrated by Convenor CA Preeti Cherian.

After a day of bonding and networking, the third day commenced with intensive brainstorming at group discussions for case studies on Direct Taxation that enthralled participants on a Saturday morning. Divided into four groups led by group leaders CA Atul Suraiya, CA E. Chaitanya, CA Kinjal Bhuta, and CA Shaleen Patni, group discussions continued even during breaks, reflecting the delegates’ enthusiasm. CA Jagdish Punjabi’s meticulously compiled case studies on pertinent and complex direct tax practitioner challenges formed the centrepiece of these discussions. The dynamic discussions underscored the collective zeal to unravel complex challenges and chart a course towards innovation and progress.

The subsequent session featured a Paper Presentation titled ‘Global Opportunities for CAs in India’ with a specific focus on the USA and UAE, delivered by CA (Dr) Mitil Chokshi and proficiently chaired by Past President CA Ameet Patel infusing a dash of knowledgeable insights into the proceedings. CA Mitil elucidated on the multitude of opportunities available to Indian Chartered Accountants (CAs) for servicing clients in the UAE and USA. He provided a comprehensive overview of the process involved in establishing a practice in these jurisdictions, including insights into expected setup costs, types of services offered, and supplemented his discourse with pertinent case studies. Additionally, he articulated strategies for CAs to procure work in these domains, thereby encouraging diversification into new business lines and harnessing the vast potential inherent in non-traditional sectors.

Following lunch on the third day, CA Satish Shenoy delivered a compelling paper presentation titled ‘Internal Audit – Thriving in the Co-sourcing Space’, proficiently chaired by Past President CA Rajesh Muni. CA Satish adeptly emphasised the essential qualities and guiding principles for auditors, emphasising adaptability in the digital era, introducing the ABCD framework (Automation, Blockchain, Cybersecurity, and Deep Data Analytics).
His engaging presentation included insightful dos and don’ts of auditing, accompanied by humorous songs relevant to audit scenarios, keeping the audience captivated. Overall, CA Satish’s presentation effectively conveyed his vision for thriving in the co-sourcing landscape.

The third day concluded with leisure activities, as participants engaged in an exhilarating treasure hunt followed by indulging in some retail therapy and leisurely strolls along the lanes of Mahabaleshwar in the evening while relishing the strawberries and other delectable dishes. The evening culminated with a delightful gala dinner by the poolside, providing a perfect ending to the day’s events.

On Sunday, the final day marked the last technical session of the event, featuring CA Jagdish Punjabi’s discussion on the direct tax case studies. This session was chaired by Past President CA Ashok Dhere exemplifying his seasoned leadership. CA Jagdish’s thorough deliberation on the case studies, covering topics such as capital gains, exemptions under sections 54 and 54F, property redevelopment taxation, rectification proceedings, penalty provisions under section 270A, presumptive taxation under section 44AD, and revision proceedings under sections 263 and 264, provided a comprehensive review of the Income Tax Act, 1961, akin to revisiting fundamental principles.

Overall, the breakout sessions served as crucibles of thought, igniting innovative perspectives, and fostering a culture of collaborative learning.

The 57th RRC also featured T20 sessions for the first time, inspired by the GST RRC, introducing a novel concept whereby first-time participants were allotted 20 minutes each to present on a topic. All three T20 sessions garnered positive reception from the audience.

Session 1 focused on “Financial Statements — a better way,” presented by CA Namit Bhambri. CA Namit elucidated on innovative techniques for enhancing financial statements using Excel efficiently. Additionally, he demonstrated SQL queries applicable in Tally software to facilitate effective management of ledger groupings during financial statement preparation.

Session 2 focused on “Recent Amendments in ITR Forms,” presented by CA Aditya Pradhan. CA Pradhan delivered a succinct and informative presentation regarding the latest amendments in the ITR forms, pertinent for the forthcoming tax return filing season.

In Session 3, titled “Unique Features of GST,” CA Payal (Prerna) Shah delivered an informative and comprehensive presentation highlighting key aspects of GST, providing attendees with valuable insights into the intricacies of the taxation system.

To commemorate the 75th year of BCAS, the office staff was graciously invited to Mahabaleshwar for a weekend getaway during the RRC. It was an opportunity for them to unwind, have fun, and finally experience firsthand the event they tirelessly work on but have never had the chance to attend.

The event reached its conclusion with Chairman CA Uday Sathaye delivering formal closing remarks. President CA Chirag Doshi extended his heartfelt congratulations to all participants for their contributions to another successful event, coinciding with BCAS’ 75th year celebrations. Reflecting on the recent three-day mega-conference, “Reimagine,” he fondly recalled the cherished memories and acknowledged the many unsung heroes who have played pivotal roles in BCAS’ journey. In particular, he highlighted the significant contribution of one such unsung hero — a respected senior gentleman, who generously contributed to BCAS including the 75th year as a gesture of giving back, citing how BCAS had played a crucial role in his formative years, attending the RRCs and learning from esteemed figures like CA Pradyumna Shah, CA Pinakin Desai and more. These experiences had greatly benefited him, honing his understanding, and instilling the confidence to develop a flourishing career.

As the event drew to a close, attendees reminisced about the fruitful exchanges and meaningful connections forged during the gathering. Delegates also provided heartwarming feedback and offered constructive suggestions. In celebration of the platinum jubilee of BCAS, attendees who had participated in 25 or more RRCs, as well as those under 40 who had attended five or more RRCs, were honoured with tokens of appreciation. The event exemplified a collective dedication to academic excellence and professional development. With hearts full of gratitude and minds enriched with new insights, participants departed, carrying with them not only cherished memories but also a renewed sense of camaraderie and commitment to excellence in their professional journeys. The contributions to the success of the RRC also goes to Convenors of the Committee CA Kinjal Bhuta, CA Manmohan Sharma, CA Preeti Cherian and CA Rimple Dedhia. We now move on till we meet next year for the 58th RRC.

 

Regulatory Referencer

I. COMPANIES ACT, 2013

1. Adoption of a centralised approach for processing all e-forms filed by companies: MCA has notified that effective 6th February, 2024, the Central Processing Centre (CPC) shall process and dispose of e-forms filed by the companies. This is aimed at freeing up capacity at the offices of Regional Directors and Registrar of Companies to deal with enforcement matters. Further, it has been clarified that the jurisdictional Registrars shall continue to have jurisdiction over the companies whose e-forms are processed by the CPC in respect of all other provisions of the Companies Act, 2013. [Notification No. S.O. 446(E), dated 2nd February, 2024]

2. Guidelines on the appointment of Independent Directors and Board evaluation process: The Confederation of Indian Industry (CII) has issued Guidelines on the Appointment of Independent Directors and the Process of Board Evaluation. The Guidelines are divided into two parts with ‘Part A’ focusing on Appointment of Independent Directors & Succession Planning and ‘Part B’ on the Process of Board Evaluation. [Guidelines dated 6th February, 2024]

3. Revised Secretarial Standards on ‘Meeting of Board of Directors’ and ‘General Meetings’: The ICSI has notified revision in SS-1 i.e., Secretarial Standard on Meeting of Board of Directors, and SS-2 i.e., Secretarial Standards on General Meeting. The revised Secretarial Standards align with recent amendments to the Companies Act, 2013 post publishing of second versions of SS-1 & SS-2. The revised SS- 1 and SS-2 will be effective from 1st April, 2024

4. Extension of the deadline for filing Form BEN-2 & Form 4D for LLPs without additional fees until 15th May, 2024: MCA vide notifications dated 9th November, 2023 and 27th October, 2023 had prescribed E-form LLP BEN-2 and E-form LLP Form no. 4D. In view of the transition of MCA-21 from V2 to V3 and to promote compliance on the part of reporting LLPs, the MCA has decided to allow LLPs to file Form LLP BEN-2 and LLP Form No. 4D, without payment of any additional fees, up to 15th May, 2024. The two forms shall be made available in version 3 for filing purposes from 15th April, 2024. [General Circular No. 01/2024, dated 7th February, 2024]

5. Norms regarding processing of forms by Central Processing Centre: MCA has notified an amendment to the Companies (Registration Offices and Fees) Amendment Rules, 2014. A new rule 10A has been inserted to the existing rules. The rule specifies the list of e-forms, applications and documents on which the Central Processing Centre (CPC) shall exercise jurisdiction. Further, the timeline for processing of application has also been specified. The provisions shall be effective from 16th February, 2024. [Notification No. G.S.R 107(E), dated 14th February, 2024]

6. Operationalisation of Central Processing Centre (CPC) for Corporate Filings to Promote Ease of Doing Business: MCA has operationalised the Central Processing Centre (CPC) for centralised processing of corporate filings without requiring any physical interaction with the stakeholders to promote ease of doing business. The Ministry said 12 forms have begun to be processed at CPC from 16th February, 2024 which will be followed by other forms from 1st April, 2024 onward. [MCA Press release, dated 16th February, 2024]

7. Deployment of the ‘Change Request Form’ on MCA-21 for the convenience of users of MCA-21 services: MCA has provided for deployment and usage of the ‘Change Request Form’ (CRF) on MCA-21. Stakeholders are informed that CRF has been made available on the V3 portal for convenience of users of MCA-21 services. This web-based Form is to be used only under exceptional circumstances, for making a request to ROC, for purposes which cannot be catered through any existing form or services or functionality available either at Front Office level (users of MCA-21 services) or Back Office level (RoCs). [General Circular No. 02/2024; dated 19th February, 2024]

II. SEBI

8. Guidelines for returning of draft offer document and its resubmission: SEBI has observed that at times, draft offer documents filed with the Board for public issue / rights issue are found lacking in compliance with respect to Schedule VI of ICDR Regulations. Such documents require revisions/changes and thus lead to a longer processing time. Now, for consistency in the disclosures & timely processing, SEBI has decided to issue ‘Guidelines for returning of draft offer document and its resubmission’. This Circular shall come into force with immediate effect. [Circular No. SEBI/HO/CFD/POD-1/P/CIR/2024/009, dated 6th February, 2024]

9. SEBI cautions investors to avoid transactions with unregistered entities: SEBI has issued a caution against unregistered entities falsely claiming registration, showcasing fake certificates, and promising high returns. SEBI urged investors to verify the registration statusand exercise due diligence to avoid potential fraud risks. In this regard, SEBI has also advised investors to (a) verify before investing (b) Beware of promises ofhigh returns (c) Verify enforcement action by SEBI (d)Be well informed. [SEBI Press release No. 2/2024, dated 13th February, 2024]

10. SEBI directs intermediaries to centralise FATCA and CRS certifications at KYC Registration Agencies: To promote ease of doing business and compliance reporting, SEBI suggests measures for the centralisation of certifications under the Foreign Account Tax Compliance Act (FATCA) and Common Reporting Standard (CRS) at KYC Registration Agencies. As per the new norms, SEBI has directed the intermediaries, who are reporting to financial institutions (RFI), to upload the FATCA and CRS certifications obtained from the clients onto the system of KRAs with effect from 1st July, 2024. [Circular No. SEBI/HO/MIRSD/SECFATF/P/CIR/2024/12, dated 20th February, 2024]

11. SEBI cautions investors against fraudulent trading schemes claiming to be offered to Indian residents by FPIs: SEBI has cautioned investors against fraudulent trading schemes claiming to be offered to Indian residents by Foreign Portfolio Investors (FPIs). In this regard, SEBI clarified that FPI investment route is unavailable to resident Indians, with limited exceptions. Further, there is no provision for an “Institutional Account” in trading, and direct access to the equities market requires investors to have a trading and demat account with a SEBI-registered broker/trading member and DP respectively. [Press release No. 04/2024, dated 26th February, 2024]

DIRECT TAX: SPOTLIGHT

1. Ex-post facto extension of due date for filing Form No. 26QE which was required to be filed during the period 1st July 2022 to 28th February, 2023 (pertaining to F.Y. 2022-23) – Circular No. 4 of 2024 dated 7th March, 2024.

As provided in Section 194S, any person who pays to a resident any sum by way of consideration for the transfer of a virtual digital asset is required to deduct tax @ 1 per cent of such sum. Further, he is required to report such deductions in a challan-cum statement electronically in Form No. 26QE within thirty days from the end of the month in which such deduction is made.

Persons who deducted tax under section 194S of the Act during the period from 1st July, 2022 to 31st January, 2023, could not file Form No. 26QE and pay corresponding TDS on or before the due date, due to unavailability of Form No. 26QE. Further, the persons who deducted tax under section 194S during the period from 1st February, 2023 to 28th February, 2023 had insufficient time to file Form No. 26QE and pay corresponding TDS thereon.

CBDT has ex-Post Facto extended the due date forfiling of Form 26QE to 30th May, 2023 in those cases where the tax was deducted by a person under section 194S of the Act during the period from 1st July, 2022 to 28th February, 2023.

Fee levied under section 234E and / or interest charged under section 201(1A)(ii) of the Act in such cases for the period up to 30th May, 2023, shall be waived.

2. Govt. notifies reduced tax rates on royalty andFTS with Spain by invoking Most Favoured Nation (MFN) clause – Notification No. 33/ 2024 dated 19th March, 2024.

Protocol of India-Spain DTAA has a MFN clause. Since India agreed to lower tax rates on royalties and technical service fees in its 1996 Convention with Germany, the same lower rates apply to this Convention with Spain. Accordingly, the Central Government has amended the rate given in Article 13 of the India-Spain DTAA. The rate is reduced to 10 per cent. The amended Article 13(2) of the India-Spain DTAA is effective from Assessment Year 2024-25.

3. Form ITR-V and Form ITR — Acknowledgement notified for A.Y. 2024-25 — Income-tax (Fifth Amendment) Rules, 2024 – Notification No. 37/ 2024 dated 27th March, 2024.

III. FEMA

1. Definition of unit in FEM (Non-debt Instruments) Rules, 2019 expanded to include partly paid units

The Central Government has notified the Foreign Exchange Management (Non-debt Instruments) (Second Amendment) Rules, 2024. An amendment has been made to Rule 2(aq), which defines the term ‘unit’ as the beneficial interest of an investor in an investment vehicle. The amendment has inserted an explanation to the clause. It states that ‘unit’ shall include a unit that has been partly paid up as permitted under regulations framed by SEBI in consultation with the Government of India. This is an enabling provision to allow investment by non-residents in partly paid units, as allowed by SEBI, in consultation with the Government of India.

[Foreign Exchange Management (Non-debt Instruments) (Second Amendment) Rules, 2024 dated 14th March, 2024]

2. Units set up in IFSC in ship leasing activity not required to maintain a separate office

The Govt. has notified the Special Economic Zones (Second Amendment) Rules, 2024. An amendment has been made to Rule 21B of the existing rules. As per the amended norms, the term ‘aircraft leasing’ has been replaced with ‘aircraft or ship leasing’. Accordingly, units set up in IFSC are authorised to undertake aircraft or ship leasing activity and are not mandatorily required to maintain a separate office.

[Special Economic Zones (Second Amendment) Rules, 2024 dated 14th March, 2024]

3. FDI norms liberalised to allow FDI in space sector under Automatic route

Under the extant policy, FDI was permitted in establishment and operation of Satellites through the Government approval route only. The FDI policy on the Space sector has now been eased by prescribing liberalised thresholds in various sub-sectors or activities under the Automatic Route. The entry route for the various activities under the amended policy are as follows:

i. Up to 74 per cent under Automatic route:Satellites-Manufacturing & Operation, Satellite Data Products and Ground Segment & User Segment.Beyond 74 per cent these activities are under government route.

ii. Up to 49 per cent under Automatic route: Launch Vehicles and associated systems or subsystems, Creation of Spaceports for launching and receiving Spacecraft. Beyond 49 per cent these activities are under government route.

iii. Up to 100 per cent under Automatic route: Manufacturing of components and systems / sub-systems for satellites, ground segment and user segment.

While the amendment has been made to the FDI Policy, a corresponding amendment under FEMA is pending. This decision will take effect from the date Foreign Exchange Management (Non-debt Instruments) Rules, 2019 are amended.

[Press Note No. 1 (2024 series), dated 4th March, 2024]

4. Amendments in SEZ Act, 2005 and SEZ Rules, 2006

Amendments have been made in the SEZ Act, 2005 and SEZ Rules, 2006 to streamline the process of applications by proposed IFSC units as follows:

i. The SEZ approval application made by proposedIFSC units will be handled by an officer nominated by the IFSCA designated as “Administrator (IFSCA)”. Such officer shall be the Chairperson of Unit Approval Committee of IFSCA.

ii. Form F has been replaced by a consolidated Form FA which should be filed by the proposed IFSC unit for SEZ approval to Administrator (IFSCA).

[Finance Ministry Notification No. S. O. 940(E) dated 28th February, 2024]

5. Amendment in Banking Regulation Act, 1949

The Banking Regulation Act has been amended so that the restrictions on loans and advances would not apply to the IFSC Banking unit of a Foreign Bank.

[Finance Ministry Notification No. S. O. 942(E) dated 28th February, 2024]

NFRA DIGEST

BACKGROUND ABOUT NFRA ORDERS

The National Financial Reporting Authority (“NFRA”) was constituted on 1st October, 2018 by the Government of India under section 132(1) of the Companies Act, 2013 (“the 2013 Act”). The NFRA had issued its first order on 22nd July, 2020 and since then has issued 58 orders till December 31, 2023.

As mentioned in our March 2024 issue (Page 67), these orders are issued generally when irregularities are noticed by some regulators e.g. Serious Fraud Investigation Officer (SFIO), Securities Exchange Board of India (SEBI), Director General of Income Tax (Investigation), Central Economic Intelligence Bureau (CEIB), Ministry of Finance, Media Reports, Ministry of Corporate Affairs (MCA) regarding irregularities observed by FRRB except in case of DHFL matter wherein NFRA has initiated the investigation on Suo Moto. Orders are normally concluded with debarment and imposition of penalty.

Our previous issue also covered, in detail, the structure of NRFA Orders and Powers of NFRA under Section 132(4)(c) of the 2013 Act with respect to imposition of monetary penalties and debarment of the member or / and firm, where the professional or other misconduct is proved

KEY LEARNINGS FROM NFRA ORDERS

The Statutory Auditors, including the Engagement Partners (‘EPs’ hereafter) and the Engagement Team that conduct the Audit are bound by the duties and responsibilities prescribed in the 2013 Act, the rules made thereunder, the Standards on Auditing (‘SAs’ hereafter), including the Standards on Quality Control (‘SQC’ hereafter) and the Code of Ethics. Violation of any of these constitutes professional or other misconduct and is punishable with penalty prescribed under section 132(4)(c) of the 2013 Act.

These NFRA orders have highlighted observations / lapses on the part of Statutory Auditors in relation to compliance with SAs and other applicable regulatory requirements.

For the purpose of better understanding and learning perspective of the reader, the observations/lapses in these orders are classified into following key themes of accounting and auditing:

1. Independence requirements

2. Engagement Quality Control Reviewer (EQCR)

3. Audit Evidence and Documentation

4. Performing Risk Assessment and Audit Execution

5. Audit Reporting

6. Related Party (RP) Relationship, Transactions and Disclosures

7. Going Concern (GC) assessment

8. Auditing of Accounting Issues

9. Non-compliance with laws and regulations

10. Presentations and Disclosures

11. Professional Misconducts

Major observations / lapses in each of the above-mentioned themes are as follows:

Sr. No. Themes Observations/Lapses
1. Independence requirements

●    Engagement Partner (EP) accepted the audit engagement despite owning the shares of the auditee Company through a Company which was wholly-owned by him and his family members and thereby violating applicable laws and Standard relating to conflict of interest and independence. (Order No- 65/2023)

●    EP, proprietorship firm, had provided audit and non-audit services to 29 entities belonging to the concerned Group including its promoters. The audit firm of EP’s daughter had provided audits as well as non-audit services to 27 entities of the concerned Group. Further, her firm was actively participating in making presentations etc. on behalf of EP’s firm and a partner of her firm as partner of EP’s firm in the Audit Committee meetings of the company. All these audit firms operate from the same address. (Order No. 23/14/2022)

●    The firm was found to have either directly or indirectly provided prohibited services to the auditee or its holding company. (Order No. 20012/1/2020)
2. Engagement Quality Control Reviewer (EQCR)

●    No evidence in the file regarding the work performed by the EQCR partner. Further, having a checklist in file with response “Yes” and “No” is not sufficient audit procedures by EQCR partner. Para 25 of SA 220 that stipulates to document the reason and basis for conclusion. (Order No. 64/2023)

●    Failure to have formal appointment of EQCR Partner even though the Company was listed. (Order No. 20012/2/20222)

●    Acceptance of appointment as EQC reviewer without experience and authority i.e. 2 years’ experience professional was assigned as EQCR to review the work of 32 years’ experience EP which demonstrated that EQCR was without adequate experience and authority as reviewer. (Order No. 30/2023)

●    Non-availability of EQCR in the firm as the firm was proprietary. NFRA considered his firm to be ineligible to carry out statutory audits of listed companies in absence of EQCR. (Order No. 023/2023)

●    EQCR also failed to: (Order No. 20012/1/2020)

–      review selected working papers related to significant judgements,

–      perform objective evaluation of the significant judgements made by engagement team

–      document his work properly and separately from the work of the audit team, to independently analyse and question the engagement team regarding the issues arising out of RBI inspections and directors etc.

–      prepare proper documentation related to discussion between the EQCR team and EP.
3. Audit Evidence and Documentation ●    No evidence as to who performed the work, who reviewed it and the date and extent of such review. (Order No. 62/2023)

●    Failure to document discussion of significant matters with Those Charged With Governance (TCWG). (Order No. 62/2023)

●    Failure to document allocation and division of work between joint auditors. (Order No. 20012/2/20222)

●    No communication with TCWG regarding responsibilities of auditors, overview of planned scope of work etc. (Order No. 023/2023)

●    No evidence at all of work performed on Internal Financial Control over financial reporting. (021/2023)

●    Not seeking external confirmations for balances of debtors and creditors. (Order no. 23/05/2021)

●    Misconduct in relation to the role of engagement partner due to non-availability of evidence of EP’s review in file, designating other partner as EP in audit file instead of signing partner, no evidence of EQCR performed. (Order No. 20012/1/2020)

●    Non-availability of engagement letter in the audit file. (Order No. 023/2023)

●    Lack of documentation with regard to recoverability assessment of security deposits given several years back. (Order No. 58/2023)

●    Failure to prepare documentation regarding Auditor’s responsibilities relating to fraud in an Audit of Financial Statements (“FS). (Order no. 62/2023)
4. Performing Risk Assessment and Audit Execution ●    Failure to perform Analytical Procedures in spite of substantial decrease in key financial parameters like revenue, PBT etc. (Order No. 62/2023)

●    Failure to conduct branch audit, reliance by EP on the work of illegally appointed branch statutory auditors. (Order No. 63/2023)

●    Failed to identify the deficiencies in internal control relating to the appraisal and sanction of loans. (Order No. 63/2023)

●    Lapses in fulfilling auditor’s responsibilities relating to fraud even though the auditor was aware about FIR due to fraud against managerial personal of the auditee company. (Order No. 30/2023)

●    Failure to perform audit work for physical verification and valuation of PPE due to miscommunication between joint auditors. (Order No. 20012/2/2022)

●    Non-assessment of risk of material misstatement in balance of Trade Receivables even though the previous auditor had issued a qualified opinion. (Order No. 29/2023)
●    Failure to question the accounting policies related to trade receivables, improper disclosure, non-disclosure of credit risk profile of trade receivables and also to obtain external confirmation of outstanding trade receivables. (Order No. 21/2023)

●    Failure to perform risk assessment, determine materiality, analytical procedures, communicate with TCWG, reporting on fraud etc. (Order No. 21/2023)

●    Failure to report fraudulent loan transactions, fraudulent understatement of loan and evergreening of loans through structured circulation of funds.  (Order No. 23/14/2022)

●    Failed to understand the nature of business and comprehend that a company which was a shell company used by promoters for financial manoeuvres and there was no operation in the company since its incorporation. (Order No. 23/14/2022/05)

●    Failed to understand the rational for interest free loan given to a group company without business rationale. (Order No. 23/14/2022/05)

●    Misconduct in evaluation of Risk of Material Misstatements – not considering certain serious RBI non-compliance while doing risk assessment. (Order No. 20012/1/2020)
5. Audit Reporting ●    Issuing qualified opinions on SFS and CFS with 11 and 15 qualifications respectively despite the fact that the nature and effect of qualifications were material and pervasive to the FS instead of issuing Adverse Opinion or Disclaimer of Opinion. (Order No. 65/2023)

●    Issuing a qualified opinion instead of adverse opinion for non-consolidation of the subsidiary. The assets & liabilities of the subsidiary constituted 19.20% and 28.96% respectively of the assets and liabilities of Parent. (Order No. 62/2023)

●    Audit report not modified with respect to reporting on Unilateral extinguishment of trade payables and non-compliance with valuation of finished goods inventory. Included only as KAM without communicating these matters to TCWG. (Order No. 59/2023)

●    Misuse of Emphasis of Matters for issuing a modified audit opinion. The auditor reported various matters under EOM para which by its nature requires modification in auditor’s report due to non-availability of sufficient appropriate audit evidence. (Order No. 27/2023)

●    False reporting by auditor in independent auditor’s report – this mainly includes non-inclusion of cash flow in FS and annual report uploaded on BSE, wrongly reporting the company as NBFC in CARO report though the Company was into the business of media and content syndication and not an NBFC, missing disclosures regarding SBN in FS but auditor’s report states that it is included in FS. Lapses in audit conclusion since none of the above transactions were modified by the auditor in its audit opinion. (Order No. 23/30/2021)

●    Non-consideration of observations of Internal audit reports wherein it was reported that management had not carried out any physical verification of PPE whereas the auditor in its report stated that it was carried out by management. (Order No. 29/2023)
6. Related Party (RP) Relationship, Transactions and Disclosures ●    Lapses in understanding the nature of RP relationship and transactions, failure in testing the completeness of RPs and transactions, failure in evaluating management override of controls, failure in verifying arm’s length basis of RP transactions and failure to report these in CARO 2016. (Order No. 63/2023)

●    Failure to report non-disclosure of RP Loans on gross basis (Order No. 62/2023)

●    Failure to report outstanding balance of capital advances to a wholly owned subsidiary under RP disclosure. (Order No. 021/2023)

●    Failure to identify RP and RP transactions even through 100% sales were made to RP. (Order No. 23/30/2021/2)

●    Charged with failure to exercise professional skepticism while performing audit of fraudulent transactions with its subsidiary. (Order no. 23/14/2022)

●    Charged with recording of certain repayment cheques received from subsidiary to reduce the loan at year end without encashing these cheques. Further, the subsidiary’s bank account does not have sufficient balance to clear the cheques. (Order No. 23/14/2022)

●    Failure to exercise professional judgement while performing the audit of RP transactions and balances, various items of cheques received but not realised and cheques issued but not cleared (as there were no sufficient bank balances available). This indicates the intention to suppress true balances of borrowings from RPs and present a sound financial position. Further, external party payments were done using NEFT or RTGS whereas the cheques were used only for RP transactions indicating additional factor of fraud. (Order no. 23/14/2022)

●    Failure to identify suspected fraudulent diversion of funds given as land advances to RPs which was outstanding at the beginning of the financial year and completely recovered during the year without purchasing any land. Release of huge amounts to RPs on the pretext of land advances, title disputes of land for which money is advanced and return of advances on the flimsy explanation of non-suitability of land, were required to be evaluated by auditors with professional scepticism. (Order no. 23/14/2022)

●    Failed to understand the rational for interest free loan given during the year which in turn was given to the personal account of the promoter and his relatives. (Order No.23/14/2022/05)
●    Failure to detect fraudulent diversion of funds through various RPs in the form of loans and advances. (Order No. 28/2023)

●    Failure to exercise professional skepticism during verification of advance to subsidiary wherein the amount of advance granted was significantly higher as compared to the actual transactions. (Order No. 23/14/2022)

●    Charged with failure to exercise due diligence with respect to capital advances given to one group entity and the lapses include no board approval in place u/s 188 for such advances. (Order No.23/14/2022)
7. Going Concern (GC) assessment ●    Non-assessment of GC or lapses relating to GC basis of accounting in spite of current period and accumulated losses, negative net worth, negative working capital, defaults in repayment of borrowings, discontinuation of many divisions etc. (Order no. 63/2023, 20012/2/20222, 23/14/2022/05, 20012/1/2020)
8. Auditing of Accounting Issues ●    Consolidated financial statements (“CFS”) materially misstated due to non-consolidation of the subsidiary in CFS considering the investment is temporary in nature, relying blindly on the opinion of experts. (Order No. 63/2023)

●    Lapses in evaluation of unilaterally writing back of substantial liabilities and subsequent recognition of the amounts involved as gains. (Order No. 59/2023)

●    Failure in evaluation and attendance at physical verification of inventories and to report on incorrect accounting policy for valuation of inventories. (Order No. 59/2023)

●    Failure to report non-provisioning of land advances given. (Order No. 58/2023)

●    Failure to report on non-provisioning on dues outstanding for more than 3 years. (Order no. 58/2023)

●    Failure to perform Impairment testing under Ind AS 36 for investments in subsidiaries even though these subsidiaries were loss making. (Order No. 20012/2/2022)

●    Failure to report non-recognition of Interest Cost on Borrowings classified as NPAs but was only disclosed in notes to accounts. (Order No. 29/2023)

●    Allowing recognition of deferred tax assets in absence of virtual certainty supported by convincing evidence for sufficient future taxable income. Considering the company was making consistent losses, the assets should not have been recognised. (Order No. 27/2023)

●    Note to the FS states that provision for gratuity funds and leave encashment has been made on ad hoc basis whereas accounting policy states that provision is made based on valuation by independent actuary resulting in contradictory disclosures. (Order No. 27/2023)

●    Failed to report non-provision of Interest Costs on Borrowings from Bank and NBFCs resulting in understatement of loss eight times of reported loss. (Order No. 23/2023)

●    Non-provisioning for trade receivables- Unsecured, Considered Doubtful comprising 22% of total assets. (Order No. 23/2023)

●    Wrong amortization of certain expenses like Preliminary expenses, Listing expenses etc. which do not meet the definition of non-current assets as no future benefit is expected to flow. (Order No. 23/2023)

●    Outstanding foreign currency loan liabilities were carried at transaction date exchange rate and not re-evaluated using closing date exchange rate. (Order No. 20/2023)

●    Inflation of Revenue and Purchase by recording Open position Commodity Market Future Trading on daily basis instead of recording once on settlement date. (Order No. 23/05/2021)

●    Lapses in audit of inappropriate recognition of finance cost which was an extraordinary item since the underlying borrowings were not used for business purpose but shown as ordinary items in FS. (Order No. 23/14/2022)

●    Failure to carry out impairment testing even though there were consistent losses, erosion of net worth and defaults in repayment of loans taken from financial institutions. (Order No. 29/2023)
9. Non- compliance with laws and regulations ●    Not considering flagged significant potential violations in National Housing Board (NHB) inspection reports issued under NHB directions. (Order no. 63/2023)

●    Failure to report full particulars of loan to RP – Section 186(4) of the Companies Act, 2013 (Order No. 62/2023)

●    Non-evaluation of utilisation of IPO proceeds- CARO 2016 even though approx. 44% of IPO proceeds were paid to one of its RP. (Order No. 59/2023)

●    Erroneous Application of Financial Reporting Framework by the Company- the company has erroneously applied the provisions of Companies Act, 2013 while the Companies Act, 1956 was applicable for the reporting period. (Order No. 27/2023)

●    The FS has been prepared under Accounting Standards instead of Indian Accounting Standards resulting in revision of audit report and full FS. (Order No. 20012/1/2022)
10. Presentations and Disclosures ●    Failure to report non-disclosure of Trade Payable covered under the Micro, Small and Medium Enterprises Development Act, 2006 (Schedule III of the Companies Act, 2013) (Order No. 62/2023)

●    Inadequate disclosure in CARO due to failure to report the period of defaults in repayment of loans or
borrowings to banks and FIs and dues to debenture holders. (Order No. 20012/2/2022)

●    Non-evaluation of Income tax orders for demand resulted in non-provision or disclosure in the FS. (Order No. 25/2023)

●    Multiple non-compliance with the format of FS not meeting the requirements of Division I of Schedule III. (Order No. 23/2023)

●    Assets given on lease were wrongly shown under PPE as tangible assets instead of showing as receivable as per Schedule III. (Order no. 20/2023)

●    Misstatement in cash flow statement- increase in short-term borrowing were shown as operating activity instead of financing activity, loans and advances to RPs should be shown as Investing activity but shown under operating activities. (Order No. 23/14/2022)

●    Lapses in evaluation of corporate guarantee and creation of charge – non-disclosure of contingent liability given by the Company for corporate guarantee given in respect of loans taken by family members of promoters from banks and other private companies. Further, these transactions were not disclosed under RP note. (Order No. 23/14/2022)
11. Professional Misconducts ●    Failure to maintain audit file and co-operate with NFRA. The auditor did not respond to NFRA emails seeking audit file and SQC policy despite several extensions of time. (Order No. 27/2023)

●    Charged with tampering of audit files during the period NFRA asked to submit the audit file to the actual date of submission of audit file including creation of new Audit work papers during the said period. (Order No. 23/14/2022, 23/14/2022/05)

(Order No. as mentioned against each observations indicates the respective NFRA orders in which the above lapses have been stated)

KEY TAKEAWAYS FOR FUTURE

The observations/lapses highlighted by the NFRA clearly highlights that the audit quality remains a persistent concern across all the types of companies and the statutory auditors. The CAs in practice and specially engaged in the statutory audit of companies covered by NFRA should consider this as an opportunity and ensure the compliance of the Standard on Auditing (SAs) in the engagements carried out by them. The auditing errors can only be minimised and not totally eliminated but should be reduced to acceptable levels.

The NFRA in collaboration with the Institute of Chartered Accountants of India (ICAI) may also consider publishing sample audit manuals with minimum documentation requirements. For mid-sized firms, this may be especially useful as they could use this document as a reference point for their audit documentation.

“Audit work documentation, if performed in true spirit, leads to ‘thinking audit’ rather than ‘ticking audit’.”

– Dr Ajay Bhushan Pandey – NFRA Chairperson

Part A : Company Law

20 In the Matter of M/s Blue Sapphire Healthcares Private Limited

Registrar of Companies, NCT of Delhi & Haryana

Adjudication Order No. ROC/D/Adj/Section 118/Blue Sapphire/3143-3149

Date of Order: 9th August, 2023

Adjudication Order for delay in circulation of draft Board Minutes to Directors of the Company and delay in entry of minutes in Minutes’ Book which amounts to violation of provisions of Clause 7.4 and 7.5 of the Secretarial Standard — I (SS-1) issued by the Institute of Company Secretaries of India (ICSI) read with Section 118(10) of the Companies Act, 2013.

FACTS

M/s BSPL initially made a suo moto application before the office of the Registrar of Companies, NCT of Delhi & Haryana (“ROC”) for adjudication of non-compliance with regards to delay in circulation of 2 (two) draft Board meeting minutes to its directors, which amounts to violation of provisions of Clause 7.4 of the Secretarial Standard–I (SS-1) issued by Institute of Company Secretaries of India read with Section 118(10) of the Companies Act, 2013.

M/s BSPL had conducted its Board meetings on24th September, 2021 and 21st January, 2022. Thereafter as per Clause 7.4 of SS-1, the draft minutes were required to be circulated on or before 9th October, 2021 and 5th February, 2022 respectively. However, M/s BSPL circulated the draft minutes for the Board Meetings on 22nd October, 2021 and 2nd March, 2022, respectively i.e. beyond the 15 days timeline from the date of holding of the meeting.

The ROC on the basis of said application observed that M/s BSPL not only had committed delay in circulating the draft minutes, but also committed default of delay in entering the minutes in the Minute Book timely. The following table depicts the default:

Particulars of events 3rd Board Meeting of FY 2021-22 4th Board Meeting of FY 2021-22
Date of Board Meeting 24th September, 2021 21st January, 2022
Due date for circulation of Draft Minutes as per Para 7.4 of SS-1 9th October, 2021 5th February, 2022
Draft Minutes circulated on (Default for Suo-moto application filed by M/s BSPL) 22nd October, 2021 2nd March, 2022
Due date for entry of Minutes in the Minute Book as per Para 7.5 of SS-1 24th October, 2021 20th March, 2022
Minutes entered in Minute Book (Default observed by ROC on the basis of application received in the case) 29th October, 2021 9th March, 2022

 

Thereafter, the ROC issued show cause notice (“SCN”) to M/s BSPL and its officer for default with regard to non-compliance of provisions of Clause 7.5 of SS-1 for delay or late entry of minutes in the Minutes books. Subsequently, M/s BSPL in its reply to SCN admitted the violation of Clause 7.5 of SS-1.

Relevant Provisions of SS-1 and Companies Act, 2013:

SS-1 Clause 7.4. Finalisation of Minutes: –

“Within fifteen days from the date of the conclusion of the Meeting of the board or the Committee, the draft Minutes thereof shall be circulated by hand or by speed post or by registered post or by courier or by e-mail or by any other recognised electronic means to all the members of the Board or the Committee for their comments.”

SS-1 Clause 7.5 Entry in the Minutes Book: –

7.5.1 Minutes shall be entered in the Minutes Book within thirty days from the date of conclusion of the Meeting.

Section 118 of the Companies Act, 2013

Minutes of Proceedings of General Meeting, Meeting of Board of Directors and Other Meeting and Resolutions Passed by Postal Ballot: –

(1) Every company shall cause minutes of the proceedings of every general meeting of any class of shareholders or creditors, and every resolution passed by postal ballot and every meeting of its Board of Directors or of every committee of the Board, to be prepared and signed in such manner as may be prescribed and kept within thirty days of the conclusion of every such meeting concerned, or passing of resolution by postal ballot in books kept for that purpose with their pages consecutively numbered.

(10) “Every company shall observe secretarial standards with respect to general and Board meetings specified by the Institute of Company Secretaries of India constituted under section 3 of the Company Secretaries Act, 1980 (56 of 1980), and approved as such by the Central Government.”

(11) If any default is made in complying with the provisions of this section in respect of any meeting, the company shall be liable to a penalty of twenty-five thousand rupees and every officer of the company who is in default shall be liable to a penalty of five thousand rupees.

HELD

Adjudication Officer (“AO”) after considering the facts of the case and submissions made, noted that provisions of Section 118 read with clause 7.4 and clause 7.5 of SS-1 for the aforesaid 2 (two) Board meetings ofM/s BSPL had not been complied for which ROC imposed the penalty on M/s BSPL and its officer in default except one of the directors Mr. MKM who ceased to be director w.e.f. 21st January, 2022. Hence, he was not considered as officer in default for the violations pertaining to only the Board meeting held on 21st January, 2022.

 

Sr. No. Name of Person on which penalty imposed Violation provisions of Section 118 of the Act and Clause 7.4 of SS-1 for meetings held on 24th September, 2021 and 21st January, 2022. Violation provisions of Section 118 of the Act and Clause 7.5 of SS-1 for meetings held on 24th September, 2021 and 21st January, 2022. Penalty imposed under Section 118 of the Companies Act, 2013
1. M/s BSPL Yes Yes ₹1,00,000/- (₹25,000/- for
two defaults in each of the two Board meetings)
2. Mr. MKM (Wholetime Director) Yes, except meeting dated
21st January, 2022		 Yes, except meeting dated
21st January, 2022		 ₹10,000/- (₹5,000/- for each event of default on officer in default)
3. Mr. AP (Wholetime Director) Yes Yes ₹20,000/- (₹5,000/- for each event of default on officer in default)
4. Mr. PP (Wholetime Director) Yes Yes ₹20,000/- (₹5,000/- for each event of default on officer in default)
5. Mr. NKP (Managing Director) Yes Yes ₹20,000/- (₹5,000/- for each event of defaulton officer in default)
5. Mr. SM (Company Secretary) Yes Yes ₹20,000/- (₹5,000/- for each event of default on officer in default)

The amount of penalty was ordered to be paid through the MCA website, within 90 days of the receipt of the order and intimate by filing Form INC-28.

21 IN THE MATTER OF M/S CONTLO TECHNOLOGIES PRIVATE LIMITED

Registrar of Companies, Karnataka

Adjudication Order No. ROCB/ADJ.ORDER/SECTION 90(4)/CONTLO/Co. No.152010/2022

Date of Order: 9th November, 2022

Adjudication Order imposing penalty for delay in filing of Form BEN-2 with regards to declaration of Significant Beneficial Ownership (SBO) which amounts to violation of provisions of section 90 of the Companies Act, 2013.

FACTS

M/s CTPL suo-moto filed an adjudication application on 22nd August, 2022 for violation of sub-section (4) of section 90 of the Companies Act, 2013 before Registrar of Companies, Karnataka (“ROC”), for which hearing was held on 19th October, 2022.

It was noticed from the application that the share capital of M/s CTPL was held by 3 (three) shareholders, of which majority of the shares were held by a body corporate. Hence M/s CTPL identified that the provisions of Significant Beneficial Ownership (“SBO”) were applicable to M/s CTPL.

Thereafter, M/s CTPL had received a declaration in Form BEN-1 on 20th January 2022 which was required to be reported to the ROC in Form BEN-2 within 30 days of obtaining the declaration in Form BEN-1. However, M/s CTPL missed out the filing of Form BEN-2 within the required time period, i.e. on or before 19th February, 2022 but M/s. CTPL filed the Form BEN-2 with ROC on 2nd August, 2022 with a delay of 163 days.

Thus, M/s CTPL had failed to comply with the provisions of sub-section (4) of Section 90 of Companies Act, 2013 and Rule 4 of Companies (Significant Beneficial Owners) Rules, 2018.

During the hearing, the authorised representative of M/s. CTPL made written submissions, as directed by the ROC.

It was observed from the form BEN-2 that 99.98 per cent of M/s CTPL shares were held by M/s CI, USA. Hence M/s. CTPL was not a small company as defined under Section 2(85) of the Companies Act, 2013.

Provisions of section 90(4) of the Companies, 2013 require that every company shall file a return of Significant Beneficial Owners of the company and changes therein with the Registrar containing names, addresses and other details in Form No. BEN-2 within 30 days from the date of receipt of declaration from Significant Beneficial Owner, as prescribed in Rule 4 of Companies (Significant Beneficial Owners) Rules, 2018.

Sub-section(11) of Section 90 of the Companies Act, 2013, stipulates that a company, required to maintain register under sub-section (2) and file the information under sub-section (4) or required to take necessary steps under sub-section (4A), fails to do so or denies inspection as provided therein, the company shall be liable to a penalty of one lakh rupees and in case of continuing failure, with a further penalty of five hundred rupees for each day, after the first during which such failure continues, subject to maximum of five lakh rupees and every officer of the company who is in default shall be liable to a penalty of twenty five thousand rupees and in case of continuing failure, with a further penalty of two hundred rupees for each day, after the first during which such failure continues, subject to a maximum of one lakh rupees.

HELD

Accordingly, an Adjudication officer (‘AO’) as per powers vested under Section 454(3) of the Companies Act, 2013, imposed a penalty on M/s CTPL and its directors under Section 90 (11) of the Companies Act, 2013 as per below table:

Sl. No. Particulars Period of Default
(19th February, 2022 to
1st August, 2022) 163 days		 Penalty Imposed (₹)
1. M/s CTPL R1,00,000 + (500*163 days) 1,81,500/-
2. Mr MNS, Director R25,000 + (200*163 days) 57,600/-
3. Mr IB, Director R25,000 + (200*163 days) 57,600/-
TOTAL 2,96,700/-

 

 

The penalty amount was to be remitted by M/s CTPL and its officers through the MCA portal within 60 days from the date of the order. M/s CTPL was required to file INC-28 as per the provisions of the Companies Act, 2013.

Reconciling Inconsistencies in a Document

INTRODUCTION

“To err is human” so the saying goes. Human error and mistakes could creep in even after due care and caution. Agreements / documents could be the subject matter of such mistakes. One often comes across inconsistencies in a document where the earlier part is at contradistinction to the later part. In such a scenario, how does one reconcile such discrepancies? The Supreme Court in a recent decision in the case of Bharat Sher Singh Kalsia vs. State of Bihar, Criminal Appeal No. 523 of 2024 (Special Leave Petition (CRL.) No. 6562 of 2021), Order dated 31st January, 2024, had an occasion to consider this issue. Let us analyse the position in this respect based on this as well as other decisions.

FACTS OF BHARAT SHER (SUPRA)

A Power of Attorney was granted in respect of an immovable property for its management and maintenance. It was provided therein that the Power of Attorney holder shall pursue litigation, file a plaint after obtaining signature of the land owners / principals of the Power of Attorney. Clause 3 of the Power of Attorney entitled the Power of Attorney holder to execute any type of Deed and to receive consideration on behalf of the landowners / executors of the Power of Attorney and get such Deed registered. Clauses 3 and 11 read with Clause 5 gave full authority to the Power of Attorney holder to sell the property, get the Sale Deed registered and receive consideration. Clause 15 empowered the holder to present for registration all the sale deeds or other documents signed by the owner.

The plea of the respondents was that a perusal of the Power indicated that as per Clause 3, the Power of Attorney holder was authorised to execute any type of deed, to receive consideration in this behalf and to get the registration done thereof. Clause 11 of the Power of Attorney further made it clear that the Power of Attorney holder had the authority to sell movable or immovable property including land, livestock, trees etc. and receive payment of such sales on behalf of the land-owners / principals. However, Clause 15 of the Power of Attorney stated that the Power of Attorney holder was authorised to present for registration the sale deed(s) or other documents signed by the landowners / principals and admit execution thereof before the District Registrar or the Sub Registrar or such other officer as may have authority to register the said deeds and documents, as the case may be, and take back the same after registration. The dispute resolved over whether the Power of Attorney holder had power to sell the property or only had a limited power to register the sale documents executed by the landowners. In short, which clauses prevailed, Clauses 3 and 11 or Clause 15?

COURT’S VERDICT IN BHARAT SHER (SUPRA)

The Supreme Court held that it was required to interpret harmoniously as also logically the effect of a combined reading of the impugned three clauses. Its endeavour would, in the first instance, necessarily require the Court to render all three clauses as effective and none as otiose. In order to do so, the Court would test as to whether all the three clauses could independently be given effect to and still not be in conflict with the other clauses. It dissected the three clauses as follows:

(a) Clause 3 pertained to execution of any type of deed and receiving consideration, if any, on behalf of the land-owners / principals and to get the registration thereof carried out. Basically, this took care of any type of deed by which the Power of Attorney holder was authorised to execute and also receive consideration and get registration done on behalf of the land-owners / principals.

(b) Clause 11 of the Power of Attorney dealt specifically with regard to sale of movable or immovable property including land and receiving payments of such sales on behalf of the landowners / principals. Thus, Clauses 3 and 11 of the Power of Attorney together authorised the Power of Attorney holder to execute deeds, including of / for sale, receive consideration in this regard and proceed to registration upon accepting consideration for and on behalf of the land-owners / principals.

(c) Clause 15 of the Power of Attorney stated that the holder was authorised to present for registration the sale deeds or other documents signed by the landowners/ principals and admit execution thereof. The Apex Court held that it was in addition to Clauses 3 and 11 of the Power of Attorney and not in derogation thereof. The Power of Attorney holder had been authorised to execute any type of deed and receive consideration and get registration done, which included sale of movable/ immovable property on behalf of the land-owners/ principals. In addition, the land-owners / principals had also retained the authority that if a Sale Deed was/ had been signed by them, the very same Power of Attorney holder was also authorised to present it for registration and admit to execution before the authority concerned.

The Court observed this was not a situation where the land-owners / principals had executed a Sale Deed in favour of any third party prior to the Sale Deed executed and registered by the Power of Attorney-holder. Further, it held that if the Power of Attorney-holder had gone ahead himself and registered a different or a subsequent Sale Deed, the matter would be entirely different. There was no contradiction between Clauses 3, 11 and 15 of the Power of Attorney. To restate, Clause 15 of the Power of Attorney was an additional provision retaining authority for sale with the land-owners / principals themselves and the process whereof would also entail presentation for registration and admission of its execution by the Power of Attorney-holder. The Court opined that all three clauses were capable of being construed in such a manner that they operated in their own respective fields and were not rendered nugatory.

RECONCILIATION PRINCIPLE

The Supreme Court also reiterated the principle that states that when different clauses in a document or a Deed or a Contract cannot be reconciled, the earlier clauses would prevail over the later clauses. The Privy Council of Canada in Forbes vs. Git [1922] 1 A.C. 256 has explained this as follows:

“The principle of law to be applied may be stated in few words. If in a deed an earlier clause is followed by a later clause which destroys altogether the obligation created by the earlier clause, the later clause is to be rejected as repugnant and the earlier clause prevails. In this case the two clauses cannot be reconciled and the earlier provision in the deed prevails over the later. Thus, if A covenants to pay 100 and the deed subsequently provides that he shall not be liable under his covenant, that later provision is to be rejected as repugnant and void, for it altogether destroys the covenant. But if the later clause does not destroy but only qualifies the earlier, then the two are to be read together and effect is to be given to the intention of the parties as disclosed by the deed as a whole. …”

The above Privy Council decision has been approved by a Three-Judge Bench of the Supreme Court in Radha Sundar Dutta vs. Mohd. Jahadur Rahim, AIR 1959 SC 24. In that case, the Court held that it is a settled rule of interpretation that if there be admissible two constructions of a document, one of which will give effect to all the clauses therein while the other will render one or more of them nugatory, it is the former that should be adopted on the principle expressed in the maxim “ut res magis valeat quam pereat”. This maxim means that it is better for a thing to have an effect than for it to become void. However, where the maxim cannot be implemented, then if there is a conflict between the earlier clause and the later clauses of a document by which it is not possible to give effect to all of them, then the rule of construction was well-established that it is the earlier clause that must override the later clauses and not vice versa.

The Delhi High Court in Sunil Kumar Chandra vs. M/s Spire Techpark Pvt Ltd, 2023/DHC/000492 has held that it has been held in a catena of judgments by the Hon’ble Supreme Court that where there exists any iota of inconsistency between two provisions of a same instrument, the former clause shall prevail over the latter one. It referred to the Supreme Court’s decision Ramkishorelal vs. Kamal Narayan; 1963 Supp (2) SCR 417 wherein the Court held as follows:

“12. The golden Rule of construction, it has been said, is to ascertain the intention of the parties to the instrument after considering all the words, in their ordinary, natural sense. ….. It is clear, however, that an attempt should always be made to read the two parts of the document harmoniously, if possible; it is only when this is not possible, e.g., where an absolute title is given is in clear and unambiguous terms and the later provisions trench on the same, that the later provisions have to be held to be void.”

INFIRMITY IN CLAUSES IN A WILL

What happens if a Will suffers from such an infirmity, i.e., the Clauses in a Will are at variance with each other? The Supreme Court had an occasion to consider such a situation in Mauleshwar Mani vs. Jagdish Prasad, 2002 (2) SCC 468. In this case, the testator bequeathed all his assets and properties to his wife with the power of alienation but in a later part of the Will, he bequeathed the same also in favour of his grandsons. The Court observed that the first part of the “Will” provided that after the death of the testator or author of the Will, his wife was entitled to the entire assets and properties with the right of transfer. The second part of the will is that after the death of his wife, the grandsons would inherit the property. Here, what the Court was concerned with was whether the wife acquired an absolute estate or a limited estate under the Will. Thus, the issue before the Court was whether the subsequent bequest in favour of the grandsons was valid considering the earlier absolute interest created by the testator in favour of his wife. The Court held that the general rule of construction of a Will was that a Will had to be read in its entirety and effort should be made that no part of it was excluded or made redundant. It was the duty of the court to reconcile if there was any apparent inconsistency in a Will.

The Apex Court held that it was obvious that the testator conferred an estate by providing that the wife would be entitled to get the property with right of alienation. Where the property was given by a testator with a right of alienation, such bequeath was a conferment of an absolute estate. The Will, therefore, gave an unlimited and an absolute estate to the wife. It held that where an absolute estate was created by a Will, the clauses in the Will which were repugnant to such absolute estate could not cut down the estate; but they must be held to be invalid. It laid down the following legal principle:

(a) Where under a Will, a testator had bequeathed his absolute interest in the property in favour of his wife, any subsequent bequest which was repugnant to the first bequeath would be invalid;

(b) Where a testator had given a restricted or limited right in his property to his widow, it was open to the testator to bequeath the property after the death of his wife in the same Will.

Once the testator has given an absolute right and interest in his entire property to a person, he could not again bequeath the same property in favour of the second set of persons in the same Will. The object behind is that once an absolute right is vested in the first person, the testator cannot change the line of succession of the first person. Where a testator confers an absolute right on anyone, the subsequent bequest for the same property in favour of other persons would be repugnant to the first bequest in the Will and would be held invalid. Accordingly, it concluded that under the Will, the wife had got an absolute estate and, therefore, subsequent bequest in the same Will in favour of the grandsons was repugnant to the first bequest and, therefore, invalid.

In Madhuri Ghosh vs. Debobroto Dutta, AIR 2016 SC 5242, the Supreme Court held that the position is clear that where an absolute bequest has been made in a Will in respect of certain property to certain persons, then a subsequent bequest made qua the same property later in the same Will to other persons will be of no effect.

Interestingly, the Indian Succession Act, 1925 deals with the construction of Wills. S. 88 provides that where two clauses of gifts in a Will are irreconcilable, so that they cannot possibly stand together, the last shall prevail. The section gives an Illustration that the testator by the first clause leaves his estate to A and by the last clause leaves it to B and not to A. In this case, B will have it. In Kailvelikkal Ambunh1 (Dead) vs. H. Ganesh Bhandary, 1995 (5) SCC 444, the Court explained that a Will may contain several clauses and the latter clause may be inconsistent with the earlier clause. In such a situation, the last intention of the testator is given effect to and it is on this basis that the latter clause is held to prevail over the earlier clause. This is regulated by the well-known maxim “cum duo inter se pugnantia reperiuntur in testamento itltinium ratum est” which means that if in a Will there are two inconsistent provisions, the latter shall prevail over the earlier. Thus, s.88 is at variance with the aforesaid Supreme Court decisions.

The commentary “The Indian Succession Act”, Paruck, 11th Edition, Lexis Nexis, seeks to reconcile the dichotomy between s. 88 and the decisions and states that this section does not apply where in fact there is a conflict between the earlier and later clauses and it is not possible to give effect to all of them. Then the rule of construction is well established that it is the earlier clause that must override the later clause and not vice versa.

CONCLUSION

The old adage “better safe than sorry” would clearly be useful in all cases when drafting documents. Pay attention to inconsistencies, especially when preparing a Will. A small slip could lead to years of wasteful litigation between the beneficiaries of the Will. Similarly, when drafting contracts, any error could prove very expensive to either party.

Allied Laws

55 In Re: Interplay between Arbitration Agreements under the Arbitration and Conciliation Act, 1996 and the Indian Stamp Act, 1899

AIR 2024 Supreme Court 1

Date of Order: 13th December, 2023

Arbitration Agreement — Unstamped agreement or insufficiently stamped agreement — Validity- Reference to a larger Bench — Curable defect — Enforceable- Principle of severability — Doctrine of competence — Agreement neither void nor voidable — [S. 7, 8, 11, Arbitration and Conciliation Act, 1996; S. 33, 35, Indian Stamps Act, 1899; S. 2(g), Indian Contract Act, 1872].

FACTS

An arbitral agreement between two or more parties is an underlying contract usually in the form of a clause in an original agreement / contract or a separate arbitral agreement based on the original agreement. This original agreement, thus, is an instrument which is mandated to be stamped under the Indian Stamps Act, 1899 (Stamp Act). Whenever an application is made before a court for the appointment of an arbitrator under section 8 of the Arbitration and Conciliation Act, 1996, an argument is normally made that the original agreement is not sufficiently stamped and thus, the arbitration agreement (or clauses) is inadmissible before the court. This issue was discussed at length before the Hon’ble Supreme Court before a five-member bench in the case of N.N. Global Mercantile Pvt Ltd vs. Indo Unique Flame Ltd & Ors [(2023) 7 SCC 1]. The Hon’ble Court in a 3:2 majority held that an unstamped arbitral agreement is void and thus lacked legal enforceability.

However, in a curative petition filed in one of the arbitration cases, the correctness of this decision was questioned. Subsequently, the question was referred to a larger bench. The primary issue which was referred to the seven-member bench of the Hon’ble Supreme Court was to ascertain the validity of an arbitration agreement if the underlying contract was unstamped or insufficiently stamped.

HELD

The Hon’ble Supreme Court observed that agreements which are inadequately stamped or are unstamped are deemed inadmissible in evidence as per Section 35 of the Stamp Act. However, such agreements are not automatically void, void ab initio, or unenforceable. The Hon’ble Court held that an instrument which is unstamped or insufficiently stamped would be inadmissible in evidence, however the same is a curable defect and that in itself does not make the agreement void or unenforceable. Further, relying on the principle of severability of an arbitration agreement and doctrine of competence-competence, the Court further held that objections regarding the stamping of the agreement fall under the jurisdiction of the Arbitral Tribunal and not judicial courts.

56 K. Loganathan vs. A. Elaango

AIR 2024 Madras 10

Date of Order: 2nd November, 2023

Evidence — Suit for recovery of money —Application for admission of electronic evidence — Non-production of 65B certificate — Mandatory provision- Curable defect- Production of Certificate- Any time before completion of Trial. [S. 65B, Indian Evidence Act, 1872; O.7 R. 14(3) Code for Civil Procedure, 1908].

FACTS

The Petitioner / Plaintiff instituted a suit against the Respondent in City Civil Court for recovery of money from Respondents. The Petitioner alleged that he had given a loan to Respondent which has not been repaid. The Petitioner, filed an application before the court to take on record, as additional evidence, certain electronic data such as a CD Compact, call history recordings and transcriptions wherein, the Respondent had confirmed the non-repayment of the loan. However, due to the non-production of the certificate mandated under s. 65B of the Indian Evidence Act, 1872 (Act), the Ld. Trial court rejected the said application of the Petitioner.

Aggrieved, the Plaintiff filed a civil revision petition under Article 227 of the Constitution before the Hon’ble Madras High Court.

HELD

The Hon’ble Madras High Court observed that the production of the certificate mandated under section 65B of the Act is a mandatory provision. However, the Court held that non-production of the certificate is a curable defect. This defect can be cured any time before the trial is over. Thus, the order of the Trial Court dismissing the application of the plaintiff was overturned.

57 Ashwani Sharad Pendese and Anr vs. Registrar of Hindu Marriage

AIR 2024 Rajasthan 23

Date of Order: 7th December, 2023

Registration of Marriage — Hindu — Husband, a resident of foreign residence — Denial of registration — Not mandatory that couple should be of Indian citizens [S. 5, 8, Hindu Marriage Act, 1955; S. 8, Rajasthan Compulsory Registration of Marriages, 2009, Article 14, Constitution of India.].

FACTS

The petitioners are a married couple. The wife (Petitioner No-1) is a Hindu and a resident of India, while the husband (Petitioner-2) is a Hindu residing in Belgium and frequently travels to India. The Petitioners are married as per Hindu rites and have a valid certificate of marriage from Arya Samaj, Ajmer. The Petitioners had submitted an application before the Hindu Marriage Registrar (Respondent) in order to get their marriage registered. However, the Respondent refused to register the marriage on the grounds that the husband was not a citizen of India.

Aggrieved, the Petitioner filed a Writ Petition under Article 226 of the Constitution before the Hon’ble Rajasthan High Court.

HELD

The Hon’ble Rajasthan High Court held that the Respondent cannot refuse to register the marriage of the Petitioner solely on the ground that the husband was a foreign national. Further, the Hon’ble Court held that the action of denying registration was violative of Article 14 of the Constitution. Thus, the Court ordered to accept the registration application of the Petitioners.

58 Sanyunkta Sangarsh Samiti and Anr vs. The State of Maharashtra and Ors

AIR 2024 Supreme Court 204

Date of Order: 15th December, 2023

Slum Rehabilitation Scheme- Allotment of flats- Settlement deed between residents and developers to allot flats — Private Agreement — Allotment as per the mandate of Slum Rehabilitation Authority — Public Policy- Lottery-based allotment. [S.3B, Maharashtra Slum Areas (Improvement, Clearance and Redevelopment) Act, 1971; Development Control Regulation, Maharashtra Regional Town Planning Act, 1966; Circular No. 162 of Slum Rehabilitation Authority].

FACTS

The Slum Rehabilitation Authority of Maharashtra (SRA) proposed a scheme to rehabilitate nearly 1,800 slum dwellers under the Slum Rehabilitation Scheme (SRS), governed under the Maharashtra Slum Areas (Improvement, Clearance and Redevelopment) Act, 1971. As per this Scheme, more than 70 per cent of the slum dwellers were to form a cooperative housing society and show their willingness to join the SRS. Thus, the slum dwellers unitedly formed a cooperative housing society (Respondents). The SRA had chosen a developer of Respondent’s choice for the construction of low-cost houses. However, shortly after the construction began, the project was stalled due to interference caused by a small section of slum dwellers (Appellants). The Appellants formed their own minority housing society. The Appellants and the developer initiated a legal battle which ended in a settlement deed whereby, the developer was to allot flats/houses to the Appellants. Despite a settlement deed between Appellants and developer, the SRA denied allotment of houses as per the settlement deed and proceeded with its own policy of lottery-based allotment. Aggrieved, the Appellants filed a petition before the Hon’ble Bombay High Court. The Hon’ble Bombay High Court dismissed the petition.

An appeal was filed before the Hon’ble Supreme Court.

HELD

The Hon’ble Supreme Court observed that the SRA was bound by its own established policies and rules in order to prevail over public policy. Further, as per the mandate of SRA, the allotment of houses has to be done as per a lottery system. Thus, private agreements between parties cannot be enforced in SRS since it is against the mandate of SRA. The appeal was thus dismissed.

59 S. Rajaseekaran vs. Union of India and Ors.

AIR 2024 Supreme Court 583

Date of Order: 12th January, 2024

Motor Vehicles — Hit-and-Run cases — Compensation under scheme — Effective Implementation — Direction issued [S. 145(d). 161(3), The Motor Vehicle Act, 1988].

FACTS

The Petitioner, a leading orthopaedic surgeon, filed a writ petition under Article 32 of the Constitution for effective implementation of s. 161 of The Motor Vehicle Act, 1988 (Act) which dealt with grant of compensation in cases of hit-and-run cases. According to s. 161 of the Act, an accident involving a motor vehicle can be considered a hit-and-run accident, provided the identity of the vehicle that caused the accident cannot be ascertained despite reasonable efforts. The victims or the legal representatives of such victims are entitled to compensation after making the necessary application before a Claims Enquiry Officer. However, it was discovered that a small percentage of victims or their legal representatives have actually sought compensation over the years. This was because the victims or their legal representatives were not made aware of compensation rights.

HELD

The Hon’ble Supreme Court after examining various reports including the annual report of the General Insurance Council for the financial year 2022-23 issued directions for the implementation of the scheme prescribed under s. 161 of the Act. The Hon’ble Court held that if the identity of the vehicle that caused the accident is not ascertainable after making reasonable efforts, the police officer in charge must inform the victims or their legal representatives about the scheme of compensation. Further, within one month of the accident, the officer-in-charge must forward the First Accident Report (FAR) to the Claims Enquiry Officer as per Clause 21(1) ofthe Scheme. Furthermore, the Hon’ble Court also held that a Monitoring Committee at the district level should be formed, comprising the Secretary of the District Legal Service Authority, the district’s Claims Enquiry Officer, and a police officer of Deputy Superintendent rank or above nominated by the District Superintendent of Police. The Committee shall meet at least once every two months to monitor the implementation of the Scheme in the district and the compliance with the aforesaid directions.

Service Tax

SUPREME COURT

29 Commissioner of Central Tax vs. IJM (India) Infrastructure Ltd.

2024 (15) Centax 309 (SC)

Date of Order: 2nd February, 2024

Service tax cannot be demanded for previous period outstanding receivables from associate enterprises where the law was amended prospectively.

FACTS

The respondent was engaged in providing different categories of taxable services. Pursuant to amendment in section 67 of Finance Act, 1994 and Rule 6 of Service Tax Rules, 1994, a SCN was issued demanding service tax amounting to ₹8,98,61,292 against receivables shown in books of accounts as outstanding from its associate enterprise under section 73(1) along with interest under section 75 and penalties under sections 76 and 78 of Finance Act, 1994. Also, a reply filed by the respondent was not considered and an Order-in-Original confirming tax demand along with interest and penalties was issued. Aggrieved, an appeal was filed by the respondent before the Tribunal and the same was allowed in favour of the respondent and an order demanding tax, interest and penalty were set aside. Being aggrieved by the Tribunal’s order, Revenue preferred an appeal before the Hon’ble Supreme Court.

HELD

Hon’ble Supreme Court did not interfere with the decision of Tribunal where it had relied upon the decision of Delhi High Court in case of Principal Commissioner of GST, Delhi vs. McDonalds India Pvt. Ltd.[2018 (8) GSTL 25 (Del.)] and held that amendments made in section 67 of Finance Act, 1994 and Rule 6 of Service Tax Rules, 1994 were amended w.e.f. 10th May, 2008 and could not be applied retrospectively. Accordingly, appeal was dismissed against appellant.

Goods And Services Tax

HIGH COURT

95 Star Health and Allied Insurance Co. Ltd. vs. State of Haryana

(2024) 15 Centax 468 (P&H.)

Date of Order: 25th January, 2024

The appeal cannot be rejected merely on the ground of limitation where it was filed electronically within the time period but the same was submitted physically beyond the prescribed time limit of 7 days as per Rule 108(3) of CGST Rules, 2017.

FACTS

Petitioner filed three appeals electronically on 27th May, 2022 before the appellate authority. Later, the same was filed manually on 10th June, 2022. Subsequently, all three appeals were rejected by the respondent on the ground that a self-certified copy of the order was not submitted by the petitioner within a period of 7 days as prescribed under Rule 108(3) of CGST Rules 2017. Aggrieved, a petition was filed before the Hon’ble High Court.

HELD

It was held that since the procedure prescribed in Rule 108(3) of CGST Rules, 2017 has been modified to consider the date of issuing provisional acknowledgement as the date of filing of an appeal, the mode of electronic filing of an appeal is accepted. Further, Hon’ble High Court after relying upon the decisions in the case of L.G. Electronics India (P.) Ltd vs. Union of India and others[CWP No. 12128 of 2020] and M/s. Suman Industries vs. State of Haryana and others [CWP No. 3602 of 2023] held that the respondent should decide the appeal on merits rather than dismissing on the grounds of technicalities. Hence, considering the date of electronic filing, appeal was filed within the period of limitation. Accordingly, order was set aside directing the Appellate Authority to decide the appeal on merits.

96 Arvindbhai Balubhai Vora vs. State of Gujarat

2023 (77) G.S.T.L 480 (Guj.)

Date of Order: 8th September, 2023

Bail cannot be denied where no notice in connection with evasion of GST was issued from GST Authorities especially where a co-accused was already released on bail.

FACTS

The applicant was alleged of the offence of GST evasion and was kept under the custody of an investigating officer after the registration of a First Information Report (FIR) against him. However, no GST notice was received from the GST authorities for of allegations with respect to tax evasion. Moreover, a co-accused was released on regular bail by a bench of the Hon’ble High Court. Accordingly, an application was filed by an applicant seeking a grant of regular bail before the Hon’ble High Court.

HELD

Hon’ble High Court squarely relied upon the decision given by the Hon’ble Apex Court in the case of Sanjay Chandra vs. CBI [2012] 1 SCC 40 wherein it was held that a regular bail be granted to the applicant. Further, the High Court directed the respondent to release the applicant on bail subject to execution of a personal bond amounting to ₹10,000 and subject to conditions stated in the order.

97 Chaizup Beverages LLP vs. Directorate General of System and Data Management (ICE-GATE)

2023 (78) G.S.T.L 79 (Mad.)

Date of Order: 19th July, 2023

The refund granted cannot be withheld by the respondent merely because the petitioner changed the bank account details for crediting the same.

FACTS

The petitioner had exported goods and claimed a refund of IGST paid on exports under section 54 of the CGST Act read with Rule 96 of CGST Rules, 2017. The Bank account designated for the purpose of the refund was closed by the petitioner by the time the refund claim was sanctioned. Thereafter, details of the new bank account opened were uploaded on ICEGATE Portal. Further, the petitioner raised a grievance with the Central Public Grievance Redress and Monitoring System (CPGRAMS) for crediting a refund to their new bank account. Subsequently, it was informed to the petitioner that a third respondent would redress the matter and transfer the refund amount to a new bank account. No refund was credited to the account of the petitioner thereafter. Aggrieved, the petition was filed before the Hon’ble High Court.

HELD

Hon’ble High Court held that once the petitioner is eligible for a refund, the same cannot be withheld by the respondent under the pretext that the old bank account was not operational. The concerned respondent was directed to credit the refund amount to the petitioner’s new bank account within a period of 15 days.

98 Bio Med Ingredients Pvt. Ltd. vs. Ass. Commr. (ST)/Commercial Tax Officer, Tamil Nadu

2024 (81) GSTL 133 (Mad.)

Date of Order: 1st November, 2023

Application for GST registration cannot berejected merely because both lessor andlessee were conducting separate businessesfrom the same premises without anydemarcation.

FACTS

Petitioner had applied for GST registration on 31st July, 2023 which was rejected by respondent without specifying any reason. Subsequently,the petitioner applied for GST registration once again and the same was rejected without conducting physical verification stating that both lessor and lessee were running their own businesses at the same premises. Being aggrieved, a writ petition was filed before Hon’ble High Court.

HELD

Hon’ble Court by adopting a justice-oriented approach held that respondent shall issue GST registrationnumber to petitioner within a period of one week.Further, the Court directed the petitioner to demarcatethe property within a period of one week from the date of issue of GST number and file demarcation report. Accordingly, the petition was disposed of in favour of the petitioner.

Recent Developments in GST

A. NOTIFICATIONS

1. Notification No.06/2024-Central Tax dated 22nd February, 2024

The above notification seeks to notify “Public Tech Platform for Frictionless Credit” as the system with which information may be shared by the common portal based on consent under sub-section (2) of Section 158A of the Central Goods and Services Tax Act, 2017.

B. ADVISORY / INSTRUCTIONS

a) The GSTN has issued an Advisory dated 21st February, 2024, giving information about new features of the revamped E-invoice Master Information Portal.

b) The GSTN has issued an Advisory dated 28th February, 2024 giving information about instances of delay in registration reported by some Taxpayers despite successful Aadhar Authentication in accordance with Rules 8 & 9 CGST Rules, 2017.

c) The GSTN has issued an Advisory dated 8th March, 2024 giving information about Integration of E-way bill system with New IRP Portals.

d) The GSTIN has issued further Advisory dated 12th March, 2024 giving information about introduction of new 14A and 15A tables in GSTR-1/IFF.

C. FINANCE ACT, 2024

The Government of India has enacted the Finance Act, 2024 (Act no.8/2024 dated 15th February, 2024). The Finance Act is with relation to Finance Bill, 2024 (Bill no.14/2024 dated 1st February, 2024) (reported in the March 2024 issue of BCAJ).

D. ADVANCE RULINGS

57 Hostel vis-à-vis Renting of Residential accommodation
M/s. 2 Win Residency Ladies Hostel (AR Order No. 32/AAR/2023 dated 31st August, 2023 (TN)

The applicant has submitted that they are providing best hostel facilities to college female students and also to working women as most of the students and working people travel far and wide from their remote villages. The total charges collected for lodging ranges between ₹66 per day to ₹100 per day. Thus, the monthly tariff per student or per inmate ranges between ₹2,000 to ₹3,000 per month per inmate. They provide single-room occupation or double-room sharing or dormitory style of accommodation and rates vary accordingly.

The applicant has raised following questions:

“(1) Whether the hostel and residential is required accommodation extended by the Applicant hostel would be eligible for exemption under Entry 12 of Exemption Notification No. 12/2017-Central Tax (Rate) dated 28th June, 2017 and under the identical Notification under the TNGST Act, 2017 and also under Entry 13 of Exemption Notification No.9/2017 – Integrated Tax-Rate dated 28th June, 2017 as amended?

(2) Whether the Applicant hostel being eligible for exemption under Sl. No. 12 of Notification-12/2017 (CT-Rate) dated 28th June, 2017 as amended would at all be required to take registration under the GST Enactments by virtue of the Exemption Notifications as afore-mentioned and also under the provisions of Section 23 of the CGST/TNGST Act, 2017?

(3) Whether any specific tariff entry is applicable to hostels under the Tariff Notification in the event of requirement of registration?

(4) Whether, in the event of the hostel accommodation being an exempt activity, the incidental activity of supply of in-house food to the inmates of the hostel would also be exempt being in the nature of a composite exempt supply?

(5) Whether the judgement of the Division Bench of the Hon’ble Karnataka High Court in the case of Taghar Vasudeva Ambrish – vs- Appellate Authority for Advanced Ruling, Karnataka reported in Manu/KA/0327/2022 — 2022-VIL-110-KAR is applicable to the facts of the applicant?”

The Applicant has interpreted its version on premises, that they have licence to run the residential hostel for boarding and lodging under Section 5 of the Tamilnadu Hostels and Home for women and children (Regulation Act 2014) [hereinafter referred to as the “Hostel Regulation Act”].

Applicant also made reference to definition in Section-2 (e) of the ‘Hostels Regulation Act’ which defines “Hostel” or “Lodging House” to mean “a building in which accommodation is provided for women or children or both either with boarding or not”. Further the term “Home for Women & Children” is defined in section-2 (d) to mean “an institution, by whatever name called, established or maintained or intended to be established or maintained for the reception, care, protection for welfare of women or children or both”: Reference also made to similar provisions in other Acts.

The applicant also referred to Entry No. 12 of Exemption Notification No. 12/2017-Central Tax (Rate) dated 28th June, 2017 which reads as follows:

Reference is also made to amendment in above notification by Notification under TNGST Act, 2017, Notification 15/2022- Central Tax (Rate) dated 30th December, 2022 whereby an Explanation is inserted in Column-3 against Entry 12 which reads as follows:

“Explanation — For the purpose of exemption under this entry this entry shall cover services by way of renting of residential dwelling to a registered person where the registration person is Proprietor of a Proprietorship concern and rents the residential dwelling in his personal capacity for use as his own residence and to such renting is on his own account and not that of the proprietorship concern.”

Applicant submitted that the occupants or the inmates of the residential hostel are either students or working women who are not registered persons under the GST Enactments and hence the activity of applicant is covered by above exemption notification.

Reference also made to certain judicial pronouncements.

The revenue also gave elaborate reply including that the applicant is rendering services by way of renting of immovable property with a business motive for pecuniary benefit and these services are classified under Heading 9963 (Accommodation, food and beverage services) and hence taxable.

The ld. AAR analyzed the submission of both sides and observed that the term “residential dwelling” has not been defined either under CGST Act or under Notification No. 12/2017.

It was further observed that, generally, renting of residential dwelling involves letting out any building or part of the building by a lessor to a person or family (related persons) against a rent for using rooms which form part of a house as kitchen, bedroom, and living room etc., on the whole as residence. The ld. AAR also observed that a common understanding of the term “residential dwelling” is one where people reside treating it as a home and renting of residential dwelling does not include amenities like food, housekeeping, or laundry etc. In comparison, the ld. AAR observed that a hostel is an establishment which provides living accommodation to a specific category of persons such as students and workers, and it is with intention of providing hotel accommodation which is more akin to sociable accommodation rather than what is typically considered as residential accommodation.

With reference to various licences held by the applicant, the ld. AAR observed that the above provisions are not mandatory or applicable to a typical residential building or “residence dwelling for use as residence”, whereas it is mandatory for a hostel building. In view of above, the ld. AAR observed that the hostel building cannot be considered as residential dwelling but a non-residential complex.

The applicant had strongly placed reliance on the decision of the Hon’ble High Court of Karnataka in the case of Taghar Vasudeva Ambrish vs. Appellate Authority for Advance Ruling, dated 7th February, 2022 – 2022-VIL-110-KAR, wherein it is held that hostel is a residential dwelling and since it is used for residence, the assessee is eligible for exemption. However, the ld. AAR observed that Special Leave Petition (Civil) No. 29980/2022 has been filed against this order before the Hon’ble Supreme Court of India, and the case is pending for disposal.

Therefore, ld. AAR ruled that exemption is not eligible to the applicant.

Regarding classification the ld. AAR held that the hostel accommodation service will be covered under Tariff heading 9963 and is taxable @ 18 per cent under Sl. No. 7(vi) of the Notification No. 11/2017, Central Tax (Rate), dated 28th June, 2017, as amended vide Notification No. 20/2019 – Central Tax (Rate) dated 30th September, 2019.

Regarding question 4, the ld. AAR held that it is not covered by section 97(2) and hence, no ruling is given.

58 Blocked ITC
M/s. VBC Associates (AR Order No. 06/2022/AAAR dated 13th<s/sup> October, 2023 (TN)

Appellant had filed application for AR as under:

“Whether the input tax credit on solar power panels procured and installed is a blocked credit under Section 17(5) (c) and (d) of CGST/ TNGST Act, 2017”.

The ld. AAR vide order No.33/AAR/2022 dated31st August, 2022-2022-VIL-257-AAR has ruled as follows:

“The applicant is not eligible for claim of Input Tax Credit, as per Section 17(2) of the CGST /TNGST Act read with Rule 43(a) of CGST /TNGST Rules 2017, on the Goods/Services used in installation of Solar Power Panels, which are considered as Plant and Machinery.”

The appeal is filed by Tax payer appellant with following grounds:

“> that the original authority exceeded the scope of the question and concluded that Appellant is not eligible to claim ITC under Section 17(2) of CGST Act read with rule 43(a) of CGST Rules 2017;

> that the original authority ignored documents placed (tax invoice etc.,) which evidenced that tax was discharged on the component of electricity recovered from tenants and incorrectly holding that electricity is exempt supply under Notification 2/2017-CT(R);

> that rather than delivering a ruling on the question of blocked credit, the original authority exceeded its jurisdiction in delivering a ruling on apportionment of credit in terms of Section 17(2).”

Based on the above, the appellant had prayed that the AAAR may pass an appropriate order.

The ld. AAAR observed that the Appellant is engagedin the business of maintenance of an immovableproperty in Chennai, have procured, erected and commissioned Solar Power Panels for generation of electricity at their additional place of business at R. Kombai Village, Kujilyambarai Taluka, Dindigul District, Tamil Nadu.

The ld. AAAR also observed that the question raised indicates that the intention of appellant is to claim the ITC on the inputs / input services used in the setting up of Solar Power Plant for generation of electricity at their above additional place of business, in relation to their taxable outward supply viz: maintenance of an immovable property at Chennai.

The ld. AAAR also observed that the main ground of appeal is that the AAR had exceeded its jurisdiction in delivering a ruling on apportionment of credit in terms of Section 17(2) of the CGST Act, 2017, rather than delivering a ruling on the question of blocked credit under section 17(5)(c)/(d).

In this respect, the ld. AAAR observed that section 97(2) of GST Act envisages the specific aspects / subjects in respect of which questions seeking Advance Ruling could be raised before the AAR. The ld. AAAR observed that the subject matter is covered by clause (d) of the Sec. 97(2) of the Act i.e.: “admissibility of input tax credit of the tax paid or deemed to have been paid”. The ld. AAAR, therefore, felt that the said provision does not provide for examination about the inadmissibility of Input Tax Credit under a particular sub-section of the Act relating to Input Tax Credit. The ld. AAAR expressed its view that while a particular sub-section of the Act may or may not allow / disallow the ITC in relation to a specific supply, but may be inadmissible for a given input supply under other provisions of the Act. Since in this case, the ITC is not admissible ab initio, on the goods / services used for erection and commissioning of the Solar Power plant in terms of the Sec. 17(2) of the Act, the ld. AAAR held that the AR given by AAR is correct.

In this relation, the ld. AAAR also made reference to section 17(5)(c) and observed that the said section is not applicable to facts of appellant as the claim is for ITC on solar power panel and not on works contract services.

The ld. AAAR also held that Sec. 17(5) (d) is also not attracted as it applies when ITC is not available on goods or services or both (being inputs) received by a taxable person for construction of immovable property, and in the case of appellant, there is no case of construction of immovable property.

The ld. AAAR held that non-application of section 17(5)(c)/(d) does not mean that the ITC is eligible and it may be hit by other provisions, in this case by section 17(2).

With the above discussion, in respect to the ground that the AAR has exceeded its jurisdiction, the ld. AAAR observed as under:

“8.3 To sum up, as the Appellants are not supplying works contract service for construction of an immovable property and since such their activity does not fall within the ambit of the Section 17(5)(c) or (d) of CGST Act, 2017, the question whether ITC is blocked or otherwise, in terms of the said provisions, does not arise at all and the issue raised before the AAR was totally irrelevant. Moreover, the issue raised is extraneous to provide a ruling, as it is not within the scope of Section 97(2)(d) of the Act i.e. admissibility of input tax credit.”

The ld. AAAR also observed the merits of the admissibility vis-à-vis section 17(2).

The ld. AAAR has referred to facts of transactions. The claim of appellant was that he is supplying Electricity generated by his Solar Panel to tenants as part of maintenance. However, the ld. AAAR noted that the appellant is merely receiving money as reimbursement of upfront payment of the bill paid by it to the Electricity Board. The ld. AAAR observed that so far as electricity generated by appellant is concerned, it is supplied to TN Electricity Board which is exempt supply and hence, ITC on Solar panel is not eligible as per Section 17(2). The appeal is dismissed by ld. AAAR.

59 Classification and applicable rate of tax on ‘Raula Gundi’
M/s. Das and Sons (Order No. 03/ODISHA-AAR/2022-23 dated 22nd November, 2022 (Odisha)

The facts are that the applicant’s principal place of business is at Mochinda, Salbani, Dist- Keonjhar, Odisha, and he is engaged in manufacturing of “Raula Gundi” (Chewable Gundi, final product) and supplying the same to various betel shops, grocery shops, tea shops etc. under the cover of GST invoices.

Applicant further explained that in preparation of “Raula Gundi”, he purchases different raw materials like tobacco dust, bhajadhania, madhuri, mala zira, mustard oil, epoil, lime etc.

The applicant also explained the manner of production of above product as under:

“a) Tobacco dust is added with lime and Mustard oil and mixed properly.

b) After being mixed, other ingredients like Dhania, Pan madhuri, Mala zira, Epoil Cinnamon & Clove etc. are added to the mixture to prepare the finished product i.e. Raula Gundi.”

The product is sold in the market in 500 gm, 10 gm and 50 gm packets.

he Applicant has requested AAR to consider the product “Raula Gundi” to be classified under HSN Code 24039920, and the applicable GST Rate at 28 per cent (14 per cent CGST & 14 per cent SGST) along with GST Cess @72 per cent.

In hearing, the department representative submitted that the product “Raula Gundi” is classifiable under Tariff Heading 24039910 considering that the predominant ingredient is Tobacco in the making of the Chewable Gundi (Raula Gundi). It was of the opinion that the tax rate of the product “Raula Gundi” which is Chewing Tobacco is 28 per cent (CGST-14 per cent + SGST-14 per cent) and Cess-160 per cent.

The ld. AAR observed about the nature of product as under:

“4.5 We see that the resultant product of the applicant is a combination of various ingredients/raw materials intended for chewing needs and the predominant ingredient is ‘Tobacco dust’ which constitutes about 50 per cent of the product and other ingredients are added to it as per required proportion to make it consumable a. In the process of manufacturing the product, the raw materials used by the Applicant undergo a set of processes and emerge as ‘Chewable Tobacco Gundi’ which is marketable/ consumable. Therefore, the product prepared and sold by the Applicant is a “Manufactured Tobacco product for chewing”. Once it is held that the product is ‘Manufactured Chewing Tobacco’, the classification of the product is under HSN Code 24039910 which specifies ‘Chewing Tobacco’ under the head “2403-Other manufactured tobacco”. The very purpose of consuming this combination is that it has both stimulant and relaxation effects, but regular consumption of the same leads to addiction. It is believed to produce a sense of euphoria in the body which is akin to that of smoking. On this analogy and on common parlance, we would like to consider the product ‘Raula Gundi’ i.e. chewable gundi as ‘Chewing Tobacco’, the principal/ predominant ingredient of which is Tobacco.”

The ld. AAR also referred to Tariff of Chewing Tobacco in HSN and has reproduced the same in AR. With reference to said Tariff also the ld. AAR considered the product as covered by 24039910 as Chewing Tobacco.

In view of above, the ld. AAR held the product as covered by HSN 24039910 liable to GST at 28 per cent plus 160 per cent cess.

60 Classification of service — Agricultural activity or not
M/s. Raj Mohan Seshamani (Trade Name: Sustainable Green Initiative) (App. Case No. 03/WBAAAR/APPEAL/2022
dated 22nd September, 2022 (WB)

The applicant has entered into agreement with M/s One Tree Planted. As per ‘Project details’ of the said agreement, the aim of the project is “to enhance biodiversity and re-establish ecosystem function to protect the islands and the populace from erosion. While this reforestation activity will offer an immediate economic stimulus, it will also help protect important livelihood functions of local communities while addressing climate adaptation benefits and addressing climate change impact.

In view of the above agreement, the appellant has carried out following activities.

“i) Initially, the land identification is made for the plantation of mangrove seeds & seedlings.

ii) Thereafter, trenches are dug on identified areas fortnight in advance to allow sedimentation for planting of the mangrove seeds, propagules and seedlings.

iii) The seeds are then collected from the mud lands or water bodies nearby. Sometimes, as per requirement of different species of mangroves, survivability is checked in nearby nurseries.

iv) Planting of Seeds & seedlings in the land identified and allotted by State Governments and also by the local people.

v) Local people are engaged for planting activity of these seeds and seedlings into the trenches. Planting activity is done during monsoons and low tide.

vi) Post plantation of seeds and seedlings, local people are engaged to safeguard the fenced areas and mangroves are monitored for 3 to 5 years to ensure survival.

vii) Periodic re-planting is done to make up for plant mortality.”

Based on above, the appellant had posed following questions before ld. AAR.

“What would be SAC Code & GST Rate for the outward supply made by the applicant, in case of mangroves being cultivated and nurtured at coastal communities?”

The appellant was of view that the above-described activity should be covered under Sl. No. 24 of the Notification No. 11/2017- Central Tax (Rate) dated 28th June, 2017 having SAC 9986 and therefore, shall attract Nil rate of tax.

The ld. AAR had observed that the appellant does not provide such services for food, fibre, fuel, raw material or other similar products or agriculture produce but the sole object of the services is to enhance biodiversity and re-establish ecosystem function to protect the islands and the populace from erosion.

Therefore, the ld. AAR disagreed with appellant and ruled as under:

“Supply of services for plantation of mangrove seeds and seedlings in coastal areas shall be covered under Sl. No. 32 of Notification No. 11/2017- Central Tax (Rate) dated 28/06/2017 having SAC 9994 and therefore shall attract tax @ 18 per cent (CGST @ 9 per cent + WBGST @ 9 per cent or IGST @ 18 per cent).”

This appeal is filed against above AR.

The challenge was made on various grounds, including the meaning of ‘agriculture’ as per Hon. Supreme Court, the overall effect of activity on Society and benefit of it to society.

The ld. department representative submitted that the appellant is doing activity only upon receiving a contract and it does not support services for food, fibre, fuel, raw material or other similar products or agricultural produce.

Based on the above propositions, the ld. AAAR observed that the appellant has entered into contract with foreign organizations for plantation of mangrove seeds and seedlings in coastal areas of the country with the sole purpose of enhancing biodiversity and re-establish ecosystem function to protect the islands and the populace from erosion.

The ld. AAAR concurred with department that ‘support services to agriculture, forestry, fishing, animal husbandry’ is applicable only if it is relating to cultivation of plants and rearing of all life forms of animals, except the rearing of horses, for food, fibre, fuel, raw material or other similar products.’

Since in present case, the appellant is engaged in business of cultivation, planting and nurturing of mangrove seeds and seedlings for the primary purpose of environmental protection by way of enhancing biodiversity and re-establishing the ecosystem functions and such services are not related to cultivation of plants for food, fibre, fuel, raw material or other similar products, the ld. AAAR justified the AR and dismissed the appeal.

61 GST liability on charges exceeding ₹7,500 in case of RWA
M/s. Prinsep Association of Apartment Owners (Case No. WBAAR-21 of 2023
dated 31st August, 2023 (WB)

The applicant is an Association of Persons (AOP, for short) registered with Association of Apartment Owners under the West Bengal Act XVI of 1972, whose primary functions are to:

(i) raise funds;

(ii) provide for maintenance, repair and replacement of the common areas and facilities of the property and payments thereof;

(iii) provide for proper maintenance of accounts;

(iv) provide for and do any other thing for the administration of the property in accordance with the Act and bye-laws.

The questions raised before AAR are as under:

“(1) Where monthly contribution charged to a member exceeds INR 7500 per month, whether the applicant can avail the benefit of Notification No. 12/2017 dated 28.06.2017 (Sl. No. 77) read with Notification No. 02/2018 dated 25.01.2018 which provide for exempting from tax, the value of supply up to an amount of R7,500 per month per member? In other words, whether tax would be charged over and above INR 7,500 or the total amount collected from members.

(2) Whether applicant is liable to pay CGST/SGST on amounts which it collects from its members for setting up a corpus fund for future contingencies / major CAPEX. Whether such fund from members will come under the definition of supply and liable to be taxed?

(3) Whether the applicant is liable to pay CGST/SGST on collection of common area electricity charges paid by the members and the same is recovered on the actual electricity charges?”

In respect of exemption up to ₹7500, applicant referred to definition of ‘supply’ given in section 7 as also entry 77 in above notification no.12/2017 read with notification no.2/2018. It was submitted that due to above legal position the supply of services by RWA (unincorporated body or a registered non-profit entity) to its own members by way of reimbursement of charges or share of contribution up to an amount of ₹7,500 per month per member is exempt from payment of tax and only amount in excess of ₹7500 is taxable.

The judgement of Hon. Madras High Court in case of Greenwood Owners Association vs Union of India [2021] 128 taxmann.com 182 (Madras) — 2021-VIL-523-MAD cited, wherein the Hon’ble Court has held that exemption up to ₹7,500 is available and only amount in excess of ₹7,500 is liable to GST.

Regarding contribution to corpus fund the applicant referred to definition of ‘goods’ and ‘service’ and sought to argue that where members of Association contribute such money as Corpus Fund (other than monthly/Quarterly maintenance) for future contingencies or development of Society, the same is transaction in money and not liable to GST.

In relation to common electricity charges, it was submitted that the same is recovered on actual basis and hence the same should be kept out of purview of GST. Reliance placed on the advance ruling given by the Telengana Authority for Advance Ruling in the case of Jayabheri Orange County Owners Association – 2022-VIL-158-AAR.

The revenue opposed all above submissions.

The ld. AAR referred to clarification given by the Tax Research Unit, Department of Revenue, Ministry of Finance vide Circular No.109/28/2019-GST dated 22.07.2019 [West Bengal Trade Circular No. 30/2019 dated 31.07.2019] in which the above issue, whether tax is payable only on the amount exceeding ₹7,500 or on the entire amount of maintenance charges, is clarified as under:

“The exemption from GST on maintenance charges charged by a RWA from residents is available only if such charges do not exceed ₹7,500 per month per member. In case the charges exceed ₹7,500 per month per member, the entire amount is taxable. For example, if the maintenance charges are R9,000 per month per member, GST @18 per cent shall be payable on the entire amount of ₹. 9,000 and not on [₹9,000 – ₹7,500] = ₹1,500.”

The ld. AAR also made reference to comments of the Fitment Committee from the Agenda for the 25th GST Council Meeting, where in the proposal is fixed for exemption up to ₹7500 on the basis that the person paying more than above limit can afford payment of GST.

Regarding the judgment of Madras High Court in Greenwood Owners Association, the ld. AAR noted that the matter is before the Division bench in an appeal petition filed by the Department in case of Union of India vs. M/s TVH Lumbini Square Owners Association.

Based on the above findings, the ld. AAR held that the tax is payable on the whole amount.

Regarding the tax on corpus fund (also referred to as sinking fund), the ld. AAR observed that sinking fund is created in order to meet future contingencies, e.g., to meet the expenses for structural repairing, reconstruction work, etc. It is observed that the members contribute to the sinking fund with an agreed condition that the RWA will provide some specific services in future, as and when required out of the said fund.

Accordingly, the ld. AAR held that the amount collected by the applicant from its members towards sinking fund is only meant for meeting expenses for future supply of services and, therefore, they cannot qualify as a deposit. Accordingly, such a collection was held taxable.

Regarding collection of electricity charges, the ld. AAR referred to Circular No. 206/18/2023-GST dated 31st October, 2023 in which it has been clarified that where the electricity is supplied by the Real Estate Owners, Resident Welfare Associations (RWAs), Real Estate Developers etc., as a pure agent, it will not form part of value of their supply. Further, when they charge for electricity on an actual basis, that is, they charge the same amount for electricity from their lessees or occupants as charged by the State Electricity Boards or DISCOMs from them, they will be deemed to be acting as a pure agent for this supply.

The ld. AAR observed that in the present case, the applicant collects the electricity charges consumed for the common area from its members on a pro-rata basis and the amount collected on account of consumption of electricity has not been shown separately in the said invoice. Accordingly, the ld. AAR held that electricity is supplied bundled with supply of goods and services sourced from a third person for the common use of its members, and it forms a part of composite supply where the principal supply is the supply of common area maintenance services. Accordingly, the ld. AAR held that such collection is liable to GST.

Accordingly, all three questions ruled against the applicant.

Financial Reporting Dossier

A. KEY GLOBAL UPDATES

1. IASB: PROPOSAL TO IMPROVE REPORTING OF ACQUISITIONS

On 14th March 2024, the international accounting Standards Board published Exposure Draft Business Combinations — Disclosures, Goodwill and Impairment aimed at enhancing the information companies provide to investors about acquisitions.

The exposure draft published responds to stakeholder feedback that reporting on acquisitions poses difficulties for both investors and companies:

  •  Investors lack sufficient and timely information about acquisitions and post-acquisition performance.
  •  Companies seek to provide useful information to investors but see risks and costs in providing some information, particularly commercially sensitive information that could be used by competitors.

The stakeholders have also expressed concern about the effectiveness and complexity of the impairment test for operations which have been allocated goodwill.

The Exposure Draft proposes amendments to:

  •  IFRS 3 Business Combinations — in particular, to improve the information companies disclose about the performance of business combinations; and
  •  IAS 36 Impairment of Assets — in particular, amendments to the impairment test of cash-generating units containing goodwill.

The proposed amendments would require companies to report the objectives and related performance targets of their most important acquisitions, including whether these are met in subsequent years. Companies would also be required to provide information about the expected synergies for all material acquisitions. However, companies would not be required to disclose information that could compromise their acquisition objectives. The comment period for the Exposure Draft Business Combinations — Disclosures, Goodwill and Impairment is open until 15th July, 2024.

2. IASB: IFRS 18- Presentation & Disclosure in Financial Statements

On 5th February, 2024, the International Accounting Standards Board (IASB), provided an overview on IFRS 18 Presentation & Disclosures in Financial Statements, the forthcoming IFRS Accounting Standard, that will set out the overall requirements for presentation and disclosures in the financial statements. This new Standard responds to investors’ demand for better information about companies’ financial performance. It will affect all companies and all investors.

IFRS 18 arises from the IASB’s work on the Primary Financial Statements project. This will introduce three sets of new requirements:

  • •The first set of requirements create structure in the statement of profit or loss by requiring companies to present two new defined subtotals. This will provide a consistent and comprehensive starting point for investors’ analysis and help investors compare performance between companies. In particular, using the subtotal for operating profit, which will now be defined and therefore more comparable.
  •  The second set of requirements is that companies will be required to disclose information about some non-GAAP measures in a single note to the financial statements. These are called management-defined performance measures. This will help companies to complement information provided using the new structure for the statement of profit or loss, with company specific information about performance and provide investors with greater transparency about those measures. Since the same will be disclosed in the financial statements they will be subject to audit.
  • The third set of requirements enhances guidance on grouping of information, also known as aggregation and disaggregation, in the financial statements. This will help ensure that investors receive material information, making financial statements more understandable and more useful. IFRS 18 will also provide guidance for a company to determine whether information should be presented in the primary financial statements or disclosed in the notes.

IFRS 18 is expected to be issued in April 2024. The effective date for IFRS 18 will be 1st January, 2027. IFRS 18 will replace IAS 1 Presentation of Financial Statements.

3. FASB: CONCEPTUAL FRAMEWORK OF MEASUREMENT

On 21st December, 2023, the Financial Accounting Standards Board (FASB) proposed a new chapter of its Conceptual Framework related to the measurement of items recognised in financial statements. The proposed chapter provides concepts for the Board to consider when choosing a measurement system for an asset or liability recognised in general purpose financial statements. It describes (a) Two relevant and representationally faithful measurement systems: the entry price systems and the exit price systems and (b) considerations when selecting a measurement system.

4. IAASB: AUDITOR’S RESPONSIBILITIES RELATED TO FRAUD

On 6th February, 2024, the International Auditing & Assurance Standards Board proposed significant strengthening of its standard on auditor’s responsibilities relating to fraud.

The proposed revisions to International Standards on Auditing 240 (Revised)- The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements, include:

  •  Clarified auditor responsibilities relating to fraud in an audit.
  •  Emphasised professional skepticism to ensure auditors remain alert to possible fraud and exercise professional skepticism throughout an audit.
  •  Strengthened identification and assessment of risks of material misstatement due to fraud.
  •  Clarified response to fraud or suspected fraud identified during the audit.
  •  Increased ongoing communication with management and those charged with governance about fraud.
  •  Increased transparency about auditors’ responsibilities and fraud-related procedures in the auditor’s report.
  •  Enhanced audit documentation requirements about fraud-related procedures.

The exposure draft is open for comments till 5th June, 2024.

5. IAASB: AMENDMENT TO ISQMS, ISAS AND ISRE 2400

On 8th January, 2024, the International Auditing and Assurance Standards Board launched a consultation process on proposed narrow scope amendments to achieve greater convergence with International Ethic’s Standards Board for Accountants’ (IESBA) International Code of Ethics for Professional Accountants (including independence Standards).

These proposed revisions have two key objectives (a) aligning definitions and requirements in IAASB Standards with new definitions for publicly traded and public interest entities in the IESBA Code, (b) amendments would extend the applicability of existing differential requirements for listed entities to meet heightened stakeholder expectations regarding audits of public interest entities (PIE).

Key proposed revisions include extending thescope of the entities included under the International Standards on Quality Management and theInternational Standards on Auditing such that they will be subject to:

  •  Engagement quality reviews;
  •  Providing transparency in the auditor’s report on specific aspects of the audit, including auditor independence, communicating key audit matters, and the engagement partner’s name; and
  •  Communicating with those charged with governance to help them fulfill their responsibility overseeing the financial reporting process, (e.g., communicating about quality management and auditor independence).

6. FRC: UPDATE ON ETHICAL STANDARD FOR AUDITORS

On 15th January, 2024, the FRC updated the Ethical Standard for Auditors. The update does three main things:

  •  First, the FRC has simplified the existing ethical standard and provided additional clarity in a limited number of areas to respond to helpful feedback from auditors.
  •  Second, the new standard considers recent revisions made to the international IESBA Code of Ethics. This aligns the UK with international standards and helps to ensure high standards of independence and ethical behaviour are applied consistently by UK audit firms and their networks.
  •  Third, the FRC has added a new targeted restriction on fees from entities related by a single controlling party. This is in response to issues identified through FRC audit inspection and enforcement cases.

The high-quality ethical standards for auditors enhance trust in the quality of financial information that drives investment in the UK. This is balanced with ensuring that any requirements are targeted and proportionate.

7. FRC: REVISION OF UK CORPORATE GOVERNANCE CODE

On 22nd January, 2024, the FRC announced important revisions to the UK Corporate Governance Code (the Code) that enhance transparency and accountability of UK plc and help support the growth and competitiveness of the UK and its attractiveness as a place to invest.

In a significant move aimed at promoting smarter regulation, the FRC has kept changes to the Code to the minimum that are necessary. The FRC is conscious that the expectations for effective governance must be targeted and proportionate.

Given stakeholder support for the importance of good corporate governance, the FRC has prioritised revisions to the Code in one significant area- Internal Controls. As signalled on 7th November, the FRC has dropped its earlier proposals for revisions to the Code related to the role of audit committees on environmental, social and governance issues; expanding diversity and inclusion expectations; over-boarding provisions, and expectations on Committee Chairs’ engagement with shareholders.

In relation to Internal Controls, the existing expectations in the Code will remain. Namely that the Board should monitor the company’s risk management and internal control framework and, at least annually, carry out a review of its effectiveness. The existing Code also includes the provision that monitoring and review should cover all material controls, including financial, operational, reporting and compliance controls. The main substantive changes the FRC is now making is asking Boards to explain through a declaration in their Annual Reports how they have done this and their conclusions.

A small number of other more minor changes have been made to the Code that aim to better streamline the expectations or clarify the language. This relates to the Code provisions on malus and clawback and audit committee minimum standards.

8. FRC: THEMATIC REVIEW OF REPORTING BY THE UK’S LARGEST PRIVATE COMPANIES

On 31st January, 2024, the FRC published the review of reporting by the UK’s largest private companies. This review looked at the annual report and accounts of 20 UK companies.

The key findings that company and their auditors should consider for future annual reports are:

  •  The best strategic report disclosures focused on the matters that are key for an understanding of the company. These were explained in a clear, concise and understandable way that was consistent with the disclosures in the financial statements. Good quality reporting does not necessarily require greater volume.
  •  Better examples of judgement and estimates disclosures included detail of the specific judgement involved and clearly explained the rationale for the conclusion. The significance of estimation uncertainty was much more apparent when sensitivities were quantified.
  •  Accounting policies for complex transactions and balances were often untailored, providing boilerplate wording. Entity-specific policies are particularly critical for revenue, where the better examples explain the nature of each significant revenue stream, the timing of recognition and how the value of revenue was determined.

9. FRC: ANNUAL REVIEW OF COMPETITION IN THE AUDIT MARKET

On 14th December, 2023, the FRC published an updated overview of competition in the UK’s audit market for public interest entities (PIE).

While the report shows a small increase in market share for challenger audit firms, the audit market remains highly concentrated. The Big Four accounting firms continue to dominate, earning 98 per cent of FTSE 350 audit fees in 2022, resulting in limited choices for businesses and ongoing concerns about resilience. The audit fees paid by FTSE 100 increased by 15 per cent in 2022 and FTSE 350 by 13 per cent.

Over the past year, and with a focus on addressing concerns in the quality of PIE audits among smaller firms, the FRC has pursued a range of initiatives targeting different aspects of market competition. These include publishing a standard for audit committees in relation to their role on the external audit, launching the FRC’s Scalebox to assist smaller firms’ entry in the PIE audit market, and exploring barriers to growth for smaller audit firms.

10. IESBA: NEW ETHICAL BENCHMARK FOR SUSTAINABILITY REPORTING AND ASSURANCE

On 29th January, 2024, the International Ethics Standards Board for Accountants (IESBA) announced the launch of two Exposure Drafts (EDs):

  • International Ethics Standard for Sustainability Assurance (including International Independence Standards) (IESSA) and ethics standards for sustainability reporting proposes a clear framework of expected behaviors and ethics provisions for use by all sustainability assurance practitioners regardless of their professional backgrounds, as well as professional accountants involved in sustainability reporting. The goal of these standards is to mitigate greenwashing and elevate the quality of sustainability information, thereby fostering greater public and institutional trust in sustainability reporting and assurance.
  •  The Exposure Draft on Using the Work of an External Expert proposes an ethical framework to guide professional accountants or sustainability assurance practitioners, as applicable, in evaluating whether an external expert has the necessary competence, capabilities and objectivity in order to use that expert’s work for the intended purposes. The proposals also include provisions to aid in applying the Code’s conceptual framework when using the work of an external expert.

These proposed ethics (including independence) standards are especially relevant in a context where sustainability information is increasingly important for capital markets, consumers, corporations and their employees, governments and society at large, and when new providers outside of the accounting profession play a prominent role in sustainability assurance.

B. GLOBAL REGULATORS- ENFORCEMENT ACTIONS AND INSPECTION REPORTS

I. THE FINANCIAL REPORTING COUNCIL, UK

a) SANCTIONS AGAINST KPMG LLP AND AUDIT PARTNER (4th March, 2024)

On 4th March, 2024, the FRC imposed sanctions against KPMG & Adrian Wilcox (the audit engagement partner) in respect of their statutory audit of M&C Saatchi plc for the financial year ended 31st December, 2018.

The FRC investigation was launched following M&C Saatchi’s discovery of accounting errors, announced in 2019, which ultimately led to a restatement of the FY 2018 profit in the FY 2019 annual accounts. The investigation looked at a number of elements of the audit, including revenue recognition, journal entries, and the year-end consolidation process.

KPMG and Mr. Wilcox have admitted breaches of relevant requirements in the following areas:

  •  A failure to audit with sufficient professional skepticisms the release of WIP credits (a type of client payment on account), which increased revenue by £1,200,000. These releases, processed as UK sub-consolidation adjustments, were subsequently reversed in the FY2019 annual accounts.
  •  Failures to properly audit journal entries across a number of subsidiary companies, including a lack of any journals-testing at all for two subsidiaries, and a failure to identify potentially high-risk journals for testing across a number of entities.
  •  A failure to document the auditors’ reasoning, or complete their inquiries with management, in relation to the retention of rebates under a contract which, on its face, appeared to require such rebates to be passed back to a client. The level of professional skepticism was insufficient.

The sanctions were a financial sanction of £2,250,000 on KPMG and financial sanction of £75,000 on Mr. Wilcox.

II. THE PUBLIC COMPANY ACCOUNTING OVERSIGHT BOARD (PCAOB)

a) Imposing $2 million in fines for pervasive Quality Control Violations Involving SPAC Audits

On 21st February, 2024, PCAOB announced a settled disciplinary order sanctioning WithumSmith+Brown, PC (“the firm”) for violations of PCAOB rules and quality control standards.

From January 2020 through December 2021, WithumSmith+Brown, PC accepted a substantial number of special purpose acquisition company (SPAC) audit clients, resulting in a dramatic increase in its issuer audit practice and putting a significant strain on its quality control system.

In 2021, for example, the firm’s issuer audit practice increased almost 500 per cent, from approximately 80 audit reports to almost 450. Yet the number of partners assigned to these audits increased by only 50 per cent (from 15 to 23). The firm’s quality control system failed to provide reasonable assurance that its personnel complied with applicable professional standards and regulatory requirements, including those related to appropriately staffing issuer audits.

The PCAOB found that the firm’s system of quality control failed to provide reasonable assurance that the firm would:

  •  Undertake only those issuer engagements that the firm could reasonably expect to be completed with professional competence and appropriately consider the risks associated with providing professional services in the particular circumstances;
  •  Ensure that partner workloads were manageable to allow sufficient time for engagement partners to discharge their responsibilities with professional competence and due care;
  •  Ensure that personnel were consulting with individuals within or outside the firm, when appropriate, when dealing with complex issues;
  •  Perform sufficient procedures to test estimates, including sufficiently evaluating the reasonableness of certain significant assumptions underlying the estimate;
  •  Make all required communications to issuer audit committees;
  •  Perform sufficient procedures to determine whether certain matters were critical audit matters;
  •  Perform sufficient procedures to test journal entries.

The firm settled with the PCAOB, without admitting or denying the findings, and consented to a disciplinary order imposing a $2 million civil money penalty on the firm.

On this, PCAOB Chair Erica Y. Williams said “Growth must not come at the expense of quality. The PCAOB will hold firms accountable for upholding quality control systems that protect investors.”

b) Sanctions audit firms for violating PCAOB rules and standards related to audit committee communications

On 20th February, 2024, PCAOB announced settled disciplinary orders sanctioning four audit firms for violating PCAOB rules and standards related to communications that firms are required to make to audit committees.

These firms failed to make certain required communications with audit committees, as required by Auditing Standards (AS) 301, Communications with Audit Committees. These firms includes (a) Baker Tilly US, LLP – $80,000; (b) Grant Thornton Bharat LLP (India) – $40,000; (c) Mazars USA LLP – $60,000; and (d) SW Audit (Australia) – $60,000.

Three of these firms also violated additional PCAOB rules and standards:

  •  Baker Tilly US, LLP failed to document pre-approval of statutory audit services, in violation of AS 1215, Audit Documentation.
  •  Grant Thornton Bharat LLP failed to ensure that an issuer client’s audit committee received a copy of management’s representation letter, in violation of AS 1301 and AS 2805, Management Representations.
  •  SW Audit failed to satisfy independence requirements in violation of PCAOB Rule 3520, Auditor Independence, and PCAOB Rule 3524, Audit Committee Pre-Approval of Certain Tax Services, by failing to obtain audit committee pre-approval of tax compliance and other services and by engaging an issuer audit client pursuant to an indemnification agreement. SW Audit also violated PCAOB quality control standards in failing to maintain effective policies and procedures with respect to independence and audit documentation.

c) Sanctions Audit firm & Partner for Violating PCAOB Audit & Quality Control Standards

On 24th January, 2024, the PCAOB announced a settled disciplinary order sanctioning Jack Shama (the “firm”) and Jack Shama, CPA (“Shama”), the sole proprietor of the firm, for numerous and repeated violations of various PCAOB rules and standards in connection with nine audits.

The PCAOB found that, among other violations, Shama and his firm

  •  failed to exercise due professional care and professional skepticism during the nine audits,
  •  failed to obtain sufficient appropriate audit evidence to support the firm’s opinions and failed to properly assemble and retain audit documentation.
  •  Violated PCAOB standards by failing to have an engagement quality review performed for any of the nine audits.

The PCAOB also found that the firm violated PCAOB quality control standards because it failed to design and implement adequate policies and procedures to provide reasonable assurance that (1) the work performed by engagement personnel would meet applicable professional standards and regulatory requirements, (2) the work was assigned to personnel with the required technical training and proficiency, and (3) the firm would only undertake engagements that it could reasonably expect to complete with professional competence.

The PCAOB permanently revoked the firm registration and permanently barred Shama from being an associated person of a registered public accounting firm.

d) Sanctions Haynie & Company and Four of Its Current and Former Partners for Audit and Quality Control Violations

PCAOB announced three settled disciplinary orders sanctioning Haynie & Company (“Haynie”); Haynie partner Tyson Holman, CPA (“Holman”) and former Haynie partner Anna Hrabova, CPA (“Hrabova”); and Haynie partner Steven Avis, CPA (“Avis”) and former Haynie partner Richard Fleischman, CPA (“Fleischman”) (collectively, “Respondents”).

PCAOB’s findings include the following:

  •  Holman and Avis — the engagement partners on the George Risk and Investview audits, respectively — failed to exercise due professional care and professional skepticism, failed to obtain sufficient appropriate audit evidence to support Haynie’s opinions, and failed to evaluate whether the financial statements were presented in conformity with the applicable financial reporting framework. With respect to George Risk’s investments, Holman was aware of deficiencies in his testing approach identified during the PCAOB’s inspection of Haynie’s audit of George Risk’s 2017 financial statements. Despite this awareness, he followed a similar deficient testing approach during the 2019 George Risk audit.
  •  Hrabova and Fleischman, while serving as engagement quality review partners on the 2019 George Risk and Investview audits, respectively, failed to exercise due professional care and professional skepticism. Therefore, they lacked an appropriate basis to provide their concurring approvals of issuance of Haynie’s audit reports.

The PCAOB further determined that Haynie violated PCAOB QC standards because it failed to (1) effectively implement policies and procedures to provide reasonable assurance that the work performed by engagement personnel met applicable professional standards and regulatory requirements; and (2) establish policies and procedures to provide reasonable assurance that Haynie’s quality control policies and procedures were suitably designed and were being effectively applied, and that its system of quality control was effective.

e) Deficiencies identified in Inspection Reports:

1) Grant Thornton (Dublin, Ireland) (11th December, 2023)

Deficiency: In an inspection carried out by PCAOB it has identified (a) deficiency in financial statements audit related to revenue. The firm did not performed procedures to test, or test any controls over, the accuracy of certain data used in its substantive testing of the issuer’s revenue disclosures, (b) the firm did not include all relevant work papers in the final set of audit documentation it was required to assemble, Non-compliant with AS 1215 Audit Documentation, (c) the firm did not make certain required communications to the issuer’s audit committee related to name, location and planned responsibilities of other accounting firms that performed audit procedures in the audit, uncorrected misstatements, other material written communications with management, non-compliant with AS 1301 communications with Audit Committees, (d) did not provide the copy of Management representation letter to the issuer’s audit committee.

2) Grassi & Co., CPAs, P.C. (21st December, 2023)

Deficiency: In an inspection report carried out by PCAOB it has identified (a) deficiency in the financial statement audit related to Revenue & Related Accounts and a Business Combination, (b) the firm when testing journal entries for evidence of possible material misstatement due to fraud, did not perform procedures to determine whether journal entry population from which it made its selections was complete, non-compliant with AS 1105 Audit evidence, (c) the firm did not assess the risks of Material Misstatement related to certain significant accounts and disclosures, non-compliant with AS 2110 Identifying and Assessing Risks of Material Misstatements.

3) KCCW Accountancy Corp., California (11th December, 2023)

Deficiency: In an inspection report carried out by PCAOB it has identified (a) deficiency in the financial statement audit related to Revenue, Financial Statement Presentation and Disclosures, and Related Party Transactions, (b) the firm did not communicate to the issuer’s audit committee certain critical accounting estimates, significant risks identified through its risk assessment procedures, certain critical accounting policies and practices, (c) did not include certain matters that were communicated or required to be communicated, to the issuer’s audit committee while performing procedures to determine whether or not matters were critical audit matters.

III. THE SECURITIES EXCHANGE COMMISSION (SEC)

a) Violation of Foreign Corrupt Practices Act (FCPA) (10th January, 2024)

The SEC announced charges against global software company SAP SE for violations of the Foreign Corrupt Practices Act (FCPA) arising out of bribery schemes in South Africa, Malawi, Kenya, Tanzania, Ghana, Indonesia, and Azerbaijan.

SAP violated the FCPA by employing third-party intermediaries and consultants from at least December 2014 through January 2022 to pay bribes to government officials to obtain business with public sector customers in the seven countries mentioned above. According to the SEC’s order, SAP inaccurately recorded the bribes as legitimate business expenses in its books and records, despite the fact that certain of the third-party intermediaries could not show that they provided the services for which they had been contracted. The SEC’s order finds that SAP failed to implement sufficient internal accounting controls over the third parties and lacked sufficient entity-level controls over its wholly owned subsidiaries.

The company agreed to monetary sanctions of nearly $100 million in disgorgement and prejudgment interest to settle the SEC’s charges.

b) Fraud in Block Trading Business (12th January, 2024)

The SEC charged investment banking giant Morgan Stanley & Co. LLC and the former head of its equity syndicate desk, Pawan Passi, with a multi-year fraud involving the disclosure of confidential information about the sale of large quantities of stock known as “block trades.” The SEC also charged Morgan Stanley with failing to enforce its policies concerning the misuse of material non-public information related to block trades.

A block trade generally involves the sale of a large quantity of shares of an issuer’s stock, privately arranged and executed outside of the public markets. According to the SEC’s orders, from at least June 2018 through August 2021, Passi and a subordinate on Morgan Stanley’s equity syndicate desk disclosed non-public, potentially market-moving information concerning impending block trades to select buy-side investors despite the sellers’ confidentiality requests and Morgan Stanley’s own policies regarding the treatment of confidential information. The SEC’s orders find that Morgan Stanley and Passi disclosed the block trade information with the understanding that those buy-side investors would use the information to “pre-position” by taking a significant short position in the stock that was the subject of the upcoming block trade. According to the SEC orders, if Morgan Stanley eventually purchased the block trade, the buy-side investors would then request and receive allocations from the block trade from Morgan Stanley to cover their short positions. This pre-positioning reduced Morgan Stanley’s risk in purchasing block trades.

SEC censures the firm, and orders it to pay approximately $138 million in disgorgement, approximately $28 million in prejudgment interest, and an $83 million civil penalty. The SEC’s order concerning Passi finds that he willfully violated Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, orders him to pay a $250,000 civil penalty, and imposes associational, penny stock, and supervisory bars.

c) Violation of Whistleblower Protection Rule (16th January, 2024)

The SEC announced settled charges against J.P. Morgan Securities LLC (JPMS) for impeding hundreds of advisory clients and brokerage customers from reporting potential securities law violations to the SEC. JPMS agreed to pay an $18 million civil penalty to settle the charges.

According to the SEC’s order, from March 2020 through July 2023, JPMS regularly asked retail clients to sign confidential release agreements if they had been issued a credit or settlement from the firm of more than $1,000. The agreements required the clients to keep confidential the settlement, all underlying facts relating to the settlement, and all information relating to the account at issue. In addition, even though the agreements permitted clients to respond to SEC inquiries, they did not permit clients to voluntarily contact the SEC.

The SEC’s order finds that JPMS violated Rule 21F-17(a) under the Securities Exchange Act of 1934, a whistleblower protection rule that prohibits taking any action to impede an individual from communicating directly with the SEC staff about possible securities law violations.

d) Fraud: ‘HyperFund’, Crypto Asset Pyramid Scheme (29th January, 2024)

The SEC charged Xue Lee (aka Sam Lee) and Brenda Chunga (aka Bitcoin Beautee) for their involvement in a fraudulent crypto asset pyramid scheme known as HyperFund that raised more than $1.7 billion from investors worldwide.

According to the SEC’s complaint, from June 2020 through early 2022, Lee and Chunga promoted HyperFund “membership” packages, which they claimed guaranteed investors high returns, including from HyperFund’s supposed crypto asset mining operations and associations with a Fortune 500 company. As the complaint alleges, however, Lee and Chunga knew or were reckless in not knowing that HyperFund was a pyramid scheme and had no real source of revenue other than funds received from investors. In 2022, the HyperFund scheme collapsed and investors were no longer able to make withdrawals.

The SEC’s Office of Investor Education and Advocacy directs investors to resources on detecting and avoiding pyramid schemes.

e) Fraud: Misappropriation with Revenue (6th February, 2024)

The SEC announced settled accounting fraud charges against Cloopen Group Holding Limited, a China-based provider of cloud communications products and services whose American depositary shares formerly traded on the New York Stock Exchange.

Two senior managers who led Cloopen’s strategic customer contracts and key accounts department orchestrated a fraudulent scheme from May 2021 through February 2022 to prematurely recognise revenue on service contracts. The order finds that, facing pressure to meet strict quarterly sales targets, the two senior managers directed their employees to improperly recognise revenue on numerous contracts for which Cloopen had either not completed work or, in some instances, not even started work. As a result of this misconduct and other accounting errors, Cloopen overstated its unaudited financial results for the second and third quarters of 2021 and its announced revenue guidance for the fourth quarter of 2021.

Within a few days of starting an internalinvestigation, Cloopen self-reported the accounting violations to the SEC.

f) Failure to Disclose Influencer’s Role in connection with ETF Launch (16th February, 2024)

The SEC announced that registered investment adviser Van Eck Associates Corporation has agreed to pay a $1.75 million civil penalty to settle charges that it failed to disclose a social media influencer’s role in the launch of its new exchange-traded fund (ETF).

According to the SEC’s order, in March 2021, Van Eck Associates launched the VanEck Social Sentiment ETF to track an index based on “positive insights” from social media and other data. The provider of that index informed Van Eck Associates that it planned to retain a well-known and controversial social media influencer to promote the index in connection with the launch of the ETF. To incentivise the influencer’s marketing and promotion efforts, the proposed licensing fee structure included a sliding scale linked to the size of the fund so, as the fund grew, the index provider would receive a greater percentage of the management fee the fund paid to Van Eck Associates. However, as the SEC’s order finds, Van Eck Associates failed to disclose the influencer’s planned involvement and the sliding scale fee structure to the ETF’s board in connection with its approval of the fund launch and of the management fee.

From Published Accounts

Compilers’ Note:

Many companies publish information on the steps taken to alleviate the possible climate impact of their business. Details of all such steps are normally stated in the Sustainability Reporting under various frameworks. The effect of such possible climate impact on the financial results and financial statements is also an important aspect of financial reporting. Given below are instances where such disclosure is given in the Notes to the Financial Statements which are subjected to audit by the Statutory Auditors.

Hindustan Zinc Limited (year ended 31st March, 2023)
From Notes to Standalone Financial Statements
Significant management estimates and judgements

a) Restoration, rehabilitation and environmental costs

Provision is made for costs associated with restoration and rehabilitation of mining sites as soon as the obligation to incur such costs arises. Such restoration and closure costs are typical of extractive industries and they are normally incurred at the end of the life of the minefields. The costs are estimated on an annual basis on the basis of mine closure plans and the estimated discounted costs of dismantling and removing these facilities and the costs of restoration are capitalised when incurred reflecting the Company’s obligations at that time. The Company has not considered salvage value for the estimates of provision for decommissioning calculated as at 31st March, 2023.

The provision for decommissioning liabilities is based on the current estimate of the costs for removing and decommissioning producing facilities, the forecast timing of settlement of decommissioning liabilities and the appropriate discount rate.

b) Climate change

The Company aims to achieve net carbon neutrality by 2050 or sooner & committed to reduce its GHG emissions (Scope- 1 & 2) by 14 per cent by 2026 & Scope 3 by 20 per cent by 2026 from 2017 baseline, five times water positive by 2025 from the current 2.41 times, etc. as part of their climate mitigation and adaptation efforts and sustainability strategy. The Company conducted a climate risk assessment and outlined its risks and opportunities in the Task Force on Climate-Related Financial Disclosures (“TCFD”) report. Climate change may have various impacts on the Company in the medium to long term. These impacts include the risks and opportunities related to the demand of products, impact due to transition to a low-carbon economy, disruption to the supply chain, risk of physical harm to the assets due to extreme weather conditions, regulatory changes, etc. The accounting related measurement and disclosure items that are most impacted by our commitments, and climate change risk more generally, relate to those areas of the financial statements that are prepared under the historical cost convention and are subject to estimation uncertainties in the medium to long term.

The potential effects of climate change may be on assets and liabilities that are measured based on an estimate of future cash flows. The main ways in which potential climate change impacts have been considered in the preparation of the financial statements, pertain to (a) inclusion of capex in cash flow projections, (b) recoverable amounts of existing assets, (c) review of estimates of useful lives of property, plant and equipment, (d) assets and liabilities carried at fair value, etc.

The Company’s strategy consists of mitigation and adaptation measures and is committed to reduce its carbon footprint by limiting its exposure to coal based projects and reducing its GHG emissions through high impact initiatives such as investment in Renewable Energy (450 MW Power delivery agreement (‘PDA’) signed on a group captive basis, fuel switch, electrification of vehicles and mining fleet and energy efficiency opportunities. However, renewable sources have limitations in supplying round the clock power, so existing power plants would support transition and fleet replacement is part of normal life cycle renewal. We have also taken certain measures towards water management such as commissioning of zero liquid discharge plants, sewage treatment plants, dry tailing plants, rainwater harvesting, thus reducing freshwater consumption. These initiatives are aligned with the Company’s ESG strategy and no material changes were identified to the financial statements as a result.

As the Company’s assessment of the potential impacts of climate change and the transition to a low-carbon economy continues to mature, any future changes in the Company’s climate change strategy, changes in environmental laws and regulations and global decarbonisation measures may impact the Company’s significant judgments and key estimates and result in changes to financial statements and carrying values of certain assets and liabilities in future reporting periods. However, as of the balance sheet date, the Company believes that there is no material impact on carrying values of its assets or liabilities.

Vedanta Ltd (year ended 31st March, 2023)
From Significant management estimates and judgements

Climate Change

The Company aims to achieve net carbon neutrality by 2050, has committed reduction in emission by 25 per cent by 2030 from 2021 baseline, net water positivity by 2030 as part of its climate risk assessment and has outlined its climate risk assessment and opportunities in the ESG strategy. Climate change may have various impacts on the Company in the medium to long term. These impacts include the risks and opportunities related to the demand of products and services, impact due to transition to a low-carbon economy, disruption to the supply chain, risk of physical harm to the assets due to extreme weather conditions, regulatory changes etc. The accounting related measurement and disclosure items that are most impacted by our commitments, and climate change risk more generally, relate to those areas of the financial statements that are prepared under the historical cost convention and are subject to estimation uncertainties in the medium to long term. The potential effects of climate change may be on assets and liabilities that are measured based on an estimate of future cash flows. The main ways in which potential climate change impacts have been considered in the preparation of the financial statements, pertain to (a) inclusion of capex in cash flow projections, (b) review of estimates of useful lives of property, plant and equipment, (c) recoverable amounts of existing assets, (d) assets and liabilities carried at fair value. The Company’s strategy consists of mitigation and adaptation measures. The Company is committed to reduce its carbon footprint by limiting its exposure to coal-based projects and reducing its GHG emissions through high impact initiatives such as investment in Renewable Energy (1,826 MW on a group captive basis), fuel switch, electrification of vehicles and mining fleet and energy efficiency opportunities. Renewable sources have limitations in supplying round the clock power, so existing power plants would support transition and fleet replacement is part of normal life cycle renewal. The Company has also taken certain measures towards water management such as commissioning of sewage treatment plants, rainwater harvesting, and reducing freshwater consumption. These initiatives are aligned with the group’s ESG strategy and no material changes were identified to the financial statements as a result. As the Company’s assessment of the potential impacts of climate change and the transition to a low-carbon
economy continues to mature, any future changes in the Company’s climate change strategy, changes in environmental laws and regulations and global decarbonisation measures may impact the Group’s significant judgments and key estimates and result in changes to financial statements and carrying values of certain assets and liabilities in future reporting periods. However, as of the balance sheet date, the Group believes that there is no material impact on carrying values of its assets or liabilities.

From notes to financial statements

The Ministry of Environment, Forest and Climate Change (“MOEF&CC”) has revised emission norms for coal-based power plants in India. Accordingly, both captive and independent coal-based power plants in India are required to comply with these revised norms for reduction of sulphur oxide (SO2) emissions for which the current plant infrastructure is to be modified or new equipment have to be installed. The Company is required to comply with the norms by 31st December, 2026 via MoEF&CC’s notification dated 5th September, 2022.

Ind AS/IGAAP — Interpretation and Practical Application

Activities that represent efforts by a service provider in fulfilling the performance obligations, and which trigger revenue recognition, sometimes can be lumpy and unpredictable; whereas the cash received from the customer can be time-based, smooth and predictable. Therefore, the question is whether revenue recognition can follow a smooth pattern, rather than get recognized in a lumpy manner. Very often, stock markets reward more stable and predictable earnings per share (EPS), rather than a highly volatile EPS each quarter. Most entities, therefore, prefer to have a smooth revenue recognition pattern. The big question is whether such smoothing is possible under Ind AS 115 Revenue from Contracts with Customers. This question is addressed through a simple fact pattern.

QUERY

Repair Company Ltd (RepCo) provides repair and maintenance (R&M) services as well as overhaul and relining of crusher machines that are used in mining operations. The contract is for a period of six years. At the end of the second, fourth and sixth year, RepCo does a complete relining and overhaul of the crusher. Additionally, RepCo also provides R&M services for the crusher on a continuous basis, and for this purpose, it will have two of its mechanics located at the customer’s site on a full-time basis for a period of 6 years, along with certain stores and spares that would be required for relining, overhaul and regular R&M.

For the next six years, the customer will pay RepCo a consideration at the end of each month. The consideration is variable and is dependent upon the usage of the crusher determined at the end of each month; however, the customer will pay a basic minimum amount, even if the crusher was idle through the period. The customer does not pay separately for the relining and overhaul, and that consideration is embedded in the monthly payments.

For the sake of simplicity, consider that typically the R&M involves 40% effort and the relining and overhaul involves 60% effort.

RepCo, wants to recognize revenue, in line with the payment by the customer, i.e., recognize as revenue, the consideration paid by the customer at the end of each month. Is that permissible under Ind AS?

RESPONSE

Ind AS 115 Revenue from Contracts with Customers

22 At contract inception, an entity shall assess the goods or services promised in a contract with a customer and shall identify as a performance obligation each promise to transfer to the customer either: (a) a good or service (or a bundle of goods or services) that is distinct; or (b) a series of distinct goods or services that are substantially the same and that have the same pattern of transfer to the customer (see paragraph 23).

23 A series of distinct goods or services have the same pattern of transfer to the customer if both of the following criteria are met: (a) each distinct good or service in the series that the entity promises to transfer to the customer would meet the criteria in paragraph 35 to be a performance obligation satisfied over time; and (b) in accordance with paragraphs 39–40, the same method would be used to measure the entity’s progress towards complete satisfaction of the performance obligation to transfer each distinct good or service in the series to the customer.

29 In assessing whether an entity’s promises to transfer goods or services to the customer are separately identifiable in accordance with paragraph 27(b), the objective is to determine whether the nature of the promise, within the context of the contract, is to transfer each of those goods or services individually or, instead, to transfer a combined item or items to which the promised goods or services are inputs. Factors that indicate that two or more promises to transfer goods or services to a customer are not separately identifiable include, but are not limited to, the following: (a) the entity provides a significant service of integrating the goods or services with other goods or services promised in the contract into a bundle of goods or services that represent the combined output or outputs for which the customer has contracted. In other words, the entity is using the goods or services as inputs to produce or deliver the combined output or outputs specified by the customer. A combined output or outputs might include more than one phase, element or unit. (b) one or more of the goods or services significantly modifies or customises, or are significantly modified or customised by, one or more of the other goods or services promised in the contract. (c) the goods or services are highly interdependent or highly interrelated. In other words, each of the goods or services is significantly affected by one or more of the other goods or services in the contract. For example, in some cases, two or more goods or services are significantly affected by each other because the entity would not be able to fulfil its promise by transferring each of the goods or services independently.

46 When (or as) a performance obligation is satisfied, an entity shall recognise as revenue the amount of the transaction price (which excludes estimates of variable consideration that are constrained in accordance with paragraphs 56–58) that is allocated to that performance obligation.

56 An entity shall include in the transaction price some or all of an amount of variable consideration estimated in accordance with paragraph 53 only to the extent that it is highly probable that a significant reversal in the amount of cumulative revenue recognised will not occur when the uncertainty associated with the variable consideration is subsequently resolved.

84 Variable consideration that is promised in a contract may be attributable to the entire contract or to a specific part of the contract, such as either of the following: (a) one or more, but not all, performance obligations in the contract (for example, a bonus may be contingent on an entity transferring a promised good or service within a specified period of time); or (b) one or more, but not all, distinct goods or services promised in a series of distinct goods or services that forms part of a single performance obligation in accordance with paragraph 22(b) (for example, the consideration promised for the second year of a two-year cleaning service contract will increase on the basis of movements in a specified inflation index).

85 An entity shall allocate a variable amount (and subsequent changes to that amount) entirely to a performance obligation or to a distinct good or service that forms part of a single performance obligation in accordance with paragraph 22(b) if both of the following criteria are met: (a) the terms of a variable payment relate specifically to the entity’s efforts to satisfy the performance obligation or transfer the distinct good or service (or to a specific outcome from satisfying the performance obligation or transferring the distinct good or service), and (b) allocating the variable amount of consideration entirely to the performance obligation or the distinct good or service is consistent with the allocation objective in paragraph 73 when considering all of the performance obligations and payment terms in the contract.

86 The allocation requirements in paragraphs 73–83 shall be applied to allocate the remaining amount of the transaction price that does not meet the criteria in paragraph 85.

Ind AS 108 Operating Segments

27 An entity shall provide an explanation of the measurements of segment profit or loss, segment assets and segment liabilities for each reportable segment. At a minimum, an entity shall disclose the following: (a) ………. (b) the nature of any differences between the measurements of the reportable segments’ profits or losses and the entity’s profit or loss before income tax expense or income and discontinued operations (if not apparent from the reconciliations described in paragraph 28). Those differences could include accounting policies and policies for the allocation of centrally incurred costs that are necessary for an understanding of the reported segment information.

28 An entity shall provide reconciliations of all of the following: (a) ………. (b) the total of the reportable segments’ measures of profit or loss to the entity’s profit or loss before tax expense (tax income) and discontinued operations. However, if an entity allocates to reportable segments items such as tax expense (tax income), the entity may reconcile the total of the segments’ measures of profit or loss to the entity’s profit or loss after those items.

ANALYSIS

RepCo will apply paragraph 29, to identify the different performance obligations in the six-year contract. There are three promises, namely, (a) performing thrice the relining and overhaul services during the contract period (b) supplying spares as and when required (c) stand-ready obligations towards R&M.

The relining and overhaul service is distinct from the daily R&M service, as (a) the two services are not integrated with each other (b) the two promises do not modify each other (c) the two services are not highly interdependent or highly interrelated.

On the other hand, the stand-ready obligation to R&M, and to provide the necessary spares to deliver such a service is to be treated as one performance obligation. The customer has contracted with RepCo to provide daily R&M service, and in doing so, RepCo would need to use the services of mechanics or spares. In other words, the use of spares is an input to providing the service of daily R&M services.

Therefore, in accordance with the requirements of paragraph 29, the contract comprises two performance obligations, namely, the (a) three relining and overhaul services and (b) daily R&M service.

Paragraphs 22 and 23 contain requirements with respect to a series of distinct goods and services. An entity may provide a series of distinct goods or services that are substantially the same and have the same pattern of transfer to the customer. Examples could include services provided on an hourly or daily basis, such as cleaning services or security services. This requirement was incorporated in the standard to simplify the model and promote consistent identification of performance obligations in cases when an entity provides the same good or service over a period of time. Without the series requirement, applying the revenue model would have presented operational challenges because an entity would have to identify multiple distinct goods or services, allocate the transaction price to each distinct good or service on a stand-alone selling price basis and then recognise revenue when those performance obligations are satisfied.

A series of distinct goods or services has the same pattern of transfer to the customer if both of the following criteria are met:

(i) each distinct good or service in the series that the entity promises to transfer to the customer would meet the criteria to be a performance obligation satisfied over time; and

(ii) the same method would be used to measure the entity’s progress towards complete satisfaction of the performance obligation to transfer each distinct good or service in the series to the customer.

The series guidance requires each distinct good or service to be “substantially the same”. The promise to provide daily R&M services and stand ready for the same fulfils the series requirement. This is because the entity is providing the same service of “standing ready to provide R&M” each moment, even though some of the underlying activities may vary each day (for e.g., some days may involve more work and other days may not involve any R&M). The distinct service within the series is each time increment of performing the service (for example, each day or month of service).

The consideration in the contract is variable to the usage of the crusher, for e.g., the number of hours the crusher was in operation or volume crushed. At the inception of the contract, RepCo will have to estimate the variable consideration. In accordance with paragraphs 46 and 56, variable consideration is allocated to a performance obligation, only to the extent that it is highly probable that a significant reversal in the amount of cumulative revenue recognised will not occur when the uncertainty associated with the variable consideration is subsequently resolved.

In accordance with paragraphs 84–86, RepCo considers the underlying distinct goods or services in the contract, rather than the single performance obligation identified under the series requirement, when applying the requirement with respect to allocation of variable consideration. Consider a 5-year service contract that includes fixed annual fees plus a bonus (variable consideration) upon completion of a milestone at the end of year two. If the entire service period is determined to be a single performance obligation, comprising a series of distinct services, the entity may be able to conclude that the bonus should be allocated directly to its efforts to perform the distinct services up to the date the milestone is achieved (e.g., the underlying distinct services in years one and two). This would result in the entity recognizing the entire bonus amount, if earned, at the end of year two. In contrast, if the entity determines that the entire service period is a single performance obligation that is composed of non-distinct services, the bonus (after applying constraint) would be included in the transaction price and recognized based on the measure of progress determined for the entire service period. For example, assume the bonus becomes part of the transaction price at the end of year two (when it is probable to be earned and not subject to a revenue reversal). In that case, a portion of the bonus would be recognized at the end of year two based on performance completed to date and a portion would be recognized as the remainder of the performance obligation is satisfied. As a result, the bonus amount would be recognized as revenue through to the end of the five-year service period. The series requirement does not apply to the allocation of variable consideration; therefore, in this example, the bonus will be recognized at the end of year two.

The above analysis can be summarised as follows:

1. RepCo will determine the total consideration including the variable consideration to be allocated to the two performance obligations, namely (a) fulfilment of the promise to provide three overhaul and relining services and (b) the provision of daily R&M services.

2. The transaction price will include the basic minimum amount and the variable consideration to the extent that it is highly probable that a significant reversal in cumulative revenue recognized will not occur. Variable consideration is included in the transaction price when the uncertainty associated with the variable consideration is subsequently resolved.

3. The series requirement will apply separately to both, the relining/overhaul services and the daily R&M services. However, as discussed above the series requirement is not applied for the allocation of variable consideration. In other words, with respect to the daily R&M, if the usage of the crusher in the first month is greater than the usage in the following month, the variable consideration to the extent it is crystallized at the end of the first month, is recognized in that month.

4. Overhaul and relining service revenue will be recognized thrice when those services are performed. The overhaul and relining service revenue recognized at the end of the 2nd, 4th and 6th year, will be determined by the consideration received in years 1 & 2, years 3 & 4 and years 5 & 6, respectively.

5. Therefore, in accordance with the above analysis applied to the fact pattern, each month, when consideration is crystallized, 40% of revenue is recognized as relating to R&M, and 60% is carried forward to be recognized once the overhaul and relining services are provided.

CONCLUSION

RepCo will be unable to smoothen revenue as it desires because the relining and overhaul revenue gets recognised at the end of years 2, 4 and 6, and therefore it would result in lumpy revenue in those quarters. However, RepCo can soften the impact of such lumpy revenue, by doing the following:

1. Educate the investors and analysts on why there is lumpy revenue in certain quarters, and low revenue in other quarters.

2. Ensure that contracts are entered into and executed in a manner, that the lumpy revenue arises in each quarter, and the impact of lumpy revenue is therefore minimized. We see that typically happening in real estate contracts and other entities whose revenue is impacted by seasons, e.g., air conditioners. To achieve this objective, RepCo will have to carry out appropriate planning, scheduling and forecasting, such that each quarter will have an equal amount of relining and overhaul work, from different contracts.

3. RepCo can follow a different policy for the purposes of segment results, and to that extent the investors and analysts can be provided with a revenue pattern based on the cash flows received each month. Appropriate reconciliation between RepCo’s profit or loss and the segment profit or loss shall be disclosed in the financial statements (see paragraphs 27 & 28 of Ind AS 108)

4. Additional analysis can be provided over investor calls post the quarter results to mitigate the impact of lumpy revenue. This will ensure that RepCo’s earnings multiply and consequently the valuation of the share price is not adversely affected.

Glimpses of Supreme Court Rulings

58 C.I.T. Delhi vs. Bharti Hexacom Ltd.

(2003) 458 ITR 593 (SC)

Capital or Revenue expenditure — Amortisation of Licence fees to operate telecommunication services — Payment of one-time entry fee and licence fee based on percentage of annual revenue earned — Both payments are capital in nature and to be amortised.

The National Telecom Policy of 1994 was substituted by the New Telecom Policy of 1999 dated 22nd July, 1999. The said Policy of 1999 stipulated that the licencee would be required to pay a one-time entry fee and additionally, a licence fee on a percentage share of gross revenue. The entry fee chargeable would be the fee payable by the existing operator up to 31,sup>st July, 1999,calculated up to the said date and adjusted upon notional extension of the effective date. Subsequently, w.e.f. 1st August, 1999, the licence fee was payable on a percentage of Annual Gross Revenue (“AGR”) earned. The quantum of revenue share to be charged as a licence fee was to be finally decided after obtaining recommendation of the Telecom Regulatory Authority of India (“TRAI”) but in the meanwhile, the Government of India fixed 15 per cent of the gross revenue of the licencee as provisional licence fee. On receipt of TRAI’s recommendation by the Government, adjustment of the dues was to be made.

Pursuant to the request of the Assessee, a licence was granted to it, inter alia on certain terms and conditions to establish, maintain and operate cellular mobile services. Accordingly, having accepted the Policy of 1999 and migrated there to, after paying the licence fee up to 31st July, 1999, i.e., the one-time licence fee as stipulated in the Communication dated 22nd July, 1999, the Respondent-assessee continued in the business of cellular telecommunication and associated value-added services, under the regime governed by the Policy of 1999.

The Assessee filed its return of income on 1st November, 2004, for the assessment year 2003–2004 declaring nil income. The same was processed under Section 143(1) of the Act on 30th March, 2006. The case was selected for scrutiny and a notice was issued to the Assessee under Section 143(2) of the Act, on 20th October, 2005.

It was noted that an amount of ₹11,88,81,000, which was the licence fee paid by the Assessee on a revenue sharing basis, was claimed by the Assessee as revenue expenditure. In that regard, vide questionnaire dated 15th November, 2006, the Assessee was required to explain as to why the said amount may, instead, be treated as capital expenditure and amortised over the remaining licence period of 12 years. The Respondent-Assessee furnished its response to the questionnaire, on 4th December, 2006. On consideration of the Assessee’s response, an Assessment Order was passed on 27th December, 2006, observing that the amount of ₹11,88,81,000, i.e., the licence fee paid by the Assessee on revenue sharing basis, which was claimed as a revenue expense, ought to have instead been amortised over the remainder of the licence period, i.e., 12 years. Accordingly, an amount of ₹99,06,750 was allowed as a deduction under Section 35ABB of the Act, and the remaining amount of ₹10,89,74,250 was disallowed and added back to the income of the Assessee.

Being aggrieved, the Assessee filed an appeal before the Commissioner of Income Tax (Appeal), New Delhi. In view of the decision of the Commissioner of Income Tax (Appeal) in the Assessee’s own case for the assessment year 2003–2004, it was reaffirmed vide order dated 27th September, 2007 that the annual licence fee calculated on the basis of annual gross revenue of the Assessee would be revenue expenditure deductible under Section 37 of the Act.

Aggrieved by the said order, the Revenue preferred an appeal before the Tribunal, New Delhi. By order dated 24th July, 2009, the Tribunal dismissed the Revenue’s appeal following its earlier order dated 29th May, 2009 in ITA No.5335 (Del)/2003 in the case of Bharti Cellular Ltd., for the assessment year 2000–2001, the facts of which case were held to be identical to the facts of the case at hand. Being aggrieved, the Revenue filed an appeal before the High Court of Delhi.

The Delhi High Court in the judgment dated 19th December, 2013 made the following preliminary observations:

i. Section 35ABB applies when expenditure of a capital nature is incurred by an Assessee for acquiring a right for operating telecommunication services. It is immaterial whether the expenditure is / was incurred before or after commencement of the business to operate telecommunication services but what is material is that the payment should be actually made. That Section 35ABB is not a deeming provision but comes into operation and is effective when the expenditure itself is of a capital nature and is incurred towards acquiring a right to operate telecommunication services or for the purposes of obtaining a licence for the said services. That Section 35ABB does not help in determining and deciding the question, as to, whether licence fee paid under the Policy of 1999 under the 1994 Agreement, was / is capital or revenue in nature.

ii. That there was no decision of the Supreme Court or any of the High Courts directly applicable to the factual matrix of the case.

The Delhi High Court discerned the facts of the present case as under:

i. The licence was issued under a statutory mandate and was required and acquired, before the commencement of operations or business, to establish and also to maintain and operate cellular telephone services.

ii. The licence was for initial setting up but, thereafter, for maintaining and operating cellular telephone services during the term of the licence.

iii. Contrary to what was stated, under the licence agreement executed in 1994, the considerations paid and payable were with the understanding that there would be only two players who would have unfettered right to operate and provide cellular telephone service in the circle. The payment, therefore, had the element of warding off competition or protecting the business from third-party competition.

iv. Under the 1994 agreement, the licence was initially for 10 years extendable by one year or more at the discretion of the Government / authority.

v. 1994 Licence was not assignable or transferable to a third party or by way of a sub-licence or in partnership. There was no stipulation regarding transfer or issue of shares to third parties in the company.

vi. Under the 1994 agreement, the licencee was liable to pay a fixed licence fee for the first three years. For the fourth year and onwards, the licencee was liable to pay variable licence fee @ ₹5,00,000 per 100 subscribers or part thereof, with a specific stipulation on minimum licence fee payable for the fourth to sixth year and with modified but similar stipulations from the seventh year onwards.

vii. The licence could be revoked at any time breach of the terms and conditions or in default of payment of consideration by giving 60 days’ notice.

viii. The authority also reserved the right to revoke the licence in the interest of the public by giving 60 days’ notice.

ix. Under the 1999 policy, the licencee had to forgo the right of operating in the regime of a limited number of operators and agreed to multiparty regime competition where additional licences could be issued without limit.

x. There was a lock-in period on the present shareholding for a period of five years from date of licence agreement, i.e., the effective date, and even transfer of shareholding directly or indirectly through subsidiary or holding company was not permitted during this period. This had the effect of ‘modifying’ or clarifying the 1994 agreement, which was silent.

xi. Licence fee calculated as a percentage of gross revenue was payable w.e.f. 1st August, 1999. This was provisionally fixed at 15 per cent of the gross revenue of the licensee but was subject to the final decision of the Government about the quantum of revenue share to be charged as licence fee after obtaining recommendation of TRAI.

xii. At least 35 per cent of the outstanding dues,including interest payable as on 31st July, 1999 and liquidated damages in full, had to be paid on or before 15th August, 1999. Dates for payments of arrears were specified.

xiii. Past dues up to 31st July, 1999 along with liquidated damages had to be paid as stipulated in the 1999 policy, on or before 31st January, 2000 or on an earlier date as stated.

xiv. The period of licences under the 1999 policy was extended to 20 years starting from the effective date.

xv. Failure to pay the licence fee on a yearly basis would result in cancellation of licences. Therefore, to this extent, licence fee was / is payable for operating and continuing operations as a cellular telephone operator.

On a consideration of the aforesaid aspects, the Delhi High Court held that the payment of licence fee was capital in part and revenue in part and that it would not be correct to hold that the whole fee was capital or revenue in nature in its entirety. It was further observed that the licencees / Assessees in question required a licence in order to start or commence business as cellular telephone operators; that payment of licence fee was a precondition for the Assessees to commence or set up the business. That it was a privilege granted to the Assessee subject to payment and compliance with the terms and conditions.

It was observed by the High Court that the licence granted by the Government or the concerned authority to the Assessee would be a capital asset and yet, since the Assessee had to make the payment on a yearly basis on the gross revenue to continue to be able to operate and run the business, it would also be in the nature of revenue expenditure. Having opined thus, the High Court decided to apportion the licence fee as partly revenue and partly capital and divided the licence fee into two periods, that is, before and after 31st July, 1999 and observed that the licence fee that had been paid or was payable for the period upto 31st July, 1999, i.e. the date set out in the Policy of 1999, should be treated as capital expenditure and the balance amount payable on or after the said date should be treated as revenue expenditure.

In an appeal filed before the Supreme Court by the Revenue, the Supreme Court noted the provisions of the Act and observed that Section 35ABB of the Act governs the treatment of expenditure incurred by entities to obtain a licence for operating telecommunication services in India. The provision addresses the tax treatment of such expenses and ensures that they align with the income tax framework. With effect from 1st April 1996, this provision provides for amortisation of capital expenditure incurred for acquisition of any right to operate telecommunication services, regardless of whether such cost is incurred before the commencement of such business or thereafter. The cost is allowed to be amortised in equal installments in the years for which the licence is in force. The amortisation commences from the year in which such business commences (where such cost is incurred before the commencement of such business) or the year in which such cost is actually paid, irrespective of the method of accounting adopted by the Assessee for such expenditure.

The Supreme Court also noted provisions of the Telegraph Act, which is the parent legislation under which licences to establish, maintain or work a telegraph are issued.

The Supreme Court then referred to the terms of the Licence Agreement entered into under the Policy of 1994 and the terms of migration of the existing licencees to the New Telecom Policy, 1999 regime, with a view to examine whether the nature and character of the licence fee was changed in light of migration.

The Supreme Court, thereafter, made a detailed review of relevant case law detailing the nature and characteristics of capital expenditure and revenue expenditure and the tests to identify the same.

The Supreme Court culled out the broad principles / tests that have been forged and adopted by it from time to time, while determining whether a given expenditure is capital or revenue in nature.

The Supreme Court, having regard to the tests and principles forged by this Court from time to time, proceeded to consider whether the High Court of Delhi was right in apportioning the licence fee as partly revenue and partly capital by dividing the licence fee into two periods, i.e., before and after 31st July, 1999 and accordingly holding that the licence fee paid or payable for the period upto 31st July, 1999 i.e. the date set out in the Policy of 1999 should be treated as capital and the balance amount payable on or after the said date should be treated as revenue.

The Supreme Court answered the said question in the negative, against the assessees and in favour of the Revenue for the following reasons:

i. Reliance placed by the High Court on the decisions in Jonas Woodhead and Sons (1997) 224 ITR 342 (SC) and Best and Co. (1966) 60 ITR 11 (SC) and the decision of the Madras High Court in Southern Switch Gear Ltd. (1984)148ITR272(Mad) as approved by this Court (1998) 232ITR 359(SC) appeared to be misplaced in as much as the said cases did not deal with a single source / purpose to which payments in different forms had been made. On the contrary, in the said cases, the purpose of payments was traceable to different subject matters and accordingly, it was held that the payments could be apportioned. However, in the present case, the licence issued under Section 4 of the Telegraph Act was a single licence to establish, maintain and operate telecommunication services. Since it was not a licence for divisible rights that conceive of divisible payments, apportionment of payment of the licence fee as partly capital and partly revenue expenditure was without any legal basis.

ii. Perhaps, the decision of the High Court could have been sustained if the facts were such that even if the Assessee-operators did not pay the annual licence fee based on AGR, they would still be able to hold the right of establishing the network and running the telecom business. However, such a right was not preserved under the scheme of the Telegraph Act. Hence, the apportionment made by the High Court was not sustainable.

iii. The fact that failure to pay the annual variable licence fee led to revocation or cancellation of the licence vindicated the legal position that the annual variable licence fee was paid towards the right to operate telecom services. Though the licence fee was payable in a staggered or deferred manner, the nature of the payment which flowed was plainly from the licensing conditions and could not be recharacterised. A single transaction cannot be split up, in an artificial manner, into a capital payment and revenue payments by simply considering the mode of payment. Such a characterisation would be contrary to the settled position of law and decisions of the Supreme Court, which suggest that payment of an amount in installments alone does not convert or change a capital payment into a revenue payment.

iv. It is trite that where a transaction consists of payments in two parts, i.e., lump-sum payment made at the outset, followed up by periodic payments, the nature of the two payments would be distinct only when the periodic payments have no nexus with the original obligation of the Assessee. However, in the present case, the successive installments relate to the same obligation, i.e., payment of licence fee as consideration for the right to establish, maintain and operate telecommunication services as a composite whole. This is because in the absence of a right to establish, maintenance and operation of telecommunication services is not possible. Hence, the cumulative expenditure would have to be held to be capital in nature.

v. Thus, the composite right conveyed to the Assessees by way of grant of licences is the right to establish, maintain and operate telecommunication services. The said composite right cannot be bifurcated in an artificial manner, into the right to establish telecommunication services on the one hand and the right to maintain and operate telecommunication services on the other. Such bifurcation is contrary to the terms of the licensing agreement(s) and the Policy of 1999.

vii. Further, it is to be noticed that even under the 1994 Policy regime, the payment of licence fee consisted of two parts:

a) A fixed payment in the first three years of the licence regime;

b) A variable payment from the fourth year of the licence regime onwards, based on the number of subscribers.

Having accepted that both components, fixed and variable, of the licence fee under the 1994 Policy regime must be duly amortised, there was no basis to reclassify the same under the Policy of 1999 regime as revenue expenditure in so far as variable licence fee is concerned.

As per the Policy of 1999, there was to be a multi-licence regime in as much as any number of licences could be issued in a given service area. Further, the licence was for a period of 20 years instead of 10 years as per the earlier regime. The migration to the Policy of 1999 was on the condition that the entire policy must be accepted as a package and consequently, all legal proceedings and disputes relating to the period up to 31st July, 1999 were to be closed. If the migration to the Policy of 1999 was accepted by the Assessees here in or the other service providers, then all licence fee paid up to 31st July, 1999 was declared as a one-time licence fee as stated in the communication dated 22nd July, 1999 which was treated to be a capital expenditure. The licence granted under the Policy of 1999 was non-transferable and non-assignable. More importantly, if there was a default in the payment of the licence fee, the entire licence could be revoked after 60 days’ notice. The provisions of the Telegraph Act, particularly Section 8 thereof, are also to the same effect. Having regard to the aforesaid facts and in light of the aforesaid conclusions, the Supreme Court held that the payment of entry fee as well as the variable annual licence fee paid by the Assessees to the DoT under the Policy of 1999 was capital in nature and may be amortised in accordance with Section 35ABB of the Act.

According to the Supreme Court, the High Court of Delhi was not right in apportioning the expenditure incurred towards establishing, operating and maintaining telecom services as partly revenue and partly capital by dividing the licence fee into two periods, that is, before and after 31st July, 1999 and accordingly, holding that the licence fee paid or payable for the period up to 31st July, 1999 i.e. the date set out in the Policy of 1999 should be treated as capital and the balance amount payable on or after the said date should be treated as revenue. The nature of payment being for the same purpose cannot have a different characterisation merely because of the change in the manner or measure of payment or for that matter the payment being made on an annual basis.

Therefore, in the ultimate analysis, the nomenclature and the manner of payment are irrelevant. The payment post 31st July, 1999 is a continuation of the payment pre-31st July, 1999 albeit in an altered format which does not take away the essence of the payment. It is a mandatory payment traceable to the foundational document, i.e., the license agreement as modified post migration to the 1999 policy. Consequence of non-payment would result in ouster of the licensee from the trade. Thus, this is a payment which is intrinsic to the existence of the licence as well as trade itself. Such a payment has to be treated or characterised as capital only.

In the result, the judgment of the Division Bench of the High Court of Delhi, dated 19th December, 2013 in ITA No.1336 of 2010 and connected matters, was set aside.

The judgments passed by the High Courts of Delhi, Bombay and Karnataka, following the judgment of the Division Bench of the High Court of Delhi, dated 19th December, 2013, were also consequently set aside.

The appeals filed by the Revenue were allowed

Sec 144C(2) — Draft Assessment Order — Due to oversight / inadvertence Petitioner did not inform the AO within 30 days period prescribed under sub-section (2) of section 144C of the Act that it had filed objection — AO passed assessment order unaware of the objection filed before DRP.

33 OmniActive Health Technologies Limited vs. Assessment Unit, Income Tax Department NFAC

[WP No. 474 Of 2024, Dated: 4th March, 2024. (Bom.) (HC).]

Sec 144C(2) — Draft Assessment Order — Due to oversight / inadvertence Petitioner did not inform the AO within 30 days period prescribed under sub-section (2) of section 144C of the Act that it had filed objection — AO passed assessment order unaware of the objection filed before DRP.

Petitioner’s case is that section 144C(2) of the Act, inter alia, requires Assessee, should he choose to file reference before the Dispute Resolution Panel (DRP) to file such objection within 30 days from the receipt of Draft Assessment Order. The section also requires Assessee to file a copy of the reference with the Assessing Officer (“AO”) within the time limit prescribed. Section 144C(4) of the Act requires AO to pass a final order within one month from the end of the month in which the period of filing of objections before DRP and AO expires.

According to Petitioner, though section 144C of the Act requires Petitioner to communicate the objection filed before the DRP to the AO, due to oversight / inadvertence Petitioner did not inform the AO within 30 days period prescribed under sub-section (2) of section 144C of the Act that it had filed objection by way of an email dated 23rd October, 2023. The AO, unaware of Petitioner having filed an objection before the DRP after expiry of the prescribed period of 30 days, proceeded to pass the assessment order dated 21st November, 2023. Petitioner informed the AO only on 28th November, 2023 about having filed objections with the DRP.

The Hon. Court observed that since Petitioner had already filed a reference raising its objections to the DRP within the 30 days period and section 144C(4) of the Act requires the AO to pass a final order including the view expressed by the DRP, the order dated 21st November, 2023 of the AO is set aside. The AO shall take further steps in the matter after the DRP passes its order on the objection filed by Petitioner, in accordance with law.

Sec 147 — Reassessment — Income Declaration Scheme, 2016 (“IDS, 2016”) — having issued a certificate under the IDS, 2016, after verifying the details filed by Petitioner, the declaration cannot be the basis to reopen the assessment of Petitioner.

32 Gaurang Manhar Gandhi vs. ACIT – 3(2)(1)

[WP NO. 2058 OF 2020,

Dated: 4th March, 2024, (Bom) (HC)]

Sec 147 — Reassessment — Income Declaration Scheme, 2016 (“IDS, 2016”) — having issued a certificate under the IDS, 2016, after verifying the details filed by Petitioner, the declaration cannot be the basis to reopen the assessment of Petitioner.

Petitioner, an individual, filed his return of income on24th July, 2014, declaring a total income of ₹88,13,470 for A.Y. 2014–15. Petitioner’s case was selected for scrutiny and Petitioner received a notice under section 143(2) of the Act and under section 142(1) of the Act calling upon Petitioner to provide various details / documents including details of long-term capital gains on sale of shares and short-term capital gain of office premises. Petitioner provided all the documents called for. Petitioner specifically provided details of the transactions reported in Bombay Stock Exchange for contracts of ₹10,00,000 and above. Petitioner made specific disclosure about transactions pertaining to sale of shares in Sunrise Asian Limited (“SAL”). Petitioner disclosed long-term capital gain on sale of shares of ₹6,44,61,215. Petitioner also gave the details of gain on sale of investments / shares / long term and disclosed that he had purchased and sold a quantity of 1,33,439 equity shares of SAL. The cost price is disclosed as ₹26,68,780 and the sale price is disclosed as ₹6,71,29,994.58 and a gain of ₹6,44,61,214.58 is also disclosed.

Subsequently, an assessment order dated 26th April, 2016 came to be passed under section 143(3) of the Act. The assessment order also discusses long-term capital loss, short-term capital loss, etc. which were carried forward.

Following the introduction of Chapter IX dealing with Income Declaration Scheme, 2016 (“IDS, 2016”) by the Finance Act, 2016, which came into effect from1st June, 2016, till 30th September, 2016, Petitioner, to get peace of mind, decided to take advantage of the IDS, 2016 and filed a declaration under section 183 of the Finance Act, 2016. Petitioner declared an amount of ₹6,84,61,220, which consisted of ₹6,44,61,215 pertaining to long-term capital gains on shares of SAL and ₹40,00,000 pertaining to cash income. Petitioner’s declaration was accepted pursuant to which Petitioner paid the amounts payable under the Finance Act, 2016 and Petitioner was also issued a certificate of declaration under section 183 of the Finance Act, 2016.

Over three and half years later, Petitioner received a notice dated 31st March, 2021 issued under section 148 of the Act, stating that there was reason to believe Petitioner’s income chargeable to tax for A.Y. 2014–15 has escaped assessment within the meaning of section 147 of the Act. Petitioner was also provided with the reasons recorded for reopening. The reasons indicate that a total amount of ₹60,25,280 had escaped assessment, which needs to be taxed. This amount is in two parts, i.e., ₹26,68,780 paid by Petitioner for purchase of shares in SAL and ₹33,56,500 as assumed brokerage / commission paid. Reasons do not mention anywhere that this amount was paid or when it was paid or to whom it was paid. It proceeds on the assumption that for the kind of transaction Petitioner had indulged, an operator or broker charges a fixed commission, which might vary between 0.5 per cent to 5 per cent of the entire sale consideration and taking into account that the total sale consideration was ₹6,71,29,995, the brokerage that Petitioner might have paid would be ₹33,56,500, which needs to be taxed. This amount of ₹6,71,29,995 is the sale consideration, which Petitioner had disclosed in the computation of income filed along with the ROI and also during the assessment proceedings in response to a query raised by the Assessing Officer.

In response to the notice received under section 148 of the Act, Petitioner filed objections vide letter dated 17th September, 2021, and the same came to be rejected by an order dated 14th February, 2022. Petitioner, therefore, filed this Petition.

The Hon. Court observed that under the IDS, 2016, and as per the clarifications of the IDS, 2016 dated 30th June, 2016, issued by the Central Board of Direct Taxes (“CBDT”), it is stated that the information contained in the declaration shall not be shared with any other law enforcement agency and not only that, it will not be shared within the Income Tax Department for any investigation in respect of a valid declaration. Since the declaration in Petitioner’s case was a valid declaration, the information as contained in the declaration filed by Petitioner could not have been made available to the AO, who issued the notice under section 148 of the Act. In answer to question no. 5 in the clarifications, which says “where a valid declaration is made after making valuation as per the provisions of the scheme read with IDS Rules and tax, surcharge and penalty as specified in the scheme have been paid, whether the Department will make any enquiry in respect of sources of income, payment of tax, surcharge and penalty” is an emphatic ‘NO’. The Hon. Court agreed with the contention that the information could not have been shared with the AO.

The Hon. Court observed that reliance placed on the declaration made under the IDS, 2016 is against the principles of natural justice and is not valid. Moreover, Respondents having issued a certificate under the IDS, 2016 after verifying the details filed by Petitioner, the declaration cannot be the basis to reopen the assessment of Petitioner.

The Hon. Court further observed that the reopening merely by deeming commission expenses of 5 per cent of total sale consideration of the shares and arbitrarily and in an adhoc manner fixing 5 per cent of the total sale consideration as commission expenses amounting to ₹33,56,500 cannot be accepted. Ad-hoc disallowances without pointing out any specific defects cannot be accepted. In fact, there is not even an allegation in the reasons to believe escapement of income that Petitioner had in fact paid any commission to any broker or operator. The AO proceeds on a surmise that there was no such free service available and, therefore, Petitioner would have paid brokerage. The AO having observed that the brokerage / commission varied between 0.5 per cent to 5 per cent does not even explain why he took into account 5 per cent as the brokerage paid and not 0.5 per cent or any other figure in that band.

The Hon. Court further observed that there has been no failure on the part of Petitioner to disclose any material fact, because in the computation of income filed by Petitioner, (a) Petitioner has disclosed long-term capital gain on sale of shares of ₹6,44,61,214.58, (b) purchase of 1,33,439 equity shares of SAL on 16th September, 2011 for a total consideration of ₹26,68,780, (c) the sale of those shares between 30th July, 2013 up to 23rd October, 2014 for a total consideration of ₹6,71,29,994.58 and (d) the gain of ₹6,44,61,214.58. The Petitioner gave the entire details relating to the transactions in shares of SAL and even in the assessment order, long-term capital loss, short-term capital loss, etc., are discussed. It is also recorded in the assessment order dated 26th April, 2016 that capital gain was nil.

In the circumstances, the subject matter of capital gains in the shares of SAL was certainly a subject matter of consideration of the AO during the original assessment proceedings. Once a query is raised during the assessment proceedings and Assessee has replied to it, it follows that the query raised was a subject of consideration of the AO while completing the assessment. It is also not necessary that an assessment order should contain reference and / or discussion to disclose its satisfaction in respect of the query raised. Therefore, the reopening of the assessment is merely on the basis of change of opinion of the AO from that held earlier during the course of assessment proceedings and this change of opinion does not constitute justification and / or reason to believe that income chargeable to tax has escaped assessment.

In the circumstances, the impugned notice dated 31st March, 2021 issued under section 148 of the Act quashed.

Transfer of case — Transfer from one AO to another subordinate to different higher authority — Condition precedent — Agreement between two higher authorities — Assessee should be given adequate opportunity to be heard — Mere speculation that assessee was connected to group of companies against whom search proceedings undertaken and that cases had to be centralized — Order of transfer not valid.

96 Kamal VarandmalGalani vs. PCIT

[2024] 460 ITR 380 (Bom)

A.Y.: 2021–22

Date of Order: 20th April, 2023

S 127 of ITA 1961

Transfer of case — Transfer from one AO to another subordinate to different higher authority — Condition precedent — Agreement between two higher authorities — Assessee should be given adequate opportunity to be heard — Mere speculation that assessee was connected to group of companies against whom search proceedings undertaken and that cases had to be centralized — Order of transfer not valid.

The assessee had been filing return of income for the past 22 years in Mumbai. The assessee was in receipt of show cause notice dated 24th June, 2022 issued by the Principal Commissioner of Income-tax — 19 proposing to transfer the assessment jurisdiction to Deputy Commissioner of Income-tax — Central Circle, Jaipur to enable coordinated assessment with that of Veto Group on whom search proceedings were conducted u/s 132 of the Act. As per the show cause notice, the Principal Commissioner of Income-tax (Central) — Rajasthan had proposed for centralization of the case of the assessee with Veto Group at Jaipur, and therefore, the assessee was asked to file submissions. The assessee filed objections against the aforesaid transfer of jurisdiction on the grounds that there was no search conducted at the premises of the assessee. Only a survey was conducted u/s 133A that too in the case of one company LHPL in which the assessee was a director. There was no material found during the search conducted at Veto group which could be related to the assessee. Similarly, there was no incriminating material found in the course of survey at LHPL which could relate the assessee or even LHPL to Veto Group. Lastly, the show cause notice did not refer to any material collected by the Department against the assessee on the basis of which transfer of jurisdiction was proposed.

The objections of the assessee were rejected on the ground that the assessee was the director of LHPL which was proposed to be centralized with Jaipur jurisdiction and further that the assessee was a key person of the Veto Group. During the course of search / survey at various entities of the group, incriminating documents and data were found / seized / impounded which may relate to the assessee as well as other ssesses of the group. However, what is incriminating material was nowhere specified neither in the show cause notice nor in the order.

The Bombay High Court allowed the writ petition filed by the assessee and held as follows:

“i) The Instructions of the CBDT dated 17th September, 2008 make it clear that where an order of transfer is proposed for centralisation of cases, while sending a proposal for centralisation, reasons have to be reflected including the relationship of the assessee with the main persons of the group.

ii) The order passed u/s 127(2) of the Act did not reflect why it was necessary to transfer the jurisdiction from the Deputy Commissioner, Mumbai to Deputy Commissioner, Jaipur. None of the issues raised by the assessee had been dealt with either in the order disposing of the objections raised by the assessee much less had they been reflected in the order u/s 127(2) of the Act. The transfer of assessment jurisdiction from Mumbai to Jaipur would certainly cause inconvenience and hardship to the assessee both in terms of money, time and resources, and therefore, in the absence of the requisite material or reasons as the basis the order would be nothing but an arbitrary exercise of power and therefore liable to be set aside.”

Revision — Powers of Commissioner — Special deduction — Claim to deduction u/s 80-IA not made in return of income and assessment order passed — Principal Commissioner or Commissioner competent to consider claim for deduction — Matter remanded.

95 TATA-ALDESA JVvs. UOI

[2024] 460 ITR 302 (Telangana)

A.Y.: 2014–15

Date of Order: 12th June, 2023

Ss. 80IA, 263 and 264 of ITA 1961

Revision — Powers of Commissioner — Special deduction — Claim to deduction u/s 80-IA not made in return of income and assessment order passed — Principal Commissioner or Commissioner competent to consider claim for deduction — Matter remanded.

For the A.Y. 2014–15, the Assessing Officer passed an order u/s 143(3) of the Income-tax Act, 1961. Thereafter, the assessee filed an application before the Principal Commissioner u/s 264 in which it submitted that it had commenced its business operations during the previous year 2013–14, and accordingly, the A.Y. 2014–15 was the first year under assessment and that though it was entitled to claim deduction u/s 80-IA because of a bona fide error, it did not claim it either at the time of filing the return of income or during the assessment proceeding. The assessee also sought condonation of delay of 52 days. The Principal Commissioner condoned the delay and observed that the assessee did not opt to make the claim to deduction u/s 80-IA and that in the subsequent A.Y. 2015–16 also, the assessee did not make such claim before the Assessing Officer. He opined that the assessee chose not to claim deduction u/s 80-IA and declined to interfere u/s 264 in the order of the Assessing Officer.

The Telangana High Court allowed the writ petition filed by the assessee and held as under:

“i) There is a fundamental difference between sections 263 and 264 of the Income-tax Act, 1961. For invoking the power u/s 263, the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner should be of the opinion that an order passed by the Assessing Officer or Transfer Pricing Officer is erroneous inasmuch as the order is prejudicial to the interests of the Revenue. In that event, he may call for the record of the proceedings before the Assessing Officer or the Transfer Pricing Officer and after making inquiry, may pass such an order as section 263 contemplates. But there is no such limitation in section 264 under which the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner may either of his own motion or on an application by the assessee for revision, call for the records of any proceeding relatable to an order other than an order to which section 263 applies and after making due inquiry, he may pass such order thereon as he thinks fit; the only caveat being that such order should not be prejudicial to the assessee. It is not confined to legality or validity of an order passed by the Assessing Officer or a claim made and disallowed or a claim not put forth by the assessee.

ii) There was no limitation on the exercise of power u/s 264 by the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner. The order rejecting the assessee’s application was set aside. The matter was remanded to the Principal Commissioner for reconsideration of the revision application filed by the assessee u/s 264 on the merits after giving due opportunity of hearing to both the sides.”

Revision — Writ — Powers of Commissioner — Commissioner cannot consider application where appeal lies or is pending — Prohibition does not apply where writ petition has been filed.

94 Ratan Industries Ltd. vs. Principal CIT

[2024] 460 ITR 504 (All.)

A.Y.: 2012–13

Date of Order: 11th May, 2023

S. 264 of ITA 1961

Revision — Writ — Powers of Commissioner — Commissioner cannot consider application where appeal lies or is pending — Prohibition does not apply where writ petition has been filed.

The assessment proceedings for the A.Y. 2012–13 were completed. Against the assessment order, the assessee filed revision application u/s 264 of the Income-tax Act, 1961. The Principal Commissioner rejected the application on the grounds that as the writ petition, filed by the assessee against the order passed initiating reassessment proceedings u/s 143(3)/147 of the Act of 1961 on 30th March, 2019, is pending consideration, in view of the provisions of section 264(4)(a) of the Act, no order can be passed u/s 264 of the Income-tax Act of 1961.

The Allahabad High Court allowed the writ petition filed by the assessee and held as follows:

“i) From a perusal of section 264(4)(a) of the Income-tax Act, 1961, it is clear that the Principal Commissioner or Commissioner shall not revise any order which is under challenge in a case where an appeal against the order lies to the Deputy Commissioner (Appeals) or to the Commissioner (Appeals) or to the Appellate Tribunal but has not been made and the time within which such appeal may be made has not expired, or, in the case of an appeal to the Commissioner (Appeals) or to the Appellate Tribunal, the assessee has not waived his right of appeal. The pendency of a writ petition before the High Court would not amount to pendency of any appeal before any authority.

ii) Once the proceedings were initiated for reassessment by the respondent and the competent authority proceeded to complete the assessment on 31st December, 2019, no occasion arose as to any matter being pending before the High Court as the only challenge before the writ court was for initiation of proceedings u/s 143(3) read with section 147 of the Act. Once the reassessment was made and the proceedings were completed, the writ petition had practically become infructuous. The ground taken by the Principal Commissioner for rejection of the application did not hold any ground as the writ petition is not an appeal according to section 264(4)(a) of the Act. The rejection of the application for revision was not valid.

iii) In view of the above discussions, I find that the order dated 30th March, 2022, passed by the Principal Commissioner of Income-tax-I, Agra, is unsustainable in the eyes of law and, as such, the same is hereby quashed and set aside. Respondent No. 1 is hereby directed to continue with the revisional proceedings initiated by the assessee-petitioner u/s 264 of the Act and shall decide the same expeditiously, in accordance with law.”

Rent — TDS — Agreement with State Government for development — External Development Charges (EDC) paid under Agreement with State Government — Not in the nature of rent — No tax deductible on such charges.

93 DLF Homes Panchkula Pvt. Ltd. vs. JCIT(OSD)

[2023] 459 ITR 773 (Del.)

Date of Order: 24th March, 2023

Ss. 194I read with 194C of the IT Act

Rent — TDS — Agreement with State Government for development — External Development Charges (EDC) paid under Agreement with State Government — Not in the nature of rent — No tax deductible on such charges.

The assessee was engaged in the business of developing real estate. The assessee made application to Director General, Town and Country Planning for grant of license for setting up an IT Park as well as a Group Housing Colony. As per the rules of Haryana Development and Regulation of Urban Areas Rules, 1976 (HUDA Rules), the assessee entered into agreement with the State Government of Haryana for setting up the IT Park and Group Housing Colony. The agreement required the assessee to pay proportionate development charges as and when required and as determined by the Director General.

The Assessing Officer held that the external development charges were in the nature of “rent” and, therefore, tax was liable to be deducted at source under section 194-I of the Act at the rate of 10 per cent. The Assessing Officer quantified the demand.

The Delhi High Court allowed the writ petition filed by the assessee and held as follows:

“i) The question as to the nature of external development charges payment was one of the issues that was required to be addressed by the Assessing Officer. He had concluded that the payment was ‘rent’ as it was in the nature of an arrangement to use land. It was not open to the Department to now contend that external development charges were payment made to a contractor under a contract and not ‘rent’ under an arrangement to use land.

ii) The Assessing Officer had held that tax was liable to be deducted at source u/s 194-I of the Act, and he had also proceeded to analyse the section and hold that external development charges were in the nature of rent. He had, in addition, also applied the rate of 10 per cent for assessing the assessee’s liability.

iii) The approach of the Revenue was flawed. The contention that the findings of the Assessing Officer regarding the nature of the external development charges as well as at the provisions referred by him for determining the assessee’s liability were not material was erroneous. The orders passed by the Assessing Officer raising a demand u/s 201(1) and (1A) of the Act were liable to be quashed.”

Reassessment — Notice after three years — Limitation — Change in law — Effect of decision of Supreme Court in Ashish Agarwal — Conditions prescribed under amended provisions of section 149(1)(d) for extended period of limitation — Notices issued beyond limitation period stipulated under amended provisions of section 149(1)(a) not satisfying prescribed conditions — Barred by limitation. Reassessment — Notice after three years — Limitation — CBDT Instructions dated 11th May, 2022 — Validity — Instruction vague about “original date when such notices were to be issued” — Instruction to the extent it propounded “travel back in time” theory unsustainable.

92 Ganesh Dass Khanna vs. ITO

[2024] 460 ITR 546 (Del.)

A.Ys.: 2016–17 and 2017–18

Date of Order: 10th November, 2023

Ss. 147, 148, 148A(b), 148A(d), 149(1)(a) and 149(1)(b) of ITA 1961

Reassessment — Notice after three years — Limitation — Change in law — Effect of decision of Supreme Court in Ashish Agarwal — Conditions prescribed under amended provisions of section 149(1)(d) for extended period of limitation — Notices issued beyond limitation period stipulated under amended provisions of section 149(1)(a) not satisfying prescribed conditions — Barred by limitation.

Reassessment — Notice after three years — Limitation — CBDT Instructions dated 11th May, 2022 — Validity — Instruction vague about “original date when such notices were to be issued” — Instruction to the extent it propounded “travel back in time” theory unsustainable.

A bunch of petitions involving the A.Y.s 2016–17 and 2017–18 were before the Delhi High Court where the common issue to be decided by the Hon’ble High Court was whether the notices issued u/s 148 of the Act were maintainable having regard to clauses (a) and (b) of section 149(1). In other words, where the alleged escaped income is below the threshold of R50 lakhs, the period of limitation of three years as prescribed u/s 149(1)(a) will be applicable.

Owing to the COVID-19 pandemic, Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act was enacted where the due dates / time limit / limitation were extended. Under the TOLA, the end date for proceedings and compliances referred to in section 3(1) of the said Act (which included the compliance regarding the issue of notice u/s 148) was 31st March, 2021. The Finance Act was amended in 2021 whereby significant amendments were made to the provisions relating to reopening of assessment. Sections 147 to 151 were substituted and new provisions u/s 148A and 151 were also introduced. The controversy arose when CBDT issued two notifications, i.e., Notification 20 of 2021, whereby the period of limitation as per provisions of section 149 was extended from 31st March, 2021 to 30th April, 2021 and Notification No. 38 of 2021 further extended the period of limitation to 30th June, 2021. An Explanation was added in both the Notifications which provided that provisions of sections 148, 149 and 151 as existed prior to amendment by Finance Act 2021 shall apply. In other words, the Notifications provided that the old provisions would apply even when the amended provisions were in force. Thus, the Departmentissued notices under the unamended provisions of section 148.

Several petitions were filed before the High Court challenging the notice on broadly two grounds, i.e., the notices could not have been issued under the old provisions when new provisions were in force and the notices were barred by limitation as per the amended provisions of section 149. The High Courts quashed the notices which were issued under the old provisions based on the Explanation contained in the aforesaid Notifications. The Union of India challenged the decision of the High Court before the Supreme Court and the Hon’ble Supreme Court, vide its judgment in Ashsish Agarwal’s case reported in 444 ITR 1 (SC) held that as a one-time measure the notices issued u/s 148 of the Act be treated as notice issued u/s 148A(b) of the amended provisions.

Pursuant to the decision of the Supreme Court, the CBDT issued Instruction dated 11th May, 2022 in compliance with the directions of the Supreme Court in Ashish Agarwal’s case. Accordingly, a second round of notices / communications were issued by the Assessing Officers. The assessees filed their objections once again against the notices.

Amongst the various objections taken, one of the objections was that the time limit prescribed u/s 149(1)(a) had expired and given the fact that the income chargeable to tax which had allegedly escaped assessment amounted to less than ₹50 lakhs, the revenue could not take recourse to the extended limitation period provided in clause (b) of sub-section (1) of section 149 of the 1961 Act. The Department rejected this objection of the assessee and proceeded to pass order u/s 148A(d) of the Act holding it to be fit case for issue of notice u/s 148 and thereby, notices were issued u/s 148 of the Act. It is this second notice issued u/s 148 which is now the subject matter of challenge before the High Court in the bunch of petitions.

The Delhi High Court allowed the petitions and held as under:

“i) Section 149(1) of the Income-tax Act, 1961 as amended by the Finance Act, 2021 mandates that no notice u/s 148 for reopening the assessment u/s 147 would be issued for the relevant assessment year after a period of three years has elapsed from the end of the relevant assessment year. The Assessing Officer can invoke the extended limitation period if the conditions precedent prescribed in clause (b) of sub-section (1) of the amended section 149 are fulfilled. Under clause (b) of sub-section (1) of section 149 one of the conditions for invoking the extended period up to ten years is that income chargeable to tax which has escaped assessment amounts to, or is likely to amount to, ₹50 lakhs or more for the assessment year in issue. Therefore, after the coming into force of the Finance Act, 2021, in cases where, for the relevant assessment year, the alleged escaped income is less than ₹50 lakhs, notice u/s 148 could only be issued for commencement of reassessment proceedings within the limitation period provided in clause (a) of section 149(1) as amended. If proceedings are wrongly initiated, estoppel, waiver or res judicata principles cannot apply in such situations.

ii) The time limit for reopening assessments under the new regime introduced by the Finance Act, 2021 was reduced from six years to three years and only in respect of ‘serious tax evasion cases’, that too, where evidence of concealment of income of R50 lakhs or more in a given period was found, has the period for reopening the assessment been extended to ten years. In order to ensure that utmost care is taken before invoking the extended period of limitation, approval should be obtained from the Principal Chief Commissioner at the highest hierarchical level of the Department. Where escapement of income is below ₹50 lakhs, the normal period of limitation, i.e., three years would apply.

iii) In UOI vs. Ashish Agarwal [2022] 444 ITR 1 (SC); [2023] 1 SCC 617, the Supreme Court held that it would be open to the Department to advance submissions based on the provisions as amended by the 2021 Act and those that might otherwise be available in law. Since the Supreme Court, in no uncertain terms, ruled that the judgments of the various High Courts, which included the decision in Mon Mohan Kohli vs. Asst. CIT [2021] SCC OnLine Del 5250; [2022] 444 ITR 207 (Delhi), stood “modified or substituted” to the extent indicated in the directions issued by the court, it would follow that all rights and contentions would be available to the assessees, notwithstanding any observations made in that judgment which curtailed the defences available to the assessees u/s 149.

iv) The law declared by the Supreme Court, under article 141 of the Constitution of India, is binding on every authority, including the High Court, which would necessarily have to be given effect. The Supreme Court’s directions issued under article 142 are no different.

v) The Supreme Court’s directions issued u/s 142 would show that the court noted that the power of reassessment which existed before 31st March, 2021 continued to exist till 30th June, 2021, with alteration in procedure brought about upon the enactment and enforcement of the 2021 Act. The Supreme Court, in no uncertain terms, declared Explanation A(a)(ii)/A(b) of the Notifications dated 31st March, 2021 and 27th April, 2021, ultra vires the parent statute, i.e., the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020. These Explanations sought to impose the un-amended provisions of sections 148, 149 and 151 of the 1961 Act, although the substituted provisions were in force. It specifically observed that the Legislature was aware of the situation when it enacted the 2021 Act. Its observations made it clear that the amended section 149 continued to operate despite attempts to the contrary made by the introduction of the Explanations in the notifications dated 31st March, 2021 and 27th April, 2021.

vi) There was no power invested under the 2020 Act, and that too through notifications, to amend the statute, which had the imprimatur of the Legislature and since, with effect from 1st April, 2021, when the 2021 Act came into force, the Notifications dated 31st March, 2021 and 27th April, 2021, which were sought to be portrayed by the Department as extending the period of limitation, were contrary to the provisions of section 149(1)(a) of the 1961 Act, they lost their legal efficacy. The extension of the end date for completion of proceedings and compliances, a power which was conferred on the Central Government u/s 3(1) of the 2021 Act, could not be construed as one which could extend the period of limitation provided u/s 149(1)(a) of the 1961 Act.

vii) Section 149(1)(a) applied to the A.Ys. 2016–17 and 2017–18. The third proviso only excluded the timeframe obtaining between the date when the notice u/s 148A(b) was issued and the date by which the assessee filed its response within the time and extended time provided in the notices in question. Therefore, the date could not be shifted beyond the date when the original notice under the unamended section 148 was issued, which was treated as notice u/s 148A(b) of the 1961 Act. Concededly, these notices were issued between 1st April, 2021 and 30th June, 2021, by which time the limitation prescribed u/s 149(1)(a) had already expired. The fourth proviso had no impact on the outcome of the cases at hand, as it provided for a situation where, after the exclusion of the timeframe referred to in the third proviso, the time available to the Assessing Officer for passing an order u/s 148A(d) was less than seven days. Neither the judgment of the Supreme Court rendered in Ashish Agarwal nor the 2020 Act allowed for any such recourse to the Department, i.e., that extended reassessment notice would ‘travel back in time’ to their original date when such notices were to be issued and thereupon application of the provisions of the amended section 149 of the 1961 Act.

viii) The provisions contained in the Instruction dated 11th May, 2022, were beyond the powers conferred on the CBDT u/s 119 of the 1961 Act and were ultra vires the amended provisions of section 149(1) of the 1961 Act.

ix) The decision in Ashish Agarwal did not rule on the provisions contained in the 2020 Act or the impact they could have on the reassessment proceedings u/s 147 of the 1961 Act. The 2020 Act conferred no such power on the CBDT. There is no clarity in the Instruction dated 11th May, 2022 regarding the ‘original date when such notices were to be issued’. The provisions of the Instruction dated 11th May, 2022 in question are also unsustainable because they are vague. “Certainty” in taxing statutes is one of the ground norms, as ordinarily, they are agnostic to equitable principles.

x) The principle of constructive res judicata was not applicable. The orders passed u/s 148A(d) and the consequent notices issued for the A.Ys. 2016–17 and 2017–18 under the amended provisions of section 148 of the 1961 Act were unsustainable. The references made in paragraphs 6.1 and 6.2(ii) of the Instruction dated 11th May, 2022 issued by the CBDT to the extent they propounded the ‘travel back in time’ theory, was bad in law.”

Income from other sources — Shares received at price higher than market value — Determination of fair market value — Change in prescribed formula with effect from 1st April 2018 — Formula that prevails during relevant A.Y. 2014–15 applicable — Application of amended formula as on date of assessment order by AO — Not sustainable.

91 Principal CIT vs. Minda Sm Technocast Pvt. Ltd.

[2024] 460 ITR 7 (Del.)

A.Y.: 2014–15

Date of Order: 4th August, 2023

S. 56(2)(via) of ITA 1961: Rule 11UA of IT Rules 1962

Income from other sources — Shares received at price higher than market value — Determination of fair market value — Change in prescribed formula with effect from 1st April 2018 — Formula that prevails during relevant A.Y. 2014–15 applicable — Application of amended formula as on date of assessment order by AO — Not sustainable.

The assessee purchased 48 per cent of the equity of a company from three entities at a price of ₹5 per share. For the A.Y. 2014–15, the assessee submitted the valuation report of a chartered accountant who had determined the value of the shares at ₹4.96 per share in terms of rule 11UA of the Income-tax Rules, 1962, as applicable in the period in issue, i.e., the A.Y. 2014–15. The Assessing Officer valued the shares at ₹45.72 per share, taking into account rule 11UA of the Rules, as on the date when the order was passed and added the difference to the income of the assessee.

The Commissioner (Appeals) upheld the addition. The Tribunal deleted the addition.

The Delhi High Court upheld the decision of the Tribunal and held as under:

“i) The formula prescribed under rule 11UA of the Income-tax Rules, 1962 required calculation of the fair market value by taking into account, inter alia, the book value of the assets shown in the balance-sheet. This underwent a change with effect from April 1, 2018, which resulted in the fair market value of unquoted shares being calculated by taking into account, inter alia, the value of assets such as immovable property, adopted by ‘any authority of the Government’ for the purposes of payment of stamp duty.

ii) The Assessing Officer had committed an error in applying the formula contained in rule 11UA of the Rules, which was not applicable to the A.Y. 2014-15 in question as on the date of passing the assessment order and the error was continued by the Commissioner (Appeals). The assessee had applied the formula prescribed in rule 11UA which was applicable for the A.Y. 2014-15. The error was corrected by the Tribunal and therefore, there was no reason to interfere in its order.”

Block assessment — Procedure — Notice u/s 143(2) — Condition precedent for block assessment — Failure to issue notice u/s 143(2) — Not a curable defect u/s 292BB.

90 Chand Bihari Agrawal vs. CIT

[2024] 460 ITR 270 (Patna)

Date of Order: 25th July, 2023

Ss. 143(2), 158BC and 292BB of ITA 1961

Block assessment — Procedure — Notice u/s 143(2) — Condition precedent for block assessment — Failure to issue notice u/s 143(2) — Not a curable defect u/s 292BB.

A search was conducted at the premises of the assessee. Subsequently, a notice u/s 158BC was issued on 10th December, 2003 directing the assessee to file the return within a period of one month. Thereafter, a notice u/s 142(1) was issued on 9th November, 2004, wherein the assessee was required to file a return in response to the notice issued u/s 158BC issued earlier. The assessee filed the return on 22nd November, 2004. Assessment was made and order was passed u/s 158BC. The assessment was completed without issuing any notice u/s 143(2) of the Act.

The assessee’s appeals before the CIT(A) as well as the Tribunal were dismissed. The Tribunal observed that the return filed by the assessee was non-est as the same was filed beyond the outer limit of 45 days u/s 158BC, and therefore, the Assessing Officer was entitled to proceed for assessment even without the issuance of notice u/s 143(2) of the Act. Further, the Tribunal held that in the event that assessment is defective, the defect was cured by operation of section 292BB. Though section 292BB was introduced later, the Tribunal held that it was merely a procedural clarification, and since the assessee co-operated in the assessment, 292BB would apply.

The Patna High Court allowed the appeal filed by the assessee and held as follows:

“i) Though block assessment under Chapter XIV-B of the Act is a complete code in itself, the procedure under Chapter XIV for regular assessment in so far as it is applicable to block assessments stands incorporated under clause (b) of section 158BC as Circular No. 717, dated August 14, 1995 ([1995] 215 ITR (St.) 70, 98) clarifies the requirement of law in respect of service of notice u/ss. 142, 143(2) and 143(3) of the Act. It is declared that “even for the purpose of Chapter XIV-B of the Act, for the determination of undisclosed income for a block period under the provisions of section 158BC, the provisions of section 142 and sub-sections (2) and (3) of section 143 are applicable and no assessment could be made without issuing notice u/s 143(2) of the Act.

ii) Section 292BB only speaks of a notice being deemed to be valid in certain circumstances, when the assessee has appeared in any proceeding and co-operated in any enquiry relating to assessment or reassessment. It does not take in the circumstance of a complete absence of notice; which does not stand cured u/s 292BB, especially in the teeth of such notice being found to be mandatory under the Act.

iii) The search and seizure was conducted in the residential-cum-business premises of the assessee on February 27, 2003. On the basis of the recovery made, a notice u/s 158BC of the Act was issued on December 9/10, 2003. The assessee was directed to file a return within a period of one month. A further notice u/s 142(1) of the Act was issued on November 9, 2004 wherein again the assessee was required to file a return in response to the notice issued u/s 158BC. The subsequent notice was issued u/s 142(1), to which the assessee responded with a return filed within almost twelve days. The assessment was completed much after, but without issuing a notice u/s 143(2). The assessment completed u/s 158BC without a notice u/s 143(2) could not be sustained and had to be set aside.”

Assessment — Effect of self-assessment — Tax paid on self-assessment entitled to refund and interest on refund.

89 Mrs. SitadeviSatyanarayanMalpani& Others vs. ITSC

[2023] 459 ITR 758 (Bom.)

A.Ys.: 1989–90 to 1996–97

Date of Order: 30th June, 2023

S. 244A of ITA 1961

Assessment — Effect of self-assessment — Tax paid on self-assessment entitled to refund and interest on refund.

Pursuant to a search carried out at the premises of the assessee, an application for settlement was filed u/s 254C(1) of the Income-tax Act, 1961, for the A.Ys. 1989–90 to 1996–97. The Application was admitted on 22nd April, 1998. As per the order, the assessee was required to pay additional tax on the income disclosed. The assessee paid the additional tax and furnished copies of the challans. Pending application, the assessee filed a working of tax and interest for verification and also stated that the assessee shall pay the shortfall, if any. In response, the assessee received communication stating that a sum of ₹55,03,494 was payable by the assessee on account of tax and interest. In response, the assessee submitted that the payments made by the assessee had not been considered and thereby requested that the calculations be revised. During the course of hearing before the Settlement Commission, the assessee furnished the copies of challans. The assessee was informed that the balance amount of ₹1,16,511 was payable and to cover the said shortfall, the assessee made payment of ₹1,30,000. On 3rd August, 2008, an order was passed holding that the application filed by the assessee was not maintainable due to non-compliance of section 245(2D) of the Act and the application was held to have abated u/s 245HA(1)(ii) of the Act.

On writ petition, the assessee contended that the assessee had in fact paid more than the amount he was required to pay on self-assessment. The Settlement Commission contended that credit for such excess tax paid had already been granted to assessee but no interest was payable on the same as excess tax paid was arising out of self-assessment tax paid by assessee which was not eligible for any interest.

The Bombay High Court allowed the petition of the assessee and held as follows:

“i) Tax paid on self-assessment would fall u/s 244A(1)(b) of the Income-tax Act, 1961, i.e., the residual clause covering refunds of amount not falling u/s 244A(1) of the Act and as confirmed by a circular issued by the CBDT (Circular No. 549 dated October 31, 1989 * [1990] 182 ITR (St.) 1), the payment should be considered to bea tax and interest thereon would be payable to the assessee.

ii) It was clear that the tax payable was only ₹19,52,372 whereas the total tax paid was ₹20,06,280 which would leave an excess amount of ₹53,098 as paid. It was not denied that there was an excess tax paid of ₹53,098 but the stand of the Department was that credit for such excess tax paid had already been granted to the assessee but no interest was payable thereon as the excess tax paid arose out of self-assessment tax paid by the assessee which was not eligible for any interest. This was not correct. The assessee had complied with his obligations under the provisions of section 245D of the Act. The order rejecting the application for settlement of cases was not valid.

iii) In the circumstances, we are quashing and setting aside the impugned order dated January 3, 2008.We direct the matter to be placed before the InterimBoard for Settlement constituted u/s 245AA for consideration. Since the matter is old, the petitioners shall file a copy of the settlement application that was originally filed on April 27, 1997 before the Board within two weeks of this order being uploaded. The photocopy shall be certified as true copy by the advocates/chartered accountant of the petitioners. The Interim Board shall dispose of the application on merits in accordancewith law.”

Explanation 5 to Section 9(1)(i) of the Act — Substantial viewership of Channel in India cannot be a reason to hold that Channel is situated in India; situs of intangibles is the situs of owner.

16 Star Television Entertainment vs. DCIT

ITA No: 1814/1813/Mum/2014

A.Ys.: 2009-10

Date of Order: 8th December, 2023

Explanation 5 to Section 9(1)(i) of the Act — Substantial viewership of Channel in India cannot be a reason to hold that Channel is situated in India; situs of intangibles is the situs of owner.

FACTS

Assessee, a Hong Kong based company, transferred ‘Star World’ channel vide a business agreement, to one of its sister concerns based in Hong Kong. The Taxpayer did not offer the gain arising out of such transaction to tax in India based on the contention that the transaction was undertaken between two non-residents and the underlying asset (i.e., channel) was not situated in India and, hence, no income accrued or can be deemed to accrue or arise in India.

AO contended that the transfer of the Channel would result in a trigger of indirect transfer provisions under the Act. Further, gains arising from transfer of channel can be deemed to accrue or arise in India and, hence taxable in India basis the following arguments:

• The very nature of the asset and its ability to regularly generate income from India created a strong nexus and business connection with India.

• Various elements of the asset being the brand name, logo, contents, permits, customer base (advertisers), substantial viewer base etc. were located in India hence the situs of the channel was in India.

DRP upheld order of AO. Being aggrieved, assessee appealed to ITAT.

HELD

• Delhi High Court in the case of Cub Pty Ltd1 held that the situs of intangibles (such as Channel, here) is the situs of the owner i.e., outside India. The down-linking license obtained by the assessee from Ministry of Information and Broadcasting of India, establishes that ownership of the channel is situated outside India. Accordingly, applying the ratio of Delhi High Court, ITAT held that the situs of the channel is also outside India.

• Delhi High Court decision in the case of Asia Satellite Telecommunications Co Ltd2 supports that merely because the footprint area includes India and the viewers of the channel are located in India, does not amount to carrying on a business in India.

• The indirect transfer provision under the Act is a deeming provision which deems that a share or
interest in a company or entity located outside India is located in India, if such share or interest derives substantial value from assets in India. However, there is no such specific provision with regard to the situs of intangible assets.

• Without prejudice, the indirect transfer provisions require that for an asset to be deemed as being situated in India, it must derive substantial value from assets in India. While there may be merit in the argument that viewership in India may affect the determination of whether the Channel derives substantial value from India, AO has not brought any material on record to show that the Channel derives substantial value from assets in India.

• ITAT held that gains from transfer of channel is not taxable in India.

2(2016) 71 taxmann.com 315
3 332 ITR 340

Article 5 of India-Singapore DTAA — For computation of duration of Service PE, only time spent in India needs to be considered. Presence in India should not include days during which employees did not render any services to the client such as days of vacation and business development. Further, presence should be computed based on solar days i.e. day on which more than one employee is present in India should be counted as one day.

15 Clifford Chance PTE Ltd. vs. ACIT

[2024] 160 taxmann.com 424 (Delhi – Trib.)

ITA No: 2681 & 3377/Del/2023

A.Ys.: 2020-21 & 2021-22

Date of Order: 14th March, 2024

Article 5 of India-Singapore DTAA — For computation of duration of Service PE, only time spent in India needs to be considered. Presence in India should not include days during which employees did not render any services to the client such as days of vacation and business development. Further, presence should be computed based on solar days i.e. day on which more than one employee is present in India should be counted as one day.

FACTS

Assessee, a tax resident of Singapore provided legal services to its clients in India. Part of the services were provided remotely from outside India and some services were rendered by the employee physically present in India. Assessing Officer (AO) held that the assessee had Service PE in India as the duration threshold of 90 days as provided in the DTAA was exceeded. AO also included the duration of services provided from outside India, total presence of employees in India inclusive of vacation, non-billable hours in the form of business development and computed period based on man-days. On appeal, DRP upheld the order of AO.

Being aggrieved, the assessee appealed to ITAT.

HELD

• For the purpose of Service PE clause, the actual performance of services in India is essential and only duration of the employees physically present in India for furnishing services are to be taken into account.

• Assessee does not have Service PE in India as its employees were present for 441 days which is less than the 90 days threshold.

• For calculating presence in India, following days should be excluded.

• Days when no service was rendered to the client i.e. employees vacation period.

• Days when employees performed non-revenue generating activities i.e. business development such as identification of customers, technical presentation/providing information to prospective customers, developing market opportunities, providing quotations to customers.

• Presence in India should be computed based on solar days i.e. days on which more than one employees are present in India should be counted as one day.

1 Assessee substantiated this based on time sheet, HR system and employees declaration

Sec. 40A(2)(b).: Disallowance u/s 40A(2)(b) is not justified on merely estimating that more income should have been earned from subcontracting without bringing any comparable figures.

68 Tapi JWIL JV vs. Income-tax Officer

[2023] 108 ITR(T) 27 (Delhi – Trib.)

ITA NO. 6722 (DELHI) OF 2018

A.Y.: 2014-15

Date of Order: 16th October, 2023

Sec. 40A(2)(b).: Disallowance u/s 40A(2)(b) is not justified on merely estimating that more income should have been earned from subcontracting without bringing any comparable figures.

FACTS

M/s TAPI Prestressed Products Ltd. (‘TPPL’) and M/s JITF Water Infrastructure Ltd. (‘JWIL’) had entered into an agreement to form a Joint Venture (JV) with the specific purpose of bidding for construction of 318 MLD 70 MGD Sewage Pumping Station etc. on design, build and operate basis. The contract was awarded by Delhi Jal Board to the assessee JV. TPPL had executed the work and raised bills for ₹15,02,04,381/- to the assessee JV. The assessee JV had raised bills for ₹15,52,33,963/- to Delhi Jal Board. The assessee JV had filed its ITR declaring total income of ₹1,75,600/-.

The AO had passed the assessment order u/s 143(3) in the status of AOP, determining the total income at ₹1,20,77,763/- while making disallowance u/s 40A(2)(b) at ₹1,18,92,163/-. AO held that the assessee JV had suppressed its profit by making excessive payment to TPPL. To work out the amount to be disallowed u/s 40A(2)(b), the AO had applied the net profit rate of 8% on the Sub-Contract Expenses (net) of ₹14,86,52,038/-, and thus arrived at a figure of ₹1,18,92,163/-.

On appeal the CIT(A) held that profit in the hands of the assessee JV should also be calculated by applying a rate of 3.78 per cent and worked out the total income of the assessee JV at ₹ 56,19,047.

Aggrieved by the order, the assessee filed an appeal before the ITAT.

HELD

The ITAT observed that the AO never alleged nor enquired into the issues nor:

i. recorded his finding that the books of account were not correct and complete

ii. doubted the genuineness of the expenses incurred by the assessee JV

iii. brought on record any material to prove that the expenses incurred by the assessee JV were excessive or unreasonable having regard to the fair market value; and

iv. recorded his finding that he was rejecting the books of account

The ITAT observed that the provisions of section 40A(2)(b) are applicable to the expenses which are considered to be excessive or unreasonable, having regard to the fair market value of the goods / services or facilities for which the payments are made. The AO had made disallowance u/s 40A(2)(b), by opining that the assessee JV should have earned income from sub-contracting.

The ITAT held that section 40A(2)(b) had no application to the income aspect of the assessee JV. The AO had not brought any comparable figures to disallow the expenditure, moreover with the structuring of the JV, provisions of Section 40A(2)(b) were not attracted.

Hence, the ITAT held that the AO had fallen into error in determining the profit @ 8 per cent and also invoking the provisions of Section 40A(2)(b) and the CIT(A) had also erred in determining the profit of the assessee @ 3.78 per cent equal to the profit of one of the parties to the JV.

In the result, the appeal of the assessee was allowed.

Sec. 69B.: Where the assessee has provided the necessary explanation about the nature and source of unrecorded transactions / assets and the necessary nexus with assessee’s business income has been established, such unrecorded transactions cannot be considered as unexplained and thus, deeming provisions of section 69B cannot be invoked.

67 Montu Shallu Knitwears vs. DCIT

[2024] 109 ITR(T) 1 (Chd – Trib.)

ITA NO. 21 (CHD) OF 2023

A.Y.: 2019-20

Date of Order: 1st December, 2023

Sec. 69B.: Where the assessee has provided the necessary explanation about the nature and source of unrecorded transactions / assets and the necessary nexus with assessee’s business income has been established, such unrecorded transactions cannot be considered as unexplained and thus, deeming provisions of section 69B cannot be invoked.

FACTS

The assessee is a partnership firm engaged in the business of manufacturing of wearing apparels. A survey action u/s 133A was carried out at the business premises of the assessee on 29.08.2018. During the course of the survey, certain discrepancies were encountered in physical verification of stock and in order to buy peace of mind, the assessee had surrendered an amount of ₹50,00,000/- as additional business income for the FY 2018-19. The assessee had credited said amount of ₹50,00,000/- in its profit & loss account for the year ending 31st March, 2019 and the assessee had paid tax at normal rates on such surrendered amount in its Return of Income filed on 30th September, 2019.

The assessee’s case was selected for scrutiny and notice u/s 143(2) was issued on 29th September, 2020. The case of the assessee was finalised and assessment order dated 28th September, 2021 was passed, wherein the AO had assessed total income at ₹1,90,22,390/- after making additions of ₹50,00,000/- on account of disallowance u/s 37 of the Act and applied provisions of section 115BBE of the Act on alleged application of Section 69B of the Act.

Aggrieved by the assessment order, the assessee filed an appeal before the CIT(A). The CIT(A) in its order deleted the disallowance of ₹50,00,000/- u/s 37 of the Act and upheld the application of Section 69B r.w.s. 115BBE on account of the amount surrendered by the assessee during the course of survey proceedings.

Aggrieved by the order, the assessee filed an appeal before the ITAT.

HELD

The ITAT observed that it is a settled legal proposition that there is difference between the undisclosed income and unexplained income and the deeming provisions are attracted in respect of undisclosed income however, the condition before invoking the same is that the assessee has either failed to explain the nature and source of such income or the AO doesn’t get satisfied with the explanation so offered by him.

The ITAT observed that the stock physically found had been valued and then, compared with the value of stock so recorded in the books of accounts and the difference in the value of the stock so found belonging to the assessee had been offered to tax.

The ITAT held that the Revenue had not pointed out that the excess stock had any nexus with any other receipts other than the business being carried on by the assessee. There was thus a clear nexus of stock physically so found with the stock in which the assessee regularly deals in and recorded in the books of accounts and thus with the business of the assessee and the difference in value of the stock so found was clearly in the nature of business income.

The ITAT held that no physical distinction in unaccounted stock was found by the Revenue. The difference in stock so found out by the authorities had no independent identity and was part and parcel of the entire stock in the normal course of business. It could not be said that there was an undisclosed asset which existed independently. Thus, what was not declared to the department was receipt from business and not any investment as it could not be correlated with any specific asset and the difference should be treated as business income. Therefore, the income of ₹50,00,000/- surrendered during the course of survey cannot be brought to tax under the deeming provisions of section 69B of the Act and the same had to be assessed to tax under the head “business income”. In the absence of deeming provisions, the question of application of section 115BBE did not arise and normal tax rate was applied.

In the result, the appeal of the assessee was allowed.

Section 2(22)(e) can be invoked only in the hands of the common shareholder who was in a position to control affairs of both the lender company and the receiving company, and not in the hands of the receiving company.

66 ApeejaySurrendra Management Services Pvt. Ltd. vs. DCIT

ITA Nos.: 987 & 988 / Kol/ 2023

A.Y.s: 2013-14 and 2014-15

Date of Order: 19th February, 2024

Section 2(22)(e)

Section 2(22)(e) can be invoked only in the hands of the common shareholder who was in a position to control affairs of both the lender company and the receiving company, and not in the hands of the receiving company.

FACTS

The assessee-company received a sum of ₹5.50 crores as loans / advances from another group company, “APL”.

The assessee was not a registered shareholder of the lender company, APL. However, there was a common shareholder, “KSWPL”, who held substantial interest in both the assessee (57.86 per cent shares) and the lender company (99.96 per cent shares). The lender company had sufficient accumulated profits for distribution in its books.

The Assessing Officer treated the loan / advance as deemed dividend under section 2(22)(e) in the hands of the assessee.

Aggrieved, assessee filed an appeal before CIT(A) who confirmed the addition.

The assessee filed an appeal before the Tribunal.

HELD

The Tribunal observed as follows:

(a) Considering the provisions of the Companies Act, 2013 and the legislative intent of section 2(22)(e), the beneficial ownership was with KSWPL under whose substantial control, loan from APL was granted to the concern, i.e. assessee. The assessee could not influence the decision making of company KSWPL. Similarly, APL could not influence the decision making process of KSWPL. In both the companies, the controlling interest (substantial interest) was held by KSWPL. It is, in fact, KSWPL who was in a position to influence the decision making process of the two companies. Therefore, the deeming fiction of section 2(22)(e) could be applied only in the hands of KSWPL who was the beneficial owner of shares in both, the lender and the receiving company.

(b) A loan or advance received by assessee (a concern) was not per se in the nature of income. It was, in fact, deemed accrual of income under section 5(1)(b) in the hands of the beneficial shareholder and not in the hands of the receiver (concern) who was a non- shareholder.

(c) Even going by the observations of the Supreme Court in CIT vs. National Travel Services (2018) 89 taxmann.com 332 (SC), the beneficial shareholder was KSWPL under whose controlling interest and influence APL had given loan / advance to the assessee. Accordingly, the deeming provisions of section 2(22)(e) were attracted on KSWPL.

Accordingly, the Tribunal held that no addition under section 2(22)(e) can be made in the hands of the assessee-company.

Where the claim of exemption under section 11 of the assessee-Board was on the basis of commercial principles of accountancy and in accordance with directions of the Government of India, such exemption was allowable.

65 DCIT vs. National Fisheries Development Board

ITA No.: 244 / Hyd / 2023

A.Y.: 2015-16

Date of Order: 13th February, 2024

Section 11, 13(1)(d)

Where the claim of exemption under section 11 of the assessee-Board was on the basis of commercial principles of accountancy and in accordance with directions of the Government of India, such exemption was allowable.

FACTS

The assessee was a Board established by the Central Government to act as a nodal agency in developing activities of fisheries among various states in the country.

The major source of receipt of the assessee was grants from the Central Government, and the outflow was release of grants to the State Governments.

In accordance with the accounting procedure and directions issued by the Government of India, the assessee followed the following treatment in its books of accounts-

(a) When the grants from Central Government were received, the same were kept on the liability side;

(b) When the grants were paid to the State Governments for implementing the projects, the same were kept in advances account;

(c) When the amount sanctioned to the State Governments was spent by the implementing agencies / State Governments, utilisation certificate was submitted to the Central Government through the assessee. Such amount was treated as expenditure in the Income & Expenditure Account of the assessee.

(d) The amount so spent (including the administrative expenses of the assessee) was recognised as income in the Income & Expenditure Account.

For assessment year 2015-16, assessee filed the return of income declaring NIL income by claiming exemption under section 11 on the basis of the accounting principles followed by the assessee.

The Assessing Officer did not accept the treatmentof the assessee and contended that the assesse had not utilised 85 per cent of the income, being the total grants-in-aid / refunds received during the year and therefore, the shortfall in application below 85 per cent was liable to be taxed. He also contended thatthe assessee had invested ₹1.55 crores in equity shares in one Sasoon Dock Matsya Sahakara Samstha Ltd., and continued to hold the investment so made, and thereby contravened section 13(1)(d) read with section 11(5).

CIT(A) allowed the appeal of the assessee observing that the treatment of the assessee was based on commercial principles of accountancy and made in compliance with the regulations of the Government of India.

Aggrieved, the revenue filed an appeal before the Tribunal.

HELD

The Tribunal observed as follows-

(a) The assessee had been treating only such part of grants that were utilized by the implementing agencies as income and only such part of the funds released to the implementing agencies in respect of which the utilisation certificates were received as expenditure. This method of accounting followed by the assessee in treating the income and expenditure irrespective of the year of receipt of grant had not been appreciated or referred to by the Assessing Officer so as to find out any defects or reasons to reject the same.

(b) Given the position of the assessee in respect of the funds vis-à-vis the implementing agencies, it wasn’t possible to treat all the grants as receipts and all the allocations as expenditure. Such an approach was not at all scientific, because there was no income element on grant of funds by the Central Government, nor any expenditure incurred merely by allocation. Therefore, there was no illegality or irregularity in the method of accountancy followed by the assessee in treating the funds utilised by the implementing agencies as income and the funds covered by the utilisation certificate as expenditure.

(c) If the contention of the tax department was accepted, then as against the actual grants during the current year to the tune of ₹ 146.40 crores, the assessee had spent a sum of ₹178.13 crores which included the expenditure on account of the grants received for the current year as against the earlier year, which was more than 85 per cent of the grants received. Further, such treatment disturbed the method of accounting consistently followed by the assessee.

(d) Vis-à-vis the contention under section 13(1)(d),there was no contradiction to the plea taken by the assessee that such an investment was made in Sasoon Dock Matsya Sahakara Samstha Ltd., in the financial year 2008-09 and not during the current year and never in the earlier years any objection on that aspect was taken. It was also not in dispute that registration under section 12AA granted by the authorities in favour of assessee was continuing. In these  circumstances, the ground raised by the Assessing Officer was liable to be rejected.

Accordingly, the appeal of the revenue was dismissed.

Where the assessee passed away before framing of the assessment order, no assessment could be made in the name of the deceased without bringing the legal heirs of such person on record. In the absence of specific provision requiring the legal heirs to intimate the tax department, assessment cannot be valid only for the reason that the legal heirs failed to inform the department about the death of the assessee.

64 Bhavnaben K Punjani vs. PCIT

ITA No.: 138 / Rjt / 2017

A.Y.: 2007-08

Date of Order: 15th February, 2024

Where the assessee passed away before framing of the assessment order, no assessment could be made in the name of the deceased without bringing the legal heirs of such person on record.

In the absence of specific provision requiring the legal heirs to intimate the tax department, assessment cannot be valid only for the reason that the legal heirs failed to inform the department about the death of the assessee.

FACTS

During the financial year 2006-07, the assessee sold certain immovable property purportedly for less than stamp value.

The assessee passed away on 15th October, 2013. However, no intimation regarding the demise wasgiven to the tax department by the legal heirs of the assessee.

The Assessing Officer initiated reassessment proceedings under section 147 seeking to adopt stamp value of the property under section 50C; accordingly, he passed best judgment assessment under section 143(3) / 144 read with section 147 vide order dated 23rd February, 2015 in the name of the assessee, that is, after the assessee expired.

PCIT passed an order under section 263 dated 24th March, 2017 revising the said assessment order on the ground that while framing the assessment order, the Assessing Officer did not ascertain the cost and year of acquisition of the property and therefore, the order was made without proper inquiry and investigation.

Aggrieved, the assessee filed an appeal before the ITAT.

HELD

The Tribunal observed that-

(a) in absence of any specific statutory provision under the Income Tax Act which requires the legal heirs to intimate the income tax department about the death of the assessee, the assessment order cannot be held to be valid in the eyes of law only for the reason that the legal heirs of the deceased assessee had not informed the income tax department about the death of the assessee.

(b) Since no assessment can be framed in the name of a person who has since expired, any assessment order framed in the name of a deceased person without bringing the legal heirs of such person on record, is invalid in the eyes of law.

Accordingly, since the original assessment order was not valid in law, the Tribunal also set aside the order of PCIT passed under section 263.

The Bookkeeping in Electronic Mode

Bookkeeping is a way of recording a company’s financial transactions in an organised manner. Bookkeeping creates a trail of all the transactions and serves as evidence for financial reporting. This practice of bookkeeping or maintaining books of account is not an option; multiple laws, like the Companies Act, 2013, Income Tax Act, and Good and Service Tax (GST), mandate maintenance and retention of the books of account in a prescribed manner.

As maintenance of books of account has transitioned from physical record-keeping to electronic mode, the bookkeeping laws have evolved. Section 128 (1) of the Companies Act, 2013 stipulates that every company shall prepare and keep its books of account and other relevant books, papers, and financial statements annually. It also mentions that these books can be kept in electronic mode. While Section 128(1) mentions the allowance for maintaining books in electronic mode, the specific requirements for electronic bookkeeping, like format, accessibility, and security, are provided in the rules made under the Act. For example, the Companies (Accounts) Rules, 2014, especially Rule 3, provides detailed requirements for maintaining books of account in electronic form.

Most of the provisions related to physical books apply to books maintained in electronic mode. The common points between manual and digital books are as follows:

– The statutory laws recognise both physical and digital books of account.

– Both manual and digital books must always be accessible in India.

– The physical books and digital books are subject to inspection.

– Both manual and digital books must be accurate and complete.

– The time period for retention of manual and digital books is the same.

Key requirements that are unique to digital books of account as per the provision of the Companies Act, 2013 are as listed below:

Particulars Requirement
Maintenance Given the nature of digital books and the maturity of accounting systems, it is mandatory that the data from books maintained outside India should be always accessible in India.
Retention The books of account and other important books and papers shall be retained in the original format in which they have been generated, sent, or received or in a format that will present the information generated, transmitted, or received accurately. The information must remain complete and unaltered.
Branch Office The branch can maintain proper books of account to record transactions effected at the branch and periodic summarised returns have to be sent to the registered office. The information received from the branch office shall not be altered and shall be kept in a manner that depicts the information initially received from the branches and the backup shall be kept in servers physically located in India on a daily basis.
Storage There shall be a proper system for displaying, storing, retrieving, or printing electronic records as the audit committee/board of directors may deem appropriate. Unless expressly allowed by the law, the records shall not be disposed of or rendered unusable for disposal.
Backup The electronic copies of account books and other relevant documents, even if stored overseas, the backup must be kept on a daily basis on physical servers situated in India.
Service Provider (Outsourced Vendor maintaining accounts) At the time of filing financials annually, the company must inform the Registrar of Companies:

–     the name of the service provider

–     the IP address of the service provider

–     the location of the service provider (wherever applicable)

–     if maintained in the cloud, then the address as given by the service provider

Recent amendments in the Companies Act, 2013 and rules made thereunder:

Maintenance:

The books of account and other relevant books and papers maintained in electronic mode shall remain accessible in India, at all times. Before the amendment it was only accessible in India, however now the words at all times have been added.

Backup:

The backup of books of account and other books and papers of the company, which is maintained in electronic mode, even if stored at a place outside India shall be kept in servers physically located in India on a daily basis. Before the amendment, it was on a periodic basis and no specific time was prescribed.

Audit trail in the accounting software:

For the financial year commencing on or after the period 1st April, 2023, every company that uses accounting software to maintain books of account shall use only such accounting software that can record an audit trail of each and every transaction as per MCA notification. This will help create an audit log with the changes made and the date when the changes are made. Also, it must be ensured that the audit trail cannot be disabled at any point of time during the year.

Service provider outside India:

If the service provider is outside India, then the company must inform the Registrar of Companies, of the name and address of the person in control of the books of accounts and books and papers in India.

The above amendments in light of the digital evolution in bookkeeping have given rise to the below-mentioned challenges for the companies:

– When books are maintained outside India, daily data backup poses a challenge for companies where the data backup is centralised outside India and servers are physically located outside India.

– For data from outside India to be accessible in India at all times, there must be seamless integration and real-time transfers. This can be challenging for companies with multiple locations outside India.

– Section 128 (5) of the Companies Act, 2013 requires that the books of account must be maintained for eight financial years immediately preceding the financial year, and accordingly, the backup must also be held for eight years. Hence, the company must have the facility to store the backups safely or upload them to cloud storage.

COMPLIANCE CHECKLIST & AUDIT PROCEDURES

To comply with all the provisions of Rule 3, the company needs a robust system in place, and auditors need to check the system in place to certify total compliance. A compliance checklist and audit procedures as given below will ensure that there are no lapses in audit documentation and provide a basis for appropriate conclusion on the maintenance of books of account as prescribed.

Sr. no. Requirement Complied (yes/no) Remarks
1. If the books of account and other relevant books and papers are maintained in electronic mode,

–   whether it is always accessible in India for its subsequent use?
2. From 1st April, 2023, whether the accounting software has a feature of:

–   recording the audit trail of each and every transaction,

–   creating an edit log of each change made in books of account along with the date when such changes were made, and

–   ensuring that the audit trail cannot be disabled?
3. Whether it is ensured that the books of account are

–   entirely retained in the format in which they were originally generated, sent, or received, or in a format which shall present accurately the information generated, transmitted, or received, and

–   the information contained in the electronic records remains complete and unaltered.
4. Is it ensured that the information received from branch offices is not altered and is kept in a manner that depicts what was originally received from the branches?
5. Is it ensured that the information can be displayed in a legible form?
6. Is it ensured that there is a proper system for:

–   storage,

–   retrieval,

–   display or

–   printout

of the electronic records
7. Is there a proper system to ensure that such records are not disposed of or rendered unusable unless permitted by law?
8. Is it ensured that the backup is taken daily?
9. Is it ensured that the server on which the backup is maintained is physically located in India?
10. Has the company intimated the following information to RoC?

–   the name of the service provider,

–   the IP address of the service provider,

–   the location of the service provider (wherever applicable),

–   where the books of account and other books and papers are maintained on the cloud, such address as provided by the service provider,

–   where the service provider is located outside India, the name and address of the person in control of the books of account and other books and papers in India?

Suggested audit procedures:

1. Obtain the list of books and other records maintained in electronic mode from the IT team of the company and document the process of access rights, maintenance of servers, backup policy, IT controls, etc.

2. Assess the need for IT experts for IT General Control (ITGC) testing based on the accounting software used, nature and size of the company.

3. Obtain the information w.r.t. the compliance of Rule 3 and provision of Companies Act, 2013 for maintenance of books of account from the company Secretary of the company.

4. Information Provided by Entity (IPE) testing shouldbe performed on the reports generated from the accounting software to verify the completeness of the information.

5. Understand and document the process of storage, backup, and retrieval from the IT team of the company.

6. In respect of audit trail and maintenance of daily backup, obtain the reports from the IT team and perform test checks to validate the compliance requirements.

7. Obtaining a report or management’s representation in respect of the use of audit trail features throughout the year.

8. With respect to the maintenance of books of account, Form AOC-4 and AOC-5 submitted by the company to the ROC can be verified along with the date of submission and the other relevant information.

COMPARISON BETWEEN VARIOUS ACTS

The following table summarises requirements pertaining to the maintenance of books of account per the Companies Act, 2013, Income Tax Act, 1961, and Central Goods and Services Act, 2017.

Sr. No Particulars Companies Act, 2013 Income Tax Act, 1961 GST Act, 2017
1 Maintenance At the registered office. If maintained elsewhere, notice to the Registrar to be given within seven days (Section 128(1)) Where any person carries on business or profession other than specified professions mentioned in Section 44AA(1), then he is required to maintain books of account if income from business or profession exceeds
R1,20,000 or total sales/turnover/gross receipts exceed R10 lakh in any of the three years immediately preceding the previous year. However,		 At the principal place of business (Rule 56 of CGST Rules 2017)
in case the Assessee is an individual or HUF, such limits should be read as R2,50,000 and R25 lakhs, respectively.

Or

where the business or profession is newly set up, the income from the business or profession is likely to exceed the threshold limits.
2 Scope of transactions to be recorded All transactions of registered and branch offices (Section 128(1)) As may enable computation of total income (Sections 44AA(1), 44AA(2)) Production/manufacture, supply, stock of goods, input tax credit, output tax payable/paid, etc. (CGST 2017)
3 Basis of accounting Accrual basis and double-entry system (Section 128(1)) Cash or Accrual Not specifically mentioneds
4 Intimation requirement if maintained outside registered office File notice within seven days with the Registrar (Section 128(1)) Not specifically mentioned Not specifically mentioned
5 Mode of maintenance Can be maintained in electronic mode as prescribed (Section 128(1)) Not specifically mentioned As per Section 35(1) and Rule 56(7) of CGST Rules, 2017, the registered person may keep and maintain such accounts and other particulars in electronic form.
6 Branch office compliance Maintain at branch office; summarized returns to registered office to be sent (Section 128(2)) Not specifically mentioned As per Section 35(1), where more than one place of business is specified in the certificate of registration, the accounts relating to each place of business shall be kept at such places of business.
7 Retention Period For eight financial years or all preceding years if less than eight (Section 128(5)) For six years from the end of the relevant assessment year i.e., for a total period of eight previous years (prescribed by rules (Section 44AA(4))) For at least 72 months (6 years) from the due date of annual return (Section 36 CGST Act 2017)
8 Definition of Books and Papers Includes books of account, deeds, vouchers, writings, documents, minutes, and registers in paper or electronic form (Section 128(12)) Specific books of account to be maintained for Legal, Medical, Engineering, Architectural, Accountancy, Technical Consultancy, Interior Decoration Not specifically mentioned
9 Other records included Receipts and payments, purchases and sales, assets and liabilities, and cost items as prescribed (Section 128(13)) Not specifically mentioned Manufacture of goods, inward and outward supply, stock of goods, input tax credit, output tax payable and paid, etc. (CGST 2017)

CONCLUSION

Digitalisation brings in its wake both solutions and unique challenges. The recent amendments prevent the unique challenges from becoming vulnerabilities and hence, implement stringent measures. Companies and auditors need to adapt to the bookkeeping in the digital age and ensure total compliance with respective applicable laws.

Limited Liability Partnerships — Relevant Auditing and Accounting Considerations

A Limited Liability Partnership (LLP) is a hybrid entity that combines features of a corporation and allows the flexibility of organizing its internal structure as a partnership based on a mutually arrived agreement. The agreement is not required to follow the strict form that applies to a company.

Talking about the key characteristics of an LLP, an entity structured as an LLP will enjoy a separate legal identity, limited liability for the partners, and perpetual succession. An LLP enjoys management and organisational flexibility regarding economic rights, which are freely transferable, and non-economic rights (management participation) which are non-transferable.

The contribution to LLP’s capital can be in cash or in kind. Receipt of consideration in ‘kind’ will entail determining its valuation to be able to determine the proportionate entitlement of the partners.

As stated above, the LLP provides enough flexibility to partners to enter into an LLP agreement, which shall govern the rights and duties of the partners. The LLP Agreement and any changes made therein shall be filed with the Registrar of LLPs. In the absence of agreement as to any matter, the mutual rights and the duties of the partners and the mutual rights and the duties of the LLP and the partners shall be determined by the provisions set out in the First Schedule of the LLP Act.

One may also believe that making changes in the LLP deeds may be comparatively simpler and / or less costly as compared to making changes to the memorandum /articles of association. This may particularly be true where the main deed allows operations-related changes to be carried as part of the Annexure which may be subjected to minimal approvals and is not construed to be leading to a change in the main deed and is accordingly not required to be filed with the Registrar. However, this should strictly be determined in consultation with a legal expert.

LLP as a vehicle has emerged as a great model for Chartered Accountant firms, consulting firms and for structuring joint ventures by corporates.

In this article, we will take a look at the recent regulatory changes that impact these forms of entities with a specific focus on reporting and audit consideration.

FINANCIAL REPORTING CONSIDERATION

Section 34(1) of the LLP Act requires that the LLP shall maintain such proper books of accounts as may be prescribed relating to its affairs for each year of its existence on a cash basis or accrual basis and accordingly, to double entry system of accounting and shall maintain the same at its registered office for eight years. Compared to a company, this flexibility for small businesses comes in handy.

Sub-section (2) of section 34 further prescribes that within a period of six months from the end of each financial year, prepare a Statement of Account and Solvency for the said financial year as of the last day of the said financial year in Form 8 with Registrar, and such statement shall be signed by designated partners of the LLP. Sub-section 4 of section 34 requires that the accounts of limited liability partnerships shall be audited in accordance with sub-rule 8 of rule 24 LLP Rules.

It is observed that timely filing of financial information with the Registrar has been one of the noted areas of non-compliance and thus professionals are expected to keep themselves abreast of key forms and their filing deadlines.

In accordance with section 34A of the LLP Act, the National Financial Reporting Authority (NFRA) would specify the accounting standards and standards on auditing for LLPs as recommended by the Institute of Chartered Accountants of India (ICAI).

In 2023, ICAI issued an exposure draft for the proposed accounting standards on limited liability partnerships (LLPs). As per the said exposure draft Accounting Standards 1 to 5, 7, 9 to 19 and 21 to 29, as notified under Companies (Accounting Standards) Rules, 2021, shall be applicable to the LLPs. AS 20 Earning Per Share shall be exempted from the LLPs.

For applicability of Accounting Standards, ICAI’s exposure draft states that LLPs shall be classified into four categories, viz., Level I, Level II, Level III and Level IV. Level I LLPs will be Large size Limited Liability Partnerships, Level II LLPs will be Medium size Limited Liability Partnerships, Level III LLPs will be Small size Limited Liability Partnerships and Level IV LLPs will be Micro size Limited Liability Partnerships. Level IV, Level III and Level II LLPs shall be referred to as Micro, Small and Medium-sized Limited Liability Partnerships (MSMLLPs).

As clarified in the exposure draft since the LLP Act permits a cash basis of accounting, therefore, if an LLP is following a cash basis of accounting, it shall apply Accounting Standards (read together with the exemptions in II and VIII as may be available) to the extent applicable in the context of a cash basis of accounting.

Considering the present practice and the fact that the exposure draft continues to propose applicability of Companies (Accounting Standards) Rules, 2021 for LLPs, the likelihood of applying Ind-AS remains remote and is contingent upon notification from regulators. Accordingly, there is likely to be a situation where LLP prepares Ind-AS compliant financial statements specifically for the purposes of consolidation as required by the parent company or Joint Venturer who otherwise is required to follow Companies (Indian Accounting Standards) Rules, 2015. Thus, at the time of conversion of financial statements from one GAAP to another GAAP, matters like fair value accounting, deferred tax, business combination etc. require significant consideration.

Guidance Note on Financial Statements of Limited Liability Partnerships: The Accounting Standards Board (ASB) of the ICAI, in June 2022, issued a Technical Guide on Financial Statements of Limited Liability Partnerships to prescribe guidance for the applicability of Accounting Standards to LLPs and to recommend the formats of the financial statements for standardisation of presentation of the financial statements by LLPs.

The ASB has subsequently issued the Guidance Note on Financial Statements of Limited Liability Partnerships. The Guidance Note will enable the LLPs to communicate their financial performance and financial position in standardised formats thereby enhancing their comparability. This Guidance Note is effective for financial statements covering periods beginning on or after 1st April, 2024. The Technical Guide on Financial Statements of Limited Liability Partnerships stands superseded by this Guidance Note.

The Illustrative formats for Financial Statements included in the Guidance Note on Financial Statements for Limited Liability Partnerships have also been given in the Excel file.

AUDITING CONSIDERATIONS

In the absence of any specific auditing standards that may apply to the audit of an LLP, the existing set of Standards on Auditing issued by the ICAI will continue to be applicable mutatis mutandis (with necessary modifications to the audit procedures in the context of an LLP).

The auditing will continue to envisage planning,execution and reporting as its key steps. As an auditor, professional membersshould carefully read andtake necessary notes about important aspects ofthe LLP deed, specifically those in relation to thenature of the business, Profit sharing Ratio, formand manner of capital contribution, valuation(if any), rights, restrictions and obligations of individual partners.

Although one would assume that doing an audit of smaller entities structured as LLP may be relatively easy, however, the same may not always be true. Vide one of the recent amendments, the government has become more conscious of ensuring transparency and has accordingly mandated LLPs to disclose Significant Beneficial Ownership.

Pursuant to the recent amendment Limited Liability Partnership (Third Amendment) Rules, 2023 which are effective from 27th October, 2023, LLPs are required to maintain a register of partners at their registered office.

Another important amendment was in the context of the declaration regarding beneficial interests in any contribution. The Amended Rules make it mandatory for people to declare the nominee or registered holder-beneficial owner relationships (including any changes in the beneficial interest).

MCA also notified the Limited Liability Partnership (Significant Beneficial Owner) Rules, 2023 (SBO Rules) with effect from 9th November, 2023. As per the Rules “Significant beneficial owner” means an individual, who acting alone or together or through one or more persons or trust, possesses one or more of the following rights or entitlements in such reporting LLP, namely —

  • holds indirectly or together with any direct holdings not less than 10 per cent of the contribution;
  • holds indirectly or together with any direct holdings, not less than 10 per cent of the voting rights in respect of the management or policy decisions in such LLP;
  • has the right to receive or participate in not less than 10 per cent of the total distributable profits or any other distribution, in a financial year through indirect holdings alone or together with any direct holdings;
  • has the right to exercise or actually exercises significant influence or control, in any manner other than through direct holdings alone.

In the case of LLPs, the determination of SBO has to be based on the holding of capital contribution, voting rights in respect of management or policy decisions of LLP, and with respect to the right to receive or participate in distributable profits and thus it becomes all the more important for the auditor to assess the same in the context of the LLP deed.

Further, the determination of indirect holding is likely to pose a significant challenge for the auditor since it has to be determined based on the individual’s relationship with the non-individual member of the reporting LLP. For instance, where the member is a Hindu Undivided Family (HUF), the Karta of the HUF shall be considered to be holding indirect right or entitlement in the reporting LLP. Similarly in case where the member is a Trust (through a trustee), an individual’s right or entitlements in a reporting LLP shall be considered to be held indirectly if he is a trustee/settlor/author depending upon the nature of the trust. Auditors are accordingly expected to examine necessary regulatory filings made by LLP / SBOs in this regard.

Other areas that are likely to pose similar audit risks are complex related party relationships and transactions with related parties; accounting estimates, assessment of the use of going concern basis in an evolving geopolitical environment, fraud risk assessment, etc.

At the time of reporting, an auditor needs to ensure that necessary changes are made to the audit report format as illustrated in Standards on Auditing 700, Forming an Opinion and Reporting on Financial Statements, to ensure factual accuracy since the report is to be issued for a separate form of entity. The auditor is expected to consider the key areas that need to be imbibed as part of the audit report as a result of the differing legal and regulatory requirements. Some of the required changes to the audit report are listed below:

  • All references to ‘company’ as stated in the illustrative format of Standards on Auditing 700 Forming an Opinion and Reporting on Financial Statements, need to be amended to ‘limited liability partnership’.
  • All references to ‘directors’ need to be amendedand the recommended term to use is ‘designated partner’ as that is the term that is used in the LLP Act/LLP Deed. The references to the ‘Companies Act 2013’ need to be amended to the Limited Liability Partnership Act 2008 (as amended) read along with LLP Rules.
  • The audit report of an LLP is addressed to the ‘Designated Partner’.
  • The opinion paragraph describes the financial statements, including specifying the titles of the primary statements. However, it is important that the titles of the primary statements precisely match those used by the entity. The opening paragraph of the ‘opinion’ section needs to reflect the financial reporting framework.
  • The audit opinion needs to be amended as follows:
  • In our opinion, the financial statements:
  • give a true and fair view of the state of the limited liability partnership’s affairs as of [date] and of its [profit/loss] for the year then ended.
  • have been properly prepared in accordance with the accounting standards issued by the Institute of Chartered Accountants of India and other accounting principles generally accepted in India; and
  • gives information as required by the LLP Act.
  • The ‘Basis for opinion’ will continue to mention the facts that the audit was done in accordance with the Standards on Auditing (SAs) and other applicable authoritative pronouncements issued by the Institute of Chartered Accountants of India (including those related to ethics and independence). Basis ofopinion will also state that the auditor believes that the audit evidence we have obtained issufficient and appropriate to provide a basis for the opinion.
  • Other information: The Designated Partner of the LLP is not required to prepare an annual report. Accordingly, the requirement for reporting on such other information does not arise.
  • In respect of the signature on the audit report the requirements for LLPs are effectively the same as for companies and the audit report is required to be signed by the statutory auditor, for and on behalf of the audit firm along with the other compliances like UDIN.

WHAT’S AWAITED?

Recently IAASB issued the much-awaited International Standard on Auditing for Less Complex Entities (ISA for LCE). The standard is effective for audits beginning on or after 15th December, 2025, for jurisdictions that adopt or permit its use. It recognizes the importance of smaller businesses and their specific audit needs.

It is a standalone standard that is proportionate & tailored to the specific needs of an audit of less complex entities, which makes it easier to navigate for those practitioners who support these types of engagements. It provides the same level of assurance as an audit performed under the ISAs i.e., reasonable assurance. Considering this being of global relevance we may soon have a similar standard for less complex entities in India. However, the same would require regulatory backing from ICAI and NFRA. In November 2023, an exposure draft was issued proposing the applicability of all 35 standards on Auditing for limited liability partnerships (LLPs).

As noted from MCA’s Annual Report (2022–23) as of 31st October, 2022, the number of LLPs registered in the country was 2,86,377, and out of those 2,57,944 LLPs were active. During the period from 1st December, 2021, to 30th October, 2022, a total of 31,349 LLPs were incorporated.

The statistics clearly indicate that with the extension of tax benefits, the ease of FDI norms, LLP form of structure has gained a lot of momentum recently. With LLPs likely to dominate the constitutional form, more and more professional opportunities would emerge ranging from incorporation to auditing.

Immovable Property Transactions: Direct Tax and FEMA Issues for NRIs

INTRODUCTION

This article is the fourth part of a series on “Income Tax and Foreign Exchange Management Act (FEMA) issues related to NRIs”. The first article focused on the provisions of the Income Tax Act, whereas the second one was on the applicability of the treaty on the definition of Residential Status. The third one was focused on the Residential Status under FEMA Regulations and this one deals with the “Immovable property Transactions – Direct Tax and FEMA issues for NRIs.

BACKGROUND

Immovable property refers to any asset, which is attached to the earth and is immobile, and includes land. Typically, the term “immovable property” is used to mean land and/or buildings attached to the land. Owning an immovable property, especially a residential house, in India has often been considered an aspirational goal. The lure of owning a property in India also attracts Non-resident Indians (“NRIs”), who have moved out of India but have an investible surplus available with them. Additionally, many NRIs also inherit ancestral or family properties and continue to hold them and enjoy the passive income therefrom. As these NRIs identify better or alternative opportunities outside India, the properties are sold,and sale proceeds are sought to be repatriated outside India.

This article seeks to touch upon the tax and FEMA aspects of the various transactions surrounding investment in Immovable Property by NRIs ranging from investment and passive income to sale and repatriation of the proceeds.

TAXABILITY OF INCOME FROM IMMOVABLE PROPERTIES

As a thumb rule, rent income or passive income arising from an immovable property is taxable in India. Rent income received by the owner of a property from the letting out of any building or land appurtenant thereto is generally taxable under the head “Income from House Property”, irrespective of whether the property in question is a residential property or a commercial one. In fact, section 22 of the Income-tax Act seeks to tax the Annual Value of such property as “Income from House Property”, which is determined on the basis of the higher of the actual rent received or receivable for a property or the sum for which the property might reasonably be expected to be let. Thus, a property is taxed on the basis of its capacity to earn rent even though it is not actually let out or generating rent income.

Section 23, however, provides for considering the Annual Value as Nil in case of up to two properties, which are occupied by the owner for his own residence or which cannot be so occupied by the owner on account of his employment, business or profession is carried on at any other place and he has to reside at that other place in a building which is not owned by him. Where the NRI owns more than two properties which have not been let out, then, he can opt for the Annual Value of two of the properties to be considered as Nil and the Annual Value of the remaining properties will be computed as if they have been let out. Further, if the property is used or occupied by the owner for the purposes of any business or profession carried out by the owner and the profits of such business or profession are chargeable to income-tax, then, its Annual Value is not taxable.

If, however, that leasing or renting of the property is only one of the elements of a composite contract, under which various services are provided, then, the entire income from such composite services is taxable as business income1. For instance, leasing of shops by a mall or renting of rooms by a hotel. When the rent income is taxable as Income from House Property, only specific deductions are allowable from the Annual Value in respect of municipal taxes paid, standard deduction of 30 per cent and interest on borrowings. As against this, in case of income taxable as business income, the taxpayer can claim any expense incurred for the purposes of the business, including depreciation on capital expenditure. The tax rate on income from the property for NRI in either case would be the applicable slab rate.

1   Krome Planet Interiors (P.) Ltd. 265 Taxman 308 (Bom HC); Plaza Hotels (P) Ltd. 265 Taxman 90 (Bom HC); City Centre Mall Nashik Pvt. Ltd. 424 ITR 85 (Bom HC)

 

In the case of jointly owned properties, the income from the property would be taxable in the hands of all the owners in the ratio of their ownership. If the deed does not mention the ratio of ownership of the property between the joint owners, it would be assumed to be an equal share of each joint owner2. If, however, the name of any joint owner is added merely for convenience and such joint owner has neither paid for any of the purchase consideration nor has any source of income to do so, then, it would be appropriate to consider the entire income as taxable in the hands of the remaining owners3, following the principle laid down by the Apex Court that in the context of section 22, owner is a person who is entitled to receive income from the property in his own right4.

2   Saiyad Abdulla v. Ahmad AIR 1929 All 817
3   Ajit Kumar Roy 252 ITR 468 (Cal. HC)
4   Podar Cement (P.) Ltd. 226 ITR 625 (SC)

 

If the immovable property in question is simply plot of land, without any building thereon, then the charge under section 22 would not be triggered and the income from the land would instead be taxable as “Income from Other Sources” under section 56. Any expenses incurred to earn the said income can be claimed as a deduction under section 57 from the said income. The income from the land would, however, be exempt under section 10(1) if it is an agricultural income in terms of section 2(1A), which refers to rent or revenue derived from land in India used for agricultural purposes; income derived from the land by agriculture, or by the performance of any process by the cultivator or receiver of rent-in-kind to render the produce fit to be taken to the market, or sale of the produce by the cultivator or receiver of rent-in-kind; as also income derived from a building on or in the immediate vicinity of the land, subject to certain conditions.

TAXABILITY OF CAPITAL GAINS

The gains arising from the sale or transfer of immovable property, i.e., land or building or both, are taxable under section 45 as Capital Gains, classified as short-term or long-term depending on the period for which the property was held. Where the property is held by the owner for a period of more than twenty-four months immediately preceding the date of its sale or transfer, it is considered a long-term asset and the gains are taxable as Long-Term Capital Gains (“LTCG”). Where the period of holding does not exceed twenty-four months, the property is treated as a short-term asset, with the gains taxable as Short-Term Capital Gains (“STCG”). In the case of non-residents, STCG is included in the total income for the period and taxable as per the applicable slab rate, whereas LTCG is taxable under section 112 at a rate of 20 per cent, excluding applicable surcharge and cess.

The term “transfer” includes the transfer of immovable property on account of compulsory acquisition, redevelopment of old property, or even receipt of the insurance claim on account of damage to or destruction of the property, but does not include the transfer of property under a gift, will, irrevocable trust or distribution upon the partition of a Hindu Undivided Family (“HUF”). In the case of a property transferred by way of a gift, will, irrevocable trust or distribution upon the partition of an HUF and similar other situations as enumerated in section 47, the Capital Gains is taxable only in the event of a final sale or transfer and at the point of taxability, the amount of gain is computed with reference to the purchase price for the previous owner.

Further, the period of holding of the previous owner is also included while determining whether the gain on the property is Long Term or Short Term.

Section 48 lays down the computation of the amount of Capital Gain as under —

Sale Consideration
Less: Expenses incurred wholly and exclusively in connection with the transfer
Less: Cost of Acquisition
Less: Cost of Improvement
Taxable Capital Gain

 

As per the second proviso to section 48, in case the property is a long-term asset, the cost of acquisition and cost of improvement are indexed for the period of holding as per the cost inflation index notified by the Central Government in relation to each year. Thus, LTCG is computed with reference to a stepped-up cost, allowing for rising costs.

The various elements relevant to the computation of gains are discussed hereunder —

Sale Consideration: The transaction price at which the property is sold shall be considered to be the sale consideration, including the value of any consideration in kind. In a situation where a property is sold at a consideration, which is lower than the value adopted or assessed for the purposes of payment of stamp duty, section 50C would come into play, requiring that such value adopted or assessed for stamp duty payment should be assumed to be the full value of sale consideration and the capital gains should accordingly be calculated with reference to such higher value.

Expenses incurred wholly and exclusively in connection with the transfer: In claiming deduction of the expenses from sale consideration, attention should be paid to the requirement that such expenses are “incurred wholly and exclusively in connection with the transfer.” Expenses such as transfer fees paid to society, brokerage expenses, and legal expenses connected to the transfer such as fees for drafting of the agreement, would be allowable expenses. Further, in the case of non-residents, expenses incurred on travel to India as well as stay if incurred specifically for the purposes of executing and registering the sale agreements can also be considered as incurred wholly and exclusively in connection with the transfer.

Cost of Acquisition: As a general rule, the actual purchase price paid for acquiring a property would constitute the cost of acquisition of the property. It would include the expenses incurred at the time of purchase of the property towards stamp duty, registration fee, and brokerage. However, any payment made at the time of purchase towards recurring expenses, which form part of the purchase price, such as advance maintenance for a certain period or outstanding property taxes or electricity charges, etc. would not form part of the cost of acquisition.

The cost inflation index used for indexation of the cost follows FY 2001–02 as the base year with the index for the base year set at 100. Thus, if any property was purchased prior to 1st April, 2001, its cost cannot be indexed beyond FY 2001–02. To address this issue, in case of properties purchased by the taxpayer or the previous owner (in case of property acquired through gift, will, etc.) prior to 1st April, 2001, Section 55(2)(b) allows the taxpayer the option to adopt its original purchase price or its fair market value as on 1st April, 2001 as the Cost of Acquisition. This fair market value as of 1st April, 2001, however, cannot exceed the value of the property adopted or assessed for the purpose of payment of stamp duty as of 1st April, 2001. Where the property was purchased prior to 1st April, 2001, the original purchase cost would usually be lower than the fair market value as of 1st April, 2001. The option provided in Section 55(2)(b) would, therefore, let the taxpayer adopt the higher value as the cost of acquisition (subject to the cap of stamp duty value as on 1st April, 2001) and index it from FY 2001–02 till the year of sale. Thus, when computing capital gains in respect of an immovable property purchased by the taxpayer or the previous owner prior to 1st April, 2001, a valuation report determining the fair market value of the property as on 1st April, 2001 as well as its value for the purposes of stamp duty on the same date shall be required to be obtained.

Often, in case of ancestral properties acquired by way of inheritance, will or such other modes, the details of original purchase cost of the property are not available, making it difficult to compute the capital gains. Section 55(3) provides that in cases where purchase cost of the previous owner cannot be ascertained, the fair market value of the property as on the date on which the previous owner became the owner of the property shall be considered as the Cost of Acquisition of the previous owner.

Cost of Improvement: Any cost that has been incurred by the taxpayer or the previous owner towards making additions or alteration to the property, which is capital in nature is considered as cost of improvement and is allowable as a deduction while computing the amount of capital gains. Examples of cost of improvement include cost incurred towards adding a room or a floor to an existing property, fencing a plot of land to secure its perimeter, installation of lift, incurring expenses to make the property habitable, incurring expenses to clear the legal title of a property, which is under dispute, etc. However, expenses such as routine repairs and renovation expenses, modifications to furniture, aesthetic expenses, etc. would not be considered as Cost of Improvement. Any cost of improvement incurred prior to 1st April, 2001 is not to be considered in the computation. This restriction is in line with the fact that the taxpayer has an option to adopt the fair market value as on 1st April, 2001 as the Cost of Acquisition, which would take into account any improvements done to the property prior to 1st April, 2001 and thus, separate deductions need not be claimed for such cost of improvements. Further, any expenditure that can be claimed as a deduction in computation of income under any other head of income, cannot be claimed as a Cost of Improvement.

In case of the purchase of property, while it was under construction, the determination of the period of holding and the year from which indexation should be allowed can be debatable. The date of allotment of the future property to the taxpayer by the builder, phase-wise payment towards the purchase cost, the date of registration of the sale agreement and the date of possession would fall in different years in such cases, leading to significant differences in the computation of the amount of taxable capital gain depending on when the property is said to be acquired by the taxpayer. Several judicial pronouncements5 have held that where the taxpayer has been allotted a specific identified property and such allotment is final, subject only to the payment of the consideration, then, the date of allotment is to be considered as the date of acquisition of the property and the period of holding should be calculated from the date of allotment. Similarly, in the case of allotment of property along with shares in the co-operative society prior to the completion of construction or physical possession of the property, it has been held that the date of allotment should be considered as the date of acquisition of the property6. In fact, in the context of whether acquisition of a flat under the self-financing scheme of the Delhi Development Authority shall be considered as construction for the purposes of sections 54 and 54F, the CBDT Circular No. 471 dated 15th October, 1986 states that “The allottee gets title to the property on the issuance of the allotment letter and the payment of instalments is only a follow-up action and taking the delivery of possession is only a formality.”

Further, payments for an under-construction property are made by taxpayers over several years starting from the date of allotment in a phase-wise manner. It has been held by the Courts that the benefit of indexation in such cases should be allowed on the basis of payment7, i.e., payment made in each year should be indexed from that year till the date of sale of the property. In fact, in the case of Charanbir Singh Jolly v. 8th ITO 5 SOT 89 and thereafter, in Smt. Lata G. Rohra v. DCIT 21 SOT 541 the Mumbai Tribunal has held that indexation for the entire purchase cost of the property should be allowed from the year in which the first instalment was paid by the assessee. While the ratio of aforesaid judgements has not been further appealed against and is, thus, valid, indexation of the entire cost from the year of first payment irrespective of date of actual payments may be considered to be an aggressive tax position and open to litigation.

5   Praveen Gupta v. ACIT 137 TTJ 307 (Delhi – Trib.); CIT v. S.R.Jeyashankar 228 Taxman 289 (Mad.); Vinod Kumar Jain v. CIT 195 Taxman 174 (Punjab & Haryana)
6   CIT v. AnilabenUpendra Shah 262 ITR 657 (Guj.); CIT v. JindasPanchand Gandhi 279 ITR 552 (Guj.)
7   Praveen Gupta (supra); ACIT v. Michelle N. Sanghvi 98 taxmann.com 495 (Mumbai-Trib.); Ms. RenuKhurana v. ACIT 149 taxmann.com 160 (Delhi-Trib.)

However, this view is supported by the form of return of income. The form of return of income does not provide mechanism to index cost of acquisition with reference to payments made in various years. Therefore, if an assessee chooses to index cost of acquisition with reference to years in which instalments of purchase price are paid then such instalments will need to be reported in the form of return of income as cost of improvement which is technically not correct.

Where the property in question is an agricultural land, one would need to examine whether the same is a “rural” agricultural land or an “urban” agricultural land, as is referred to in common parlance. The former is excluded from the definition of a capital asset under section 2(14) and thus, gains arising from its sale would not give rise to taxable Capital Gains. An “urban” agricultural land, however, does not enjoy such an exclusion and would be subject to capital gains taxation like any other property. The distinction between “rural” or “urban” agricultural land is drawn on the basis of the location of the land with reference to local limits of municipalities and the population of such municipalities as per the latest census. Accordingly, agricultural land which is situated within any of the following areas shall be considered to be an “urban” agricultural land and thus, included within the definition of capital asset —

i) Within the jurisdiction of a municipality or any such governing body, having a population exceeding 10,000, or

ii) Within 2 km of the local limits of a municipality or any such governing body, having a population exceeding 10,000 but not exceeding 1,00,000, or

iii) Within 6 km of the local limits of a municipality or any such governing body, having a population exceeding 1,00,000 but not exceeding 10,00,000, or

iv) Within 8 km of the local limits of a municipality or any such governing body, having a population exceeding 10,00,000.

EXEMPTIONS FROM CAPITAL GAINS

The Income-tax Act contains certain beneficial provisions to provide relief from tax on the capital gains upon reinvestment into certain specified assets if the conditions laid down in those provisions are satisfied. A summary of the relevant exemption provisions applicable for capital gain arising on the sale of immovable property is given in the table below —

Section Nature of Gain Type of New Asset Amount to be reinvested for full exemption Time period for reinvestment Lock-in period for New Asset Capital Gain Deposit Account Scheme Other provisions
54 LTCG on transfer of residential property One residential property in India Amount of Capital Gains Purchase of new property within 1 year before, or 2 years after date of transfer; or Completion of construction of new property within 3 years after date of transfer 3 years from purchase or construction, failing which cost of the new asset shall be reduced by the amount of exemption already claimed To be deposited before the date of filing / due date of filing the return of income •   Taxability in case of unutilised balance in CG Deposit Account

•   One time option to small taxpayers having LTCG less than R2 crores

•   Exemption capped at
R10 crores
54D Gain on compulsory acquisition of land or building or rights therein, forming part of industrial undertaking Any other land or building or rights therein Amount of Capital Gains Purchase or construction within 3 years from date of transfer 3 years from purchase or construction, failing which cost of the new asset shall be reduced by the amount of exemption already claimed To be deposited before the date of filing / due date of filing the return of income •   Use of asset for 2 years immediately prior to the date of transfer for business of the industrial undertaking

•   Taxability in case of unutilised balance in CG Deposit Account
54EC LTCG on transfer of land or building or both Specified Bonds issued by NHAI, RECL or as maybe notified Amount of Capital Gains, subject to a maximum of
R50 lakhs		 Within 6 months after the date of transfer 5 years. Transfer of New Asset or monetisation other than by way of transfer within the lock-in period will result in revocation of exemption in the year of such transfer or monetisation Not Applicable •   Interest received on Bonds is taxable.

•   No deduction can be claimed under section 80C in respect of the investment in bonds
54F LTCG on transfer of any asset other than a residential property One residential property in India Full amount of net sale consideration. Proportionate exemption is allowed in case of lower reinvestment Purchase of new property within 1 year before, or 2 years after date of transfer; or Completion of construction of new property within 3 years after date of transfer 3 years from purchase or construction, failing which the amount of exemption already claimed shall be deemed to be LTCG in the year of transfer of new asset To be deposited before the date of filing / due date of filing the return of income •   Taxability in case of unutilised balance in CG Deposit Account

•   Added condition relating to ownership of residential house on the date of transfer of original asset or purchase or construction of one more residential house within 1 year / 3 years after the date of transfer – withdrawal of exemption in case of violation of condition.

•   Exemption capped atR10 crores

 

 

INCOME UNDER SECTION 56(2)(X)

Section 56(2)(x) seeks to bring into the tax net, any transactions of receipt of money or movable or immovable property without consideration or for inadequate consideration. Where any person receives an immovable property having a stamp duty value exceeding ₹50 thousand without consideration, the stamp duty value of such property is deemed to be an income of the recipient. Similarly, where a person purchases an immovable property at a consideration lower than its stamp duty value, where the difference is more than the higher of ₹50 thousand or 10 per cent of actual consideration, then, such difference between the actual consideration and stamp duty value of the property is deemed to be the income of the recipient. In other words, if any person, including a non-resident, is purchasing an immovable property in India for a value lower than its stamp duty value, then, the difference is assumed to be a benefit to the purchaser and sought to be taxed in the hands of the purchaser.

This provision intends to target property transactions that are intentionally undervalued so as to reduce the burden of stamp duty and involve cash payments. However, practically, the price of any transaction varies depending on various factors which may not reflect in the stamp duty value of the property, and it is likely that the actual transaction may genuinely take place at a value lower than the stamp duty value. To address such situations, the provisions allow a safe harbour of higher ₹50 thousand or 10 per cent of the actual consideration. If the difference in the consideration and the stamp duty value is within this safe harbour, then, it will not have any implication for the purchaser. However, if the difference exceeds the safe harbour limit, then, the entire difference will be treated as income of the purchaser.

In practice, parties may agree upon the consideration for property sale when the initial token or advance is given and enter into an agreement or MOU to document the same, but the actual registration of the sale agreement may take place subsequently after a gap, by which time the stamp duty value of the property may have increased. In such a case, the first proviso to section 56(2)(x) allows for stamp duty value as on the date of the initial agreement or MOU to be adopted provided the advance or token is paid on or before that date by account payee cheque or bank draft or electronically. Thus, if for any reason the registration of the final sale deed is delayed, the purchaser will not have to suffer taxation merely due to an increase in the stamp duty value of the property during the period of delay.

TAXABILITY UNDER A TAX TREATY

Article 6 of the OECD Model Convention deals with Income from Immovable Property, while Paragraph 1 of Article 13 deals with Gains from alienation of Immovable Property. Both these articles give the right to tax the income and capital gains relating to immovable property to the Source State where such property is situated. This is considering the fact that there is always a close economic connection between the source of income relating to immovable property and the State of source8. Further, the definition of the concept of immovable property as also the manner of taxation and computation is left to the Source State to decide. This helps to remove any ambiguity regarding the classification of an asset as immovable property.

8   Paragraph 1 of Commentary on Article 6

Thus, in the case of NRIs having income or capital gains from immovable property in India, the manner of taxation and computation would be determined as per the domestic tax laws, which have been briefly discussed above. The NRIs can then offer to tax or report these incomes in their Residence State and claim credit for the taxes paid in India as per the provisions of the applicable tax treaty and domestic tax laws of the state of residence.

TAX DEDUCTION AT SOURCE

Section 195 requires any person making payment to a non-resident or a foreign company of any sum chargeable to tax under the Act, to deduct tax at source on such payment and deposit the same with the Government. Unlike the TDS provisions applicable in case of rent payments or property purchases amongst residents, Section 195 does not provide a fixed rate of TDS. Thus, the person making payment in respect of income from property or sale consideration to the non-resident would be required to deduct tax at source as per the applicable rate of tax on the respective transactions. In order to do so, the payer would have to obtain a Tax Deduction Account Number (“TAN”), which is often not required in case of property transactions between residents. Additionally, the payer would also have to file quarterly TDS statements in Form 27Q so as to enable the NRI to get credit of tax deducted.

As discussed earlier, the income from property, computed after claiming deductions, would be taxable for the NRI at the applicable slab rates. However, the tax would be required to be deducted at source by the payer on the entire rental income at the rate of 30 per cent as per the residuary entries for “other income” under Serial No. (1)(b) of Part II of the Finance Act. Further, STCG on transfer of property would also be taxable at the applicable slab rates, while LTCG would be taxable at a rate of 20 per cent plus applicable surcharge and cess. The person making the payment to the NRI in respect of the sale of the property would not be in a position to conclusively determine either the slab rate applicable to the NRI or the computation of taxable capital gains. Consequently, the payer would not be in a position to determine the appropriate rate at which the TDS obligation should be discharged.

In the above scenarios, the payer or the NRI payee can make an application to the Assessing Officer under section 195(2) or section 197 to determine the sum chargeable to tax or the rate at which tax should be deducted at source, respectively. Based on the application made, the Assessing Officer would issue a certificate determining the sum chargeable to tax or the rate at which tax deduction should be done and the payer can deduct tax under section 195 accordingly.

While no time limit has been prescribed in the provisions for the Assessing Officer to deal with such an application and issue the certificates, a 30-day timeline was provided for this process in the Citizen’s Charter 2014, which was further endorsed by the CBDT in its office memorandum of 26th July 2018. Thus, the overall process of making an application for lower or nil deduction of tax, responding to queries, if any, of the tax offices and obtaining the certificate can take from 5-8 weeks. In a time-sensitive transaction and considering the logistics of transacting with an NRI, the payer or the NRI payee may not be in a position to follow the process of obtaining a lower or nil deduction certificate. In such a scenario, the payer may deduct tax at source at the rate applicable to the transaction (20 per cent plus applicable surcharge and cess in case of LTCG on sale of property and 30 per cent plus applicable surcharge and cess in other cases) on the entire amount payable to the NRI, who would be required to claim a refund of the excess tax deducted by filing a return of income.

REPORTING OF HIGH-VALUE TRANSACTIONS

Section 285BA requires various reporting persons to file a statement of financial transactions (“SFT”) to report certain transactions above the specified thresholds, referred to as high-value transactions, to the Income-tax authorities, which enables the latter to evaluate if the incomes reported by the persons transacting are in line with such high-value transactions and whether there could have been any tax evasion. One of the transactions required to be reported by the Registrar or Sub-Registrar is the purchase or sale of immovable property for an amount of ₹30 lakh or more or valued at ₹30 lakh or more by the stamp valuation authority. It is a common scenario where non-residents may not have filed a return of income in India for several years as they have negligible income less than the maximum amount not chargeable to tax, and consequently, no tax liability. However, if they have entered into a transaction of purchase or sale of immovable property, the same would be reported in the SFT and would reflect against the PAN of both the buyer and the seller. This would lead to the issuance of notice by the assessing officer to investigate the reason for non-filing of return of income even though a high-value transaction was entered into during the year. It is, thus, advisable for a person entering into any of the specified high-value transactions, including the purchase or sale of immovable property, to file a return of income for the year in which such transaction is undertaken, so as to avoid unnecessary proceedings merely on the premise of such a transaction.

INVESTMENT IN IMMOVABLE PROPERTY UNDER FEMA

Acquisition or transfer of immovable property byNon-residents in India is regulated by sub-sections 2(a), (4) and (5) of section 6 of the Foreign Exchange Management Act, 1999 (“FEMA”) read with Foreign Exchange Management (Non-debt Instruments) Rules, 2019 and is subject to applicable tax laws and other duties and levies in India.

NRIs and Overseas Citizens of India (“OCIs”) have general permission to invest in immovable property in India subject to certain conditions and restrictions. They can purchase residential or commercial property, other than agricultural land, plantation property, or farmhouse. NRIs and OCIs can also receive an immovable property other than agricultural land, plantation property, or farmhouse as a gift from a relative as defined in section 2(77) of the Companies Act, 2013. A NRI or OCI can also receive any immovable property as inheritance from a resident or from any person, who had acquired the property in accordance with the laws in force.

Payment for the purchase of immovable property can be made in India through normal banking channels by way of inward remittance. It can also be made out of funds held by the NRI or OCI in their NRE, FCNR(B) or NRO accounts. However, the payment cannot be made through travellers’cheques and foreign currency notes or any other mode.

A non-resident spouse of any NRI or OCI, who is not themselves an NRI or OCI, is permitted to acquire one immovable property in India, other than agricultural land, plantation property, or farmhouse jointly with their spouse, provided the marriage has been registered and has subsisted for a continuous period of at least 2 years immediately prior to acquiring the property. In such a case, the payment for the purchase can be made by the non-resident spouse, who is not a NRI or OCI either by way of inward remittance through normal banking channels or by debit to their non-resident account maintained as per the FEMA Act or rules thereunder.

SALE AND REPATRIATION OF FUNDS

The NRI or OCI can transfer the immovable property, other than agricultural land, plantation property, or farmhouse to a resident or another NRI or OCI. Transfer by way of gift can only be made to a relative as defined in section 2(77) of the Companies Act, 2013. Further, transfer of agricultural land, plantation property, or farmhouse can only be made to a person resident in India.

As a general rule, any person, who had acquired an immovable property when they were a resident in India or inherited from a person resident in India or their successor, requires RBI approval to remit the sales proceeds of the property. However, under the Foreign Exchange Management (Remittance of Assets) Regulations, 2016, NRIs and PIOs are permitted to remit up to USD 1 million per financial year, out of the sale proceeds of such assets in India. The limit of USD 1 million shall apply qua a financial year, irrespective of how many such assets may have been sold during the year.

In all other cases, the NRIs, OCIs and PIOs (in case of property acquired under the erstwhile Foreign Exchange Management (Acquisition and transfer of Immovable Property in India) Regulations, 2000, can repatriate the sale proceeds of immovable property outside India provided the following conditions are satisfied —

i) The property was acquired by the NRI / OCI / PIO as per the laws in force at the time of acquisition;

ii) The payment for the purchase of property was made by way of inward remittance through normal banking channels or out of balances in NRE / FCNR(B) account; and

iii) The repatriation of sale proceeds for residential property is restricted to not more than two properties.

In the case of point ii) above, if the NRI / OCI / PIO had acquired the property through housing loans availed in accordance with the applicable FEMA regulations, then the repayment ought to have been made by way of inward remittance through normal banking channels or out of balances in NRE / FCNR(B) account.

PROPERTIES IN INDIA BY CITIZENS OF NEIGHBOURING COUNTRIES

Citizens (including natural persons and legal entities) of certain countries — Pakistan, Bangladesh, Sri Lanka, Afghanistan, China, Iran, Nepal, Bhutan, Macau, Hong Kong, and the Democratic People’s Republic of Korea — cannot acquire or transfer immovable property in India, without the prior permission of RBI. They can,however, acquire the property on lease, which does not exceed 5 years. These restrictions do not apply in case of an OCI.

However, the regulations prescribe some relaxations in case of citizens of neighbouring countries Afghanistan, Bangladesh, or Pakistan, who belong to the minority communities in those countries, i.e., Hindus, Sikhs, Jains, Buddhists, Parsis and Christians. If such a person is residing in India and has been granted a Long-Term Visa (“LTV”) by the Central Government, he can purchase only one residential immovable property in India for his own residence and only one immovable property for self-employment, subject to the following conditions —

i) The property should not be located in, and around restricted / protected areas notified by the Central Government and cantonment areas.

ii) A declaration should be submitted to the district Revenue Authority specifying the source of funds and that the person is residing in India on an LTV.

iii) The registration documents of the property should mention the nationality and the fact that such a person is on an LTV.

iv) The property of such a person may be attached/ confiscated in the event of his/ her indulgence in anti-India activities.

v) A copy of the documents of the property shall be submitted to the Deputy Commissioner of Police / Foreigners Registration Office / Foreigners Regional Registration Office concerned and to the Ministry of Home Affairs (Foreigners Division).

vi) Sale of such property is permissible only after the person has acquired Indian citizenship. However, if the property is to be transferred before acquiring Indian citizenship, then, it would require the prior approval of the Deputy Commissioner of Police (DCP) / Foreigners Registration Office (FRO) / Foreigners Regional Registration Office (FRRO) concerned.

CONCLUSION

The acquisition and sale of immovable property in India by non-residents has several nuances under both the tax laws and FEMA. Several aspects discussed in the above article may have different implications depending on the facts of each case. For instance, in order to decide which payments can be included in the Cost of Acquisition or Cost of Improvement would require one to understand the nature of payments as well as their context. Similarly, as discussed in this article, the determination of the period of holding and indexation of cost can have its own complexities in cases of purchase of under-construction property with phase-wise payment and the conclusion can vary on the basis of the facts of the case. The aim of this article is to highlight the various aspects to be considered by individuals involved in property transactions, especially non-residents, and to bring about awareness regarding the applicable provisions and regulations so that the detailed facts of each case can be examined in light of these.

Audits of Future

Dear BCAS Family,

As more and more entities are undergoing digital transformation, it is now becoming increasingly important to include the technology tools as part of our audit procedures. The term coined nowadays for the way audits would be undertaken in future is Continuous Auditing.

Amongst firms, especially small and medium sized firms today, there is a struggle for adequate technology staff / support; there is also a lack of understanding of the technological advancements which can ease their execution and lack of technologically proficient staff. The above challenges for such firms are on account of lack of allocation of adequate financial resources to attract skilled staff and / or conduct upskilling / reskilling initiatives for existing staff. Smaller firms are also concerned about the increasing exposure to cybersecurity risks as audit firms’ increased access to clients’ data which is requested, obtained and stored online.

This month, I attended the 1st NFRA international conference. Certain key areas which this conference touched upon were Audit fees charged by auditors are too low and need to be addressed, use of technology in Audits is ever increasing, role of independent auditors and directors needs course correction, importance of training and upskilling of audit staff is need of the hour, amongst others.

At our Society this month, the Accounting and Assurance Committee of BCAS has launched a 75-hour-long duration course in the 75th year of the Society. This course covers the accounting standards (Indian GAAP and IndAS), auditing standards, FRRB observations, NFRA observations, Ethics and Governance and many other relevant topics. This is with the aim of equipping accountants, staff of audit firms and other assurance function intermediates with adequate knowledge for preparation of Companies Act-compliant financial statements and also to bring efficiency in assurance function.

I would also like to touch upon the most critical area for attest function, viz, use of technology in audit processes, considering that the information technology used in business processes is always evolving but changes significantly with new breakthroughs. As the high costs of IT infrastructure are shared through using cloud services, the costs of using technology for business processes are reducing. This has made the use of technology available for smaller organizations that would otherwise not have the resources to do so.

We can expect more entities to start implementing emerging technologies such as continuous integration / deployment, Data lakes, Artificial Intelligence and Machine Learning, and integrating these technologies into core business processes. This change will further increase the relevance of the use of technology within the audit processes.

The new innovations in technology, like collaborative portals, are resulting in a situation whereby the audit clients can directly interact with the technology used in the audit or the result can be presented through the automated portal.

As we move towards automation-based audits, there would be a number of challenges to overcome like technological integration and data analytics, cybersecurity and data privacy, non-financial reporting, remote auditing, talent management and skills development, globalization and cross-border auditing. One of the key challenges globally is to bridge the gap between the new way of auditing and the existing auditing standards. One key aspect of the audit process which cannot be automated is the judgement of the auditor. The reality of technological changes is that deviations will occur, either due to evolvement of new disruptive technologies or due to changes in the way the businesses will function. Whether the deviations occur or not, the involvement of human auditors to provide judgement shall continue; however, the increasing gap between technology and auditing standards needs to be bridged. As audit automation takes the driving seat, this will be the most discussed and relevant topic between auditors and accounting oversight boards of various countries.

The other challenge is that creating tools to automate auditing and the relevant infrastructure requires a significant upfront investment and will likely not yield returns until several years of operation. This challenge can partially be overcome by using low-code development or open source codes, which typically requires less time and investment to create a piece of automation.

The other technical challenges to overcome are related to data completeness and its integrity and also ensuring that the results of the automated procedures produce quality and consistent results. The future audit will, therefore, require an auditor of the future. The current skill set of accounting knowledge needs to be upgraded with knowledge of data analysis and other analytical skills so as to automate our more routine work and be more efficient and effective.

I came across an international Survey done in May 2022, whereby CPA Australia with the support of the Malaysian Audit Oversight Board conducted an online survey of 179 external audit and IT professionals in Malaysia to obtain their perspectives on the use of technology by auditors.

All participants stated that technology is used in external audits in some form. The extent of firms’ usage of technology in external audits largely aligns with the firm’s size and the nature of audit clients. The observations in case of the Big 4 were 65 per cent use technology in audit to a large extent, 34 per cent use it to a moderate extent and 2 per cent with limited use of technology in external audit. In case of other firms that consist of mid-tier and smaller size firms, the results are encouraging although the technology uptake in other firms is slightly lower. Twenty-six per cent use technology in audit to a large extent, 45 per cent use it to a moderate extent and 22 per cent indicated that there is limited use of technology in external audit.

Over 90 per cent of participants embraced the use of four core technologies (cloud technology, digital tools, digital platform and projects, work-flow, or time management system) in managing external audit engagements.

One of the Research papers regarding the audit of the future said to gain a better understanding of processes, and how information flows through the organization, data analytics can be used to follow accounting records through the organization’s business processes. This can be performed as an audit procedure to verify that all information is part of the financial statements.

As markets change and companies evolve, so must the audit function. The use of key technologies such as advanced analytics, artificial intelligence and virtualization, digital twins should be encouraged which in turn help auditors boost their efficiency and deliver a better-quality audit.

Women’s Day Celebrations

This month our Society planned a women empowerment session. The session had two female speakers Ms. NazChougley and Ms. RupalTejani. Concepts like Law of attraction and women as venture were discussed and both of them spoke on the importance and challenges towards empowerment of women in the current scenario. The program was very well received, and I congratulate the Seminar Public Relations and Membership Development committee led by three female convenors for organizing such an impactful and interactive session.

Wishing you a happy summer and a good vacation ahead!

Best Regards,

 

Chirag Doshi

President

Elections in India: Political Funding or Politics of Funding

Funding for any election, whether for a Municipal Council, State, Nation, or even ICAI is a burning issue.

Recently, the five judge-bench of the Supreme Court of India (SC) struck down the anonymous Electoral Bond Scheme (EBS) as unconstitutional and directed the State Bank of India (SBI) to stop issuing electoral bonds immediately. SC held that electoral bonds violate the right to information under Article 19(1)(a) of the Indian Constitution, which guarantees the freedom of speech and expression. SC held that voters have the right to know who funds political parties and their campaigns under Article 19(1)(a) of the Indian Constitution.1

1 https://www.newindianexpress.com/explainers/2024/Feb/25/explainer-ctrl-delete-electoral-bonds

So, what was EBS?

Electoral Bonds were like promissory notes. They were interest-free bearer instruments, payable to the bearer on demand. These bonds could be purchased by any citizen of India or entities incorporated or established in India. These bonds could be donated to any political party registered under Section 29A of the Representation of the People Act, 1951 and which secured not less than 1 per cent of votes polled in the last general election to the House of the People or the Legislative Assembly of the State. Only SBI was authorised to issue these bonds. They were issued four times in a year, i.e., January, April, July, and October, for 10 days in a month (open for 30 days in Lok Sabha Election Years) with a validity of 15 days only. The bonds were in the denominations of ₹1,000, ₹10000/-, ₹1 lakh, ₹10 Lakh and ₹1 crore. A buyer could maintain anonymity as his name was not revealed publicly, and he could donate bonds to any political party, which could encash the same with SBI.

Along with the EBS, the SC also struck down amendments to the Representation of the People Act, 1951 (RPA), the Income-tax Act, 1961, and the Companies Act, 2013, which were brought to facilitate corporate donations to political parties.2

2 https://forumias.com/blog/electoral-bonds-scheme-explained-pointwise/#gsc.tab=0

The government introduced EBS with objectives such as transparency in election funding, protection of donors’ anonymity, political accountability, and reduction of black money in politics. The bonds were issued only by SBI to KYC-validated individuals, besides corporates, etc. Earlier, the amount of money that a party could accept in cash from anonymous sources was ₹20,000, which was reduced to ₹2,000 with the introduction of EBS. This was done to reduce the use of black money in elections.

However, the EBS was criticised and challenged on many grounds. It was alleged that EBS compromised the citizen’s ‘Right to Know’, which is part of the right to information under Article 19 (1) of the Constitution.

One of the major concerns was the removal of the clause of the Companies Act 2013, which limited the donations in aggregate in any financial year by a company to the extent of seven and a half per cent of its average annual profits during the three immediately preceding financial years. As a result, a company could donate any amount without adequate profits, raising significant risks of pumping black money into political funding through shell companies. The companies did not require shareholders’ approval for political funding; therefore, Board of Directors could fund any political party of their choice. Donations received by a political party through electoral bonds were not required to be reported under section 29C of the Representation of the People Act 1951. This, too, compromised the transparency of political donations. Thus, EBS was perceived to compromise the free and fair election process, which the SC considers to be a part of the basic structure of the Indian Constitution. Well, with the direction of SC, SBI has made public the full details of the donors and the beneficiary political parties. However, nothing seems to have changed with such disclosures, except allegations and counter allegations. The ban on EBS without an alternative may fuel cash funding of elections, as the Lok Sabha elections require huge funding.

There are many suggestions for the way forward. The Indrajit Gupta Committee on State Funding of Elections has supported partial state funding of recognised political parties3. State funding has proved its effectiveness in a number of countries like Germany, Japan, Canada, Sweden etc.2 A National Electoral Fund can be set up to which all donors can contribute. The funds can be allocated to various political parties in the proportion of votes they secure in the election. The Law Commission of India, in its 255th Report, has recommended capping the entire donation received through anonymous sources at ₹20 crores or 20 per cent of the total funding of a political party3. With increased digitization, a complete ban on cash donations can be imposed to curb the menace of anonymous donations. Companies making political funding should obtain shareholders’ approval in general meetings and disclose them prominently in their financial reports. Various recommendations of the Venkatachaliah Committee Report (2002) for strict regulatory frameworks for auditing and disclosure of party income and expenditure may be implemented forthwith.

3 However, the Venkatachaliah Commission rejected the idea of State Funding for elections.

Some global practices may be considered, such as restrictions on the donations that a political party can accept and the mandatory disclosure of the source of the donations by the Publicity Act (USA), Elections and Referendums Act 2000 (UK), and the EU regulations. France banned corporate funding in 1995 and capped individual donations at 6,000 Euros. Brazil and Chile have also banned corporate donations after several corruption scandals related to corporate funding emerged2.

Corruption and corrupt practices, such as using illicit money in political campaigning, exercising undue influence, and political rigging, are common in elections of almost every nation, and India is no exception.

In this context, a recent (4th March 2024) seven judge-bench decision of the SC in the case of Sita Soren is worth noting, wherein it was held that “An MP/MLA can’t claim immunity from prosecution on a charge of bribery in connection with the vote or speech in the legislative house.” The SC further stated, “Corruption or bribery by a member of legislature erodes probity in public life,” adding, “Accepting bribes itself constitutes the offence.”4

4 https://www.oneindia.com/india/supreme-court-overrules-1998-narsimha-rao-judgment-mps-mlas-lose-immunity-from-prosecution-3765427.html?story=4

Blatant violations of the model code of conduct and good practices propounded by the election commission/authorities are followed more in breach than in compliance in any election. Haven’t we experienced spending beyond the authorised amount in campaigning or the use of unethical practices in the big housing society’s elections, or elections of Municipality, or in some cases of ICAI elections also? We, as enlightened citizens, should vote for clean candidates and clean the political system. The dictionary definition of ‘Politics’ is “a methodology and activities associated with running a government or an organisation.” However, today, it has become a dirty word and a synonym for wrongdoing.

Let us rise to the occasion and be vocal for fair and free elections. Let us begin by exercising our vote judiciously in the upcoming Lok Sabha Election. If the Nation survives, we survive. Therefore, “Nation First” should be our mantra.

Jai Hind!

Dr CA Mayur Nayak

Editor


	


	

			






	

		
!! धन्यो गृहस्थाश्रमः !!
	


	
	

		
This shloka almost comprehensively describes a happy family life. गृहस्थ means who stays at home in family. In English, he may be called a house-holder. It mentions eleven attributes of a contented family. The text of the shloka: –


सानंदं सदनं सुताश्च सुधिय


:कांता न दुर्भाषिणी !


सन्मित्रम्सुधनं स्वयोषितिरतिश्चचापरा: सेवका:


आतिथ्यम्शिवपूजनं प्रतिदिनं मिष्टान्नपानं गृहे !


साधो: संगमुपासते हि सततं धन्यो गृहस्थाश्रमः


A beautiful house, intelligent sons, soft spoken or sweet tongued wife, good friend, abundant wealth, loving wife, obedient servants, hospitality, prayers to God, every day delicious food and company of good people — these make a family life happy and enjoyable.


Even if a single item out of these is missing, that makes life less enjoyable, though not miserable. One’s house should be decent. That is a precondition for a happy family to stay in. If your sons (children) are not intelligent, they will not make progress in life. Intelligent does not necessarily mean good at academics. It means your children should be smart enough to stand on their own. They should get good education and should not remain dependent on parents. Eventually, they should be able to take care of parents.


Wife should not be speaking very harsh and unpleasant language. She should be soft spoken that keeps the house peaceful. If she is quarrelsome, the peace is disturbed. Of course, it equally applies to the head of the family — the man. A good friend is always a great asset. In the normal course, you may not need his help; but in difficulties he should be willing to help and be capable of helping. A friend in need is a friend indeed.


Next attribute is wealth — or money. You may not be very rich or affluent; but should be able to afford a decent life. A loving wife is an enviable thing. In your difficulties, she supports you. In your success, she feels proud. She ignores your limitations and does not expect too much. She keeps smiling and takes care of the family. In another shloka, Kalidasa describes a good housewife as a minister or secretary. (गृहिणीसचिव:)


If your servants are honest, loyal and obedient, your work is smooth. Your worries get reduced. It applies equally in office work when your subordinates are honest, loyal and obedient. Your efficiency gets multiplied.


Next is hospitality. This shows a good culture in the family where a guest is respected and received with affection. The guest’s blessings are very valuable. Therefore, it is said अतिथिदेवोभव! Treat a visitor as God.


After hospitality, it talks of prayers to God. This keeps a holy and cordial atmosphere in the house. Normally, such family members keep themselves away from sins. They become pious and God-fearing.


If one gets good, delicious food every day, why should one not be happy? Of course, good food must be good for health too. Not merely rich or lavish. It should be tasty and nutritious, healthy.


Lastly, company of good people. This is popularly known as सत्संग. A man is known by the company he keeps.


Today, we find there is lot of stress everywhere. There is greed, selfishness. Peace is disturbed. There are frictions among family members. Cases of divorce are increasing. There is a self-centred approach. If one tries to consciously maintain these attributes mentioned in the subhasit, the whole social life can become happier. With the changing times, one may think of a couple of more attributes.


Family life is considered as India’s great boon to the world. The world envies the Indian family system. Many wise people and institutions have taken up the task of strengthening the family system that creates a bond of affection amongst people.


Friends, if we think about these points in a matured way and try to implement them, a lot of stress will be reduced, and there can be happiness everywhere.


This can be a blessing to newlywed couples. Let us try to achieve this


!! धन्यो गृहस्थाश्रमः !!




	


	

			






	

		
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Students’ Lecture Meeting on 24th February 2015 


Lecture Meeting on Performance evaluation of the Board of Directors including Independent directors, on 25th February 2015


On 25th February 2015, Ms. Smita Anand, Leadership & Talent Consulting, India & Head, Board/CEO Succession, Asia spoke on Governance matters: Performance evaluation of Board of Directors including the independent directors, at the IMC.


The speaker gave an overview of how governance matters at the Board level and how to differentiate between high performance boards and also-ran boards. She took the audience through some of the common issues faced in under-performing boards such as lack of strategic alignment, poor team dynamics, lesser role clarity, poor process driven management and wrong board make up. 


She discussed at length as to how a board can move from process-driven approach to behaviour-driven approach. A company can grow from being a foundation board by having basic compliance in place, to a developed board which takes care of future proofing and basic compliance to an advanced board that takes into account high performance, future proofing and basic compliance, and finally, the strategic board that has its strategic assets in terms of world class insights, relentless focus on tomorrow and all the rest of the parameters of an advanced board. 


Finally, the discussion was summed up on the 6 pivotal areas which lay the gold standard for good governance in companies. 


Students’ Lecture Meeting on How to Succeed in CA Exams – Success Mantra and Practical Tips, on 24th February 2015 


This lecture meeting was held at RVG Hostel, Andheri West, Mumbai. CA. Mayur Nayak, Past President, Chairman of Human Resources Committee of the Society conducted his 3rd Program on the topic for the benefit of Students pursuing CA. This session was basically conceived on the technicality of handling the pressure of Exams and various situations they personally come across during this period. His presentation covered the technique of dealing with fear of failure, lessons from the nature & law of Karma. He also gave various demos of exercises for keeping oneself calm during the exams. Students present gained immensely from the knowledge and technique shared by the eminent speaker.


Lecture Meeting on 2nd March 2015 on the Finance Bill (Economic and other aspects) 


This lecture meeting was held jointly with Nani Palkhivala Memorial Trust, Forum of Free Enterprise, M.R. Pai Foundation, The A.D. Shroff Memorial Trust, Council of Fair Business Practices at Patkar Hall, New Marine Lines, Mumbai. Mr. H. P. Ranina, Noted Tax Expert & Mr. Yashwant Sinha, Former Union Finance Minister delivered a talk on various aspects of the Union Budget 2015-16 Members present gained immensely from the knowledge shared by the speaker.




Mentoring Seminar on 26th February 2015 


The Membership & Public Relations Committee has launched its mentoring program at L. N. Welingkar Institute of Management Development and Research, Mumbai. This unique program endeavours to bring together young chartered accountants (mentees) and some handpicked seniors from the CA profession (mentors). Over a span of 6 months, the mentors will coach, guide and support their mentees in their professional journey so that the mentees are better equipped to achieve their career goals and visions. Participants immensely benefited from the session they attended and the journey continues. 


Lecture Meeting on Direct Tax Provisions of Finance Bill, 2015 on 4th March 2015 


Mr. S. E. Dastur, Senior Advocate, addressed our members on the Direct tax provisions of the Finance Bill 2015. Mr. Dastur explained the impact of the proposed amendments, highlighting instances of grey areas. 


In regard to the proposed amendment in the definition of a resident applicable to foreign companies, he felt that the definition, of place of effective management, as proposed would lead to hardship and litigation. 


Regarding the threshold set at 50% for the word ‘substantially’ in the proposed explanation 6 to Section 9(1), with reference to indirect transfers, Mr. Dastur pointed out that though the amendment was in consonance with the recommendations of the Shome committee, the word substantial would ordinarily mean something much more than 50%. Commenting on amendment to the proviso to Section 2(15), he felt that, the limit of 20% of receipts from any activity in the nature of trade, commerce or business, as against an absolute limit of 25 lakhs may actually affect smaller trusts adversely.




The speaker was critical of the amendment to section 263. In his opinion, extending the power to revise an order of an assessing officer, on the ground that it was passed without making inquiries or verification, would lead to extensive litigation, for as to what constituted sufficient inquiry or verification was a very subjective matter. 


Mr. Dastur commented on a number of other provisions, in the finance bill. His presentation was of immense value addition to all, those present at the venue, as well as those, who heard him through the live web cast. 


Udat Abeel Gulal on 5th March 2015 


It was a proud moment for BCAS and BCAS Foundation to organize a music concert “Udat Abeel Gulal”, together with a few other organizations at the Bharatiya Vidya Bhavan on 5th March, 2015 in aid of Vicharata Samudaya Samarthan Manch (VSSM), an NGO dedicated to the cause of nomadic tribes. Attended by a large audience, it started with jugalbandi of Santoor and Saraswati Veena by very senior maestros Shri Snehal Muzoomdar and Shri Narayan Mani. They were accompanied by a team of virtuoso musicians and interspersed with Vedic chants by Ved Pandit Dr. Narasimha Ghanpatigal. Explaining the theme “Bairagi se Basant”, Compere Mihir Sheth vividly created an atmosphere for celebration of spring with quotes from Kalidasa and Rig-Veda. Narrating the ethos of the theme, he said when season of Basant arrives, Abeel and Gulal colour our lives, the fire of Holi protects our lives, give us the prosperity and hence, we all invoke Firegod Agni as narrated in Agnisooktam in Rig-Veda whose hymns are often chanted in raga Bairagi.




The Jugalbandi started with raga Bairagi rendered on Santoor and Saraswati Veena interspersed with chanting of Vedic hymns and then deftly moved on to raga Basant and Kafi, which are the popular ragas of the Basant season. The musicians were accompanied by vocalists Nupur Joshi and Gayatri Narayan. A Fine balance of melodious music with perfect percussion left the audience completely mesmerised. 


The second session, “hori rasiya and haveli Sangeet” began with an introduction of the session by compere mihir Sheth, touching hearts of audience with his imaginative description of hori (holi) played by Krishna and Gopis    in Brindavan. Creating the atmosphere of ras, raga and sangeet he said that going by the calibre of the artists present, the music of the second session was certain to fill the hearts of all present with bliss appropriate to the festival of holi. the second session began with hori raga and haveli Sangeet devotedly sung by Shri Hemang Mehta evoking great response from the audience. Smt. Sraboni Chawdhari, another accomplished artist delighted the audience with her thumris, followed by Shri mangal mishra who enthralled the audience with his captivating voice singing Bandish and haveli Sangeet. Each artist performed with a unique style creating  a sheer magic  on audience which was deeply intoxicated with nectar of bliss as promised.


The  jugalbandi  started  with  Raga  Bairagi  rendered  on Santoor and Saraswati Veena interspersed with chanting of Vedic hymns and then deftly moved on to raga Basant and Kafi, which are the popular ragas of the Basant season. The  musicians  were  accompanied  by  vocalists Nupur  Joshi  and  Gayatri  Narayan.   A  fine  balance  of melodious music with perfect percussion left the audience completely mesmerised.
 


This event also provided opportunity to the audience to see the presentation of the great work being done by Ms. mittal patel of Vicharata Samudaya Samarthan manch (VSSM) who spoke of the challenges that the wandering, nomadic tribes live with. She made emotional appeal to the audience to be sympathetic to their cause saying that they are denied even a right of existence. audience was most receptive and with the result VSSm could collect donations of approx. rs. 6,50,000/ for a worthy cause.


Budget meeting on indirect Tax provisions of the Finance bill, 2015 on 11th March 2015


The lecture meeting was held at Walchand hirachand hall, IMC. Mr. Vikram nankani, Senior advocate addressed the audience on various aspects of indirect tax provisions of the finance Bill, 2015. Mr. Nankani discussed about the increase in service tax rates and detailed provisions on revising penalty rates for Customs, excise and Service tax. He explained the amendment to various sections such as section 78(B), section 67 and the significant change in terms of a service rendered by a Government or local authority through a business entity he also covered the significant changes made to section 73(1)(b) –recovery of
 
Service tax amount in self -assessment where a liability is arrived at, and in his view it violates all the canons    of natural justice. He also welcomed the change with reference reverse charge mechanism (including partial reverse charge),


Mr. nankani also discussed the changes with reference to fema provisions.


Workshop on power of Visual Communication on 14th March 2015


Membership & public relations Committee had organised this Workshop at BCA Society Office, Mumbai for Women CAS  &  CA  Students.  Ms.  himani  Shah,  trainer  in  her session covered the topics such as first impression, power dressing, defining authority with visual communication & grooming. the purpose of the workshop was to empower the women participants with the tips to project a powerful image at their workplace. 30 participants attended and benefited from the expert deliberation of the faculty.



	


	

			






	

		
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Workshop on Mastering E Filing Compliances under Taxation & Corporate Laws, 28th January 2014 to 28th February 2014



L to R: Mr. Mandar Telang, Mr. Govind Goyal (Speaker), Mr. Ameet Patel and Mr. Suhas Paranjpe




This 15 Sessions workshop was jointly organised by the Indirect Taxes & Allied Laws Committee of the BCAS and HR College of Commerce and Economics. The objective of the programme was to enable users to gain comprehensive working knowledge on practical issues related to E-Compliances under various statutes like obtaining registration, payment of taxes or fees, submission of various forms or returns etc. are now required to be carried out electronically, using IT-oriented methods. 


31 participants attended the course.


Seminar on Software Industry, 7th March 2014



L to R: Mr. Hasnain Shroff (Speaker), Mr. Naushad Panjwani (President), Mr. Kishor Karia, Mr. Gaurang Gandhi




A full day seminar on the topic “Software Industry” was jointly organised by the International Taxation & Taxation Committee of BCAS. The objective of the seminar was to understand the various nuances of direct tax, transfer pricing, indirect tax and accounting issues related to software Industry. The recent judicial pronouncements and the undercurrent of various contentious issues faced by the software industry, were also discussed. 


105 participants attended the seminar. 






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CHARTERED ACCOUNTANTS’ PROGRAM IN MANAGEMENT, BUSINESS & ACCOUNTING ORGANIZED BY MPR & HDTI COMMITTEES OF BCAS AT  ISME CAMPUS




To hone the Management, Leadership and Technical skills of Chartered Accountants to achieve growth, whether in practice or in industry, Membership & Public Relations Committee (MPR Committee) and Human Development and Technology Initiatives Committee (HDTI Committee) jointly organized Chartered Accountants’ Program in Management, Business and Accounting (CAMBA) at the ISME Campus, Lower Parel, which is equipped with the latest facilities for a conducive learning environment. The CAMBA Course was designed by BCAS along with the Management Institute of ISME. The 1st batch of the course started in May, 2017 and concluded in December, 2017.


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With an eligibility criteria of minimum 2 years of post-qualification experience, the first batch saw participation from 16 CAs in practice as well as those working with Big 4s or in the industry. The participants shared their experiences and ideas, problems faced in their respective work environments and best practices employed.




The course, designed to conduct 120 hours of classroom training of which 102 hours were dedicated to various emerging aspects of Entrepreneurship, Management, Human Resources, Strategy, Soft Skills and Marketing was conducted by highly experienced faculty from ISME. The subjects were taken up with a variety of interactive pedagogical techniques including discussing case studies, role playing, movies, model building and team work by learned and experienced faculties like Prof. David Wittenberg, Dr. Amarpreet Singh Ghura, Dr. A. Doris Greenwood, Prof. Anjana Vinod, Dr. Ramkishen Y, Prof.   Omkar    Pandharkame,   Ms.   Anubhuti     Gupta, Mr. Moksh Juneja and CA. Nikhil Srinivas.




The remaining 18 hours of the course included sessions designed by the BCAS team on subjects relevant to the professionals. The speakers and the topics discussed during these well-conceived sessions in the 1st batch are enumerated hereunder:






 


The participants thoroughly enjoyed their journey of this long course, experiencing a transformation in their perspective towards their profession.




It was indeed a very enlightening experience for the participants who benefitted a lot from the sessions.




“Motivational Talk for Young Chartered Accountants & Felicitation of CA’s cleared in Nov. 2017” held on 19th February, 2018 at BCAS Conference Hall.




The Membership & Public Relations Committee organized a motivational talk for Young Chartered Accountants on the topic of “How to become an Extraordinary Professional?”. The talk was addressed by CA. Mudit Yadav, a TEDx Speaker and Success Coach.




The session began with the opening remarks by CA. Chetan Shah, Chairman, MPR Committee who briefed the audience about BCAS and its initiatives. He also encouraged new CAs to become members of BCAS. Few rank holders of Nov’ 2017 were felicitated and they shared their views on success in CA exams.




The Speaker CA. Mudit took up the following major issues faced by young professionals:




 How to choose the ideal career path for oneself?


  Difference between an average and a star professional.


  Habits of the most extraordinary professionals.


  How to develop the mind-set of a true professional?


  How to develop a sharper executive presence?


  How can you be a pioneer of the future of CA profession?




CA. Mudit Yadav also shared his experiences and the challenges he faced while carving out his career as a motivational speaker, in unconventional and non-traditional field.




The talk was attended by more than 150 young Chartered Accountants and the participants benefited from the experience shared by the Speaker.




“8th Residential Study Course on IndAS” held from 22nd February to 24th February, 2018




Accounting & Auditing Committee organized its 8th IndAS Residential Study Course (RSC) from 22nd to 24th February, 2018 at Hotel Gateway, Pune. The Course was conducted to address the Ind AS implementation challenges being faced as well as to impart knowledge of its execution to the professionals. This would enable a smooth transition for the corporate sector and also appraise them of impending changes which are applicable in future. The Course was attended by 110 participants from all across India.




This year’s RSC was structured with three sessions based on Case Studies which involved group discussions. The RSC also had four more papers for presentation by eminent faculties.




RSC started with group discussion on First case study paper by CA. Jayesh Gandhi on “Case Studies on Business Combinations and Consolidated Financial Statements”. The case studies highlighted the complexities involved in carrying out accounting for business combinations and consolidation as well as the evaluation of the relevant consolidation standard in specific circumstances.




The session commenced with the inaugural address by CA. Narayan Pasari, President, BCAS. He urged non-members enrolled for this course to become members of BCAS and enumerated various activities/initiations being undertaken by BCAS for the benefits of profession and industry. The Chairman of the Committee CA. Himanshu Kishnadwala gave introductory remarks on the design and structure of the course and the purpose of selection of the topics for group discussion and presentation.




Inaugural session was followed by presentation paper on Revised Audit Report Requirements by CA. Vijay Maniar which covered SA 701 on Key Audit Matters to be applicable from FY 2018-19. CA. Jayesh Gandhi analysed and replied to the issues raised on the Case Studies during the group discussion.




The 2nd day started with group discussion on the paper by CA. Arvind Daga on “Case Studies on PPE and Financial Instruments” that highlighted the intricate issues on measurement, recognition and impairment under relevant standards. He also made a presentation on his paper explaining finer points of the standards as well as dealing with the issues which came up for deliberation. CA. Raghu Iyer presented the paper on “Derivative and Hedge Accounting” and explained what is ‘derivative’, types of hedges, its purpose and importance in the commercial world.




There was another group discussion on the paper by CA. Archana Bhutani on “Case Studies on Revenue Recognition IndAS 115”. The case studies dealt with typical situations in various sectors including real estate, bundled services, FMCG and retail distribution and also some other related issues. She further made the presentation on her paper explaining finer points and concepts and principles of revised IndAS 115 which is likely to be applicable from 1st April 2018.




The last day began with the presentation on “IndAS 116 – Leases” by CA. Srinath Rajanna who came all the way from Dubai to address the participants. It is for the first time that an international faculty has addressed an  IndAS RSC. He explained the major differences in the revised standard as compared to IAS 17 as also the thought process for the same at IASB. Thereafter, CA. Himanshu Kishnadwala gave presentation on “Global Developments in IFRS” and made the participants aware about the projects in pipeline at IFRS for the next five years and the way it will impact industry as well as the profession. He also explained the process of development of standards at IFRS as also how as a stakeholder everybody can participate in the said process.




The concluding session was presided over by the Chairman CA. Himanshu Kishnadwala who acknowledged the contribution of the faculty, group leaders and other participants for the success of the RSC.


Participants were satisfied with the level of discussion and the value imparted through the RSC.




Workshop on “Transfer Pricing – CBCR and Master File” held on 27th February 2018 at BCAS Conference Hall




“The Workshop on Transfer Pricing – CBCR and Master File was conducted on 27th February 2018 at BCAS Conference Hall which was attended by over 110 participants from profession and industry.




The speakers CA. Hasnain Shroff and CA. Anjul Mota provided a comprehensive insight on the conceptual understanding and interpretation of legal provisions and other key issues surrounding the CBCR and Master File. This was followed by case studies touching upon intricacies in filing the CBCR and Master File. The speakers also outlined some practical suggestions in dealing with inherent issues.




The Workshop was well received by the participants who benefitted a lot from the sessions.




Interactive Fire Side Chat on “Strengthening the Profession” held on 28th February, 2018 at IMC, Churchgate




The CA profession is passing through tectonic shifts which have posed various challenges for the professionals. To address the issues of profession and challenges faced by the CA firms, review the regulatory impediments, learn the possible changes in this regard for strengthening and developing the capacity of Indian CA firms, enhance the competence and improve the visibility amongst the business community, BCAS organised a Fire Side Chat with the experts from the profession and industry.




The Panelists for the discussion were:


1. Mr. M. Damodaran, Former Chairman, SEBI


2. CA. Mukund Chitale, Former President, ICAI


3. CA. T. N. Manoharan, Former President, ICAI




The Fire Side Chat was moderated by CA. Himanshu Kishnadwala, Past President, BCAS.




President CA. Narayan Pasari in his opening remarks stated that presently the Chartered Accountancy profession is in a constant state of flux on account of profound changes in the sphere of economy, regulation, technology & society that throw many challenges resulting in higher complexity.


CA. Himanshu Kishnadwala while opening the chat referred to the Prime Minister’s address to the CA community on the CA foundation day on 1st July, 2017 and threw light on the various statistics about the members and the firms. He also mentioned as to what can be done to improve the profession and counter the challenges of the bigger multinationals. CA. Himanshu also talked about the SEBI Order in Satyam Case, RECO Scam, PNB Scam and Supreme Court Order on multinational firms etc.




The Fire Side Chat commenced with the expert opinions of the panelists:




CA. Mukund Chitale started with a comment of Nani Palkhivala “The time has come to see as to who will shave the barber”, which was citing Institute’s motto given by Yogi Anand “Ya esa suptesu jagarti”. He expressed that strengthening the profession doesn’t come automatically and for that there has to be an introspection as to what to do with failures individually & in a communicative manner because any profession which is rendering service exists as long as society expects it to exist. Quality of our work should match the Society’s expectations at the highest level.




Mr. M. Damodaran was of the view that professionalism is not derived just from academic qualification. Professionalism is to contribute to the informed discussion and debate where professionals should set the agenda and plan in the direction of strengthening the profession. He emphasized that Chartered Accountancy Course is enhancing the quantity but must also ensure that quality shall not be compromised.




CA. T. N. Manoharan’s remarks were amply supported with hardcore statistics of the CA profession. He stated that CA firms lack playing the role of knowledge partner. Each CA firm should ensure that any new article who comes to the office be given an open idea that they are welcome to the firm and can grow to the level of employee, manager, director or even can become partner of the firm. Every firm should have partners in different age groups that is how succession happens and the seniors will have smooth exit after handholding and guiding. The focus should not be only on tangibles like top line, bottom line, physical infrastructure etc. but also on the quality & integrity aspects. One of the issues of Indian firms is reluctance to invest in Infrastructure and growth projects. He said that we can follow principles having eternal utility for humanity and we can adopt values which will hold good forever.




Later on CA. Himanshu Kishnadwala posed some pertinent issues faced by the profession, for the response of the panelists, which were deliberated in great depth. Participants were provided fair insights as to the current state of affairs in the profession, how the society perceives the profession and what should be the measures initiated to shore up the image of the profession.




The participants got extremely enlightened with the invaluable insights from discussion by the expert panelists.




ITF STUDY CIRCLE




Meeting on “Proposed Amendments to International Taxation Provisions in Budget, 2018” held on 15th March 2018 at BCAS Conference Hall




The International Taxation Committee organized a panel discussion on 15th March, 2018 at BCAS Conference Hall, to analyze the impact of the amendments to International Taxation provisions, proposed in the Union Budget, 2018.


The meeting was kicked-off with a discussion on the proposed amendment in the Explanation 2 (a) to section 9 (1) (i) where if a non-resident appoints a person who will negotiate but not conclude contracts on his behalf, it may still constitute a Business Connection in India. It was discussed how the OECD had reviewed the definition of a Permanent Establishment in Action Plan 7 to prevent avoidance of tax by fragmentation of business and to align with the modified definition of MLI. The discussion was then turned to the newly introduced Explanation 2A in section 9 (1) (i) which clarifies meaning of a significant economic presence. It was also discussed that there was a need for proposing this amendment as a result of digital economy, whether physical presence of a person in a country is no longer the only measure of an economic connection, challenges in implementing such an amendment, impacts of such amendments on taxation, etc.




The session was very interactive and the participants benefitted a lot from the panel discussion.




INDIRECT TAX STUDY CIRCLE




Meeting on “GST E-Way Bill Provisions – Analysis and Demo of Online Preparation” held on 17th March, 2018




The Suburban Study Circle organized a meeting on GST E-way Bill Provisions on 17th March, 2018 which was addressed by CA. Manish Gadia & CA. Jignesh Kansara.


Speaker CA. Manish Gadia discussed the revised provisions and rules regarding the E-Way Bills Under GST and its applicability wef 1st April, 2018. He made detailed presentation on the following issues:




a) Procedure for generation of e-way bill, b) Multiple Consignments, c) Exemptions, d) Cancellation, e) Validity, f) Acceptance or Rejection, g) Verification of documents, h) Case Studies etc.




Speaker CA. Jignesh Kansara made a step-by-step online demonstration of the process regarding various aspects of E-Way bill through the GSTN portal. He covered the following activities in relation to the e-way bills:




a) Registration as dealer and transporter, b) Creation of masters for clients, products and godowns, c) Generation of Part A and Part B of E Way Bills, d) Generation of Consolidated E-way bill, e) Cancellation / Modifications in E-way Bills generated earlier, f) MIS reports.




He also threw light on the various technical and statutory glitches faced by the dealers and gave suggestions for corrective actions.




The participants benefited from the sessions and experience shared by the learned speakers.

	


	

			






	

		
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6th RSC ON IFRS held on 18th, 19th & 20th February 2016 


The revised roadmap for implementation of Indian Accounting Standards (IndAS), the converged accounting standards in phases to International Financial Reporting Standards (IFRS) has already been released by the Ministry of Corporate Affairs. This has instilled realisation amongst the industry and professionals alike to gear up for the impending implementation of the IndAS. BCAS as a front runner in imparting knowledge had organised the 6th Residential Study Course from 18th to 20th February, 2016 at Hotel Rhythm, Lonavala. The RSC was structured in a manner where sessions were based on case studies prepared by eminent professionals covering different aspects of IndAS implementation. These three case studies based papers involved group discussions through groups formed amongst the participants, led by knowledgeable group leaders. There were two more papers for presentation by eminent faculty which provided the impact of IndAS on the topics allotted to them. 


Immediately after the reporting of the delegates on the first morning, there was a session of group discussion on the first paper by Mr. Ramesh Lakshman on “Case Studies on Fair Value in IndAS & its Applications”. The case studies were highlighting the complexities involved in valuing financial assets and liabilities. 


Later on, post lunch, there was the inaugural session. The session commenced with the inaugural address by the President of BCAS, Mr. Raman Jokhakar. He expressed satisfaction to the response received to the course from all over India and was particularly happy to have a strong participation from industry. Subsequently, the Chairman of the Accounting and Auditing Committee, Mr. Harish Motiwalla, gave his introductory remarks on the design and structure of the course and the purpose of selection of the topics for group discussion as well as for presentation. 


After the inaugural session was the presentation on the first paper by Mr. Ramesh Lakshman, who aptly dealt with the case studies and also covered the issues raised during the group discussion in a very immaculate manner. After his presentation on the first paper on fair valuation, Mr. Ramesh Lakshman dealt with the Presentation paper on “Foreign Exchange Accounting under IndAS”, where he dealt with the salient aspects of the standard on Forex Accounting and also brought out minor differences from the existing accounting standard. 


The Second day started with group discussion on paper by Mr. Zubin Billimoria on “Case Studies on Consolidation (Incl. Foreign Subsidiaries)”. The case studies highlighted the intricacies in determining control, which is of utmost importance to consider entities which should form part of consolidation process. Later, Mr. Billimoria made a presentation on his paper and shared his vast experience, which was of immense value to the participants. Mr. Rajesh Muni ably chaired the session. 


In the evening, there was a presentation on the topic of “Impact Analysis of Conversion to IndAS on Energy & Commodities Industry (Incl. Disclosure Standards)” by Mr. Sanjay Chauhan. He shared his rich experience in energy and commodity sector by co-relating to the impact on financials on adoption of IndAS. The session was ably chaired by Mr. Kanu Chokshi. 


The last day commenced with group discussion on paper by Mr. Rakesh Agarwal on the topic “Case Study on ensuring completeness in identifying GAAP differences between Indian GAAP and IndAS, with Comprehensive Listing of such differences”. Mr. Rakesh Agarwal had circulated major GAAP differences between the existing accounting standards and IndAS. These differences were the base to analyse eight companies’ financials which he had circulated to be discussed in the groups. 


Immediately after group discussion, there was a special session which was to felicitate Mr. Nilesh Vikamsey on his election as Vice President of the Institute of Chartered Accountants of India. Mr. Nilesh Vikamsey was felicitated by BCAS President Mr. Raman Jokhakar, along with Co-Chairman of Accounting & Auditing Committee, Mr. Rajesh Muni, Past President Mr. Himanshu Kishnadwala and BCAS Vice President Mr. Chetan Shah. Mr. Nilesh Vikamsey shared his views on the roadmap of the Institute regarding IndAS as well as other important areas of interest for the CA fraternity. 


Later, the penultimate session was addressed by Mr. Rakesh Agarwal along with a presentation on the topic and also dealt with the queries raised by the participants during group discussion. The session was chaired by the Past President Mr. Nitin Shingala. 


The concluding session was presided over by Mr. Rajesh Muni and he acknowledged contribution of the faculty as well as active participants for the success of the RSC. Some of the participants gave their views on the course and conveyed their satisfaction to the format and structure of the course. 


Public Lecture Meeting on “Direct Tax Provisions of the Finance Bill 2016” held on 4th March 2016


Every year, the most awaited event is the budget. What the Finance Minister unfolded on 29th February 2016 with respect to the direct tax provisions was covered in the Public Lecture Meeting held on 4th March 2016 by Senior Advocate Mr. S. E. Dastur. This was the 51st Budget Lecture Meeting of the Society and 28th year of address by Mr. S. E. Dastur. This year the Society has captured pre budget expectations and post budget inteviews from the stalwarts and the youth. Just before the lecture began, a series of views of various people on the budget were taken by Mr. Ameet Patel. All these videos are available on our website as well as Youtube channel and also on social media.


The lecture meeting was witnessed live by 3,000 plus audience at the venue and around 4,000 viewers online over live streaming of the event. President Raman Jokhakar welcomed the speaker Mr. S. E. Dastur. Mr Dastur started his speech by detailing the sections and chapters of the Income-tax Act. As he decoded the fine print and his interpretation on the various amendments, he brought to light the various challenges that were in store for the assessees while implementing these amendments. The various changes made by the Finance Minister were touched upon. This included section 12AA of charitable trust where an organisation ceases to be a charitable organisation and the changes with regards to the same, the changes with regards to lowered rate of tax for newly established manufacturing companies and articulated in detail the impact of the conditions attached to this section. He also addressed the changes with regards to presumptive tax and tax on foreign companies. The provisions with regards to pension funds & dividend distribution tax and the changes there in were also detailed. He further touched upon the various changes in the field of assessment procedures and its impact on the assessee vis-à-vis rights and duties of the assessing officers. Mr. Dastur added that while the government looks to moving to a technological efficient system, it may leave the assessee with no communication left with the department officials. Finally, he concluded the session by giving a title to the bill as a rationalisation bill as it gives rationalisation to pension funds, provident fund and national pension scheme. It speaks about rationalisation of the time limit for assessment and recomputation, rationalisation for time limit in search cases, rationalisation of provisions relating to ITAT , rationalisation of TDS provisions and rationalisation with respect to section 50C. The event ended with a vote of thanks by Jt. Secretary Mr. Sunil Gabhawalla and the enthralled audience left, having witnessed a mesmerising speech on the Budget Direct Tax Proposals. 


Lecture Meeting on “Indirect Tax Provisions of the Finance Bill 2016” held on 10th March 2016 


President Raman Jokhakar welcomed the speaker, Senior Advocate Mr. Vikram Nankani, an eminent speaker on the subject to throw light on the amendments of the changes by the Finance bill 2016.The lecture meeting commenced with the launch of the new publication of the Society “Partnership Firms – Registration Procedure and Frequently Faced Issues with Registrar of Firms” by Mr. Uday Sathaye, Past President of the Society. The book was launched by the speaker Mr. Nankani. 


Advocate Vikram Nankani talked about the positive changes in various sections of indirect tax including Excise, Sales Tax, VAT and Service Tax.He detailed how the changes would impact various industries and sectorial growth. He mentioned the various changes in import and excise and how it would affect imports. He mentioned about how the levy of service tax on senior advocates will impact the availability of senior advocates for arbitration proceedings. This will affect the litigation procedures to a greater extent in the field of indirect tax. The speaker spoke about the various non CENVATA BLE cess and how the entire indirect tax regime is moving towards it. Finally, he concluded that though the changes brought about were impacting sectors and industries at large, how it would place its position in the GST regime was still to be explored. According to the speaker, the budget did not mention anything on the GST changes or implementations which needs greater ground for building a robust indirect tax structure. 


The meeting concluded with a vote of thanks by the Treasurer Mr. Manish Sampat who informed the audience about the forthcoming programs of the Society and appreciated the well-articulated talk by the speaker. The meeting concluded with a huge round of applause. 


Publication on “Partnership Firms” launched on 10th March 2016 


Professionals like CA’s, Advocates, Businessmen are finding it difficult to Register Partnership Firms with Registrar of Firms in Maharashtra due to various issues. This process of registration involves submission of documents and the careful adherence to a procedure which has been laid down. 


The publication titled “PARTNER SHIP FIRMS Registration Procedure and Frequently Faced Issues with Registrar of Firms” will help resolving these issues. This publication has been authored by Mr. Udaya Sathaye, Past President of the Society. 


Advance FEMA Conference held on 18th March 2016 


The Society held its Annual Advanced FEMA Conference jointly with the Chamber of Tax Consultants on 18th March at IMC. This Conference was unique as senior RBI officials attended the morning session and provided their views on several queries prepared jointly by the respective International Taxation Committees of the two organisations. The organisations received overwhelming response to the Conference. 



Past President of the Society, Mr. Dilip Thakkar provided his opening remarks and also chaired the interactive session. RBI was represented by a team of senior officials led by RBI Executive Director, Mr. B. P. Kanungo. Mr. Kanungo gave the keynote address dealing with a number of concerns of industry and practitioners. He also provided an insight into the RBI and Government thinking behind the present regulations. He gave an outlook of liberalisations by way of revised notifications which are in the pipeline. 


His address was followed by the interactive session wherein the panel of RBI officers provided views on the written queries provided to them in advance. The queries covered all important areas of FEMA including those dealing with ODI, FDI, LRS, ECB and Trade transactions. The Officers answered the queries and also dealt with several questions from the audience.


The post lunch technical sessions was on “Trade Transactions” by Mr. Shabbir Motorwala who succinctly covered the vast subject in the time available with him. The last session was on “ECBs” wherein Mr. Kumar Saurabh Singh covered the recent amendments in the ECB policy and also dealt with the other financing routes available to borrowers. Both the speakers answered queries from the audience and covered the subjects in significant detail. The Conference was received well by all present. 


Udat Abeel Gulal held on 19th March 2016 


It was once again a proud moment for BCAS and BCAS Foundation to organise a music concert “Udat Abeel Gulal”, together with a few other organisations at Bharatiya Vidya Bhavan on 19th March, 2016 in aid of Dilasa Sanstha, an NGO engaged in relief work for drought affected farmers of Maharashtra. Attended by a large audience, it started with jugalbandi of Santoor and Saraswati Veena by Shri Snehal Muzoomdar, Maithili Muzoomdar on Santoor and Shri Narayan Mani on Saraswati Veena respectively, accompanied by a team of virtuoso musicians and interspersed with Vedic chants by Ved Pandit Dr. Narasimha Ghanpatigal. Explaining the theme “Bairagi se Basant”, Compere Mihir Sheth vividly created background atmosphere for celebration of spring with quotes from Kalidasa and Rig-Veda. Narrating the ethos of the theme and quoting medieval poet Maagh, he said when season of Basant arrives, its enchanting beauty feels us with a sense of bliss, Abeel and Gulal colour our lives, the fire of Holi protects our lives, give us the prosperity and hence, we all invoke Firegod Agni as narrated in Agnisooktam in Rig-Veda whose hymns are often chanted in raga Bairagi. 


The Jugalbandi started with raga Bairagi rendered on Santoor and Saraswati Veena interspersed with chanting of Vedic hymns and then deftly moved on to raga Basant and Kafi, which are the popular ragas of the Basant season, accompanied by vocalists Shraddha Shridharni in Hindustani style and Nupur Joshi in Carnatic style. Both the vocalists recreated magic with their rendition of poet Nanhalal’s poems so ably composed by Snehal Muzoomdar. Fine balance of melodious music with perfect percussion and dramatic entry of vocalists on the stage left the audience completely mesmerised when it reached the crescendo in the end. 


The second session “Hori Rasiya and Haveli Sangeet” began with an introduction of the session by compere Mihir Sheth, touching the hearts of the audience with his imaginative description of Hori (Holi) as a festival and narration of how it was played by Krishna and Gopis in Brindavan. Creating the atmosphere of ras, rang and sangeet, he said that going by the calibre of the artists present, the music of the second session was certain to fill the hearts of all present with unexplainable bliss appropriate to the festival of Holi. It indeed turned out to be ecstatic. The second session began with Hori and Rasya and Haveli Sangeet devotedly sung by Smt. Sraboni Chowdhury and Shri Saurabh Chaturvedi evoking great response from the audience. Each artist performed with a unique style, creating a sheer magic on audience which was deeply intoxicated with nectar of bliss as promised. 


This event also provided opportunity to the audience to see the presentation of the great work being done by Dilasa Sanstha. Mr Ramesh Kacholia on behalf of Dilasa Sanstha explained the situation of drought in Maharashtra and the plight of the farmers. He explained the work being done and made an emotional appeal to the audience to be sympathetic to their cause. 


EYE Camp 2016 at Vansda – Dharampur on 20th March 2016 


The Human Development & Technology Initiative Committee continued with the annual CSR activity of supporting Eye Camp for the tribals and the needy people from the rural area surrounding Vansda, Dist. Navsari. 


The Eye Camp was held from 18th March to 21st March 2016 at Sant Ranchhoddas Bapu Eye Hospital, Vansda, Dist. Navsari. This unique hospital dedicated to the poor and the needy was founded under the aegis of Dhanvantari Trust by respected Dr. Kanubhai Vaidya. Dr. Vaidya gave up a thriving medical practice in Mumbai and dedicated himself entirely to the socio-economic development of rural areas. 


The Committee had set a target of one Eye Camp with a Budget of Rs.51,000/- for cataract surgery of 51 patients. However, with divine grace and kind support of all donor friends, it was able to collect Rs.2,17,200, which can take care of 217 patients i.e. little over four Eye Camps. 


A team of nine volunteers from the BCAS visited the Eye Camp and the Hospital on 20th March 2016 to commend the excellent work being done by Dr. Kanubhai and team. Dr. Kanubhai narrated several other rural upliftment projects being undertaken by his NGOs. The team of volunteers and the Committee were inspired and will be exploring avenues for extending support for such worthy causes. Interested members are requested to contact CA. Meena Shah at cameenashah@gmail.com for further details.

	


	

			






	

		
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Seminar on Advanced Excel held on 25th & 26th November 2016 at BCAS Hall, Jolly Bhavan, Churchgate


Advanced Excel Workshop held on 25th and 26th November, 2016 was aimed at giving the participants a hands-on at sharpening their MS Excel skills. The faculty was CA. Nachiket Pendharkar, who is a microsoft certified trainer and Excel expert.


The faculty covered topics like Pivot Tables, What-if Analysis, Array Formulas, Fuzzy Lookup etc. which were well received by the participants. The participants were given study material for future reference.


The workshop received a very good response. There were in all 34 participants from various locations like Ahmedabad, Bharuch, Goa and Pune. 


17th Certificate Course on DTAA-2016-17 held from 3rd December 2016 to 28th January 2017 at BCAS Hall, Jolly Bhavan, Churchgate


The 17th batch of Certificate Course on DTAA, the flagship program of the Society was successfully conducted at the BCAS Hall from 3rd December, 2016 to 28th January, 2017. The course was held over 7 Saturdays with 4 sessions each. The course was aimed at imparting middle-level knowledge on conceptual aspects and interpretation of Tax Treaties. All the Articles of UN Model Convention were explained to the participants along with presentations, practical examples and case studies. Additionally, relevant and contemporary subjects such as BEPS and provisions of Section 195 relating to TDS on income of Non-residents were also covered. 


A total of 73 participants enrolled for the Course. Out of this, 56 participants were from Mumbai and the remaining participants were from Ahmedabad, Ajmer, Goa, Hyderabad, Kolkata, Navi Mumbai, Pune, Thane and Ulhasnagar. The course received an over whelming response from 25 BCAS members and 48 non-members. BCAS had 25 Eminent Faculties who delivered lectures at the Course. The faculty members were renowned Chartered Accountants/Advocates in their chosen field of expertise for past many years and generously shared their knowledge and experience with the participants. The Course was very well received and appreciated by the participants on the academic as well as organizational counts. 


At the end of the Course, for the first time, Multiple Choice Questions Test was held at the end of the course and the successful candidates have been awarded the Certificate of Passing. The Faculties along with 3 top scoring participants were felicitated by the International Taxation Committee meeting held on 15th March, 2017. 


Panel Discussion on Finance Bill, 2017 for students of N. M. College held on 1st February 2017 at N. M. College


After demonetisation, the next significant event was the Union Budget 2017 preponed this year to February 1, 2017 and for the very first time the Railway Budget was merged with the Union Budget. This year, the Finance Bill 2017 came with more focus on international taxation and transfer pricing norms. The Modi Government seems to make a budget in a view of “Rob Peter to pay Paul”. The bill proposed changes in tax structures for the low-income categories, boost to affordable housing and higher surcharge for the higher income sectors. 


A session on the amendments by the Finance bill, 2017 was scheduled for the students of N. M. College. The session began with the students of Finance & Investment Cell of N. M. college introducing the speakers with the details of the discussion. The Session was inaugurated by Vice President, BCAS CA. Narayan Pasari. The students gave a warm welcome to the speakers CA. Ameet Patel and CA. Sushil Lakhani.


CA. Ameet Patel articulated with examples the details and intricacies of direct tax. He enthralled the students with his lucid style, talking about demonetisation and how digital economy is  coming to the forefront today. The changes made in TDS regulations and changes in areas of capital gains were widely covered. The benefits that would be extended to business in a digital economy was also well articulated.


Thereafter, there was a presentation by CA Sushil Lakhani who gave the students an insight into the area of international taxation. He detailed the areas of changes in BEPS, Equalization Levy with case studies of Apple and Google. He covered various areas of different treaties entered into and the way and reasons why countries enter into such treaties. He also touched upon the various changes made in the Finance Bill, 2017 in simple and explanatory format for the students to relate to international taxation.


The floor was then open for Q&A and students raised questions on various aspects of both direct and international taxation. The session ended with a vote of thanks to the speakers. 


Lecture Meeting on Indirect Tax Provisions proposed by Finance Bill, 2017 including Constitutional Aspects of GST held on 9th February 2017 at BCAS Hall, Jolly Bhavan Churchgate


The Lecture meeting on indirect tax provisions proposed by Finance Bill, 2017 along with certain Constitutional Aspects of GST was held on 9th February 2017. Mr. Vikram Nankani, Senior Advocate analysed not only the Budget proposals but also a few of the recent amendments in service tax like taxation of prepaid import freight, B2C online information and database access services, etc. Thereafter, the speaker expressed his views on the proposed GST Regime and touched upon some issues likely to arise in view of the Constitution Amendment Act, taxation on intangibles, inclusions and exclusions of certain items in the new GST. He discussed about the interpretation of the Article 366(29A) pertaining to deemed sales in the context of GST. He elaborated on the tax treatment of works contracts under GST. Advocate Vikram Nankani also addressed participants’ queries with respect to GST and the implementation. The eager participants had many queries on the practical applicability of GST on various products and services. The speaker responded to each in detail.





Adv. Vikram Nankani


The Q&A session was well received and various issues related to GST were discussed. The session ended with a vote of thanks.


Lecture Meeting addressed by CA. T. P. Ostwal on Budget 2017 and Recent Announcements on Provisions Relating to International Taxation held on 13th February, 2017 at IMC jointly with International Fiscal Association – India Branch and Chambers of Tax Consultants.


The Lecture meeting was addressed by CA. T. P. Ostwal, who gave a presentation discussing the various amendments with regards to International Taxation. This included the insertion of new section 92CE bringing in the concept of secondary adjustments to Indian Transfer Pricing regime. He further discussed on the insertion of new section 94B to introduce Thin capitalisation regime in Indian Taxation context. The meeting also covered a brief overview of various other amendments such as clarification on Indirect Transfer Provisions, changes in Taxation of “Masala Bonds”, and clarifications introduced with respect to interpretation of terms used in Tax Treaties. 
The Lecture was very well received by the participants.


Human Development Study Circle Meeting to watch the DVD – Video Talk on “Thought Leadership” held on 14th February, 2017 at BCAS Conference Hall 


The discussion was led by CA. Vinod Jain. He gave a small introduction before the DVD was screened. The talk was so absorbing that it was an undisturbed screening of 120 minutes. 


The Lessons learnt from this video talk are discussed hereunder:


Good people have to learn to come together and work together, may be from the bad people since bad people are more organised, motivated and have better team spirits. 


Though we are not born great, greatness can be achieved. One has to achieve first, self-leadership than external leadership. If you cannot lift yourself, you cannot lift others. 


Speed of the train mainly depends upon the speed of the engine. Hence, business cannot grow, if the businessmen at the helm of the business do not continue to grow. In many cases, we ourselves become a bottleneck in our own organisation. Without getting ourselves right, we cannot achieve anything. 


The Demand of Our Roles is growing faster than demand of us as an individual. As such one needs to continue to develop ourselves, in this fast changing world. Even method of parenting between two children need to be changed, since the way first child is successfully brought up, same method of parenting would not help in bringing up the second child.  


We should be careful about our thinking. “What you think you become” said Buddha. “Mind in itself can make a heaven of hell or a hell of heaven.” said poet John Milton. “If you think you can or think you can’t, either way you’re right.” – Henry Ford – “Whatever the mind can conceive and believe; the mind can achieve” Napoleon Hill – “God never gives us an idea, without power to achieve it”. 


We should be careful about our words and should replace word “Problem” with “Challenge”.  We should drop filthy words from our vocabulary.


We should become an opportunist in thinking. Acid destroys the vessel that contains it. We should not keep bad thoughts about people in our mind. Never hold any blemish close to our eyes. 


We should choose to see, what we want to see.  We should focus on the magnificence of beautiful things.


Our mind is divided in 1/8th as conscious and 7/8th as subconscious mind. Subconscious mind does not understand positive emotions and negative emotions. It understands deep emotions and shallow emotions.   Anything positive in your life, speak 5 sentences. Anything negative in your life, speak just in one sentence. Do not miss celebration of positive happening in life. The participants were interested in more such movie screenings for Study Circle Meetings.


Panel Discussion on the Finance Act, 2017 held on 20th February, 2017 at BCAS Hall, Jolly Bhavan, Churchgate


Panel Discussion on Finance Act, 2017 was held by the Taxation Committee of the BCAS at BCAS Gulmohar Hall. The event saw attendance by over 100 participants and more than 300 members viewed it live on BCAS YouTube Channel. President CA.Chetan Shah gave the opening remarks followed by introductory words from the Chairman of the Taxation Committee, CA. Ameet Patel. The distinguished panel consisted of CA. Pinakin Desai, CA. Hitesh Gajaria, CA. Deven Choksey and was moderated by CA. Ameet Patel.





L to R – CA. Pinakin Desai, CA. Hitesh Gajaria, CA. Deven Choksey and CA.
Ameet Patel


Various questions were posed to all the three panelists by CA. Ameet Patel. 


–    CA. Pinakin Desai gave his views with an in-depth analysis on questions related to amendments proposed to Joint Development Agreements, Charitable Institutions, Measures to discourage cash transactions, Long term Capital Gain on non – STT paid shares and many others. 
–    CA. Hitesh Gajaria gave his views with statistics on various questions related to change in rates of Income Tax, Thin Capitalisation, Secondary Adjustments and other provisions. 
–    CA. Deven Choksey gave his views on the overall impact and reactions of capital markets on the budget. He also talked on the various  amendments with respect to penny stocks and FII/FPIs. 


Overall, the Panel Discussion was well received and the participants benefited immensely with the expert analysis of the panel on the proposed amendments in the Finance Bill, 2017.


Budget & Economic Survey 2017 held on 22nd February, 2017 at BCAS Hall, Jolly Bhavan, Churchgate


CA. Harshad Shah and CA. Kapil Sanghvi (Jamnagar) presented finer economic aspects of Budget & Economic Survey 2017 to members at the International Economics Study Group meeting held on 22nd February, 2017. 


The refreshing feature was specific commitments by government in terms of values and dates.
The Budget proposals were divided in 10 distinct themes under the overarching agenda of “Transform, Energise and Clean India” (TEC India).


Farmers: To double the income in 5 years; Credit fixed at record level of Rs. 10 lakh Cr.; Model law on contract farming, Agriculture sector is estimated to grow at 4.1% in 2016-17 as opposed to 1.2% in 2015-16; Govt. to set up mini-labs for Soil Health. Rural Population: providing employment and basic infrastructure; Mission Antyodaya to bring Rs. 1 Cr. households out of poverty by 2019, MGNREGA: Rs. 48,000 Cr., Prime Minister Gram Sadak Yojana: Rs. 19,000 Cr. (Rs.27, 000 Cr incl. State Share), PM AwasYojana: Rs. 23,000 Cr, 100% village electrification by May 2018, Rs. 1, 87,223 Cr. allocated for rural programmes (24% Higher). Youth: energising them through education, skills and jobs. Poor and the Underprivileged: strengthening the systems of social security, health care and affordable housing. Infrastructure: for efficiency, productivity and quality of life; Total allocation for infrastructure: Rs. 3.96 lakh Cr.  Financial Sector: Growth and stability through stronger institutions. Digital Economy: for speed, accountability and transparency. Public Service: effective governance and efficient service delivery through people’s participation. Prudent Fiscal Management: to ensure optimal deployment of resources and preserve fiscal stability. Tax Administration: Direct tax collection not commensurate with income/expenditure pattern of India, We are largely a tax non-compliant society.


Economic Survey 2016-2017
This year’s Survey comes in the wake of a set of tumultuous international developments – Brexit, political changes in advanced economies (Germany, France, and Netherland, Italy) – and two radical domestic policy actions: the GST and Demonetisation. Demonetisation has hit India’s growth by 0.25-0.5% of GDP. GDP growth is estimated at 6.75-7.5% next year, well below the “sweet spot” of over 8%, the rupee has strengthened by 8.3-10.4% in the last two years. India’s growth rate is set to accelerate to 8-10% in 2-5 years.Risks to Indian Economy-Oil Prices, Rising Dollar Value, Volatile Commodity Prices. 


The Economic Survey brought out 8 Interesting Facts about India


(A)    India on the Move and Churning: About 9 million people, almost double what the 2011 Census suggests are migrating.


(B)    Biases in Perception: China’s credit rating was upgraded from A+ to AA- in December 2010 while India’s has remained unchanged at BBB. 


(C)    Income, Health, and Fertility:


(D)    Convergence Puzzles: India does well on life expectancy, not-so-well on infant mortality rate, and strikingly well on fertility rate and India’s low level of expenditures on health (and education) have been the subject of criticism Infrastructure and Connectivity, Redirecting flows to households. Political Democracy but Fiscal Democracy? – India has 7 taxpayers for every 100 voters ranking us 13th amongst 18 of our democratic G-20 peers. Demographic India’s Soon-to-Recede Demographic Dividend. Working age to non-working age population will peak later and at a lower level than that for other countries but last longer. Demography provides potential and is not destiny.  India Trades More Than China and a Lot Within Itself. One Economic India (GST) – Why Does India Trade so Much? Divergence within India, Big Time.


(E)    The ‘Other India’: Two Analytical Narratives (Redistributive and Natural Resources) on States’ Development. (Unconditional Convergence in GDP per capita), Economic Vision for Precocious, Cleavaged India. Absenteeism, corruption, clientism and red tape dominate our system. One consequence is inefficient redistribution to the poor. Hundreds of welfare schemes fail to reach the masses.


(F)    Clothes and Shoes: Can India Reclaim Low Skill Manufacturing. Meeting the challenge of jobs may require paying attention to labour-intensive sectors such as Leather & Textiles. 


(G)    Tax Potential Unexploited: Evidence from satellite data indicates that Bengaluru and Jaipur collect only between 5% to 20% of their potential property taxes.


(H)    Demonetisation: To Deify or Demonise? Demonetisation has been a radical, unprecedented step with short term costs and long term benefits and could have particularly profound impact on the real estate sector. 


CA. Kapil presented Twin Balance Sheet Problems of Corporate & Banking Sectors, Fiscal Frame work and Universal Basic Income.


Panel Discussion on the Finance Bill, 2017 held on 22nd February, 2017 at HR College, Churchgate.


Discussion on Finance Bill, 2017 was held by BCAS as invited by HR College to talk to their students. The event saw attendance by over 50 students. Chairman of the Taxation Committee, CA. Ameet Patel gave the opening remarks followed by introductory words highlighting the first combined budget presented on 1st February 2017 after the merger of Railway Budget with the Union Budget. A prominence of Union Budget was in the memory of “demonetisation” efforts of the government which provides for growth in a very difficult environment.


The speakers consisted of CA. Ameet Patel, CA. Samir Kapadia (on GST & Other Indirect Taxes) and CA. Siddharth Banwat.


Proposed amendments in Union Budget – Direct taxes and Indirect taxes were covered with most of practical live examples faced by the industry. The following features and key steps initiated by the government which plugged to abuse tax provisions were discussed:


1.    Proposed amendment – Direct Taxes, broader aspects covered
–    Tax rates
–    Capital gains
–    Restrictions on cash transactions
–    Threshold limit under section 44AA – maintenance of books of account
–    Rebate under section 87A of the Act
2.    Indirect taxes – Rationalisation under GST provisions
3.    Abolition of Black money
4.    Prohibition of Benami Transactions
5.    Income disclosure scheme of 2016
6.    Demonetisation of high-value currency notes
7.    Electoral reforms
8.    High level discussion on Investment strategies and tax saving benefits
9.    Digital India
10.    Cashless economy


Various questions were posed to all the three speakers by some students. 


–    CA. Ameet Patel gave his views with in-depth analysis on questions related to investment strategies and tax saving benefits.


–    CA. Samir Kapadia gave his views (on GST & Other Indirect Taxes) with statistics and practical examples or issued faced by various industries on classification of products and applicable rates of tax prior to GST. Further, benefits under GST were highlighted.


–    CA. Siddharth Banwat gave his views on the overall impact and reactions on the budget. 


Overall, the Budget Discussion was well received and the students benefited immensely with the expert analysis on the proposed amendments in the Finance Bill, 2017.


Leadership Workshop on Chanakya Business Sutra held on 24th & 25th February 2017 at BCAS Hall, Jolly Bhavan, Churchgate
Human Development and Technology Innitiatives Committee organised the 15th Leadership Workshop. In contrast to the residential camps organised in earlier years this year it was a non-residential camp held at BCAS Conference Hall of the Society on Friday & Saturday, 24th and 25th February 2017. About 54 Participants registered for the leadership workshop titled ‘Chanakya Business Sutra’. Mr. Mahendra Garodiya, an avid reader of scriptures including Srimad Bhagavatam, Mahabharat, Ramayan, Bhagavad Geeta and Chanakya’s various commentaries including ArthaShashtra was the trainer. He had also inspiration influence from the life of Mahatma Gandhi, and writings of Stephen Covey, Napolean Hill, Jim Collings and Robert Kiyosaki.


President CA. Chetan Shah welcomed the participants. He described Chanakya  as a great strategist,, kingmaker, and author on the variety of subjects like Economics, Politics, Leadership, Governance, Warfare, military tactics, accounting systems etc. and appreciated his vision for Akhand Bharat, United  India.


Past President and also Past Chairman CA. Pradeep Shah complimented all participants. He motivated them to leave all worries. He also shared the information about leadership camps held in the past. He posed pertinent questions and motivated them to introspect as to what one would do if this was the last year of one’s life.


Past President and Chairman of HDTI Committee CA. Nitin Shingala shared a beautiful definition of a complete professional as the one who implements whatever he/she learns. 


CA. Mihir Sheth introduced the speaker and CA. Mukesh Trivedi proposed vote of thanks.


Few of the important points discussed during the workshop were:


–    Entire workshop was based on T.I.M.E. i.e. Thinking, Inking, Mapping and Executing.


–    WHY: Ask as to why you are doing what you are doing. Is it for dharma, artha, Kama, Moksha?
    For the Growth, Life of Contribution or money or Life of Significance.


–    How do we earn money? By Employment 80%,Self Employment 10%, Business 10%. How to earn passively from Investment of your established assets like goodwill, reputation. 


–    RAS: Reticular Access syndrome: Clear Cut emotional Goal in Mind.


–    Essential are skill, People, system.


–    Live the life of contribution by generating employment, opportunities etc. constantly introspect as to when you are doing something is it for contribution to the mankind, or nation, or for significance i.e. recognition ? or for personal luxuries or comforts?


–    Know your capability before you start the work.


–    Anything begins with thought or story in mind, followed by words, state, emotion, action and Result.


–    OQP: Only quality people. Always Select  quality people for the right job. The mentors should have promise, thought and action (MVK – Manah, Vachanam, and Karma ) well aligned.
–    Manage the time: Important, urgent, not important and not urgent. 


–    Learn what to measure?


–    Seven important aspects of Business: Production, finance, Relationship, Star, Reference Generation and Sales.


–    Use effective communication: OFNR .e. Observation, Feelings, Needs and Request.


–    IDP: Incorporate Individual  Development plans, always maintain humility. Reward the deserving, reprimand underperformer.


All these and many other concepts were discussed interactively with many inspirational videos.


Seminar on GST held on 25th and 26th February 2017 at the Navinbhai Thakkar Auditorium, Vile Parle (E), Mumbai
                                                                                                                                    
Looking at the pace of the developments in the road map to the GST roll out by 1st July, 2017 it was imperative for all to understand the intricacies of the proposed law and its implications on trade and industries. The Indirect Taxation Committee of BCAS designed a comprehensive program spread over two days (25th and 26th February, 2017) at the Navinbhai Thakkar Auditorium.











 


CA. Sushil Solanki





 


CA. Sunil Gabhawalla





 


CA. Parind Mehta





 


CA. Amitabh
Khemka









 


CA. Rajiv Lithia





 


CA. Govind Goyal





 


CA. Udayan
Choksi





 


CA. Jayraj Sheth








The program witnessed excellent participation from members, trade and industry. Over 350 people attended the program. Various eminent faculties delivered their expert views on important statutory provisions contained in the model GST law including CA. Sushil Solanki, CA. Sunil Gabhawalla, CA. Parind Mehta, CA. Amitabh Khemka, CA. Rajiv Luthia, CA. Govind Goyal, CA. Udayan Choksi and CA. Jayraj Sheth. 


As we draw close to the appointed day, it would be the society’s objective to disseminate maximum knowledge on this reform. In this way, we would surely contribute towards smooth transition of the proposed law which intends to create a single national market.   


Lecture Meeting on “The Road Less Travelled” under auspices of Amita memorial Trust held on 1st March 2017


The annual talk held under the auspices of Amita Memorial Trust jointly with Bombay Chartered Accountants’ Society and Chamber of Tax Consultants was held on 1st March 2017 at Walchand Hirachand Hall, IMC, Churchgate.







Smt. Mittal Patel


The Speaker of the evening, Smt. Mittal Patel is a young social worker working for the rights of the Nomadic tribes. She has chosen to take a difficult path in her life which is rarely taken by the others. She took us on a journey along this path and gave a talk which held the audience spellbound and touched the hearts of all the listeners. She is working for the human rights of the Nomadic tribes, who in Gujarat alone number more than 45 lakh. 


Her work is not only difficult but dangerous too, as there are forces which want to continue to exploit these wandering tribes. Smt. Mittal explained that even today these tribes are being treated worse than untouchables, and have no identity, no voting rights, no ration cards, no permanent houses, and no address. She is fighting to get these basic rights for these downtrodden people. The talk aroused compassion in the hearts of the listeners and a desire to join and help in this struggle to get the basic rights for the nomadic tribes.


The inspired talk ended with remembering CA. Amita (Shah) Momaya, a young member of the BCAS family, who also spread the message of Universal Love during her short but inspiring life. She left this world on January 31, 1987 but continues to spread messages of peace and purpose after 30 years of her departure.


The meeting was very useful and inspiring for the participants.

Human Development Study Circle Meeting on “Man Woman Relationships” held on 7th March, 2017 at BCAS Conference Hall 


The Study Circle Meeting discussion was led by CA. Deepak Bagla on “Man and Woman relationship and their development”.


CA. Deepak Bagla has studied various scriptures like Ramayan, Mahabharat, Srimad Bhagavatam and Bhagavad Gita. He also practices Meditation for the last two decades. He likes to share his learning as a counsel. He has specialised in mentoring to cope up with challenges on relationship, parenting, employer employee relationship etc.


The story of ‘Ardhanarishvara’ as a symbol of Shiva and Shakti, Purusha and Prakriti is very inspiring, to feel two dimensions of life. Perhaps, the world would not have either been created or nurtured without Man and Woman. Physically, emotionally and genetically, both are different. Their needs, strength and weakness are different.  Men & Women complement each other and together they can create synergy.


This interactive meeting was held to discover and explore the differences between man and woman and their relationship. The topics discussed were as follows:


1)    Understand the major reasons leading to problems in man woman relationship
2)    Understand and appreciate different facets of relationship
3)    Importance of healthy relationship and its impact on children in digital age 


There are differences between Man and Women  in the way of thinking, in beliefs, in style of behaviour, etc. and one should appreciate that. One must accept the differences and use each one’s talents for the benefit of the Family Health, peace, progress.


He spoke on a five point development for man and woman:
–    Purpose – in life, we need not prove ourselves and compete with each other with motive to defeat each other. Instead find each one’s purpose and support each other and give each other space.


–    Relationships – within the family, neighbours, relatives, friends, superiors is important. Value Relationships.


–    Interdependance – we are all connected within and outside the family – this needs to be understood. Men or women are not meant to be alone.
–    Dependable – We have to be dependable and responsible.


–    Empathy and exercise are very important. We need to understand others in order that others understand us. Also exercise is important for health.


The participants were very happy to be present and learn simple but unique aspects about Man-Woman relationships.


Indirect Tax Study Circle Meeting held on 8th March 2017 at BCAS Conference Hall


GST is soon to become a reality. Information technology (‘IT’) would be a one of the determining factor for making this reform a success. In view of the relevance of IT in the GST regime a brief demonstration was held by NSDL executives. Members were explained the role of GSP’s and ASP’s in the entire compliance process. The same as appreciated by the members present.


In the second half of the meeting few amendments proposed by the Finance Bill, 2017 relating to Indirect Tax was taken up for discussion. 


Felicitation of President and Vice President of ICAI on 9th March 2017.
 
On 9th March 2017, it was a privilege of the BCAS to welcome and felicitate the ICAI President, Mr. Nilesh Vikamsey, also a Core Group member of BCAS. The Society also congratulates ICAI Vice-President Mr. Naveen N. D. Gupta, who could not make it for the felicitation. The President was also accompanied by Central Council Members Mr. Prafulla Chhajed and Mr. Nihar Jambusaria.





L to R – CA. Sunil Gabhawalla, CA. Narayan Pasari, CA. Nilesh Vikamsey 
(Honorable President of ICAI), CA. Chetan Shah (President) & CA.Manish Sampat


The discussion was an informal and an interactive one. It focused on the various matters that can be taken up by one or both the organisations, some of which can be outlined as follows:


GST, the President mentioned, is a God-sent opportunity for the profession and we all should look forward as a potential area of practice.


The developments in the area of GST was discussed and suggested for some joint publication on the topic shortly.


The ICAI President stated that the government appreciated and welcomed the support extended by our professionals for the support extended in the Income Disclosure Scheme. However, post that, there has been not much visibility for the profession. 


Thus, we all should collectively highlight the positive aspects of the profession to the government and the Society at large in whatever way possible.


The ICAI President shared the steps taken for drafting the new syllabus for CA students and the way the entry to the CA course will be made slightly difficult.  The course now will be made available post completion of HSC (Std XII). The CA Syllabus is revisited every 8 to 10 years.


The ICAI President suggested that Insolvency law is the upcoming new area which professionals can look as a new area of practice.


The Railways accounting, he said under the leadership of  a member of our profession Mr. Suresh Prabhu  is seeking to change the method of accounting from cash to accrual which was another potential area of practice.


The ICAI President felt that as professionals we should partner with the government in educating the people in the country thereby increasing the tax base.


The Past Presidents of BCAS and other members present welcomed all the suggestions and extended support towards the activities of ICAI. 


Central Council members present assured those present that the BCAS members could write to them and seek support or any co-ordination for the benefit of the profession. The Session ended with a warm vote of thanks by CA. Manish Sampat.


The 4th Youth Residential Refresher Course held on 10th March to 12th March 2017 at Fountainhead Leadership Centre, Alibaug


The 4th YRRC was jointly organised by Bombay Chartered Accountants’ Society under the Membership and Public Relations Committee and The Institute of Chartered Accountants of India under the Youth Members Empowerment Group of CCBMP from 10th to 12th March 2017 at Fountainhead Leadership Centre, Alibaug.


“Nostalgia”, the theme of the event was to reconnect the memories from childhood and school days and the participants forged long term bonds and made more memories than they recollected at the event. The participants were grouped in four houses; Zeus, Morpheus, Electra and Poseidon, and a competition for earning points for their house and the Best House trophy began.


As every school has a uniform, this year at the YRRC all the participants turned up in their suits and ties, adding the perfect professional touch at the excellent venue and facility.


A  perfect blend of learning through technical, non-technical sessions and educative extracurricular activities, the YRRC provided a great opportunity to all the participants to polish their personality and knowledge. 


The “New Youth Times”, the daily news quotient, kept the participants abreast with the happenings of the YRRC at all times.


Covering a wide range, the YRRC covered topics ranging from Ind-AS, International Tax, Direct Tax to Entrepreneurship, Leadership and even a Mock Stock Market. The speakers shared their professional journey and personal experiences with the participants. The group discussions were very productive and knowledgeable providing insights into various controversies and issues faced today. Not to forget, the chance to earn points did turn the discussions a bit intense and animated to an extent that at some places it flared up to heated arguments.
The content covered and presentations made by all the Speakers were a class apart, delivering their points and ideas with great clarity. None of the speakers returned home without a standing ovation from the enthusiastic crowd. 


The participants learned about overcoming challenges individually and as a group from the extra-curricular activities like the Activity Marathon and Open MicEvents. 
A true theatrical experience was created while watching the enriching movie “Chale Chalo”, a national award winning inspirational film starring Aamir Khan directed by a lawyer Satyajit Bhatkal. 


Today’s youth cannot be defined without some “NachGana”, the youth showcased their talent on the DJ night and also broke the myth that CAs are only studious and boring, during a Flash Mob in middle of a session wherein the surprised speaker couldn’t help but shake a leg along with them.


House Zeus was able to lift the trophy of the best house outperforming in the group discussions, mock stock trading session and activity marathon amid the tough competition put up by the other houses.


The return journey with the ferry dancing on high waves under a full moon turned into a Pre-Holi Bash where spontaneous participants burst into a Karaoke session. An event which was truly “By the Youth, Of the Youth and For the Youth” concluded with the now enriched and happy participants bidding farewell until the next YRRC. 


The event wouldn’t have been successful but for CA. Nilesh Vikamsey, President – ICAI, CA. Chetan Shah, President – BCAS, and CA. Mukesh Singh Khuswah, Chairman – CCBMP ICAI. Post the event, the advance enquiries for the next YRRC and the joyous feedback received from the speakers and their sheer experience of the wonderful novelty and energy of the event marked a beautiful end to the 4th YRRC.
















Human Development Study Circle Meeting held on 14th March, 2017 at BCAS Conference Hall 


The Study Circle Meeting discussion was led by Mrs. Reyna Rupani.


Reyna K. Rupani has a dream – Living a Life with no Medications. This desire got her in touch with SHARAN (Sanctuary for Health & Reconnection to Animals & Nature). She had thought she knew everything about Health until she heard Dr. Nandita Shah speak. Since it all appealed to reason and logic, she decided to give the whole plant-based diet a chance, and there has been no turning back since.


Her severe acidity issues disappeared within 3 days. She lost 17 kilos in eight months, and it has been over two years and she has only put on two kilos! She feels energetic, looks much younger and most of all she has sensed clarity in her thinking.


The whole plant-based diet is the ONLY solution to our Health problems and for the environment too. This truth is exactly what keeps her going. Avoid processed and packaged foods. Keep away from oil and milk.


Deodarants, pesticides, insecticide sprays used in the surroundings can harm our health as it makes us breathe chemicals.


The participants were very happy to be present and learn some frightening realisations on pollution of environment and how health can be improved by taking care of what you consume. We are what we eat.


Participants were glad to be aware of useful tips to improve health.


Workshop on Audit in IT Empowered held on 16th March 2017 at BCAS Hall, Jolly Bhavan, Churchgate















 


CA. Manoj Jain




 


CA. Madhav Kulkarni




 


CA. Kartik Radia












A crisp Thursday morning 16th March, 2017 saw over 40 participants seated before time, waiting for the workshop on “Audit in an IT Empowered World – Techniques for Effectiveness and Efficiencies” to begin. Aligned with the culture to start right on time, President CA. Chetan Shah introduced the participants to the objective of the workshop and encouraged them to freely interact with the faculties during the course of the workshop. 


The participants had an enriching experience as the learned faculties CA. Manoj Jain, CA. Madhav Kulkarni and CA. Kartik Radia who shared their insights and experiences on the allotted topics viz. ‘Audit Planning & COSO framework’, ‘ITGC and Application controls’ and ‘IFC Evaluation & COBIT framework” based on the case study approach.


A dedicated Q&A session after every presentation gave further opportunities to participants to seek replies to their practical challenges in planning and executing assurance engagements in IT environment.



	


	

			






	

		
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