Subscribe to the Bombay Chartered Accountant Journal Subscribe Now!

Month: April

A. P. (DIR Series) Circular No. 84 dated 22nd February, 2013 Know Your Customer (KYC) norms/Anti-Money Laundering (AML) Standards/Combating the Financing of Terrorism (CFT) Standards – Obligation of Authorised Persons under Prevention of Money Laundering Act (PMLA), 2002 as amended by PML (Amendment) Act 2009 Money Changing activities.

fiogf49gjkf0d
This circular contains the procedure, as mentioned below, to be followed by authorised dealers and all their agents/franchisees to identify the beneficial owner in money changing transactions in terms of Rule 9(1A) of Prevention of Money Laundering Rules 2005: –

A. Where the client is a person other than an individual or trust, the Authorised Person shall identify the beneficial owners of the client and take reasonable measures to verify the identity of such persons, through the following information:

(i) The identity of the natural person, who, whether acting alone or together, or through one or more juridical person, exercises control through ownership or who ultimately has a controlling ownership interest.

Explanation:

Controlling ownership interest means ownership of/entitlement to more than 25% of shares or capital or profits of the juridical person, where the juridical person is a company; ownership of/entitlement to more than 15% of the capital or profits of the juridical person where the juridical person is a partnership; or, ownership of/entitlement to more than 15% of the property or capital or profits of the juridical person where the juridical person is an unincorporated association or body of individuals.

(ii) In cases where there exists doubt under (i) as to whether the person with the controlling ownership interest is the beneficial owner or where no natural person exerts control through ownership interests, the identity of the natural person exercising control over the juridical person through other means.

Explanation:

Control through other means can be exercised through voting rights, agreement, arrangements, etc.

 (iii) Where no natural person is identified under (i) or (ii) above, the identity of the relevant natural person who holds the position of senior managing official.

B. Where the client is a trust, the Authorised Person shall identify the beneficial owners of the client and take reasonable measures to verify the identity of such persons, through the identity of the settler of the trust, the trustee, the protector, the beneficiaries with 15% or more interest in the trust and any other natural person exercising ultimate effective control over the trust through a chain of control or ownership.

C. Where the client or the owner of the controlling interest is a company listed on a stock exchange, or is a majority-owned subsidiary of such a company, it is not necessary to identify and verify the identity of any shareholder or beneficial owner of such companies.

levitra

Rights Issue by Unlisted Company can Become a Public Issue – Kerala High Court

fiogf49gjkf0d
When does a rights issue by an unlisted company become a public issue? What are the implications if such a rights issue is deemed to be a public issue? Whether it will become liable to comply with extensive requirements relating to public issue? More specifically, does a right to renounce shares so offered to non-shareholders make it an offer to the public?

The issue is important since it is becoming common that unlisted companies issue shares on rights basis. It is also a fact that renouncing rights shares is a statutory right unless taken away by articles, that one can renounce only in favour of another shareholder.

The Kerala High Court has held recently in SEBI vs. Kunnamkulam Paper Mills Ltd. (dated 20th December 2012, WA No. 2203 of 2009, In WPC 19192/2003, Unreported) that a rights issue to more than 50 shareholders would become a public issue if such a right could be renounced in favour of non-shareholders. Accordingly, SEBI required that the whole of the proceeds raised through such rights issue be refunded, with interest, or else the company would face penalty and prosecution.

At the outset, it may be emphasised that this decision would effectively apply only to those unlisted public companies who have more than 50 shareholders and who make a rights issue carrying such right of renunciation. By definition, private companies do not have more than 50 shareholders (the marginal cases of private companies having exactly 50 shareholders or having employee shareholders are not discussed here). Thus, any public company that has more than 50 shareholders would be affected by this decision.

The background of introducing safeguards in case of issue of shares can be easily appreciated. There is a concern that unlisted companies try to raise monies from public without following procedures that are in investors’ interest and are provided in detail under SEBI Regulations/Guidelines and the Companies Act, 1956. To prevent this, certain issues of shares made are deemed to be public issues under Section 67 of the Companies Act, 1956 (“the Act”).

Section 67 (reading its sub-sections and provisos together) provides that any offer/invitation to the public, whether selected as members of the Company or otherwise, would amount to a public offering. However, if the offer is limited to existing shareholders, then it will not amount to a public offer, unless such offer to begin with is to 50 or more persons.

In the present case, the petitioner Company had made a rights issue to its 296 shareholders. The offer document relating to the rights issue permitted renunciation of such rights to non-members. Pursuant to such rights issue, 1,73,995 equity shares were allotted to 163 persons including non-members. The question was whether issue to shareholders – whose number was admittedly more than 50 – carrying the right of renunciation amounted to a public issue. SEBI held that it was indeed a public issue and ordered the company to refund the monies raised with interest. On appeal before the High Court, a Single Judge held that SEBI had no jurisdiction since the company was an unlisted company. SEBI appealed and a two-member bench reversed the decision of the Single Judge.

The Court examined the relevant provisions of the Act, the SEBI DIP Guidelines (as they then were before the SEBI (ICDR) Regulations were notified in 2009), analysed several precedents including decisions of the Supreme Court and held that the issue was indeed a public issue.

The Court observed:-

“No doubt that section 67(3) clearly indicates that such offer or invitation shall not be applicable under certain circumstances as provided u/s/s. 3(a) and (b). But the first proviso to sub-section (3) clearly indicates that the deeming provision u/s. 67(1) and (2) applies in respect of subscription of shares or debentures made to 50 or more persons. That being the situation when a company exercises its power u/s. 81(1)(c) which gives right to a shareholder to renounce right shares in favour of persons who are not shareholders and when such right is given to 50 or more persons that also will be deemed to be an offer made to any section of the public as provided u/s. 67(1) and (2).”. It may be added that the Court also held that such a rights issue would also amount to a public issue for the purposes of the SEBI Guidelines/SEBI Act and thereby SEBI has jurisdiction. This aspect, however, has not been discussed here in detail in view of space constraint. Further, another point of note is that the Court held that SEBI Act, being a special Act, overrides the provisions of the Companies Act, 1956.

The dilemma for public companies having more than 50 shareholders or more can be imagined. On one hand, Section 81(1)(c) provides for a right, unless the articles provide to the contrary to renounce in case of a rights issue. On other hand, such an issue would become a public issue with serious adverse consequences. It needs to be noted that the Court did not hold a final view on the merits of the case but set aside the decision of the Single Judge setting aside SEBI’s order. This was because the remedy for the petition are company against SEBI’s order was appeal to the Securities Appellate Tribunal (“SAT”). Accordingly, the Court asked the petitioner company to appeal to SAT, if it still felt aggrieved.

 A few incidental observations:

Letter No. 8/81/56-PR dated 4th November, 1957 issued by the Department of Company Law Administration prescribes that issue of further shares by a company to its members with the right to renounce in favour of third parties does not require registration of prospectus. It would be a matter of consideration whether this clarification would apply to a case particularly where the issue is to more than 50 persons. In any case, the Court’s decision, is quite clear on the issue.

Readers may recollect that in the Sahara companies matter too, an issue had arisen as to where an offer of shares is to more than 50 persons whether it becomes a public offer and the Supreme Court had extensively analysed the provisions of the Companies Act, 1956, and SEBI Act/Regulations. The Supreme Court dwelt on matters such as the power and jurisdiction of SEBI, when an issue of securities becomes a public issue. The facts in that case were of course, very glaring where a very large number of persons were issued securities. A reference can be made to earlier articles in this column though this decision of the Kerala High Court stands on its own. Particularly since it deals with a peculiar situation of rights issue by a public company with right of renunciation.

It is worth considering also what the Companies Bill, 2012, as passed by Lok Sabha provides. The provisions proposed in the Bill seem ambiguous and contradictory in this context. The scheme of the Bill for issue of shares seems to broadly categorize issue of shares into three, namely,
1. a public issue, or
2. as a rights issue or
 3. “private placement”.

The provisions clearly state that rights issue need to allow for, as the existing Section 81 also provides, right of renunciation, unless the articles provide to the contrary. Rigorous restrictions have been placed in case of a private placement of shares including prohibition of offer to more than 50 persons in a year. However, in the changed scheme, wordings similar to the existing Section 67 in the Companies Act, 1956, are not there. The way the term private placement is defined and placed alongside a public issue and a rights issue seems to suggest that a rights issue may not be deemed to be a private placement. At the same time, it has been stated that any offer to allot shares to more than 50 persons shall be deemed to be a public offer. Thus, it is not wholly clear whether the intention is to permit issue of rights shares carrying right of renunciation to more than 50 members without deeming such issue to be a public issue. One will have to wait till the law is passed and examine the exact wordings, to understand whether the new law will apply or not to such rights issue.

In conclusion, it may be said that SEBI and the law makers are generally grappling with the issue of companies raising funds from the public without following the statutory safeguards of disclosures, promoters’ contribution, etc. Members of the public may unsuspectingly fall prey to fly by night operators or otherwise do not have the various benefits of listing. if they acquire shares which do not follow the required provisions of law relating to public issue. One has also to concede that in case of a rights issue with a right to renounce in favour of non-members — persons who are not familiar with the company — may end up buying shares of companies promoted by unscrupulous persons. Hence, while companies may find the provision restrictive, it makes sense to restrict the right of renunciation only in favour of existing shareholders or as an alternative, follow SEBI regulations.

In either case, public unlisted companies seeking to issue ‘rights shares’ will have to keep in mind the decision of the Kerala High Court. It would also be interesting to watch what the Companies Bill 2012 finally provides.

Stop Press: – Just as this article was going for print, this author received a copy of unreported decision of Supreme Court in appeal to the Kerala High Court decision discussed above. The Supreme Court has, vide its decision dated 21st February 2013, stayed this judgment of the Kerala High Court. An update will be provided in this column on the final decision of the Supreme Court.

PART A: Judgment of H.C. of Bombay

fiogf49gjkf0d
Section 2(h): Public Authority:

When some citizens sought certain information from Shikshan Prasarak Mandali Trust (SPM), it responded by taking the stand that SPM is not falling within the definition of Public Authority. The contention of SPM was:

 “The argument is that the Trust is not a public authority within the meaning of Section 2(h) of the RTI Act. An Educational Institution, managed and administered by the Trust receives the grants and assistance from the Government. It is at best that Institution which can be said to falling within the definition of the term ‘public authority’ but certainly this will not take within its import or fold the public charitable trust which merely manages and administers the Educational Institution. A public charitable trust pure simple cannot be said to be a public authority under the RTI Act. It cannot be said to be an Authority or body owned or controlled by the State Government.”

The Contention of Maharashtra Information Commission was:

 “The term “public authority” as defined in the RTI Act, would make it clear that first part of it clarifies that all statutory bodies and authorities would be covered and the latter part of it includes bodies owned, controlled or substantially financed by the government. Now, when non-Governmental organisations, substantially financed directly or indirectly by funds provided by the appropriate government are brought within the ambit and purview of the RTI Act, then, all the more a conclusion is inescapable that the petitioner trust’s plea could not have been entertained. It is reading the Act as if it applies to an activity or function of a public trust but it will not apply to that public trust even if that activity or function is being performed under its auspices or control. If every single Educational Institution is established, managed, administered and controlled by the public trust or societies or bodies of the present nature, then, a defence will always be raised to resist the application of the Act by urging that the Act will apply to its activity or function and not to it. This will defeat and frustrate the Act. It would run counter to the Legislative intent in making all such bodies, organisations, including non-Governmental ones, accountable and answerable to the public. For all these reasons, it was submitted that the petition be dismissed.

Public authorities should realise that in an era of transparency, previous practices of unwarranted secrecy have no longer a place. Accountability and prevention of corruption is possible only through transparency. Attaining transparency no doubt would involve additional work with reference to maintaining records and furnishing information. Parliament has enacted the RTI Act providing access to information, after great debate and deliberations by the Civil Society and the Parliament. In its wisdom, the Parliament has chosen to exempt only certain categories of information from disclosure and certain organisations from the applicability of the Act.”

 The HC quoted some paras from the judgment of the Supreme Court in case of Institute of Chartered Accountants vs. Shaunak H. Satya reported in A.I.R. 2011 S.C. 3336, [ RTIR IV (2011) 82 (SC)] In that context and dealing with some of the provisions of the Act, it was held as under:

 “The information to which RTI Act applies falls into two categories, namely

(i) information which promotes transparency and accountability in the working of every public authority, disclosure of which helps in containing or discouraging corruption. Enumerated in clauses (b) and (c) of Section 4(1) of RTI Act. and

(ii) other information held by public authorities not falling u/s. 4(1)(b) and (c) of then RTI Act. In regard to information falling under the first category, the public authorities owe a duty to disseminate the information wide suo motu to the public so as to make it easily accessible to the public. In regard to information enumerated or required to be enumerated u/s. 4(1)(b) and (c) of RTI Act, necessarily and naturally, the competent authorities under the RTI Act, will have to act in a proactive manner so as to ensure accountability and ensure that the fight against corruption goes on relentlessly. But with regard to other information which does not fall u/s. 4(1)(b) and (c) of the Act, there is a need to proceed with circumspection as it is necessary to find out whether they are exempted from disclosure.

One of the objects of democracy is to bring about transparency of information to contain corruption and bring about accountability. But achieving this object does not mean that other equally important public interests including efficient functioning of the Government and public authorities, optimum use of limited fiscal resources, preservation of confidentiality of sensitive information, etc. are to be ignored or sacrificed. The object of RTI act is to harmonise the conflicting public interest, that is, ensuring transparency to bring in accountability and containing corruption on the one hand, and at the same time ensure that the revelation of information, in actual practice, does not harm or adversely affect other public interests which includes efficient functioning of the Governments, optimum use of limited fiscal resources and preservation of confidentiality of sensitive information, on the other hand. While Sections 3 and 4 seek to achieve the first objective, Sections 8, 9 10 and 11 seek to 0achieve the second objective. Therefore, when Section 8 exempts certain information from being disclosed, it should not be considered to be a fetter on the right to information, but as an equally important provision protecting other public interests essential for the fulfillment and preservation of democratic ideals. Therefore, in dealing with information not falling u/s. 4(1)(b) and (c), the competent authorities under the RTI Act will not read the exemptions in Section 8 in a restrictive manner but in a practical manner, so that the other public interests are preserved and the RTI Act attains a fine balance between its goal of attaining transparency of information and safeguarding the other public interests.” “Among the ten categories of information which are exempted from disclosure u/s. 8 of the RTI Act, six categories which are described in clauses (a), (b), (c), (f), ( g) and (h) carry absolute exemption. Information enumerated in clauses (d), (e) and (j) on the other hand get only conditional exemption for a specific period, with an obligation to make the said information public after such period. The information referred to in clause (i) relates to an exemption for a specific period, with an obligation to make the said information public after such period. The information relating to intellectual property and the information available to persons in their fiduciary relationship referred to in clauses (d) and (e) of Section 8(1) do not enjoy absolute exemption. Though exempted, if the competent authority under the Act is satisfied that larger public interest warrants disclosure of such information, such information will have to be disclosed. It is needless to say that the competent authority will have to record reasons for holding that exempted information should be disclosed in larger public interest.”

H.C. then gave meaning to certain words/ terms covered in Section 2(h), e.g. ‘established’, ‘constituted’, ‘owned’, ‘controlled’ or ‘substantially financed by funds provided directly or indirectly.’

The word “established” means “to bring into existence” whereas the word “constituted” does not necessarily mean “created” or “set up” though it may mean that also. The word is used in a wider significance and would include both the idea of creating or establishing and giving a legal form to the body (see A.I.R. 1959 S.C. 868 M/s. R.C. Mitter and Sons vs. Commissioner of Income Tax, West Bengal). It includes in the later part “any body owned, controlled or substantially financed” and equally a non-Governmental organisation, sub-stantially financed directly or indirectly by funds provided by appropriate government. Thus, any body owned, controlled or substantially financed is being brought within the net and purview of the definition so as to clearly set out its duty and obligation to provide information and thereafter, make it possible for the citizens to enforce it. It is very clear that the Legislature did not exhaust itself but included bodies owned, controlled or sub-stantially financed, directly or indirectly by funds provided by appropriate Government. Therefore, to urge that there is no control over the public charitable trust by the appropriate government or if at all there is any control or the element of public dealings come in, that is only in relation to Educational Institutions which are run, administered and managed by the Trust is nothing but an attempt to escape from being covered by the Act and complying with its mandate. A definition as inserted and worded in Section 2(h) of the RTI Act can safely be termed as partly exhaustive and partly inclusive. The choice of words as noted above would mean enlarging the meaning of the words or phrases occurring in the statute.

HC further noted:

“A citizen is not expected to indulge in futile litigation and endless chase in overcoming technical hurdles and obstacles for seeking information. Public authorities are not obliging him by giving him information because the rule of the day is transparency, accountability in public dealing and public affairs and in relation to public funds. In cases of present nature, the information can be sought by approaching both the educational institutions and the parent entity controlling them or either. However, the duty and obligation to provide information as long as the right to seek it is enforceable by the RTI Act must be discharged by the Public Authority. In this case, it is the petitioner Trust.”

For the reasons aforestated, this petition fails, Rule is discharged without any costs. The finding and conclusion that the RTI Act is applicable to the petitioners and they are obliged to provide information in relation to its educational institutions is confirmed.

[Shikshan Prasarak Mandali vs. Maharashtra SIC & ors. Writ petition decided on 18.10.2012] [Citation: RTIR I (2013) 234 (Bombay)]

Sections 2(24) read with sections 4 and 28(i) of the Income Tax Act, 1961 – Amount realised on sale of carbon credits is a Capital Receipt and it cannot be taxed as a Revenue Receipt.

fiogf49gjkf0d
2. (2013) 151 TTJ 616 (Hyd.)
My Home Power Ltd. vs. Dy.CIT
ITA No.1114 (Hyd.) of 2009
A.Y.:2007-08. Dated: 02.11.2012

Sections 2(24) read with sections 4 and 28(i) of the Income Tax Act, 1961 – Amount realised on sale of carbon credits is a Capital Receipt and it cannot be taxed as a Revenue Receipt.

For the relevant assessment year, the amount realised by the assessee from sale of carbon credits was treated by the Assessing Officer and the CIT(A) as a revenue receipt and not a capital receipt.

The Tribunal, relying on the decision of the Supreme Court in the case of CIT vs. Maheshwari Devi Jute Mills Ltd. (1965) 57 ITR 36 (SC), held that sale of carbon credits is to be considered as a capital receipt.

The Tribunal held as under :

Carbon credit is in the nature of “an entitlement” received to improve world atmosphere and environment by reducing carbon, heat and gas emissions. It is not generated or created due to carrying on business but it is accrued due to “world concern”. It has been made available assuming character of transferable right or entitlement only due to world concern.

Further, carbon credits cannot be considered as a by-product. It is a credit given to the assessee under the Kyoto Protocol and because of international understanding. The persons having carbon credits get benefit by selling the same to a person who needs carbon credits to overcome one’s negative point carbon credit. Carbon credit is entitlement or accretion of capital and, hence, income earned on sale of these credits is capital receipt.

Thus, the amount received for carbon credits has no element of profit or gain and it cannot be subjected to tax in any manner under any head on income. It is not liable for tax for the assessment year under consideration in terms of sections 2(24), 28, 45 and 56.

levitra

Prize winning essays from the Essay Competition held by the Society for Students

fiogf49gjkf0d
Is India progessing or regressing?

Charmi Doshi
1st Prize

“Progress is the activity of today with assurance of tomorrow”, these words were rightly quoted by Sir Emerson. ‘India’, ‘Bharat’, ‘Hindustan’, as many names as many cultures, religions, languages, a complete hotchpotch of diversity and traditions. But being multi-linguistic and extremely diversified just does not make it a fully developed country, but yet, surely it plays a great role in chiselling the structure of the country. The question to be asked today is, ‘Is India capable of becoming a superpower or at least change its title from a ‘developing’ to a ‘developed’ country?’

Well, the answer is crystal clear, ‘Capability is never equal to power unless it is backed by intent and willingness to use the power in the pursuit of ‘National Interest’.

Let me put it this way; you are on a long road trip. Do you always find the road to be smooth and complete the journey without any obstacle? This same concept applies to the journey of a country from an underdeveloped to a developed one. There are always highs and lows, sometimes uneven road; similarly in the entire process of development, the country has to go through all the phases of highs and lows. So, this makes it clear that in the path of progression one has to face regression but, with the condition of bouncing back even higher. No doubt, India has progressed immensely in the past few decades that even our forefathers would have never imagined. Seeing the current scenario, it is definitely clear that India is progressing but, is it exactly how we imagined?

Tall towers in cities like Mumbai and Bangalore, four-lane drive ways in cities like Ahmedabad, monorails and metros in Delhi and Kolkata, sealink as a flyover above the sea, huge dams, constant electric supply, automatic cars, defence equipments matching the World class standards, space-crafts circumnavigating the space etc.. etc.. etc.. all these are the most lively and vibrant examples of tremendous progress the country has made in the past few decades. Today, a man can circumnavigate the globe within 24 hours. This has made the saying very clear that ‘Sky is not the Limit’. India is like the new ‘epitome’ of opportunities in the World. Many multi-nationals and business houses are looking forward to open their businesses in India. Discovery of life saving drugs, excelling in the fields of Science and Mathematics have made the Nation really proud. The most recent development in the field of ‘BPO & KPO’ i.e. business process outsourcing and knowledge process outsourcing.

We all know that in NASA organisation maximum employees are Indian. In each and every part of the World Indians are spreading goodwill and are shining all the way. What would we call all this? This is nothing but splendid performance proving the ability to progress by our Nation. Then, why is it still referred to as ‘stagnant and developing’? No doubt, the country is on its path to success. But with success come many downfalls and negative elements. Who said the developed countries do not face the adverse elements?

Yes! You heard it right, even the superpowers of the World have gone through their ‘Regression’ phase. But, what is important to know is ‘Do the adverse elements of a nation in the path of progress outweigh the favourable elements?’ This is where India is lagging behind. With each step of success comes a number of obstacles and hurdles which pulls back the country to step 1. Pollution, black money, corruption, indiscipline, are the very common hurdles present in this Nation. ‘If you want to get the work done, fill your pockets before going out’, ‘bribe’ the most common terrorist of the Nation. Adulteration in food, using cheap quality materials in building infrastructure just for earning few extra rupees at the cost of endangering the entire country, black money circulating faster than air, money laundering, ill practises like caste discrimination and untouchability. Who can say that the country which has developed so much is still backward that most of its children are malnourished and live below the poverty line? Wealth in hands of few is the ongoing picture. More than five lakh villages are still without power; more than half of the population is still illiterate. Is this exactly what we call ‘favourable progress’? It is high time that we fellow Indians must awaken and sow the seeds of development with minimum chemicals to it.

 In the end, I would like to say that no doubt India is progressing yet, it needs to change and modify its ways.

‘While India is developing to the fullest extent with infrastructure and technology on its peak, our fellow Indians are still living in ‘drudgery’. Progression has to come with regression. But, on the condition of bouncing back even higher.

‘Progress is like a double-edge sword’. It is upon us whether we want to use it to cut vegetables or to kill a person? Thus, India is definitely progressing but it is still a slave to many ill practises giving rise to regression.

Religion & Spirituality

Aneri Merchant
2nd Prize

Every religion stems out of spirituality. Religion becomes rigid and restricts you but spirituality brings that expansion you crave for.

 —Sri Sri Ravi

Shankar Religion and spirituality are the two defining factors in the determination of the higher values of life. These two functions of the inner call of a human being correspond to life in the world and life in God. The relationship between the world and God is also the relationship between religion and spirituality.

A large number of people identify themselves as “spiritual but not religious.” This phrase probably means different things to different people. The confusion stems from the fact that the words “spiritual” and “religious” are really synonymous. Both connote belief in a Higher Power of some kind. Spirituality is about personal experience of a new dimension to life and living by the lessons learned therein. Religion is blind faith in somebody else’s theories, and then conforming to their expectations and demands. Before the 20th century, the terms religious and spiritual were used more or less interchangeably.

The word spirituality gradually came to be associated with a private realm of thought and experience while the word religious came to be connected with the public realm of membership in religious institutions and participation in formal rituals. Since the birth of humankind, our biggest inner struggle has been to achieve a level of complete peacefulness through religion or spirituality.

In India, there is a discipline prescribed for the gradual evolution of the human individual by stages of

 (1) education,

 (2) adjustment of oneself with the demands of natural and social living and,

(3) detachment from the usual entanglements in life and

(4) final rootedness of oneself in God. (Sanyasa)

Every religion has its various restrictions imposed on a person, keeping all human activity confined to specific areas of living, with its several dos and don’ts – ‘do this’ and ‘do not do that’. There cannot be any religion without these two mandates imposed on man.

People in the first two stages of life mentioned above are placed under an obligation to follow these dos and don’ts of religion in social behavior, in personal conduct and dealings with people in any manner whatsoever.

Every religion has these ordinances, defining the duties, which are religious, whether in the form of ritual, worship, pilgrimage, daily diet, and devotion and adherence to the scripture of the religion. These restrictions are lifted in the third stage where the life of a person is mainly an internal operation of thought, feeling and understanding and experiences of the materialistic life.

Even though, religion has evolved and shifted through many individual beliefs, yet the essence of spirituality has always been the same.

Spirituality exists wherever we struggle with the issue of how our lives fit into the greater cosmic scheme of things. This is true even when our questions never give way to specific answers or give rise to specific practices such as prayer or meditation. We encounter spiritual issues every time we wonder where the universe comes from, why we are here, or what happens when we die.

According to one of the religion writers, Malik Khan, Religion is applied to a great variety of human ideas, acts, and institutions. All the attempts to shift out from these common elements, which would represent the “essence” of religion, have ended in failure. Men have fought and died for their religion. Art and literature have flowered forth as expressions of faith. Many people acknowledge religion as the basis for strength, hope, and significance in their lives.

Religion is an institution established by man for various reasons. You confess your sins to a clergy member; go to elaborate churches to worship, you are told what to pray and when to pray All those factors remove you from God.

Spirituality is born in a person and develops in the person. It may be kick started by a religion, or it may be kick started by a revelation. Spirituality extends to all facets of a person’s life. Spirituality is chosen while religion is often times forced.

Sri Sri Ravi Shankar in a recent interview promoted spirituality. According to him, when people become saturated by so many different kinds of experiences, even by various comforts, there is a quest to know something else, something deeper in life.

Spirituality is imbibed in a person. You don’t have to leave or sacrifice anything to have a spiritual life. You can be spiritually and materially abundant. As you become more and more spiritually fulfilled, you act more and more out of a sense of responsibility rather than a sense of greed or attachment. One may achieve financial value but if you gather a lot of stress and tension in the bargain, that affects your own health, your own peace of mind, your own relationships, then what’s the point? What are you gathering all the wealth for?

An expensive bed is no good if you can’t sleep. Losing health to gain wealth and then spending that earned wealth to regain health doesn’t sound like good economics at all.

To sum it up,

•    There is not one religion, but hundreds but there is only one type of spirituality.

•    Religion speaks of sin and of fault while spirituality encourages “living in the present” and not to feel remorse for which has already passed – Lift your spirit and learn from errors.

In the end what matters is faith, faith in an upper power, a divine energy to help us find a light through an empty tunnel in our darkness of lives.

Parliamentarians oppose jail for service tax evaders with dues above Rs. 50 Lakhs

fiogf49gjkf0d
Attempts by tax officials to garner power of arrest over individuals guilty of not paying service tax exceeding Rs. 50 lakh has run into opposition from members of Parliament (MPs) across parties.

Finance Minister P. Chidambaram’s proposal in the Budget to introduce Section 91, which will empower officials to arrest service tax evaders, has evoked concerns within the ruling party as much as the Opposition over possible misuse of the provision. The measure designed to check tax evasion is likely to lead to harassment of assessees and bring back memories of bad old days of “inspector raj”, critics of the proposal have pointed out.

According to the proposal, failure to deposit service tax will result in arrest by an official not below the rank of superintendent of central excise and imprisonment of up to seven years.

The proposal is one of two in the budget this year empowering tax officials to make arrests. The other proposal, with respect to Customs and excise duties, seeks to overcome a Supreme Court ruling in 2011 that evasion of Customs and excise tax cannot be equated with non-cognisable and non-bailable criminal offences, and that an accused cannot be arrested without a warrant. A threemember bench, headed by Justice Altamas Kabir, had ruled that all offences under the Central Excise Act, 1944, and the Customs Act, 1962, are bailable. A similar proposal was part of Budget 2012-13, but the government was forced to withdraw it. However, it has found its way into this year’s budget as Customs and excise officials insist they need the power of arrest.

Referring to the provision, the leader of the Opposition in Rajya Sabha, BJP’s Arun Jaitley said, “The bail provision was similar to that of the scrapped anti-terror law Pota (Prevention of Terrorism Act). The government was forced to withdraw it.”

levitra

Time for a clean-up act

fiogf49gjkf0d
Economic policymaking in India has reached a critical stage where any measure to correct one anomaly risks creating complications at the aggregate level. Any attempt, for example, to cut interest rates with the objective of reviving investment and economic growth can end up fuelling inflation and inflationary expectations. Any increase in demand can further aggravate the deficit on the current account, which is already at a record high and is expected to worsen before improving. The pace of output expansion in the economy is at its lowest in a decade and the government has absolutely no fiscal room to revive growth. If anything, the government is likely to cut expenditure, which will affect output in the short term.

It is well known that mismanagement of government finances is the primary reason for the current state of affairs. The rise in consumption expenditures in the form of subsides and social sector spending resulted in a situation where demand constantly outpaced supply by a wide margin, leading to persistent inflationary pressure. Higher inflation forced the central bank to raise the cost of money, reducing the rate of investment, which was also affected by higher government borrowings that pushed yields higher in the bond market.

It is true that the government has an obligation to protect all sections of society, but no government, just like households, can live beyond its means, forever. At some time profligacy will begin to hurt, and that time has arrived. But the worst part of the story is that expenditure will have to be contained and cut at a time when the economy is decelerating at an alarming pace. Further, since much of the non-Plan expenditure, such as defence and interest payments, have limited or no scope of adjustment, the burden of sacrifice will fall on the Plan part of the Budget, which will affect capacity creation.

However, these are not normal circumstances and expenditure needs to be contained, irrespective of the collateral damage in terms of growth. It is also necessary that a balance is maintained between Plan and non-Plan expenditure and some hard decisions are warranted on the non-Plan side, especially on subsides and social sector spending.

It is clear that until the quality of government finances improves and the quantity of its borrowing decreases, any possibility of a real turnaround will remain muted.

levitra

GE, Vodafone CEOs join chorus against India business climate

fiogf49gjkf0d

The heads of General Electric and Vodafone Plc have added their voices to the growing negative commentary about India’s business climate, piling the pressure on the government to draw a line under this discourse.

GE Chairman and CEO Jeffrey Immelt said there was growing concern among American and European CEOs about India’s business climate and warned against policies that were unfair and bad for much-needed investment.

“If you put yourself in the shoes of an American or a European CEO, most of the articles (in the press) have been negative. That has clearly concerned people,” said Immelt, adding that next week’s budget must address the concern of foreign investors and push infrastructure development.

While the GE boss was measured, the chief of Britain’s Vodafone, which has been locked in a high profile tax dispute with the government. Vodafone CEO Vittorio Colao told the Wall Street Journal in an interview that India’s bureaucracy was “damaging” to the country. “The concern that I have is that this country is a fantastic country with a bright future, given the demography and everything else, but the bureaucracy of this country… It is clearly damaging to India,” Colao told The Wall Street Journal.

“What is happening to us, to Nokia, to Shell, to SABMiller, all the other companies involved-one could be an accident; too many is a pattern. I think that the government is making a good effort to try to change this, but cannot continue with a bureaucracy that wakes up in the morning and decides to give another interpretation of something,” he added.

India ranks 132 in the World Bank’s Ease of Doing Business Index, below countries such as Nigeria, Kenya and Uganda, and 41 ranks below China.

A top executive at UAE’s Etihad Airways said it was revising a proposal to acquire stake in India’s Jet Airways, citing concerns about the safety of its investment in India. Etihad chairman Hamed bin Zayed al-Nahayan sought an investment protection agreement from Commerce Minister Anand Sharma during a meeting in Dubai.

This week oil giant Shell and Finnish handset maker Nokia found themselves at the receiving end of tax claims that they protested publicly. Nokia said it had filed a letter of objection with tax authorities following an income tax raid on its factory near Chennai.

Shell India said it intended to fight the claim. “Indian taxmen’s $1-billion demand on Shell’s $160-million equity infusion in its loss-making Indian arm about four years ago is an absurdity, and the company will contest it,” Shell India chairman Yasmine Hilton said.

(Source: The Economic Times dated 23-02-2013).

Management lesson from politicians: CEOs should use EAs as change agents

fiogf49gjkf0d
When Reliance Industries came calling to pick two executive assistants (EAs) for its chief, Mukesh Ambani, IIM graduates, unsurprisingly, responded with gusto.

This means two things. First, RIL’s talent hunt for two EAs perhaps indicates that large Indian companies are now more or less sold on the idea of a smart fellow shadowing the boss.

The Tatas were among the pioneers in India Inc in appointing EAs. Other majors took longer to take to the idea. And it is only recently that the EA’s role has changed from making the boss look smart – at an industry chamber conference, for example – to being the boss’s strategy-sounding board. A really talented EA can get fast-tracked real fast. The list of CEOs who started their careers as EAs is set to get longer.

levitra

Strained relations – Government should realise it must engage with global business.

fiogf49gjkf0d
A strange confusion reigns in the Indian government’s interaction with global big business at the moment. On the one hand, India is more dependent on foreign investment, and the goodwill of multinationals, than it has been for a long time. On the other hand, it has gone out of its way to be an unwelcoming and difficult environment. It seems obvious that these two facts cannot go hand in hand for any length of time – something must give. And when it does, a crisis will be difficult to avoid.

The reasons why India needs multinationals on its side are easy to see. India’s external account is worryingly weak, with the current account deficit at 5.4 per cent of gross domestic product in the second quarter of 2012-13; it might be even higher in the third quarter, and come in at five per cent of GDP for the entire financial year. India’s reserves have not grown sufficiently, and they cover only about seven months of imports. The huge trade deficit, caused by a fall-off of exports and high fuel and gold imports, is essentially being financed by an increase in inflows from foreign institutional investors (FIIs). External commercial borrowing, too, has increased. These are notoriously volatile flows. To minimise the risk of capital flight, therefore, foreign direct investment (FDI), more stable than FII inflows, is needed.

On the other hand, the sources of FDI – big multinational companies (MNCs) – will see little reason to invest in India at the moment. India boosters have long spoken of its growth, its burgeoning market, and so on; but for MNCs, the truth is that you can participate in the India consumption story without suffering the high price and inconveniences of doing business in the country. India has always been difficult for new projects. It has grown even more difficult of late, as high growth in the 2000s directed attention to environmental hurdles, power supply constraints and land acquisition bottlenecks for manufacturing. These are some of the reasons why Indian business is investing abroad. 115 (2013) 45-A BCAJ But the government has made it worse for MNCs in some other ways, just at the time it needs them most. Worries over the fiscal deficit mean the revenue department has a freer hand, and is levying assessment after harsh assessment on MNCs that are being challenged. Some of these may be justifiable. However, the reputation of India’s tax department does not inspire trust in global business, and many will think that the department is in over its head when it comes to taxing complex pricing strategies, for example. In any case, companies will choose to avoid countries that are inconsistent on taxes. Meanwhile, steps taken to protect Indian manufacturing – which has fallen by the wayside in the past 10 years, and especially the past two years – have also caused outrage. For example, the government worried that too much of India’s telecom backbone was being built by strategic rivals; but its consequent attempt to limit the procurement options of the private sector for security reasons will not have pleased global business. Similar objections will attend the special electronics clusters that many see as the only way to ensure that an Indian hardware industry develops.

The government must realise that it should engage with global business and prevent a feeling that nobody in the government is willing to address MNCs’ concerns. While attending to the collapse of domestic manufacturing cannot be de-emphasised, it is crucial that global business gets, at least, a genuine hearing. Inconsistencies in the policy environment, especially on taxes, should be avoided at all cost. If not, the contradictions at the heart of the government’s treatment of MNCs will bring a crisis ever closer.

levitra

China offers lessons for India in downsizing government by cutting ministries

fiogf49gjkf0d
The Chinese government is preparing to dismantle the ministry that has swaggeringly delivered the world’s largest high-speed network over the last few years. This is just one among many measures China is undertaking to reduce corruption and leakages while boosting efficiency and sending a forward-looking signal to the markets.

It follows on 1 Tarunkumar Singhal Raman Jokhakar Chartered Accountants Miscellanea earlier reforms when more than 40 ministries and commissions in China were cut down to just 29. Now look at India for contrast. The first cabinet of independent India apportioned out only around a dozen portfolios, which had gone up to 42 by 2004. And that number is a whopping 53 now! While such ministerial multiplication has served the cause of coalition politics admirably, it has also encouraged paunchy and improvident governance. This bungling has been worsened by ministries working at cross-purposes. As the cabinet secretariat has said in its annual performance appraisal, most central ministries are working in silos, even though there is no consolation in a team member scoring a double century if the team ends up losing the match.

To take the example of railways, why shouldn’t it be integrated alongside the road transport and highways ministry, the shipping ministry and the civil aviation ministry within a transport portfolio? If only Air India was denationalised back to its status at Independence, as is suitable for a postliberalisation nation, the civil aviation ministry would lose its raison d’etre. Or consider how the energy portfolio is (mis)handled by the ministries of coal, petroleum and natural gas, power, new and renewable energy, heavy industries and public enterprises, et al. With so many ministries splitting up the goal of powering India, the big picture suffers while petty politicking flourishes.

Why, for instance, do we need textiles, steel or information and broadcasting ministries in a liberalised environment? And what on earth, pray, is the job of the ministry of statistics and programme implementation? If other ministries cannot implement their programmes, will setting up a separate ministry dedicated to this help? Add to the incessant setting up of new ministries the innumerable departments and standalone offices that also come up, and you have layers of bureaucracy, each with its own penchant for empire-building, coming in the way of streamlined governance and meaningful work. It’s high time the government indulged its common-sense side rather than its maudlin and inflated side, and reversed the trend of mindless multiplication of ministries.

levitra

Leadership Potential

fiogf49gjkf0d
In my many years of observing leaders, I have noticed a number of signs that a person has high potential for corporate leadership… Leaders aren’t born with the phenomenal breadth and scope of thinking that characterises successful leaders of big companies, but those with a drive to constantly search for more information and see things from a broader view have the potential for it. Some young leaders exhibit a conceptual ability to rise above the details, to see a broader context than their peers, and to place themselves and their immediate accomplishments within that broader context. Leaders must also be able to make sense of all they take in and set a clear course of action.

After gathering information from multiple sources and shaping several alternatives, they have to be able to sort out what is important, make a decision and act on it. Even at lower levels, information is often muddled and the right path is often unclear, but leaders with high potential find clarity and act decisively despite the uncertainty and ambiguity that stymies others. They take disparate facts and observations and connect the dots to create a clear view of what they think is likely to happen before it does. Because they see the hazy outlines of change before others do, they put their businesses on the offensive. Most highpotential leaders will show an uncommon ability to analyse and synthesise large amounts of data and make a decision based not only on the data but also on intuition.

levitra

Section A: Financial Statements of an NGO

fiogf49gjkf0d
Section A: Financial Statements of an NGO Compiler’s Note:

Compiler’s Note:

The financial statements and annual report of ‘The Akshaya Patra Foundation’, an NGO based in Bangalore, India has won several awards in India and abroad for the best presented annual report. It is also one of the few NGOs in India who, besides Indian GAAP, also prepares its financial statements under IFRS principles.

The annual report for 2011-12 for Akshaya Patra makes a very interesting reading and can encourage several other NGOs to improve on their financial reporting. The entire annual report can be accessed on www.akshayapatra.org/sites/default/files/Annual- Report-2011-12.pdf. Given below are the significant accounting policies followed by the Foundation.
The Akshaya Patra Foundation (31-03-2012)
Significant Accounting Policies

1.1 Organisation overview
The Akshay Patra Foundation (‘the Trust or TAPF’) is registered under the Indian Trust Act 1882 as a Public Charitable Trust. It was formed on 1st July 2000 and was registered on 16th October 2001. The principal activity for the Trust is to implement the mid-day meal program of the Government of India through respective state governments for the children studying in government and municipal schools.
The Trust is also involved in various other charitable activities such as providing intensive coaching for eligible students after school hours under “Vidya Akshaya Patra Program”, providing subsidised meals to daily wage earners under various schemes like “Akshaya Kalewa program” and “Aap Ki Rasoi Program”, providing food for babies and mothers in Anganwadis and implementing various other programs for the relief of the poor.

 1.2 Significant accounting policies

(i) Basis of preparation of financial statements The balance sheet and income and expenditure accounts are prepared under the historical cost convention and the accounting is on accrual basis. In the absence of any authoritatively established accounting principles for the specialised aspects related to charitable trusts which do not carry out any commercial activity, these statements have been prepared in accordance with the significant accounting policies as described below. There are no trusts or entities over which TAPF exercises controlling interest, thus there is no requirement of consolidating other entities into the TAPF’s financial statements.

(ii) Use of estimates The preparation of the financial statements in conformity with the significant accounting policies, requires that the Board of Trustees of the Trust (‘Trustees’) make estimates and assumptions that affect the reported amounts of income and expenditure of the year and reported balances of assets and liabilities. Actual results could differ from those estimates. Any revision to accounting estimates is recognised prospectively in current and future periods.

(iii) Fixed assets Fixed assets are stated at cost of acquisition or construction, less accumulated depreciation. The cost of fixed assets includes the purchase cost of fixed assets and any other directly attributable costs of brining the assets to their working condition for the intended use. Borrowing costs, if any, directly attributable to acquisition or construction of those fixed assets which necessarily take a substantial period of time to get ready for their intended use are capitalised.

Intangible assets are recorded at the consideration paid for acquisition of such assets and are carried at cost less accumulated amortisation. Fixed assets received as donation in kind are measured and recognised at fair value on the date of being ready for their intended use. Advances paid towards the acquisitions of fixed assets as at the balance sheet date are disclosed under long-term loans and advances.

(iv) Depreciation Depreciation on fixed assets is provided on a straight-line method basis over the estimated useful life as follows:

Class
of assets

Estimated

 

useful life

 

in years

Buildings

15

Kitchen and related
equipments

3

Office and other
equipments

3

Computer equipments

3

Furniture and fixtures

5

Vehicles

3

Distribution vessels

2

Intangible assets

3

 

 
Land is not depreciated. Depreciation on leasehold improvements is provided over the primary lease term or the useful life of assets, whichever is lower.

Depreciation is charged on a proportionate basis for all assets purchased and sold during the year.

Individual low cost assets, acquired for less than Rs.5,000 (other than distribution vessels), are depreciated fully in the year of acquisition.

(v) Inventory

Inventory comprises provisions and groceries which include food grains, dhal & pulses, oils and ghee and other items like spares and fuel. Inventory is valued at cost, determined under the First-In-First Out method.

In case of Government grants of rice and wheat, the inventory cost is determined at the lower of the market price of government regulated price.

Cost of inventory, other than those received as government grants, comprises purchase cost and all expenses incurred in bringing the inventory to its present location and condition.

Inventories received as donation in kind are measured at fair value on the date of receipt.

(vi) Revenue recognition

Donation received in cash, other than those received for depreciable fixed assets, are recognised as income when the donation is received, except where the terms and conditions require the donations to be utilised over a certain period.

Such donations are accordingly recognised rateably over the period of usage. The deferred income is disclosed as “Deferred donation – feeding” under other current liabilities in the balance sheet.

Donation received in kind, other than those received for depreciable fixed assets are measured at fair value on the date of receipt and recognised as income only upon their utilisation.

Unutilised donations are deferred and disclosed as kind donations or grain grants received in advance under other current liabilities in the balance sheet.

Donations made with a specific direction that they shall form part of the corpus fund or endowment fund of the Trust are classified as such, and are directly reflected as trust fund receipts in the balance sheet.

Government grants related to subsidy received in cash or in kind are recognised as income when the obligation associated with the grant is performed and right to receive money is established and reflected as receivables in the balance sheet. The value of subsidies and donations received in kind is determined based on the lower market price or government regulated price of those goods at the time of receipt.

Donations received in cash towards depreciable fixed assets, the ownership of which lies with the Trust, are treated as deferred donation income and recognised as donation income in the income and expenditure account on a systematic and rational basis over the useful life of the asset.

The deferred donations towards depreciable fixed assets (receive both in cash and in kind), being identified as funds which provide long term benefits to the Trust, are disclosed under the Designated Funds in the Balance Sheet.

Income from cultural events, if any, is recognised as and when such events are performed.

Income from receipts for other programs is recognised when the associated obligation is performed and right to receive money is established.

Interest on deployment of funds is recognised using the time-proportion method, based on underlying interest rates.

(vii) Income Tax

The Trust is registered u/s. 12A of the In-come tax Act, 1961 (‘the Act’). Under the provisions of the Act, the income of the Trust is exempt from tax, subject to the compliance of terms and conditions speci-fied in the Act.

Consequent to the insertion of tax liability on anonymous donations vide Finance Act 2006, the Trust provides for the tax liability in accordance with the provisions of Section 115 BBC of the Act, if at all there are any such anonymous donations.

(viii) Foreign exchange transactions

Transaction: Foreign exchange transactions are recorded at a rate that approximates the exchange rate prevailing on the date of the transaction. The difference between the rate at which foreign currency transactions are accounted and the rate at which they are realised, is recognised in the income and expenditure account.

Translation: Monetary foreign currency assets and liabilities at the year-end are restated at the closing rate. The difference arising from the restatement is recognised in the income and expenditure account.

(ix) Provisions and contingent liabilities

The provisions are recognised when, as a result of obligating events, there is a present obligation that probably requires an outflow of resources and a reliable estimate can be made of the amount of obligation.

The contingent liability disclosure is made when, as a result of obligating events, there is a possible obligation or a present obligation that may, but probably will not, require an outflow of resources.

No provision or disclosure is made when, as a result of obligating events, there is a possible obligation or a present obligation when the likelihood of an outflow of resources is remote.

(x) Impairment of assets

The Trust periodically assesses whether there is any indication that an asset may be impaired. If any such indication exists, the Trust estimates the recoverable amount of the asset. If such recoverable amount of the asset is less than its carrying amount, the carrying amount is reduced to its recoverable amount. The reduction is treated as an impairment loss and is recognised in the income and expenditure account. If at the balance sheet date there is an indication that if a previously assessed impairment loss no longer exists, the recoverable amount is reassessed and the asset is reflected at the recover-able amount subject to a maximum of depreciable historical cost.

(xi) Retirement benefits

Provident fund
All eligible employees receive benefit from provident fund, which is a defined contribution plan. Both the employee and the Trust make monthly contributions to the fund, which is equal to a specified percentage of the covered employee’s basic salary. The Trust has no further obligations under this plan, beyond its monthly contributions. Monthly contributions made by the Trust are charged to income and expenditure account.

Gratuity
The Trust provides gratuity, a defined benefit retirement plan, to its eligible employees. In accordance with the Payment of Gratuity Act, 1972, the gratuity plan provides a lumpsum payment of the eligible employees at retirement, death, incapacitation or termination of employment, of an amount based on the respective employee’s basic salary and tenure of employment with the Trust. The gratuity liability is accrued based on an actuarial valuation at the balance sheet date, carried out by an independent actuary.

Compensated absences
The employees of the Trust are entitled to compensated absences which are both accumulating and non-accumulating in nature. The expected cost of accumulating compensated absences is determined by actuarial valuation based on the additional amount expected to be paid as a result of the unused entitlement that has accumulated as at the Balance Sheet date. Expense on non-accumulating compensated absences is recognised in the period in which the absences occur.

(xii) Leases

Assets acquired under lease, where the Trust substantially has all the risk and rewards of ownership, are classified as finance lease. Such assets acquired are capitalised at the inception of lease at lower of the fair value or present value of minimum lease payments.

Assets acquired under lease where the significant portion of risks and rewards of ownership are retained by the lessor are classified as operating lease. Lease rentals are charged to income and expenditure account on a straight line basis over the lease term.

Information supplied was in nature of data. It was not exploitation of know how. Hence, the payment received was business receipt and not Royalty.

fiogf49gjkf0d
4. P T McKinsey Indonesia vs. DDIT [2013] 29
taxmann.com 100 (Mumbai-trib)
Article 7 and 12 of India-Indonesia DTAA
Asst Year: 2007-2008
Decided on: 16th January 2013
Before Rajendra (AM) and  D K Agarwal (JM)

Information supplied was in nature of data. It was not exploitation of know how. Hence, the payment received was business receipt and not Royalty.


Facts

The taxpayer was an Indonesian company engaged in the business of providing strategic consultancy services. During the year, it had provided information to its group company in India and had received certain amount as consideration therefor. The taxpayer had claimed that the consideration received by it was in the nature of business receipt and since it did not have a PE in India, it was not chargeable into tax in India. According to the AO, the information provided by the taxpayer constituted technical and consultancy services so as to make available technical knowledge, skill, know-how, experience or process and thus, was in the nature of ‘fees for included services’ as covered by Article 12 of the DTAA between India and Indonesia2. The AO held that the fees received by the taxpayer were for consultancy/advisory services without any technology and they constituted Royalty in term of Article 12. The taxpayer approached DRP, which held that provisions of Article 22(3) – ‘other income’ – apply.

Held

The Tribunal observed and held as follows. The AO had nowhere established that the information supplied was arising out of exploitation of the knowhow generated by the skills or innovation of person who possesses such talent. In taxation terminology, the term ‘royalty’ has a distinct meaning. The information received by the Indian group company was in the nature of data and the consideration for the same cannot constitute ‘Royalty’. Article 22 is a residuary head analogous to sections 56 and 57 of I-T Act. Hence, It will not apply if the sum can be taxed under any other Article. With regard to earlier decisions of the Tribunal in respect of similar payments by the Indian group company, the payment should be treated as business profits in terms of Article 7.

levitra

Referral fees received by non-resident for referring international clients does not constitute FTS u/s. 9(i)(vii) of I T Act.

fiogf49gjkf0d
3. CLSA Ltd vs. ITO [2013] 31 taxmann.com 5  (Mumbai-Trib)
Section 9 r.w. S. 5 of I T Act
Asst Year: 2004-05
Decided on: 18th January 2013
Before P M Jagtap (AM) and D K Agarwal (JM)

Referral fees received by non-resident for referring international clients does not constitute FTS u/s. 9(i)(vii) of I T Act.


Facts

The taxpayer was a company incorporated in Hong Kong. It was a member of a group of companies having global presence. During the year, the Indian group company (“IndCo”) of the taxpayer had made certain payments to the taxpayer which were recorded by IndCo as recovery of overhead expenditure. IndCo had also withheld tax from the payments. The taxpayer contended that the payments were referral fees for referring overseas institutional clients to IndCo and hence, were not FTS in terms of section 9(1)(vii) of I-T Act. Consequently, they were not chargeable to tax. The issue before the Tribunal was: whether the referral fees constitute FTS in terms of section 9(1)(vii)?

Held

The Tribunal observed and held as follows. The Tribunal referred to Advance Ruling in Cushman and Wakefield (S) Pte Ltd., In re [2008] 305 ITR 208 (AAR) wherein, on similar facts, the AAR had held that the referral fees was not FTS1. Following the AAR ruling, the Tribunal held that the referral fees received by the taxpayer were not FTS u/s. 9(1)(vii) of I T Act.

levitra

Test reports provided by the Singapore company did not ‘make available’ technical knowledge, etc., and therefore, the payment did not constitute FTS under Article 12(4) of the India-Singapore DTAA.

fiogf49gjkf0d
2. Romer Labs Singapore Pte Ltd vs. ADIT [2013]
30 taxmann.com 362 (Delhi-Trib)
Article 12 of India-Singapore DTAA; Section
9 of I-T Act
Asst Year: 2005-06
Decided on: 24th January 2013
Before B C Meena (AM) and I C Sudhir (JM)

Test reports provided by the Singapore company did not ‘make available’ technical knowledge, etc., and therefore, the payment did not constitute FTS under Article 12(4) of the India-Singapore DTAA.


Facts

The taxpayer was a tax resident of Singapore (“SingCo”). The taxpayer provided services for testing of toxicity level in animal feeds to Indian companies. The Indian companies were forwarding products’ samples to the laboratory of the taxpayer in Singapore. After testing, the taxpayer forwarded the reports to the Indian company. In consideration, the Indian company paid service fee to the taxpayer. Admittedly, the taxpayer did not have PE in India. The issue before the Tribunal was whether the services provided by the taxpayer ‘made available’ any technical knowledge, experience, skill, knowhow or process in terms of Article 12(4)(b) of the India-Singapore DTAA?

Held

The Tribunal observed and held as follows: The expression ‘make available’ has been examined by various judicial authorities. There is a difference between section 9 of I-T Act and Article 12(4)(b). While Article 12(4)(b) requires the services to be ‘made available’, section 9 has no such requirement. In terms of Article 12, the payment would constitute FTS only if the service provider provides the services in a manner which equips the recipient to independently perform his functions in future without any help from the service provider. Since the test reports provided by SingCo did not ‘make available’ technical knowledge, etc. to the Indian company, the payments made for such reports were not FTS.

levitra

Independent Directors in the New Landscape

Introduction

Recent corporate scams put to question the usefulness of independent directors (IDs). At one end there are IDs who play a minimalist role, on the other there are examples where the IDs had to take the reins of the company in their own hands and run the company. Take the case of Singapore listed Sino Environment Technology Group. The IDs initiated an investigation over suspicious transactions entered into by the management to buy materials and for investments. The investigation initiated by the ID’s revealed that no raw material or equipment was delivered and no significant work was done at the projects the group had invested in. This ultimately led to the resignation of the executive directors (EDs) leaving the running of the company in the hands of the IDs.

The behaviour of the Boards in India generally tends to be between the two extremes, one where ID’s play a ceremonial role and the other where they play a significant role. This article takes a look at various matters relating to IDs, alongside the requirements of clause 49 of the Listing Agreement, the Companies Bill and SEBI’s Consultative Paper on Review of Corporate Governance Norms in India. The annexure at the end of this article also contains a detailed comparison of the above three documents with regard to matters relating to IDs. At the time of writing this article, the rules have neither been notified nor available for public comment and hence the comments with respect to the requirements of the Companies Bill may not be complete.

Can Independence be defined?

Obviously, an ID has to be independent. The next question is independence from what. The independence is from affiliation of any kind which is likely to prejudice his decisions. As can be seen in the annexure, though the goal is to prevent affiliation of any kind, the three documents differ on the details. The Companies Bill goes farther than the SEBI Guidelines in imposing stricter norms for independence which may go a long way in establishing the role of the ID as an “outside guardian”, which investors currently perceive to be a ceremonial position. Nonetheless, it would be fair to say that independence is a state of mind, and can be legislated only up to a point. For example, whilst a relative of a promoter cannot be appointed an ID under the Bill, a friend of the promoter can be appointed as an ID. Appointing a friend instead of a relative, may be far worse from a point of view of independence. Ultimately, it is the ID’s personality and moral compass that will determine his independence. But that does not mean that legislation has no role to play in this matter. The Companies Bill definition provides a sound basis for ensuring that IDs are independent, and that conflict of interest is minimised. Ultimately it is not the law in itself, but a proper implementation of the law and suitable regulatory intervention from time to time, that may firmly establish independence on the Boards. Implementation cannot be replaced by more legislation.

Whose interest does the ID serve?

The normal expectation globally of the role of an ID is essentially two fold; advisory and monitoring. The ID is supposed to contribute his business expertise which could be a good value addition to a company. On the other hand, the IDs are also expected to serve as a watchdog and protect the interest of the minority shareholders. The role of a strategic advisor and a watchdog are not easy to balance and may run at odds with each other at times.

In India, most IDs view their role principally as that of strategic advisors to the promoters. Relatively, most IDs do not perceive their role to be that of a watchdog over the promoters and the management. An ID is not willing to put on the hat of a watchdog because either he or she does not have the necessary time or the skill sets or is not remunerated enough to specifically take on that responsibility. Very often IDs develop close bonding with the promoter group, which makes it difficult for them to ask uncomfortable questions to the Board. But things have changed in recent times due to high profile instances of fraud in India. IDs are taking a direct interest in reviewing the fraud risk management framework put in place by their organisations for mitigating the risk of fraud. For ID’s of global companies, the risk of non-compliance increases significantly due to certain onerous global legislations such as the US Foreign Corrupt Practices Act and the UK Bribery Act.

In countries such as the US and UK, where shareholding in companies is largely public, the IDs can merely take into account shareholder interest as a common factor. However, in countries such as India, where shareholding is concentrated, there would be two factions; the controlling group and the minority shareholders. The controlling group could extract value from minority shareholders through dubious related party transactions or self dealing transactions, for example, through freeze-out mergers, where the controlled company is merged with another company in which the controlling group has a 100% stake. In the case of dispersely held companies, the challenges are different such as restrictions on control contests, shareholder voting procedures, executive compensation and director’s independence from the management. These differences cause the nature of frauds to be different. For example, frauds like Enron and WorldCom where management misrepresents financial performance to cover up poor performance or to influence compensation are more likely in dispersely held companies. Frauds like Satyam and Parmalat where the controlling group covers up expropriation of funds through financial misstatements are more likely in controlled companies.

In the case of controlled companies, even though the IDs may not have the voting power to stop wrongdoings of the controlling shareholder, he or she has the power to make public any wrongdoing. While the controlling shareholder can remove the ID, such actions are likely to cause unwanted public scrutiny. The press may pick up such resignations, but experience tells us that investor’s memory is too short, and other than in a serious fraud such as Satyam, it is unlikely to be an effective tool, though it may relieve the ID from an onerous engagement. Despite the general perception of the public that IDs should act as a watchdog, it appears that given the actual functioning of the Boards, the supremacy of the controlling group and the few Board/Audit committee meetings (assume average of 6 in a year), the watchdog function is not exhaustively performed. IDs argue that they should not be seen as a panacea for everything and a tool to fix all the wrongdoings.

Which of these two groups, the IDs should represent? Clause 166(2) of the Companies Bill requires directors of the company (which includes IDs90) to act in good faith for the benefit of the members as a whole, the company, its employees, the community and the environment. This requirement goes even beyond protecting the interest of the minority and extends to protecting the interest of the general public at large. This provision is far more onerous than it appears at first reading. For example, minority shareholders may argue that the promoters’ decision in favour of an acquisition, caused them huge losses, which the IDs should compensate them for, as they failed to protect the minority interest.

Schedule IV Code for Independent Directors of the Com-panies Bill requires an ID to safeguard the interest of all stakeholders; particularly the minority shareholders. It is a strange irony that IDs appointed by promoters have to protect the interest of the perceived adversaries of the promotersthe minority shareholders. The ID may not have the time, energy, power, gall or the inclination to set things right and in some cases, after exhausting all efforts to discipline the management, the only realistic option available would be to offer his or her resignation. Just because the Bill sets out the responsibilities of the IDs in greater details, does not necessarily mean that IDs will have adequate powers or remunerated commensurately to fulfill those responsibilities.

Liability of an ID

In the aftermath of Satyam, many IDs resigned from their position across India. Whilst some of the resignations may have been a knee-jerk reaction, it is also possible that the IDs were aware of wrong doings by the company which could not be corrected or they were not provided with enough information to make an appropriate judgment on how the company was being run. More importantly, after realising the onerous nature of his assignment he or she was not prepared to take on those responsibilities. The

position of an ID was no longer going to be an easy occupation for those seeking a comfortable retirement occupation.

There are various legislations that can be used against IDs, some of which are criminal violations and may trigger imprisonment. These include:

1.    Violation of clause 49 requirements could generate financial and criminal sanction for directors and IDs under the Securities Contract (Regulation) Act 1956; though this has been infrequently targeted against IDs.

2.    The Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003, contains various prohibitions on manipulative, fraudulent and unfair trade practices in securities and a prohibition on dealing in securities in a fraudulent manner or using any manipulative or deceptive device in connection with the purchase or sale of securities.

3.    Section 12A and 15G of the SEBI Act prohibit insider trading.

4.    Section 62 and 63 of the Companies Act 1956, could hold directors liable for certain misstatements in a prospectus to raise capital. SEBI can also impose sanctions for similar violations under the Takeover Code.

5.    Under IPC for breach of trust (section 406), theft and cheating (section 420).

6.    Under clause 245 of the Companies Bill, a minority group of members or deposit holders can file a class action suit against the directors and claim damages or compensation for any fraudulent, unlawful or wrongful act or omission or conduct.

7.    Under clause 447 of the Companies Bill, a director can be imprisoned for a maximum period of 10 years for any fraudulent conduct.

Clause 149(12) of the Companies Bill clarifies that IDs and other non EDs shall be liable only in respect of such acts of omission or commission by a company that had occurred with his or her knowledge, attributable through Board processes, and with the consent or connivance or where he or she had not acted diligently. From this, it appears that the clause seeks to provide immunity to IDs from civil or criminal action in certain cases. However, clause 166(2) of the Bill seems to be a contradiction. It states that the whole Board is required to act in good faith, in order to promote the objects of the company for the benefit of its members as a whole and in the best interest of the company, its employees and shareholders, the community, and for the protection of the environment. This clause narrows the distinction between IDs and EDs, and so does the definition of an “officer in default” under clause 2(60) of the Bill. Whilst an ID is not key managerial personnel under the Bill, he could be an officer in default. An officer in default under clause 2(60) of the Bill is broadly defined, and includes (a) any person in accordance with whose advice, directions or instructions the Board of Directors of the company is accustomed to act, other than a person who gives advice to the Board in a professional capacity; (b) every director, in respect of a contravention of any of the provisions of this Act, who is aware of such contravention by virtue of the receipt by him of any proceedings of the Board or participation in such proceedings without objecting to the same, or where such contravention had taken place with his consent or connivance.

Whilst there is some kind of immunity, for example, in the case of a bounced cheque where the ID can plead that it was done without his knowledge, certain events have sent confusing signals. The Nimesh Kampani and the AMRI hospital fire event in Kolkata where IDs were imprisoned suggest that there may be no immunity to IDs, even when they were not the cause of or responsible for the problem.

IDs operate in an environment of high uncertainty and confusion over their role. They are not clear whether their action or inaction while serving on the Board could subject them to potential imprisonment for violations and frauds committed by the management or the auditors. Many IDs had probably been served arrest warrants arising out of frivolous claims or bouncing of a cheque. This discourages potentially talented candidates from joining as IDs. Clear principles that attempt to replicate some of the fiduciary duty concepts drawn from Delaware law may provide IDs with more comfort that their actions in good faith will not land them up in prison. Directors’ & Officers’ (D&O) insurance is one means to cover IDs for financial liability, but that does not save them from imprisonment.

IDs argue that when a promoter pays a bribe to win a contract, those matters are not escalated to the Board and there is no way an ID would have known about it. To make the ID responsible for such an act would be highly unacceptable. The MCA general circular no. 8/2011 dated 25th March 2011, probably exonerates the IDs in such situations. The circular requires the ROC to exercise due care while including a non ED as an “officer in default”. It specifically states that an ID of a listed entity would not be held liable for any act which occurred without his knowledge or where he acted diligently in the Board process. Whilst these provisions are also contained in the Companies Bill, the exoneration is based on judgment where there is always a scope for interpretation. Besides the Company law, there are several other legislations in India that may cause havoc in the lives of the IDs.

Remuneration of an ID

IDs generally feel that they are inadequately compensated, given the perceived or real risks post the Satyam and Nimesh Kampani episodes. The existing Companies Act requirement (Rule 10B of the Companies (Central Governments) General Rules and Forms, 1956) prescribes sitting fees for independent directors. For companies with a paid up share capital and free reserves of Rs. 10 crore or more or turnover of Rs. 50 crore and above, sitting fees should not exceed the sum of Rs 20,000 and in case of other companies sitting fees should not exceed Rs 10,000. At the time of writing this article, the rules have not yet been framed under the new Companies Bill. In addition to sitting fees, the IDs are also entitled to a profit related commission. The Bill prohibits an ID from receiving stock options. SEBI’s consultative paper has proposed to amend the listing agreement to also prohibit IDs from receiving stock option.

There is overall support to the provision prohibiting an ID from receiving stock options as that directly impeaches his independence. But most people do agree that for the risks that an ID takes, he or she is not commensurately compensated.

Selection of the ID

The appointment of IDs in a controlled company presents unique challenges. The controlling shareholder has majority voting power and can nominate or replace the ID at their discretion. Therefore, the process of hiring and retaining an ID appears to inherently create dependency of the ID on the promoter group. There has been considerable emphasis in India, on whether one should allow minority shareholders to appoint one or more IDs on the Board, though this could be contrary to basic company law principles of one share, one vote. Further, an overzealous ID could become a deterrent, and may end up causing more harm than good to the minority shareholders. An alternative to minority shareholders appointing IDs is to delegate the director nomination process to an independent nominating committee. This practice is already prevalent in many companies in India. The fact that nomination of IDs is directed solely by an independent committee may result in IDs being more independent, than if they were nominated directly by the promoter group.

In the Companies Bill, a listed company may have one director elected by small shareholders. Under clause 178, every listed company and other prescribed class shall constitute a nomination committee. The nomination committee shall identify persons who are qualified to become directors, and recommend them to the Board. Under clause 150, IDs may be selected from a data bank of eligible and willing persons, maintained by a body notified by the Central Government. Thus there are sufficient provisions in the Bill to ensure that the selection process creates greater independence on the Boards.

Rotation of IDs

Sometimes, familiarity breeds complacency. A long tenure may indicate that the IDs have got too friendly with the promoters and over the years have lost their ability to play the role of watchdogs. On the other hand, the longer the ID has been on the company’s Board, he becomes an expert on the company and that industry and his judgment gets better. An ID that is completely new to the company, has less experience, but comes with a fresh pair of eyes and fresh blood. As can be seen, there are pros and con of rotating IDs, and the arguments are not very different from rotating auditors of a company. The Companies Bill requires rotation of IDs, the requirements of which can be seen in the attached annexure. Overall, it appears to be a step in the right direction.

To sum up

The business of life cannot go on if people can’t trust those who are put in a position of trust. However, from the perspective of IDs, there are a number of questions dogging their minds. What are the stakeholders’ and regulators’ expectations from him? How can he fulfill those expectations in the absence of any effective powers? How does he redress the wrong doings? How much trust should be placed on the information presented to him? How much reliance should be placed on experts, such as lawyers, auditors or valuers? What is the extent of due diligence he should carry out? What is the time he should provide to each company where he is an ID? What should be his remuneration? What is he ultimately liable for? Lack of clarity in these areas will only scare away good talent from taking up the position of an ID, and becoming a scapegoat for the misdeeds of management. The Companies Bill with all its good intention to ensure good corporate governance, does not provide any concrete answers to all the above doubts of IDs.

The office of the ID should neither be a bed of roses, nor a bed of thorns. Everyone agrees with that, but there is no agreement on what is the right balance.

Changes in Mega Exemption List Notification No. 3/2013-ST dated 1st March, 2013

fiogf49gjkf0d
This Notification gives effect to the changes proposed in the union budget which has the effect of amending the mega exemption list in the following manner.

 i) Exemption by way of auxiliary educational services and renting of immovable property is restricted only to services provided by any person to specified educational institutions and thus auxiliary education service or renting of immovable property provided by educational institution will not be exempted.

 ii) Temporary transfer or permitting the use or enjoyment of a copyright relating to original literary, dramatic, musical, artistic works or cinematograph films had, were exempted by the notification No. 25/2012; this benefit of exemption is now restricted to films exhibited in cinema halls only.

 iii) Services provided by all the restaurants, eating joints or mess having the facility of air condition during any time of the previous year is now under the service tax net.

iv) The exemptions available to transportation of goods by railway or a vessel under Sl. No. 20 and services provided by a goods transportation agency (GTA) under Sl. No. 21 are being amended. Accordingly, exemption to transportation of petroleum and petroleum products, postal mails or mail bags and household effects by railways and vessels will not be available, while the benefit of transportation of agricultural produce, foodstuffs, relief materials for specified purposes, chemical fertilisers and oilcakes, registered newspapers or magazines, relief 4 materials meant for victims of natural or manmade disasters, calamities, accidents or mishap and defense equipments will be available to GTAs. v) The exemptions in respect of Vehicle Parking Service to general public is being withdrawn. vi) The exemption of services provided to Government, a local authority or a governmental authority for repair or maintenance of an Aircraft is being withdrawn. vii) Definition of Charitable Activities as given in Clause (k) in Paragraph 2 of Mega Notification No. 25/2012-ST dated 20-06-2012 is being amended so that there will be no separate threshold limit for granting the exemption from payment of service tax to activities relating to advancement of any other object of general public utility. MVAT UPDATE Notification No VAT.1512/CR-149/Taxation-1 dated 02.02.2013 It is notified that w.e.f. 15-02-2013 government will collect tax at source from dealer who has been awarded the rights for excavation of sand. Prescribed tax collection authority is District Collector or Cantonment Board or any other authority under the State government or Central government having jurisdiction over the area. Rate of tax collection is 10% of the auction amount to be collected in addition to the amount fixed for the auction of sand. Maharashtra Ordinance No . V of 2013 MVAT Act, 2002 has been amended by extending the period of limitation for the order of assessment for the years 2005-06 and 2008-09 from 31st March, 2013 to 30th June, 2013.

levitra

Abatement reduced in certain cases in respect of builders & developers of complex, building or civil structure

fiogf49gjkf0d
Notification No. 2/2013-ST dated 1st March, 2013 By this Notification, abatement available to developers of complex, buildings or civil structures is being reduced from the existing 75% to 70% in following cases:-

• Residential properties having a carpet area above 2000 sq. ft. and where the amount charged is equal to or more than Rs. 1 crore,

• Commercial properties. This notification is applicable from 1st March, 2013.

levitra

Service Tax Return ST-3 for July to September 2012 & due date notified Notification No. 1/2013-ST dated 22-02-2013 & Order No. 01/2013 dated 6th March, 2013

fiogf49gjkf0d
By this Notification, has been released, Form No.ST-3 for filing of Service Tax return alongwith instructions to fill up the Form for the period July 2012 to September 2012. Due date for filing of ST-3 was notified as 25th March, 2013 which was then extended to 15th April 2013 by promulgating Order no. 01/2013.

levitra

Central Sales Tax – C Forms – Failure to produce at the time of assessment – Forms obtained subsequently – Can be produced before the Authority, Rule 12 (7) of The Central Sales Tax ( Registration and Turnover) Rules, 1957

fiogf49gjkf0d
Facts

 In the assessment for the period 2004-05, the claim of the dealer for concessional rate of tax against form C was disallowed for want of required C forms, but the Tribunal permitted production of C forms received subsequently and the matter was remanded back to the assessing authority for verification of the forms. Subsequently, the dealer received four more C forms and produced before the assessing authority with a request to consider those forms also. This prayer was rejected by the assessing authority on the ground that there was no evidence of those forms having been produced before the Tribunal at the time of hearing of the appeal. The dealer filed writ petition before the Punjab and Haryana High Court, against the refusal by the assessing authority to consider the claim of concessional rate of tax for production of additional C Forms before him on the ground that forms can be produced at any stage.

Held

The explanation of the dealer was that the forms were issued by the purchasing dealers in question after the decision of the appellate authority and on that ground, the same could not be produced earlier. During the hearing before the Tribunal, the forms were sought to be produced, but this was not allowed. In view of explanation given by the petitioner that the forms were received late, it could be held that there was sufficient cause for the petitioner for not producing the same before the assessing and appellate authority. This was no bar to the same being produced before the Tribunal. Accordingly, the writ petition filed by the dealer was allowed by the High Court to permit the petitioner to produce the Forms in accordance with law.

levitra

Value Added Tax – Sale Price – Sale of Motor Cycles – Separate Collection of Handling Charges For Registration – Not Forming Part of Sale Price, Section 2 (25) of The Maharashtra Value Added Tax Act, 2002

fiogf49gjkf0d
Facts

Dealer engaged in selling motor cycles collected service charges or handling charges from customer for registration of motor cycles under Motor Vehicles Act, 1988. The VAT authorities levied VAT on such amount which was contested before The Maharashtra Sales Tax Tribunal. The Tribunal held that such charges did not constitute a part of ‘sale price’ within the meaning of ‘sale price’ defined in section 2 (25) of the MVAT Act, 2002. The Department filed an appeal before the Bombay High Court against the decision of the Tribunal, setting aside the levy of VAT on such handling charges collected by the dealer from the customer at the time of sale of motor cycles.

Held

 The High Court held that transfer of property in the goods, in pursuance of the sale contract, took place against the payment of price of the goods. Delivery of the goods was affected by the seller to the buyer. The obligation under the law to obtain registration of the motor vehicle was cast upon the buyer. The service of facilitating the registration of the vehicles rendered by the selling-dealer was to the buyer and in rendering that service, the seller acted as an agent of the buyer. The handling charges which were recovered by the respondent could not, therefore, be regarded as forming part of the consideration paid or payable to the dealer for sale of goods. Those charges cannot fall within the extended meaning of the expression “ sale price”, since they did not constitute sum charged for anything done by the seller in respect of the goods at the time of or before the delivery thereof. The High Court accordingly dismissed the appeal filed by the department and confirmed the order of the Tribunal.

levitra

Service tax refund in relation to services used for authorised operations and those wholly consumed within SEZ allowed applying refund provisions with a broader view.

fiogf49gjkf0d
Facts:

The appellant, a developer of SEZ Special Economic (SEZ) Zone having operations from units in SEZ filed refund claims towards the service tax paid on services consumed within the SEZ and services used for the authorised operations of the SEZ units. The refund claims were considered and partly sanctioned. The appellant appealed against the order and again the refund was partly allowed. Appellant filed an appeal before Tribunal for balance of Rs.19,80,569/-. It involved two components, viz. Rs.6,66,794/-, rejected on the ground that various services did not bear a direct nexus with the authorised operations undertaken by the appellant and Rs.13,13,775/- related to services wholly consumed within the SEZ during July to September, 2009.

Held:

As regards the claim rejected on the ground that the services did not have direct nexus with the authorised operations, the Tribunal held that the Approval Committee issued a specific certificate indicating various services received by the appellant and justification for use of such services in relation to the authorised operations. The jurisdictional Commissioner of Central Excise was also a member of such Approval Committee. In view thereof, it was unwarranted for the adjudicating and appellate authority to go into the question and come to their own findings in the matter. Thus, this rejection was set aside.

As regards the latter claim, the question was whether the appellants could be granted refund under Notification No. 09/2009-ST as amended by Notification No.15/2009-ST dated 20-05-2009 through which one condition was inserted stating that the refund procedure prescribed under the said Notification shall apply only in the case of services used in relation to the authorised operations in the SEZ; except for services consumed wholly within the SEZ.

Tribunal held that Notification No. 09/2009-ST exempted the taxable services specified in Clause (105) of section 65 of the Finance Act, 1994 which were provided in relation to the authorised operations in a SEZ and received by a developer or units of a SEZ, whether or not the said taxable services are provided inside the SEZ, from the whole of the service tax leviable thereon u/s. 66 of the Finance Act, 1994.

In the case of services which were wholly consumed within the SEZ, there was no necessity to discharge the service tax liability ab initio. That did not mean that where service tax liability had been discharged, the appellant was not entitled for refund. If the appellant was eligible otherwise for refund u/s. 11B, then it cannot be denied because the claim was made under Notification No.09/2009- ST and there was no dispute about the services being in relation to authorised operations of the appellant within the SEZ. The records showed that the refund claim was lodged within the time prescribed u/s. 11B and the appellant had borne the incidence of taxation.

Services provided to a SEZ or unit in the SEZ were deemed as export in terms of the SEZ Act, 2005 and entitled for exemption from payment of service tax on the services used or provided to a unit in the SEZ. Further, vide section 51 of the said Act, SEZ provisions prevail over the provisions of any other law. Accordingly, a broader view of the provisions relating to refund had to be taken.

Accordingly, the orders were set aside with consequential relief.

levitra

Succession Documents

fiogf49gjkf0d

Introduction

In the past couple of Articles, we have seen various transmission formalities which the family of a deceased must comply with in respect of his estate. In the case of several assets, such as land, flats, etc., the Registrar, Society, etc., may insist upon a Succession Document to transmit the assets of the deceased to his family. These include, Probate, Letters of Administration, Succession Certificate, etc. Quite often, these terms are loosely used to denote one for the other whereas, in reality, there is a marked difference between the various types of Succession Documents. Each of them is appropriate under a given set of circumstances and has a specific purpose. Let us look at the various Succession Documents which one encounters along with when each one is used.

Relevance of various Documents

Table-1 shows the different Succession Documents and their applicability to various situations. Let us now examine each one of them in detail.

Probate
    
Meaning: A probate means the copy of the will certified by the seal of a Court. Probate of a will establishes the authenticity and finality of a will and validates all the acts of the executors. It conclusively proves the validity of the will and after a probate has been granted, no claim can be raised about the genuineness or otherwise of the will. A probate is different from a succession certificate. Thus, a probate is granted by a Court only when a will is in place.

Necessity: According to the Indian Succession Act, no right as an executor or a legatee can be established in any Court unless a Court has granted a probate of the will under which the right is claimed. This provision applies to all Christians and to those Hindus, Sikhs, Jains and Buddhists who are/whose immovable properties are situated within the territory of West Bengal or the Presidency Towns of Madras and Bombay. Thus, for Hindus, Sikhs, Jains and Buddhists who are /whose immovable properties are situated outside the territories of West Bengal or the Presidency Towns of Madras and Bombay, a probate is not required. It also applies to Parsis who are/whose immovable properties are situated within the limits of the High Courts of Calcutta, Madras and Bombay. However, absence of a probate does not debar the executor from dealing with the estate.

Procedure: To obtain a probate, an application needs to be made to the relevant court along with the original will. The executor has to disclose the names and addresses of the heirs of the deceased. Once the Court receives the application for probate, it would invite objections, if any, from the relatives of the deceased. The Court would also place a public notice in a newspaper for public comments. The petitioner would also have to satisfy the Court about the proof of death of the testator and the proof of the will. Proof of death could be in the form of a death certificate. However, in case of a person who is missing or has disappeared, it may become difficult to prove ‘death’. U/s. 108 of the Indian Evidence Act, 1872, any person who is unheard of or missing for a period of seven years by those who would have naturally heard of him if he had been alive, is presumed to be dead unless otherwise proved to be alive.

On being satisfied that the will is indeed genuine, the Court would grant probate specimen of the probate is given in the Act) under its seal. The probate would be granted in favour of the Executor/s named under the Will. The Supreme Court has held in the cases of Lalitaben Jayantilal Popat v Pragnaben J Kataria (2008) 15 SCC 365 and Syed Askari Hadi Ali v State (2009) 5 SCC 528, that while granting probate, the Court must not only consider the genuineness of the will but also the explanations, objections and proof given by the parties of the suspicious circumstances surrounding the execution of the ‘Will’. The onus of proving the will is on the propounder. The propounder has to prove the legality, execution and genuineness of the will by proving absence of suspicious circumstances and also proving the testamentary capacity and the signature of the testator. When suspicious circumstances are said to exist the onus is on the propounder to explain their non-existence to the court’s satisfaction and only when such onus is discharged the court would accept the will and grant probate – K. Laxman v T. Padmining (2009) 1 SCC 354. Probates can be granted after a minimum time of 7 days from the death of a person. No maximum period has been specified. A registered Will improves the chances of getting a Probate faster. In the case of a registered Will, no one can allege that the Will is fraudulent. However, registration does not mean that it is the last Will of the deceased. Hence, a challenge on the count of it not being the last Will remains open.

Opposition: If any relative, heir of the deceased, or other person feels aggrieved and objects to the grant of a probate, then he must file a caveat before the Court opposing the will. Once a caveat has been filed, the Courts would hear the aggrieved party and he would have to prove that he would have a share in the estate of the testator if he had died intestate.

Why does one need a probate? One of the questions which almost always arises is “why is the probate required?” A probate is a certificate from the High Court certifying the genuineness and finality of the will. Some of the reasons why a probate is required are as follows:

•    It is necessary to prove the legal right of a legatee under a will in a court.

•    Some listed / limited companies insist on a probate for transmission of shares.

•    Similarly, some co-operative housing societies insist on a probate for transmission of the flat.

•    The Registrar of Sub-Assurances would insist on a probate usually for registration of immovable properties.
 
However, it would not be correct to say that no transfer can take place without a probate. There are several companies, societies, etc., which do transfer shares, flats, etc., even in the absence of a probate. They may, as a precaution, insist upon a release deed from the other heirs in favour of the legatee who is the transferee. Sometimes, the company/society also insist on an indemnity from the legatee in its favour against any possible claims/law suits from the other heirs of the deceased.

Effect: A probate of a Will when granted establishes the Will from the death of the testator and validates all intermediate acts carried out by the executor. It is conclusive evidence of the representative title of the executor – Harmusji v Dosabhai ILR 12 Bom 164.

Special Factors : Some of the rules in respect of obtaining a probate are as under:

(a)    For obtaining a probate, the applicable court fee stamp would be payable as per the rates prescribed in different states. For instance, for obtaining a probate in the city of Mumbai, the application has to be made to the Bombay High Court and the court fee rates prescribed under the Bombay Court-Fees Act, 1959 would apply which are as follows:

(b)    A probate cannot be granted to a minor or a person of an unsound mind.

(c)    If there are more than one executors, then the probate can be granted to all of them simultane-ously or at different times.

(d)    If a will is lost since the testator’s death or it has been destroyed by accident and not due to any act of the testator and a copy of the will has been preserved, then a probate may be granted on the basis of such a copy until the original or an authenticated copy has been produced. If a copy of the will has not been made or a draft has not been preserved, then a probate can be granted on its contents or of its substance, if the same can be proved by evidence.

(e)    A probate petition requires the following con-tents:

•    A copy of the will or the contents of the will in case the will has been lost, mislaid, destroyed, etc.

•    The time of the testator’s death – proof of death.

•    A statement that the will is the last will and testament of the deceased and that it was duly executed.

•    Details and value of assets mentioned or covered in the Will for purposes of computing the Court Fees.

(v)    A statement that the petitioner is the executor of the will.

(vi)    That the deceased had a fixed place of residence or some property within the jurisdiction of the Judge where the application is moved.

(vii)    It must be verified by at least one of the witnesses to the will. It must be signed and verified by the petitioner and his lawyer.

Letters of Administration
Meaning: When a person dies intestate, i.e., without making a will, then in order to succeed to the property of the deceased, the heir(s) would require letters of administration. If the deceased was a Hindu, Muslim, Buddhist, Sikh or Jain, then the Letters may be granted to any person who according to the Rules for Intestate Succession is entitled to succeed to the estate of the deceased. If more than one person is entitled, then the Court would be at discretion to grant the letters to one or more of them. If no person applies for such Letters, then the Court can grant them even to a creditor of the deceased. In case the intestate belonged to any community other than that specified above, say, Parsis, Christians, etc., then the Indian Succession Act, 1925 lays down a separate set of rules for granting letters of administration.

Other Situations when Letters are granted: Under one situation, letter of administration may also be granted in case there is a Will. If a Will has been probated in a Court outside the State of residence of the deceased or in a Foreign Court and a properly authenticated copy of such a Will is produced, then ‘letter of administration’ may be granted on the basis of copy of the Will and probate e.g., a Hindu’s Will is probated in London and it includes property situated in Mumbai. Letters may be granted in respect of such a probated Will.

Some of the other scenarios when letter of administration may be granted are as follows:

•    In case an executor of a Will fails to take up his executorship or if a valid executor has not been appointed or if the executor dies before the testator and there is no successor executor, then instead of a probate letters of administration would be required.

•    Again if no Will is produced but there is a reason to believe that there exists a Will, then letters of administration may be granted as a stop gap arrangement till such time as the Will is produced.

•    When executor is absent from State in which application for probate is made.

•    When minor is  a sole executor.

•    Where residuary legatee survives the testator but dies before the estate has been fully bequeathed.

•    Where executor cannot be found and residuary legatee cannot be identified, then it is treated as if the deceased died intestate.

Effect: Letters of administration entitle the administration (i.e., the person in whose name the letters are granted) to all the rights belonging to the deceased as if he been granted those rights immediately on his death. However, they do not validate any acts of the administrator which tend to damage the estate of the deceased. They have effect over all the property and estate, whether movable or immovable of the deceased throughout the State in which they have been granted. They are conclusive as to the representative title against all debtors of the deceased and all persons holding property which belong to the deceased. They afford full indemnity to his debtors and persons delivering up such property to the holder of the letters.

Ineligibility: Letters cannot be granted to a minor, person of unsound mind, etc.

Application: An application for letters of administration should be made to the District Judge of the district in which the deceased had a fixed abode at the time of his death. The petition shall be made stating amongst other things, the time and place of death, his family members, details of assets of the deceased, right which petitioner claims etc. The application must also state that to the best of the belief of the applicant, no other application has been made for grant of letters. Letters can be granted after a minimum time of 14 days from the death of a person. No maximum time has been specified. An appeal against the District Judge’s Order lies to the High Court. However, High Court also has concurrent jurisdiction with District Judge and hence, in the cities of Mumbai, Kolkatta and Chennai, the High Court would exercise the jurisdiction.

Opposition: If any relative, heir of the deceased, other person feels aggrieved by the grant of letters, then he must file a caveat before the Court opposing the application. Once a caveat has been filed, the Courts would hear the aggrieved party and the party would have to prove that he would have a share in the estate of the intestate.

Succession Certificate

Meaning: A succession certificate is a certificate granted by a High Court in respect of any debt due to the deceased or securities owned by him. In case the deceased died living behind a will which only empowered the beneficiaries to collect his debts and securities, then the courts would grant a succession certificate instead of a probate. It merely empowers the grantee to collect the debts owed to the deceased. A succession certificate would not be granted if the Indian Succession Act mandatorily requires a probate or letters of administration. Thus, a succession certificate cannot be granted in respect of a flat in a co-operative society of the deceased. It can be used only for debts and securities and no other type of property. Thus, it would cover dues, shares, debentures, provident fund balances, etc.

Application: An application for a succession certificate must be made, along with the payment of requisite Court fees, to a District Judge giving inter alia the following particulars:

•    Proof of death and time of death of the de-ceased
•    Proof of ordinary residence of deceased
•    Details of family members
•    Right in which the petitioner claims
•    Details of Debts and securities in respect of which the certificate is applied for.

If the Judge is satisfied, then he would grant a succession certificate. The certificate would specify the debts and securities set forth in the application and would empower the recipient of succession certificate to receive interest or dividends and/or negotiate or transfer all or any of the specified securities.

A certificate may be revoked if it was proved that the same was obtained by fraud, the application was defective, etc.

An appeal can be filed to the High Court against the District Judge’s order granting, refusing or revoking the certificate.

Effect of succession certificate: A certificate granted would have validity throughout India. The certificate granted with respect to the debts and securities specified in the certificate, shall be conclusive as against the persons owing such debts or liable on such securities. Further, it affords full indemnity to all persons as regards all payments made, or dealings had, in good faith, with the certificate holder in respect of the debts or securities of the deceased.

Legal Heir Certificate

Meaning: A legal heir certificate or a certificate of heirship is a different kettle of fish altogether and is sometimes required. It is granted under the Bombay Regulation No. VIII of 1827, a pre-independence Order of the then Governor General of India. This is a requirement which several legal practitioners are also unaware about and practically, it can be quite a task to obtain one. Generally, it is issued by a tehsildar. However, in the city of Mumbai, the City Civil Court would issue such a certificate.

It is issued to provide formal recognition of heirs, executors and administrators and for appointment of administrator and managers of the deceased’s property by the courts. The Regulation states that it is generally desirable that the heirs, executors or legal administrators of persons deceased should, unless their right is disputed, be allowed to assume the management or sue for the recovery in Courts of justice. Yet in some cases it is necessary or convenient that such heirs, executors or administrators, in order to give confidence to persons in possession of, or indebted to the estate to acknowledge and deal with them, should obtain a certificate of heir-ship, executorship, or administratorship, from the competent Court.

In Anthony Fernandez and others, 1993(1) Bom.C.R. 580 the Bombay High Court has held that Bombay Regulation VIII of 1827 continues to be in force and the provisions thereof are supplemented in certain respects by the Indian Succession Act, 1925. Conse-quently, an application for recognition of a person as an heir of the deceased can be made under this Regulation.

Effect of Certificate: If an heir is desirous of having his legal heir right formally recognised by a Court in order that it is safer when he deals with persons, then he can apply to the Court for recognition as the ‘legal heir’. The Judge would then invite objections within one month from the date of Notice. If the Judge is satisfied that there are no objections or they are not sufficient, then he would grant recognition in the form of a Certificate in the form contained in Appendix B to the Regulations. The Certificate would regonise the person named as the legal heir, executor or administrator of the deceased.

An heir, executor or administrator, holding a proper certificate, may do all acts and grant all deeds competent to a legal heir, executor or administrator, and may sue and obtain judgment in any Court in that capacity.

An heir, executor or administrator, holding a certificate, shall be accountable for his acts done in that capacity to all persons having an interest in the property, in the same manner as if no certificate has been granted.

Certificate creates No Title: R.8 provides that the Certificate confers no right to the property, but only indicates the person who, for the time being, is in the legal management thereof, the granting of such certificate shall not finally determine nor injure the rights of any person; and the certificate shall be an-nulled by the Court, upon proof that another person has a preferable right.


In Aloysius Manuel D’souza v Mary Kamala William Manuel D’souza, 2006(6) Bom.C.R. 56(O.S.), a Division Bench of the Bombay High Court held that the grant of heirship certificate does not establish the right of a party in property of the deceased by itself. The right, if any, of a person claiming ownership in the property of the deceased are not taken away by grant of an heirship certificate to an heir. On the other hand, the Regulation makes it clear that heir-ship certificate holder is accountable to all persons having an interest in the property for the acts done by him. Based on the heirship certificate simplicitor the heirship certificate holder cannot be said to have acquired any right, title or interest in the estate of the deceased.

In Group Grampanchayat v Sunanda Shamrao Bandishti, 2011 (5) Bom.C.R. 162, it was held that the grant of an heirship certificate to the respondents would not in any way affect the right, title or interest, if there be any, of the petitioner in any of the properties of the deceased. In proceedings for heirship certificate, the Court is not required to determine title of the deceased to any property. It is required only to consider whether the persons claiming heirship certificate are heirs of the deceased. If any person comes forward to claim nearer kinship than the applicants, the rival claims for the applicant and the person claiming nearer kinship and to be an heir would be considered by the Court. The Court may decline to grant heirship certificate to an applicant and come to the conclu-sion that the applicant is not an heir of the deceased or that there are other nearer kins who are entitled to the heirship certificate. The question of title to the property allegedly held by the deceased is alien to such enquiry. Whether the deceased had any title to the property is not and indeed cannot be decided by the Court in an application for ‘heirship certificate’ made under the Regulation.

Required For: It may be required for transferring electricity meter, telephone connection, bank account, etc., of the deceased in the name of the legal heir. It may also be required if a person is buying property belonging to the deceased to establish that the sellers are the true legal heirs.

One other important area where the legal heir certificate is required is for efiling the Income-tax Return of the deceased u/s. 159 of the Income-tax Act. Thus, for the period starting from 1st April of the year in which the assessee expired till the date of death, his legal representative would be assessed u/s. 159. A new feature has been introduced in case of efiling for registering the legal heir to do efiling on behalf of the deceased assessee. The documents required for registering a person as a legal heir are copy of the Death Certificate, Copy of PAN card of the deceased, Self attested PAN card copy of the heir and the legal heir certificate. Thus, this cumbersome certificate is required by the Income-tax Department. This is one area where representations need to be made to the CBDT to do away with the requirement of furnishing a legal heir certificate for efiling the return of a deceased assessee.

Conclusion

As would be evident from the above discussion, there are several succession documents which one comes across when a person dies. Obtaining them can be quite an arduous task for the family of the deceased. Just as the Government has introduced efiling in several areas, such as, income-tax, service tax, company law, etc., time has come for introducing online applications for several of these documents. If that is too much to ask then let us have a separate fast track Court dedicated to obtaining all these succession documents. Why not have an one-stop shop concept for all things related to succession? Till such time as India reaches an utopian situation, I leave you with my modified version of the famous saying, “Where there is a Will, there is a Way” : I conclude by saying:

“Where there is a Death, there is a  Succession,

Where there is a Succession, there may be an Argument,

And if there is an Argument, there is a need for a Succession Document!!”

Independent Directors in the New Landscape Part -2

Service tax under Tour Operators category when appellant neither held tourist permits nor had tourist buses. When service tax paid was by other tour operator, can it be demanded second time on same activity?

fiogf49gjkf0d
Facts:

Appellant was providing following services against consideration:
• Bus Reservation agreement (BRA) – wherein Appellant supplied ordinary buses (other than tourist vehicles) to other tour operators and non-commercial concerns on rent.
• Seat Reservation agreement (SRA).
• Nashik Darshan (ND).
• Tour extension (TE).

 Respondent issued SCN demanding service tax of Rs. 1,03,65,342/- on BRA from 01-04-2001 to 31-03- 2006 and on other services from 01-04-2001 to 09-09-2004 under the category of “tour operator” and equal amount of penalty u/s. 78 was imposed. Appellant contended that they provided buses on rent to IDTC who was a tour operator and IDTC discharged the service tax under the category of “tour operator” and hence service tax cannot be demanded twice on the same activity.

Held:

Since appellant was neither holding tourist permits nor having tourist vehicles, they are not subject to service tax in respect of all activities concerned till 09-09-2004. Appellant was not liable for service tax on BRA where buses were hired to IDTC and service tax was paid by IDTC. However where buses were hired to non-commercial concerns like schools etc., appellant was liable to pay service tax from 09-09-2004. Held, penalty imposed u/s. 78 was waived as issue involved was of interpretation of law.

levitra

No levy of penalty in absence of suppression and holding of bonafide belief as to non-taxability.

fiogf49gjkf0d
Facts:

Appellant, a co-operative society of agriculturists lost land due to setting up of a plant by ONGC. Appellant provided renting of cab service to ONGC. Initially ONGC did not reimburse the service tax and disputed the same and hence, Appellant did not deposit the tax. This fact was intimated to the Respondent. Later on the tax was deposited. SCN was issued to demand the tax and recovery of penalties. Tribunal confirmed the penalties without paying any heed to the Appellant’s contention of bonafide belief and absence of suppression of facts.

Held:

Tribunal committed error in not accepting the plea of bonafide belief of the Appellant even though the service tax on renting of cabs was new one and there were conflicting judgments of different Tribunals. The Tribunal has not taken into consideration the correspondence between Appellant and Respondent wherein Appellant had intimated the reason for non-payment of tax. Further, there was no fraud or misrepresentation or suppression by the Appellant. Therefore, it was held that extended period was not invokable and also did not justify levying of penalty.

levitra

Whether Rule 5A(2) of the Service Tax Rules, 1994 read with section 94(2) of the Finance Act 1994 empowers CAG (Comptroller & Auditor General of India) to conduct audit of accounts of any assessee? Matter referred to the Division Bench.

fiogf49gjkf0d
Facts:

Appellant, a company incorporated under the Companies Act 1956 is engaged in the business of trading in stock and securities and was registered with the service tax authority under the categories of “stock broking”, “banking & other financial service” and “business auxiliary service” from the year 2004. Appellant company was not financed out of the funds or loans from the Central Government or State Government. However, they were served with the notice by the Principal Director of Audit, Central Kolkatta for audit by CERA audit team, an audit team under CAG to audit the service tax records, accounts and other related documents. Appellant challenged the said notice.

Held:

To carry out an audit of a non-governmental company which is neither financed nor run out of loan from Central/State Government by CAG, the condition precedent to such audit is request from the President of India or Governor of State u/s. 20 of the CAG Act, 1971 where it is carrying on its operation. And when such audit is on request of President/Governor, the obligation of the assessee under Rule 5A of the Service Tax Rules, 1994 and Rule 22 of the Central Excise Rules, 2002 is to provide the records to the audit party deputed by CAG. However, it does not oblige the assessee to agree to unauthorised audit of its accounts by CAG. Under Rule 5A(1) of the Service Tax Rules, 1994 an officer authorised by the Commissioner shall have access to the premises for the purpose of carrying out any scrutiny, verification and checks as may be necessary for safeguarding the interest of revenue. Rule 5A(2) of the said Rules requires assessee to make available records to the officer authorised by the Commissioner or CAG on demand for scrutiny of the said officer.

Therefore, the said Rule read with section 94(2) of the Finance Act, 1994 does not empower the CAG to audit the accounts of non-Government assessee, but it casts an obligation to make records and documents as specified therein available to the officer deputed by CAG. However, on being pointed out by the Counself for the Respondent to an unreported judgement and order passed by a Single Judge Bench of the Court in W.P.2762 of 2000 (M/s. Berger Paints India Ltd. & Others vs. Joint Commissioner Audit) Central Excise Calcutta- II where the vires of Rule 173G(6)(c) of Central Excise Rules which is pari materia with Rule 5A of the Service Tax Rules was under challenge, the court deemed it appropriate to refer the matter to a Division Bench for adjudication.

levitra

CENVAT credit availed and utilised on exempted services in excess of prescribed limit – No disclosure made in returns filed – Held, it is a wilful suppression of facts for which extended period can be invoked and hence liable for penalties u/s. 76 and 78 of the Act.

fiogf49gjkf0d
Facts:

Appellant was engaged in providing cellular telephone services in Jaipur circle. It was registered and paying service tax under “telephone services”. Appellant was consuming various input services and availing entire service tax credit as per Service Tax Credit Rules, 2002. Appellant was also receiving roaming charges from other telephone operators and was not paying service tax on the same during the period May, 2003 to August, 2004.

SCN was issued proposing to recover the service tax on the ground that Appellant should have restricted the utilisation of CENVAT towards payment of service tax on output service in terms of Rule 3(3)/3(5).

Tribunal upheld the demand of tax and also confirmed the invocation of extended period of limitation and upheld the penalties levied u/s. 76 and 78. Appellant contested the invocation of extended period of limitation stating absence of deliberate suppression.

Held:

When CENVAT credit was availed in excess of prescribed limits, facts ought to have been disclosed clearly by Appellant which is a professionally managed corporate. Failure to make the disclosures in returns or submitting entire facts by any letter accompanying the returns appears to be a case of wilful suppression. Extended period of limitation was rightly invoked. No substantial question of law is involved in the appeal and hence dismissed.

levitra

Implications: Amendments in Exemptions

fiogf49gjkf0d
The Finance Bill, 2013, unlike in the past few years, had a few proposals to amend the service tax law that underwent a major metamorphosis in this Budget in the last fiscal. However, seemingly small proposals made, could have large implications. Further, by issuing some notifications, amendments are made in some exemptions and abatements in case of construction services of builders or developers. Most of these amendments are effective from 1st April, 2013 and one relating to builders is effective from 1st March, 2013. These are discussed below.

• Air-conditioned Restaurants:

Background:

Whether a transaction for supply of food and/or beverages in a restaurant or a hotel is a contract for sale of food or a composite contract for sale and services was a subject of controversy vis-à-vis leviability of Sales Tax (now VAT) under the sales tax law in the states for many years. The Supreme Court in Northern India Caterers (India) Ltd. vs. Lt. Governor of Delhi (1978) 42 STC 386 (SC) held that service of meals whether in a hotel or restaurant does not constitute a sale of food for the purpose of levy of sales tax but must be regarded as the rendering of a service in the satisfaction of a human need or ministering to the bodily want of human beings. It would not make any difference whether the visitor to the restaurant is charged for the meal as a whole or according to each dish separately.

This led to the amendment in article 366(29A) of the Constitution, whereby the 46th amendment included within its scope “the supply, by way of or as part of any service, of food or any drink for cash, deferred payment or other valuable consideration” as a deemed sale. Subsequent to the constitutional amendment, VAT is being paid on the sale of food in hotels. However, the question that arose was on what value of the consideration should VAT be paid.

The five member Bench of the Supreme Court in the case of K. Damodarasamy Naidu & Sons Ltd. vs. State of TN (2000) 117 STC 1 (SC) interestingly held that the entire value should be deemed to be the consideration towards the sale. While delivering its judgment, the Honourable Supreme Court observed as under:

“In our view, therefore the price that the customer pays for the supply of goods in a restaurant cannot be split up as suggested by learned counsel. The supply of food by the restaurant owner to the customer though it may be a part of service that he renders by providing good furniture, furnishing and fixtures, linen, crockery and cutlery, music, a dance floor, and a floor show, is what is the subject of levy. The patron of a fancy restaurant who orders a plate of cheese sandwiches whose price is shown to be Rs. 50/- on the bill of fare knows very well that the innate cost of the bread, butter, mustard and cheese in the plate is very much less, but he orders it all the same. He pays Rs. 50/- for its supply and it is on Rs. 50/- that the restaurant owner must be taxed.”

In East India Hotels Ltd. & Another vs. UOI & Another (2001) 121 STC 46 (SC), it was held that “when all movable properties, materials, articles or commodities are goods, food in a restaurant has necessarily to be regarded as goods. …………. The moment the dish is supplied and the sale price paid, it would amount to sale”. It is also interesting to note that the Supreme Court in Tamilnadu Kalyan Mandapam Assn. vs. UOI 2006 (3) STR 260 (SC) observed, “In case of catering contracts, service element is more weighty; visible and predominant and it cannot be considered as a case of sale of food and drink in a restaurant”. Admittedly, there was no question before the Hon. Supreme Court in this case, to examine whether sale of food in a restaurant was a service or otherwise. Nevertheless, service tax on the service in relation to serving of food or beverage including alcoholic beverage was introduced with effect from 01-05-2011. However, this remained restricted to air-conditioned restaurants which also had a license to serve alcoholic beverages. To justify the levy in this regard, the TRU in its letter dated 28-02-2011, clarified that the tax is levied on the service element and it should not be confused with the sale of food. The levy is intended to be confined to the value of services contained in the composite contract and shall not cover either the meal portion in the composite contract or mere sale of food by way of pick up or home delivery as also goods sold at MRP. Subsequently, on the onset of negative list based taxation of services with effect from 01-07-2012, the list of declared services in section 66E of the Finance Act, 1994 in sub-clause (i) included, the service portion in an activity wherein goods, being food or any other article of human consumption or any drink (whether or not intoxicating) is supplied in any manner as a part of the activity. However, the restaurants other than fully or partially air-conditioned/centrally heated and not having license to serve alcoholic beverages remained exempted as the mega exemption Notification No. 25/2012-ST dated 20-06-2012 provided for the same at entry 19.

In many cases under the Service category of “Outdoor catering”, it has been held that it is possible to take deduction of material component in terms of Notification 12/2003. However, the Delhi CESTAT in the case of Sayaji Hotels (2011) 24 STR 177 has held that, in case of a composite contract of a “Mandap keeper” the hotel cannot artificially divide the contract and levy Service tax merely on the value of services so identified. In essence, the Delhi CESTAT rejected the theory of splitting between the value of services and goods and held that the only option the appellant had was to pay tax on the abated value as provided for in Notification 1/2006 dated 01-03-2006.

It would appear that after the rescinding of Notification 12/2003 w.e.f. 01-07-2012, the Service tax in relation to food contracts may have to be paid on the abated value as provided for or on the entire value of the contract inasmuch the new scheme of Valuation under Rule 2C does not provide for an option for claiming deduction of goods as it is provided for “Works Contract” under Rule 2A of the Valuation Rules. However, the larger issue is whether or not tax the taxing entry (i) u/s. 66E (Declared Services) which specifies service portion in an activity, can include value of goods supplied at all this is a matter that is being extensively debated. It needs to be noted that Rule 2C refers only to a “Restaurant” and does not Specify “eating joint or mess”. This appears to be inadvertent.

In addition, other valuation issues like charge of VAT on Service tax component (and vice versa), charge on other service charges (due to introduction of definition of service w.e.f. 1st July 2012) etc., are likely to be faced, which would ultimately increase the final cost to the consumer substantially.

Implication of amendment with effect from 01-04-2013:

Now, vide the Notification No. 3/2013-ST, the said entry no.19 in the Notification No. 25/2012 is amended to delete the condition for the restaurant to have a license to serve alcoholic beverages. Consequently, the amendment will have a tremendous impact, as a large number of eating places including fast food chains, coffee shops, pizza places, ice-cream parlours, cafeteria in hospitals, educational institutions or corporate offices, airports, multiplex cinema houses, book shops, auditoria, canteens in factories, food courts in shopping malls, clubs etc. are covered.

The entry 19 in the Notification No. 25/2012-ST describes a restaurant or eating joint other than those having the facility of air-conditioning or central heating in any part of the establishment, at any time during the year. This will consequentially include all the above stated illustrations including simple cafes or restaurants having a small portion or a mezzanine portion air-conditioned and will come under the service tax net. Further, even non air-conditioned portion of the café serving food would be subject to the levy. If a small ice-cream/yoghurt parlour has an air-conditioner in any part of their premises, it would be subjected to the levy. In large departmental/chain stores or book shops, small kiosks/bakeries/prepared food corners are often provided with a few tables and chairs. Since the book shop, the store or the mall has common area air-conditioned and even if the food or snacks, beverages or ice-cream are provided through “self-service” counters/desks in a tray and without the use of crockery, the exemption under entry 19 will not be available as some part of the establishment is air-conditioned. Many or most of these contracts of providing food are predominantly ‘sale’ contracts as ‘service’ element is present in a negligible proportion. In India, we have the system of ‘thali’, places serving only meals in thalis. They are known as Bhojanalayas and only lunch or dinner is served very quickly. These servings have a very little ‘service’ element. Yet, all and sundry would be subject to service tax once the turnover crosses the threshold limit of ten lakh rupees. The value of service however, in accordance with Rule 2C of the Service Tax (Determination of Value) Rules, 2006 is to be taken at 40% or in other words, after considering 60% presumptive abatement. This value is effective from 01-07-2013, as earlier 70% abatement was provided.

When the food is not consumed in the restaurant premises but packed or parcelled from the counter, there is no setup of the eating house enjoyed or used by the person collecting cooked food/meal. As referred above, the TRU circular dated 28-02-2011 clarified that on mere sale of food by way of pick-up or home delivery, no service tax would be attracted. However, there are cafes/restaurants which charge “delivery charges” for small orders or all orders as the case may be. The question therefore arises as to whether or not such “delivery charge” is a part of “sale contract” or in the negative list based taxation, it amounts to consideration for a service of providing food at the doorstep. This is because the food is supplied at home by a delivery boy which itself is a service and a separate charge is recovered for the same. It would mean a composite yet divisible contract of sale of food and service of providing home delivery of such food and thus the service components would be exigible to service tax. So far as cafeteria/canteens in corporate offices or factories are concerned, it is relevant to note the views expressed in the Draft Circular dated 25-07-2012 vide F. No. 354/127/2012-TRU issued by Tariff Research Unit of Ministry of Finance. Paras 8, 9 and 10 of the said circular read as follows:

“8.    A number of activities are carried out by the employers for the employees for a consideration. Such activities fall within the definition of “service” and are liable to be taxed unless specified in the Negative List or otherwise exempted.

9.    One of the ingredients for the taxation is that such activity should be provided for consideration. Where the employees pay for such services or where the amount is deducted from the salary, there does not seem to be any doubt. However, in certain situations, such services may be provided against a portion of the salary foregone by the employee. Such activities will also be considered as having been made for a consideration and thus liable to tax. CENVAT credit for inputs and input services used to provide such services will be eligible under extant rules. The said goods or services would now not be construed to be for personal use or consumption of an employee per se and rather shall be a constituent to the taxable service provided to an employee. The status of the employee would be as a service recipient rather than as a mere employee when consuming such output service. The valuation of the service so provided by the employer to the employee shall be determined as per the extant rules in this regard.

10.    However, any activity available to all the employees free of charge without any reduction from the emoluments shall not be considered as an activity for consideration and will thus remain outside the purview of the service tax liability (facilities like crèche, gymnasium or a health club which all employees may use without any charge or reduction from the salary will be outside the tax net). However the CENVAT credit for such inputs and input services will be guided by the extant rules.”

The above comments are a part of the Draft Circular which is yet not finalised. However, in the context of a canteen facility extended by an employer and in a case when consideration for the food served in the canteen is recovered by the employer and if the canteen is in the establishment, any part of which is air-conditioned, may need to examine service tax liability depending on the facts of each case.

Considering a mushroom growth of cafeteria, food courts, coffee shops, fast food chains and ice-cream parlours in all large and medium sized cities and towns of India, the number is alarmingly high and therefore, there would be widespread implications of the amendment, considering that eating out is a part of daily routine or a necessity of the young and middle-aged working population of the country.


•    Service of construction of complex:


Background

Service of construction of a complex, building or civil structure or any part thereof provided by a builder or a developer was notified as taxable service with effect from 01-07-2010. Although this generated tremendous controversy, the Honourable Bombay High Court in case of MCHI vs. UOI 2012 (25) STR 305 (Bom) rejected the challenge on the ground of constitution validity. Similarly, earlier the P&H High Court also dismissed the petition in GS Promoters vs. UOI 2011 (21) STR 100 (P&H) wherein the plea was made to declare the levy of service tax on builders as unconstitutional. This category, like the service portion of activity of supplying food, is included as declared service in section 66E, unless the entire consideration for the constructed unit is received post issuance of completion certificate. Vide Notification No. 26/2012-ST dated 20-06-2012 at serial no.12, the abatement of 75% subject to prescribed conditions continued.

Implication: Amendment with effect from 01-03-2013:

Alongside the budget proposals, amendment in the rate of abatement from 75% to 70% in certain cases vide Notification No. 2/2013-ST is already effective from 1st March, 2013 and plain reading of the substituted entry no. 12 in the said Notification No. 26/2012-ST reads as shown in the Table:

Table: Substituted entry no.12 in Notification No. 26/2012-ST


Reading of the aforesaid entry no. 12 indicates as follows:

a)    75% abatement subject to fulfillment of conditions will continue in two cases, viz.,

•    Construction of residential unit having car-pet area upto 2000 square feet or less OR

•    Construction of residential unit where the amount charged is less than Rs. 1 crore.

Meaning thereby that for a flat of 2500 sq. feet, if the amount charged is Rs. 80 lakh, it is entitled for abatement @ 75%. Conversely, even for a flat of 800 sq. feet, if the amount charged is Rs. 3 crore, the abatement is available @ 75%. In ef-fect, only one of the conditions mentioned above is required to be fulfilled — either the area of the residential unit is less than 2000 sq. feet or the amount charged is less than Rs. 1 crore.

b)    The abatement of 75% will no longer be available to a complex, building, civil structure or part thereof not covered by the above two categories. As such, a distinction is now made for commercial and residential construction and abatement of only 70% is available for commercial constructions irrespective of the amount charged or the area. Even if the amount charged is less than Rs. 1 crore or the area is less than 2000 sq. feet, the abatement available is 70% and the effective rate of service tax is thus 3.708% in place of 3.09%.

In this context, the words used by the Finance Minister while announcing his proposals in his Budget speech are worth taking note of:

“182. Homes and flats with a carpet area of 2,000 sq.ft. or more or of a value of `1 Crore or more are high-end constructions where the component of ‘service’ is greater. Hence, I propose to reduce the rate of abatement for this class of buildings from 75 percent to 70 percent. Existing exemptions from service tax for low cost housing and single residential units will continue.”

The above extract from the speech of the Finance Minister indicated that the reduction in abatement was to be restricted to certain residential premises. However, the language of the notification does not support that and conveys clearly that the abatement of 75% will not be available except in two cases referred above.

•    Copyright for cinematographic films:

In Notification No.25/2012-ST, entry no.15 exempted “Temporary transfer or permitting the use or enjoyment of a copyright covered under clauses (a) or (b) of s/s. (1) of section 13 of the Indian Copyright Act, 1957 relating to original literary, dramatic, musical, artistic works or cinematograph films” with effect from 01-07-2012. It is relevant to note in this context that actors, directors and various other technicians are brought under the net of service tax vide the new definition of service and the negative list based service tax regime from 1st July, 2012. Accordingly, a film producer is required to pay various actors, technicians and/ or other professionals their charges along with service tax and thus there is a cost addition of 12.36% to the producers. However, such producer of the film, the owner of copyrights of his film was not liable to pay service tax on his services of transferring or permitting use of such copyright in favour of distributors and/or theatre owners on account of the entry prior to amendment.

Implication of amendment with effect from 01-04-2013:

•    Now, this entry of exemption is restricted to “cinematograph films for exhibition in a cinema hall or cinema theatre”.

Thus, the exemption in respect of original literary, dramatic, musical or artistic work is retained without any change. However, grant of copyright is restricted only to transfers or permissions for the use of exhibition in a cinema hall or a cinema theatre.

•    The intention for the amendment is explained in CBEC letter dated 28-02-2013 as follows:

“The benefit of exemption u/s. No. 15 of the notification in relation to copyrights for cinematograph films will now be available only to films exhibited in a cinema hall or theatre. This will allow service providers to pass on input tax credits to taxable end-users”.

Now, when a film producer grants copyrights or temporarily transfers these to distributors for exhibition of the film in theatres, the producer is still not liable for service tax. However, when rights are granted for direct to home (DTH) exhibition or to broadcasting agencies viz. TV channels, satellites etc., the film producer is liable to service tax and in turn broadcasting TV channels already being under the tax net would be eligible to CENVAT credit of the service tax paid for temporary transfer of copyrights in their favour. However, film producers paying service tax to actors, technicians etc. would be eligible for only proportionate credit as they would be providing taxable service in respect of DTH or broadcasting rights whereas services of transfer of rights for exhibition in cinema continue to be exempt. The CBEC letter therefore appears to be only partially correct considering the above discussion.

•    Renting of immovable property and auxiliary education services provided by specified educational institutions:

Background:

Entry No. 9 in the Notification 25/2012-ST exempted service to or by an educational institution in re-spect of education exempted from service tax by way of renting of immovable property or education auxiliary service. The term “auxiliary educational service” is defined in the said Notification 25/12-ST itself as follows:

“(f) “auxiliary educational services” means any services relating to imparting any skill, knowledge, education or development of course content or any other knowledge – enhancement activity, whether for the students or the faculty, or any other services which educational institutions ordinarily carry out themselves but may obtain as outsourced services from any other person, including services relating to admission to such institution, conduct of examination, catering for the students under any mid-day meals scheme sponsored by Government, or transportation of students, faculty or staff of such institution”

Education which is not taxable under the negative list in section 66D appears at entry (1) and reads as follows:

“(l) services by way of-

(i)    pre-school education and education up to higher secondary school or equivalent;
(ii)    education as a part of a curriculum for obtaining a qualification recognized by any law for the time being in force;
(iii)    education as a part of an approved vocational education course”

Implication of amendment with effect from 01-04-2013:

Exemption will not continue for services provided by such institutes to other persons for the said services. However, such other persons providing auxiliary educational services or renting of immovable property services to the educational institutes would continue to be exempt. Educational institutions imparting education recognised by law such as university-affiliated colleges or any higher secondary school often provides its premises like halls, auditoria or ground on hire for any official, social, cultural or political functions. Prior to the introduction of the negative list from 01-07-2012, this service was covered under the category of mandap keeper. In the negative list taxable categories have ceased to exist and entry no.9 exempted renting of immovable property. Therefore letting off of institution’s immovable property was declared exempt. Now again, this becomes taxable. Even when the schools provide small counters/ place to banks in their premises for facilitating students/parents to pay school fees, this was taxable prior to 01-07-2012 and is noe taxable again. The definition of auxiliary educational services is such that generally services provided by others or those outsourced by the specified educational institutes would get covered. For instance, admission process outsourced by a university or the services of bus contractor etc. Nevertheless, if a school owns its transport vehicles and recovers charges from students for these facilities, it now will attract service tax. Similarly, if a place for canteen is let out to a contractor, it will attract service tax. If a training programme is conducted by a school for persons other than to specified education institutions, it will also become taxable as the scope of entry 9 is substantially narrowed. Further, educational institutions conduct a large number of extra-curricular courses (in addition to basic education) which are usually charged sepa-rately. These could get hit unless they fall under Entry No. 8 of Notification 25/2012- ST i.e., recreational activities in relation to arts, sports, etc.

•    Charitable activity of advancement of object of general public utility:

Background:

The Notification 25/2012 at entry 4 exempts services by an entity registered u/s. 12AA of the Income -tax Act, 1961 by way of charitable activities and in turn the said notification contains definition of “charitable activities” at 2(k) as follows:

“(k) “charitable activities” means activities relating to –

(i)    public health by way of –

(a)    care or counseling of (i) terminally ill persons or persons with severe physical or mental disability, (ii) persons afflicted with HIV or AIDS, or (iii) persons addicted to a dependence-forming substance such as narcotics drugs or alcohol; or

(b)    public awareness of preventive health, family planning or prevention of HIV infection;

(ii)    advancement of religion or spirituality;

(iii)    advancement of educational programmes or skill development relating to,

(a)    abandoned, orphaned or homeless children;
(b)    physically or mentally abused and traumatised persons;
(c)    prisoners; or
(d)    persons over the age of 65 years residing in a rural area;

(iv)    preservation of environment including watershed, forests and wildlife; or

(v)    advancement of any other object of general public utility up to a value of,

(a)    Rs. 18,75,000 for the year 2012-13 subject to the condition that total value of such activities had not exceeded Rs. 25,00,000 during
2011-12;

(b)    Rs. 25,00,000 in any other financial year subject to the condition that total value of such activities had not exceeded Rs. 25,00,000 during the preceding financial year;

Implication of amendment from 01-04-2013:

Now, the last sub-clause (v) is omitted. As it is, the term charitable activity is defined in a restrictive manner to include only a few specific activities. Some other activities of general nature like public awareness programmes etc., conducted by any 12AA registered organisation would not qualify to be exempt anymore.

•    Others:

  •     Transportation of goods by rail and transportation of goods by road.

Exemption in respect of transportation of goods by rail and vessel is contained at entry 20 and transportation of goods by road at entry 21 of the Notification 25/2012-ST. Amendments are made in both these entries to bring exemption in respect of all the modes of transport at par. Transportation of petroleum or petroleum products, postal mail or mail bags and household effects by rail or vessel was exempted at entry 20. This is now withdrawn. Therefore, transportation of petroleum/ petroleum products, postal mail or household effects by any mode of transport is now liable for service tax. Under entry 21 for goods transportation by road, transportation of fruits, vegetable, eggs, milk, food grain and pulses only was exempt. Now, in its place and like in the case of rail or vessel transportation, the exemption is redefined and scope is expanded to include the following products:

•    Agricultural produce

•    Foodstuff including flours, tea, coffee, jaggery, sugar, milk products, salt and edible oil, excluding alcoholic beverages

•    Chemical fertilisers and oilcakes

•    Registered newspapers or magazines, relief material for victims of natural or man-made disasters

•    Defence equipments.

The existing exemption in respect of consignment of single goods carriage for Rs. 1,500/- or less and consignment for a single consignee for Rs. 750/- or less continues to remain exempt.

•    Exemption provided at entry no.24 in Notification 25/2012-ST for vehicle parking services to general public stands withdrawn from 01-04-2013 and therefore parking charge recovered from general public now is liable for service tax.

TDS related New forms and formats introduced – [Notification No.11/2013/F.No. 142/31/2012-SO (TPL)] dated 19th February 2013

fiogf49gjkf0d
CBDT has introduced Income tax(2nd Amendment) Rules, 2013 whereby amendments are made to procedural Rules pertaining to TDS as under:

• Rule 31A provides for an option of electronic filing of quarterly returns of TDS – with digital signature.

• Refund claim can be lodged by the deductor by filing Form 26B electronically with digital signature as prescribed.

• Details of TDS not deducted as per the provisions of Section 197A(1F) need to be furnished in the form.

Similar provisions are provided for rules pertaining to Tax Collection at Source u/s. 206C. Form 26A being certificate – of Accountant u/s. 201(1), Form 27BA being certificate of Accountant u/s. 206C(6A), Form 15G being declaration for no deduction of TDS by certain persons u/s. 197A(1) & 197A(1A), Form 15H being declaration for non deduction by individuals above the age of sixty years u/s. 197A(1C), Form No. 16 being TDS on Salary, Form 16A being TDS on other income, Form 24Q, Form 26Q,27Q, 27C, 27D and Form 27EQ being quarterly statement of TDS/TCS to be filed by deductors have been substituted. Further, a new Form 26B is notified for claim of refund.

levitra

Section 14A and Rule 8D – Assessee engaged in the business of share trading – Shares held as stock-intrade – Held that the Rule 8D(2) (ii) & (iii) do not apply and only the direct expenses incurred by the assessee could be subjected to disallowance.

fiogf49gjkf0d
1. Deputy Commissioner of Income Tax vs.
Gulshan Investment Co. Ltd.
ITAT Kolkata ‘B’ Bench, Kolkata
Before Pramod Kumar (A. M.) and Mahavir
Singh (J. M.)
I.T.A. No.: 666/Kol./2012
Assessment year: 2008-09.  Decided on
March 11, 2013
Counsel for Revenue / Assessee: L K S Dahiya
and K N Jana / Girish Sharma

Section 14A and Rule 8D – Assessee engaged in the business of share trading – Shares held as stock-intrade – Held that the Rule 8D(2) (ii) & (iii) do not apply and only the direct expenses incurred by the assessee could be subjected to disallowance.

Facts

The assessee was engaged in the business of share trading. During the course of scrutiny assessment proceedings, the Assessing Officer noticed that while the assessee had earned dividend income of Rs. 18.92 lakh, it had not made any disallowance u/s. 14A. The Assessing Officer computed the disallowance u/s. 14 A r.w.r. 8 D at Rs. 21.45 lakh. Being aggrieved, the assessee appealed before the CIT(A).

The CIT(A) in turn relied on the judgments of the Kerala High Court in CIT vs. Leena Ramchandran (ITA No.1784 of 2009) and of the Mumbai Tribunal in the case of Yatish Trading Co. P. Ltd. vs. ACIT (ITA No. 456/ Mum./2009 dt.10.11.2010) and held that Rule 8D was not applicable in the case of the assessee since there were no investments and all the shares were held as stock in trade. However, he held that since the assessee had earned exempt income, the provisions of section 14A were applicable. He estimated that expenditure equal to 10% of the dividend income was fair and reasonable and disallowed the sum of Rs. 1.89 lakh u/s 14A. The revenue did not agree with the CIT(A) and challenged his order before the tribunal.

Held:

According to the Tribunal, a plain reading of Rule 8D(2)(ii) & (iii) showed that the Rules can only be applied when shares are held as investments while in the case of the assessee, the shares were held as stock in trade. The tribunal came to this conclusion because it noted that, one of the variables on the basis of which the disallowance under the Rules are computed is “the value of investment, income from which does not form part of total income.” It further observed that when there are no investments, the Rule cannot have any application. According to it, when no amount can be computed in the light of the formula given in rule 8D (ii) and (iii), the computation provision fails and no disallowance can be made under the said Rules as held by the Supreme Court in the case of CIT vs. B C Srinivas Shetty (128 ITR 294). The tribunal further noted that where shares are held as stock in trade and not as investments, the disallowance, if any, would be restricted to the expenditure directly relatable to earning of exempt income.

Thus, the provisions of Section 14 A would be applicable, but the disallowance would be restricted to direct expenses incurred in earning of dividend income. For the said proposition, it also found support from the decision of the Special Bench of Tribunal in the case of ITO vs. Daga Capital Management Pvt. Ltd. (117 ITD SB 169).

levitra

Penalty: Section 271(1)(c): Short term capital gains assessed as business income: Penalty u/s. 271(1)(c) not justified:

fiogf49gjkf0d
CIT vs. Amit Jain; 351 ITR 74 (Del):

The assessee had declared an income of Rs. 2,60,73,558/- from short term capital gains in the return of income. The Assessing Officer assessed it as income from business. He also levied penalty of Rs. 58,45,899/- u/s. 271(1)(c). The Tribunal deleted the penalty.

On appeal by the Revenue, the Delhi High Court upheld the decision of the Tribunal and held as under:

“i) The amount in question, which formed the basis for the Assessing Officer to levy penalty, was in fact truthfully reported in the return. In view of this circumstance, that the Assessing Officer chose to treat the income some other head could not characterise the particulars reported in the return as “inaccurate particulars” or as suppression of facts.

ii) Therefore, the Tribunal was not in error in deleting the penalty.”

levitra

Export profit: Deduction u/s. 80HHC: A. Y. 2003-04: Computation: Scrap is by-product of manufacturing activity: There were no expenses which could be excluded from sale of scrap:

fiogf49gjkf0d
R. N. Gupta Co. Ltd. vs. CIT; 213 Taxman 85(P&H): 30 Taxman.com 424 (P&H):

The assessee is engaged in manufacturing of goods for export. In the process of manufacturing, the scrap is generated, which is a by-product of manufacturing activity. The assessee included the receipts on sale of scrap as business income for computing the deduction u/s. 80HHC of the Income-tax Act, 1961. The Assessing Officer rejected the claim for deduction in respect of scrap sales. The CIT(A) allowed the assessee’s appeal and also held that no expenditure is incurred in generation and sale of scrap. Accordingly, the whole of the sale proceeds was includible in the business profit. The Tribunal held that only the profit on sale of scrap is includible and estimated such profit at 7.5%.

On appeal by the assessee, the Punjab and Haryana High Court held as under:

“i) Mr. Katoch, learned counsel for the revenue has argued that the scrap value has to be included in the total turn-over but cannot be included in business profit as only the profit after deducting the expenses of generation of scrap can be added in the business profit.

ii) We find that the argument raised by Mr. Katoch is wholly untenable. The expenditure is incurred by the assessee not for generation of the scrap but for generation of the finished product. There is and cannot be any expenses which are incurred for generation of scrap. Scrap is by-product of the manufacturing activity. Therefore, there are no expenses which could be excluded from the sale of scrap.

 iii) Since the question of law stands answered by this Court in favour of assessee in the above mentioned judgments, therefore, the first substantial question of law is answered in favour of the assessee and against the Revenue.”

levitra

Educational Institution: Exemption u/s. 10(23C) (vi): A. Y. 2011-12: Institution should exist wholly for education: Government grant, incidental surplus, upgrading facilities of college including for purchase of library books and improvement of infrastructure: Not a ground for denial of exemption:

fiogf49gjkf0d
Tolani Education Society vs. DDIT(Exemption); 351 ITR 184 (Bom):

The assessee, an educational institution, made an application for approval for exemption u/s. 10(23C) (vi) of the Income-tax Act 1961. The Chief Commissioner rejected the application on the ground that the assessee was in receipt of the Government grant which formed a substantial part of the total receipt and, consequently, the case of the assessee would not fall within the purview of section 10(23C)(vi) for the reason that an institution which is wholly or substantially financed by the Government falls within the ambit of sub-clause (iiiab). Sub-clause (vi) applies to those institutions which do not fall within the ambit of sub-clause (iiiab) or sub-clause (iiiad). He was of the view that an institution which was in receipt of substantial grants from the Government would consequently not fall within the ambit of sub-clause (vi). The Chief Commissioner held that the fees which were collected by the assessee for the year ending 31-03-2011, would indicate that the assessee did not exist solely for educational purposes. He had also noted that the assessee had collected from students utility fees, project work fees, industrial visit fee and a magazine fee from which it was sought to be deduced that the assessee did not exist solely for educational purposes. Moreover, there was an increase in the asset base with the generation of surplus which indicated that the activities of the assessee were not devoted solely for educational purposes.

The Chief Commissioner held on that basis that the assessee existed for the purposes of profit. The Bombay High Court allowed the writ petition challenging the order and held as under:

 “i) The Income-tax Act, 1961, does not condition the grant of an exemption u/s. 10(23C) on the requirement that a college must maintain the status quo, as it were, in regard to its knowledge based infrastructure. Nor for that matter is an educational institution prohibited from upgrading its infrastructure on educational facilities save on the pain of losing the benefit of the exemption u/s. 10(23C).

 ii) Imposing such a condition which is not contained in the statute would lead to a perversion of the basic purpose for which such exemptions have been granted to educational institutions. Knowledge in contemporary times is technology driven. Educational institutions have to modernise, upgrade and respond to the changing ethos of education. Education has to be responsive to a rapidly evolving society. The provisions of section 10(23C) cannot be interpreted regressively to deny exemptions.

iii) Though the Chief Commissioner inquired into the question for the purposes of his determination under sub-clause (vi) of section 10(23C), the requirement that an institution must exist solely for educational purposes and not for the purposes of profit is common both to sub-clause (iiiab) as well as sub-clause (iiiad). Hence, the grievance of the assessee was that while on the one hand the Chief Commissioner had held that sub-clause (vi) would not be applicable to an institution which was in receipt of substantial grants from the Government (such an institution being governed by sub-clause (iiiab)), at the same time, the finding that the assessee did not exist solely for educational purposes and not for the purposes of the profit would, in effect, not merely lead to the rejection of the exemption under sub-clause (vi) but would also affect the claim of the assessee to the grant of an exemption under sub-clause (iiiab) as well.

iv) The sole and dominant nature of the activity was education and the assessee existed solely for the purposes of imparting education. An incidental surplus which was generated, and which had resulted in additions to the fixed assets was utilised as the balance-sheet would indicate towards upgrading the facilities of the college including for the purchase of library books and the improvement of infrastructure. With the advancement of technology, no college or institution can afford to remain stagnant.

v) The assessee was entitled to exemption u/s. 10(23C)(vi).”

levitra

Succession – When claimant was born, there was neither joint Hindu family nor any property belonging to Joint Hindu Family. Will – Disproportionate bequest permissible – Hindu Succession Act 1956.

fiogf49gjkf0d
The common ancestor to whom the parties trace their lineage was one Roop Narain, who was the perpetual lessee, as per perpetual lease of plot of land at New Delhi. He admittedly died intestate and was survived by two sons one of them is Amar Nath and four daughters. The other brother and the four sisters executed a relinquishment deed in favour of their brother Amar Nath, who thus inherited the perpetual lease hold rights in the property upon the death of Roop Narain. A residential building was inherited by Amar Nath. Amar Nath had two wives named Kamla Devi and Chand Rani both of whom pre-deceased Amar Nath. Dispute arose between the two sons of Amarnath – Prem Bhatnagar and his brother Daya Narain.

With respect to the property being ancestral in the hands of Amar Nath, case of the protagonist i.e. those who questioned the Will was that since Amar Nath inherited the property from his father Roop Narain, law imparted an ancestral character to the property. Secondly, that when Roop Narain died, the Hindu Succession Act, 1956 had been promulgated, as per Section 4 whereof the provisions of the Act expressly had overriding effect over any text, rule, custom or usage amongst Hindus which was contrary to the Act.

The Delhi High Court held that the text of Hindu Law is that a male Hindu, on birth, acquires an interest in the Joint Hindu family properties. If there was a Joint Hindu family property when Prem Bhatnagar was born, he could have possibly argued that he acquired an interest in the property by birth. But, when Prem Bhatnagar was born, there neither was a joint Hindu Family nor any property belonging to the joint Hindu family. The suit property was owned by his grandfather Roop Narain and parties are not at variance that Roop Narain acquired the property from his own funds. Thus, Roop Narain held the property as his individual property and not as joint Hindu family property. He died in 1957 by which date the Hindu Succession Act, 1956 was in operation. Thus, succession to the estate of Roop narain was as per Section 8 of the Hindu Succession Act, 1956 since Roop Narain died intestate.

The High Court further held that people making disproportionate bequest, is not an unknown thing in law. After all, one object of a Will is to alter the natural line of succession or a share in a property which may be inherited by devolution of interest. A disproportionate bequest by itself is not a suspicious circumstance. That relationship between a father and all his children was equally good and yet in spite thereof only one child is made the beneficiary is again not a suspicious circumstance by itself. The Will was registered before the Sub- Registrar the day next of his execution. The High Court finally held that the testator has written that the beneficiary i.e. Ravi Mohan would need the consent of Roop Rani before he could sell the property does not make Roop Rani an interest witness. She has no interest inasmuch as nothing has been bequeathed to her. The condition in the Will that if Ravi Mohan were to sell the property, he would need the permission from Roop Rani, is void, for the reason the bequest in favour of Ravi Mohan is absolute and since mode of enjoyment cannot be curtailed; a clause curtailing the same in the bequest is void.

levitra

Succession – Right of property – Female Hindu converting herself to Christianity after death of her husband. Transfer of property Act section 54, Hindu Succession Act section 26.

fiogf49gjkf0d
The appellants before the court were defendants before the trial court against whom the plaintiff/respondent had filed a suit for permanent injunction.

The defendants/appellants had filed first appeal, contending that the sale deed executed by one Poosammal dated 17.03.1995 in favour of the plaintiff cannot legally convey any saleable right since the said Poosammal had foregone her share in her husband late Pakkirisamy’s property after she converted into Christianity and married one Issac in the year 1956 and also got 5 children from the second husband Issac. Therefore, her conversion from Hinduism to Christianity, disentitles her from inheriting her deceased husband’s property and also her parents property who are Hindus. As this settled legal position was lost sight of by the trial court, defendants prayed for setting aside the decision. The First appellate court concurred with the judgment and decree of the trial court and dismissed the first appeal. As a result, the present second appeal was filed by the defendants.

The Honourable Court held that the original suit property was purchased by husband of the vendor. Though on the death of her husband the vendor had converted to Christian religion, same would not disentitle her from her right of inheritance of the property. Thus, vendor having right and title to suit property to convey same in favour of plaintiff, sale deed would be proper. It was further observed that she had converted to Christianity by marrying a Christian, therefore she would not lose her right of inheritance in property of her deceased husband by virtue of such conversion.

levitra

Stay order – No opportunity of hearing – Strictures against Commissioner (Appeals):

fiogf49gjkf0d
The issue involved in the writ petition was whether before passing any order u/s. 85 of the Finance Act, 1994 read with section 35F of the Central Excise Act, 1944, opportunity of hearing is required to be given to the petitioner, seeking waiver of condition of the pre deposit.

The petitioner had challenged the order passed by the Commissioner (Appeals) Central Excise and Service Tax, Ranchi, whereby the ld. Commissioner (Appeals) without affording any opportunity of hearing to the writ petitioner had decided the petitioner’s prayer for waiver of deposit of the duty and interest demanded and penalty imposed and for stay of the operation of the impugned order passed by the Addl. Commissioner of Central Excise, Jamshedpur. The ld. Commissioner (Appeals) C.E. and S.T. Ranchi was of the view that in view of the judgment of the Supreme Court delivered in the case of Union of India vs. M/s. Jesus Sales Corporation Ltd. (1996) (83) ELT 486 (SC) opportunity of hearing was not required before deciding the prayer for waiver of pre deposit condition provided under the proviso to section 35 for the Central Excise Act, 1944 and for passing the interim order of stay.

The petitioner submitted that there was gross indiscipline and judicial impropriety on the part of the Commissioner (Appeals), who even after decision of the Court in M/s. Panch Sheel Udyog had passed the ex parte order in the present case.

The Honourable Court observed that if Commissioner(Appeals), Central Excise & Service Tax, Ranchi was of the view that he had correctly understood the judgment of M/s. Jesus Sales Corporation Ltd (supra) and decided the matter without affording opportunity of hearing to the writ petitioner then, it was the heavy duty upon him to update himself with the laws as the said authority himself took the task of deciding the matter without the assistance of the applicant before him. The law laid down by the Honourable Supreme Court and which had already been interpreted by the various high courts should not have been ignored. The Commissioner ought to have updated his knowledge by reading the judgments referred above wherein the case of M/s. Jesus Sales Corporation Ltd has been considered and it has been held that M/s. Jesus Sales Corporation Ltd. case has not barred hearing of applicant seeking relief of waiver of condition of pre deposit. If the Commissioner (Appeals) C.E and S.T. Ranchi had no knowledge of those judgments, then he is certainly guilty of not keeping himself updated in the case where, according to him, he has been given power to decide application having civil consequences, without following principles of natural justice and finding out one old judgment ,i.e, the judgment delivered in the case of M/s. Jesus Sales Corporation Ltd which he interpreted in the manner in which he wanted to interpret. The interpretation given by the Commissioner (Appeals) Central Excise and Service Tax, Ranchi was certainly erroneous, in view of the reasons given in the other judgments, wherein the reasons have been given in detail to show that the case of M/s. Jesus Sales Corporation Ltd never laid down that opportunity of hearing is not required before passing any order under sec. 35F of the Central Excise Act, 1944 and that position has been fully explained by various High Courts.

There was clear direction of the Court in the one case of M/s. Panch Sheel Udyog to the same authority, to grant opportunity of hearing to the writ petitioner in the similar and identical facts and circumstances, yet Commissioner (Appeals) Central Excise & Service Tax, Ranchi, without giving any reference to the decision of this Court in M/s. Panch Sheet Udyog passed the impugned order, which may amount to gross contempt of this court.

The Court observed that such attitude of the Commissioner (Appeals) certainly reflects his attitude towards litigant.

In totality, it was held that order under challenge was absolutely illegal and contrary to law. The Commissioner (Appeals) had committed gross error of law in denying the opportunity of hearing to the writ petitioner.

levitra

Precedent – Judgement of Supreme Court – High Court has to accept it and should not in collateral proceedings write contrary judgment: Constitution of India Article 141

fiogf49gjkf0d
The hierarchy of the Courts requires the High Courts also to accept the decision of Apex Court, and its interpretation of the orders issued by the executive. Any departure therefrom would lead only to indiscipline and anarchy. The High Courts cannot ignore Article 141 of the Constitution which clearly states, that the law declared by this Court is binding on all Courts within the territory of India. As observed by the Court in para 28 of the State of West Bengal and others vs. Shivananda Pathak and others reported in 1998 (5) SCC 513:-

“If a judgment is overruled by the higher court, the judicial discipline requires that the judge whose judgment is overruled must submit to that judgment. He cannot, in the same proceedings or in collateral proceedings between the same parties, rewrite the overruled judgment “

In the same vein, it may stated that when the judgment of a Court is confirmed by the higher court, the judicial discipline requires that Court to accept that judgment, and it should not in collateral proceedings write a judgment contrary to the confirmed judgment. The Court referred to the observations of Krishna Iyer, J. in Fuzlunbi vs. K. Khader Vali and another reported in 1980 (4) SCC 125:-

“………No judge in India, except a larger Bench of the Supreme court, without a departure from judicial discipline can whittle down, wish away or be unbound by the ratio of the judgment of the Supreme Court.”

 Bihar State Govt. Secondary School Teachers Association vs. Bihar Education Service Association AIR 2013 SC 487

levitra

Eviction – Tenancy – Replacement of Tin roof by concrete slab – Permanent structure – Means structure lasting till end of tenancy. Transfer of property Act., section 108:

fiogf49gjkf0d
A residential premise comprising two rooms with a gallery situate at Calcutta and owned by Gauri Devi Trust of which the Appellants are trustees was let out to the Respondent-tenant on a monthly rental of Rs. 225/-. One of the conditions that governed the jural relationship between the parties was that the tenant shall not make any additions or alterations in the premises in question without obtaining the prior permission of the landlord in writing. Certain differences arose between the parties with regard to the mode of payment of rent as also with regard to repairs, sanitary and hygiene conditions in the tenanted property, which led the landlord-Appellant to terminate the tenancy of the Respondent in terms of a notice served upon the latter u/s. 106 of the Transfer of Property Act. The ground for termination was that the Respondent-tenant had illegally and unauthorisedly removed the corrugated tin-sheet roof of the kitchen and the store room without the consent of the Appellant-landlord and replaced the same by a cement concrete slab, apart from building a permanent brick and mortar passage which did not exist earlier. The trial Court accordingly held that it was the Defendant-tenant who had made a permanent structural change in the premises in violation of the conditions stipulated in the lease agreement and in breach of the provisions of Section 108 of the Transfer of Property Act. The trial Court further held that the tenant had not, while doing so, obtained the written consent of the landlord.

On appeal, the High Court held that since the replacement of the tin-sheet roof by cement concrete slab did not result in addition of the accommodation available to the tenant, the act of replacement did not tantamount to the construction of a permanent structure. The replacement instead constituted an improvement of the premises in question. On further appeal, the Honourable Supreme Court observed that no hard and fast rule can be prescribed for determining what is permanent or what is not. The use of the word ‘permanent’ in Section 108(p) of the Transfer of Property Act, 1882 is meant to distinguish the structure from what is temporary. The term ‘permanent’ does not mean that the structure must last forever. A structure that lasts till the end of the tenancy can be treated as a permanent structure. The intention of the party putting up the structure is important, for determining whether it is permanent or temporary. The nature and extent of the structure is similarly an important circumstance for deciding whether the structure is permanent or temporary within the meaning of Section 108(p) of the Act. Removability of the structure without causing any damage to the building is yet another test that can be applied while deciding the nature of the structure. So also the durability of the structure and the material used for erection of the same will help in deciding whether the structure is permanent or temporary. Lastly, the purpose for which the structure is intended is also an important factor that cannot be ignored.

Applying the above tests to the instant case, the structure was not a temporary structure by any means. The kitchen and the storage space forming part of the demised premises was meant to be used till the tenancy in favour of the Respondentoccupant subsisted. Removal of the roof and replacement thereof by a concrete slab was also meant to continue till the tenancy subsisted. The intention of the tenant while replacing the tin roof with concrete slab, obviously was not to make a temporary arrangement, but to provide a permanent solution for the alleged failure of the landlord to repair the roof. The construction of the passage was also a permanent provision made by the tenant which too was intended to last till the subsistence of the lease.

The concrete slab was a permanent feature of the demised premises and could not be easily removed without doing extensive damage to the remaining structure. Such being the position, the alteration made by the tenant fell within the mischief of Section 108(p) of the Transfer of Property Act and, therefore, constituted a ground for his eviction in terms of Section 13(1 )(b) of the West Bengal Premises Tenancy Act, 1956.

levitra

Ind AS 40 – Investment Property

fiogf49gjkf0d
Background

Current Indian GAAP provides limited guidance on accounting for investment properties under AS 13 Accounting for Investments. In order to converge the Indian Accounting Standards (Ind AS) with those under the International Financial Reporting Standards (IFRS), Ind AS 40 has been issued. Ind AS 40 will become applicable as and when Ind AS are notified.

Scope and definitions

Ind AS 40 provides guidance with respect to recognition, measurement and disclosure of investment property. It also provides detailed guidance on transfer to/from and disposals of investment property. Ind AS 40 specifically excludes below mentioned assets from its scope, as the relevant guidance relating to these assets is covered under other accounting standards:

 • Biological assets (Ind AS 41 – Agriculture)

• Mineral rights and mineral reserves such as oil, natural gas and similar non-regenerative resources. This standard could be applied to measurement in lessee’s or lessor’s financial statements depending on certain specified conditions.

But Ind AS 40 does not deal with matters covered under Ind AS 17 – Leases like classification of leases, recognition of lease income, accounting for sale and leaseback transactions etc. Definitions Investment property is property (land or a building— or part of a building—or both) held (by the owner or by the lessee under a finance lease) to earn rentals or for capital appreciation or both, rather than for:

(a) use in the production or supply of goods or services or for administrative purposes; or

(b) sale in the ordinary course of business. Thus the classification depends on the use of the property. Owner-occupied property is property held (by the owner or by the lessee under a finance lease) for use in the production or supply of goods or services or for administrative purposes. Recognition Investment property is recognised as an asset only when both the following conditions are met:

• It is probable that the future economic benefits that are associated with the investment property will flow to the entity; and

• the cost of the investment property can be measured reliably. The above criteria are applied to all properties irrespective of whether the costs are incurred towards the property in the initial phase or subsequent phases. Measurement Initial measurement An investment property shall be measured initially at cost. Transaction costs which are directly attributable for preparing the asset for its intended use will form part of its initial cost. For example, property taxes, legal fees etc.

The principles are same as would be applied to determine the cost of asset under Ind AS 16 Property, Plant and Equipment (PPE). Maintaining consistency with Ind AS 16, abnormal amounts of inefficiencies incurred and initial operating losses incurred will not form part of the cost of the asset and will be expensed off as incurred. In case of acquisition of investment property on deferred payment terms, the investment property would be recognised, based on its current cash price equivalent. The difference between the current cash price equivalent and the deferred payment terms would be recognised as finance cost over the term of the deferred payment term.

Borrowing costs directly attributable to the acquisition, construction or development of an investment property that is a qualifying asset shall be capitalised in accordance with Ind AS 23 Borrowing Costs. The initial cost of a property interest held under a lease and classified as an investment property shall be as prescribed for a finance lease under paragraph 20 of Ind AS 17, i.e., the asset shall be recognised at the lower of the fair value of the property and the present value of the minimum lease payments. An equivalent amount shall be recognised as a liability as prescribed under Ind AS 17.

Subsequent measurement

Unlike IAS 40 which permits both cost and fair value model after initial recognition, Ind AS 40 does not provide such an accounting policy choice after initial recognition under Ind AS 40. Ind AS 40 permits application of only the cost model.

The cost model is similar to that prescribed under Ind AS 16 for Property, Plant and Equipment i.e. at cost less accumulated depreciation less accumulated impairment losses. Only if the asset is classified as held for sale, the same would be valued in accordance with Ind AS 105 Non-current Assets Held for Sale and Discontinued Operations i.e. at fair value. While initial recognition and subsequent measurement is at cost, an entity is required to disclose the fair value of the investment property.

Fair value determination

Fair value is the price at which the investment property could be exchanged between knowledgeable, willing parties in an arm’s length transaction. It should reflect the market conditions at the end of the reporting period and does not consider any transaction costs it may incur on sale or disposal. It also does not reflect future capital expenditure that will improve or enhance the value of the property.

It is best evidenced by current prices in an active market for similar properties in the same location and subject to similar terms of the contract. If information pertaining to similar term contracts is not available, then the value of such properties should be adjusted to reflect the differences in the contracts.

Transfers

Although an entity’s business model plays a key role in the initial classification of property, the subsequent reclassification of property is based on an actual change in use rather than on changes in an entity’s intentions. Transfers to and from investment property can be made only when there is change in use which has to be evidenced by:

• commencement of owner-occupation, for a transfer from investment property to owner-occupied property;

• commencement of development with a view to sell, for a transfer from investment property to inventories;

• end of owner-occupation, for a transfer from owner-occupied property to investment property; or

• commencement of an operating lease to another party, for a transfer from inventories to investment property.

As such, the subsequent reclassification is based on actual change in use and not just the intentions of the entity.

 For example, Company S owns a site that is an investment property. S decides to modernise the site and sell it. The investment property is transferred to inventory at the date of commencement of the redevelopment of the site that evidences the change in use. However, a decision to dispose of an investment property without redevelopment does not result in it being reclassified as inventory. The property continues to be classified as investment property until the time of disposal unless it is classified as held for sale.
Let us take another example where Company G which previously classified a property as an investment property has now decided to use the property as its administrative headquarters due to an expansion of its business, and commences redevelopment for own use in February 2013 (e.g. builders are on site carrying out the construction work on G’s behalf). In this case, the redevelopment of the property for future use for administrative purposes effectively constitutes owner occupation. Therefore, G should reclassify the property to owner occupied property on commencement of the redevelopment in February 2013.

Transfers between investment property, owner-occupied property and inventories do not change the carrying amount of the property transferred and they do not change the cost of that property for measurement or disclosure purposes. In other words, transfers happen at the carrying amount. For example, if an investment property of Rs. 100,000 depreciated @ 10% SLM is transferred to inventory at the end of 3 years, the same will be transferred to inventory at Rs. 70,000 i.e., the carrying amount of investment property at the end of 3 years.

Disposals
The investment property shall be derecognised i.e. eliminated from the financial statements on disposal, providing an asset under finance lease or when it is permanently withdrawn from use and no future economic benefits are expected from its disposal. The criteria and guidance given in Ind AS 18 Revenue would be applied to determine the date of disposal, whereas Ind AS 17 would be applied in case the disposal is by way of finance lease or sale and leaseback.

Gains or losses resulting from difference in net sales proceeds and the carrying value of investment property will be recognised in profit or loss in the period in which the property is disposed or retired. In case the sales proceeds are deferred, the consideration receivable will have to be discounted to its present value and the difference would be recognised as finance income over the period of credit.

Practical issues

Classification issues
Determining what is or what is not investment property may raise practical issues, some examples of which are given below:

Subsequent cost
Subsequent costs of day-to-day servicing and maintaining a property are expensed as incurred and cannot be capitalised. But where statutory/fregulatory approvals are required to be obtained and any expenses incurred during the period required to get such approvals shall be capitalised as the property cannot be put to intended use till such time that the approvals are obtained.

Equipments and furnishings
Equipments and furniture and fittings that are physically attached to the building will be considered as integral part of the building and will not be accounted for separately. For example, lifts, escalators, air conditioning units etc., will all be considered as part of investment property. In case of movable property, the same would get accounted separately as PPE in accordance with Ind AS 16. In such cases, care must be taken while disclosing the fair value of the investment property, so that it does not include the fair value of moveable property that has been accounted for separately, otherwise it will be misleading.

Inventory vs. Investment Property
The entity’s intention regarding the property is a primary criteria for classification. Property held for short-term sale would be classified as inventory whereas the one held for long-term purposes would generally get classified under investment property. For example, if a builder acquires bare land with intention to construct buildings and sell them, the land would be classified as inventory because it is an asset held in the process of production for sale. However, if the company has brought land with no specific use in mind, then it gets classified as investment property. (Eg: Financial institution acquires a property as full and final settlement of loan given and is uncertain about its intention). In case a developer of the property holds a completed developed property and intends to rent the same, he could classify the same as investment property instead of classifying it as inventory.

Consolidated and separate financial statements
A property may also get classified differently in consolidated and separate financial statements of an entity. For example, when a holding company leases building to its subsidiary which uses the same as its administrative office, the property could be classified as investment property in the books of the holding company but would be classified as PPE in the Consolidated Financial Statements (CFS).

Dual-use property
Wherein a property could be used for dual purposes, say for own use and other for renting out, a portion of dual property can be classified as investment property, only if the portion could be sold separately. When a portion of the property can not be sold separately, the entire property is classified as investment property only if the portion of the property held for own use is insignificant. For example, Company X owns an office block and uses 3 floors as its own office; the remaining 12 floors are leased out to tenants on operating lease. Under the local laws, X could sell legal title to the 12 floors, while retaining legal title to the other 3 floors. In this case, the 12 floors would be classified as investment property.

Ancillary services
In case where the owner of the property provides ancillary services, the key factor in determining whether the same should be classified as investment property is its relative insignificance to the entire arrangement.

But in case of hotels, ancillary services would be considered as significant part and an owner-managed hotel would be regarded as owner-occupied property instead of investment property, as the property is used to a significant extent for the supply of goods and services. In case where the owner of the hotel is just a passive investor and the management function and provision of services is carried out by a third party and the owner is not exposed to variations in cash flow from the operations of the hotel, the same will be treated as investment property. As such, judgment is required in determining the classification of the property in case of different scenarios. An entity should assess on a case-to-case basis whether the arrangement is more like an example of owner-managed hotel (not investment property) or an example of office building with security services provided by the owner (investment property).

Even in case of classification of business centres, some of them which provide high level services such as secretarial support, teleconferencing and other computer facilities and where tenants sign relatively short term leases, the facilities provided are more in the nature of owner-managed hotel and hence should not be classified as investment property. In other cases where the owner provides just the basic furnishing and users are required to sign up for a minimum period, the same could be treated as investment property.

Disclosures
An entity is required to disclose the following:
•    accounting policy for measurement.
•    when classification is difficult, the criteria it uses to distinguish investment property from owner-occupied property and from property held for sale in the ordinary course of business.
•    the methods and significant assumptions applied in determining the fair value of investment property.
•    the extent to which FV is based on valuation by professional independent valuer; if not, such fact should be disclosed.
•    amounts recognised in profit or loss for rental income, direct operating expenses that generated as well as those that did not generate rental income.
•    the existence and amounts of restrictions on the realisability of investment property or the remittance of income and proceeds of disposal.
•    contractual obligations to purchase, construct or develop investment property or for repairs, maintenance or enhancements.
•    Depreciation method and useful life or rate of depreciation.
•    Gross carrying amount and accumulated depreciation at beginning and end of reporting period.
•    Reconciliation of carrying amount of investment property at the beginning and end of the period.
•    Impairment losses recognised or reversed.
•    Exchange differences.
•    Transfers to and from inventories and owner-occupied property.
•    Assets classified as held for sale.
•    Other changes.

Conclusion
This accounting standard prescribes accounting for investment property and the related disclosure requirements. It gives detailed guidance on the classification, recognition and measurement of investment properties. The guidance requires the measurement of the investment property using the cost model similar to measurement of PPE under Ind AS 16. It also gives guidance on transfers to and from investment property and states that these can be made only when there has been a change in the use of the property.

Judgment would be required on case to case basis to classify the property as investment property especially in cases of ancillary use or dual-use of the property.

Amendments to CST Act, 1956 by Union Budget 2010-11 and Recent Amendments toMVAT Act, 2002

fiogf49gjkf0d

VAT

(A) The Union Finance
Minister, through the Finance Bill, 2010, has proposed certain amendments to the
Central Sales Tax Act, 1956. The important aspects of the said amendments may be
noted as under :


1.
S. 6A :


This Section refers to
branch transfers and production of ‘F’ forms.

In this sub-section two
amendments are proposed.

(i)
Ss.(2) of S. 6A :


As per the present position,
if the assessing authority is satisfied that the particulars mentioned in ‘F’
forms are correct, he can allow the transfers as other than interstate sale
i.e., branch transfer.

By amendment, it is proposed
that the authority should satisfy that the particulars are true and also that
there is no interstate sale and then he should pass the order that the transfers
are other than interstate sale. It is further provided that this allowance will
be subject to Ss.(3), which is newly inserted.

This amendment now provides
more powers to the sales tax authorities. The authorities will now be entitled
to examine whether the transfers are inter- state sales, in spite of the fact
that the particulars in the ‘F’ forms are true. This appears to be with a view
to counter the observations in certain cases, where courts have held that once
the particulars are not disputed by the authorities, the claim has to be
allowed. Even if the transaction might have been interstate sale, because the
particulars in ‘F’ form would be correct, the branch transfer claim would have
been required to be allowed. The amendment is now proposed to correct the above
position.

(ii) By another amendment in
S. 6A, Ss.(3) is proposed to be inserted. By this sub-section, the powers of
reassessment/revision are proposed to be given to the sales tax authorities. As
per this new sub-section, the respective reassessing/revision authorities will
be entitled to modify the order passed u/s.6A(2), if new facts are discovered or
that the findings of the lower authorities were contrary to law. This amendment
appears to reverse the ratio of judgment of the Supreme Court in case of Ashok
Leyland Ltd. (134 STC 473) (SC). In this case, the Supreme Court has held that
once the ‘F’ forms are allowed, it cannot be reversed through reassessment or
revision, unless the same were found to be produced fraudulently. The
interpretation put by the Supreme Court was certainly appreciable as it can save
dealer from unending fishing inquiries, in spite of completion of assessments.
This judgment, in Ashok Leyland Ltd., has been followed in many other judgments
like in the case of Steel Authority of India Ltd. (10 VST 451) (CSTAA), etc.
Now, as per proposed amendment even if the ‘F’ forms are genuine and particulars
are true, the authorities will be entitled to reassess/revise, if the order
u/s.6A(2) was contrary to law. The dealers will now be required to be prepared
for long-drawn battles in spite of initial completion of assessments.

In Maharashtra there will be
one more issue.

Under the MVAT Act, 2002
there is no provision for reassessment/revision, but there is provision for
review. The terms used in newly inserted Ss.(3) are ‘reassessment/revision’,
thus an issue may arise whether it will take into account a ‘review’. Though,
the review is in the nature of revision, its legality is certainly debatable.

2.
Chapter VA :


By another amendment,
Chapter VA is proposed to be inserted in the CST Act, 1956. This Chapter
contains S. 18A, which has (5) sub-sections. The intention of this provision is
to provide appeal against the order passed u/s.6A(2) or (3) to the highest
appellate authority of the State. This appears to avoid first appeal stage. As
per the provisions of Chapter VI, the order passed by the highest appellate
authority of the State in relation to S. 6A is appealable to the Central Sales
Tax Appellate Authority (CSTAA). Normally, the original order is passed by
assessing authorities and against the same the first appeal is provided, before
going in appeal to the highest appellate authority of the State. The amendment
appears to cut down the first appeal stage. As per this amendment, the appeal
against the original order (assessment order) u/s.6A(2) and (3) will lie to the
highest appellate authority. It is also provided that if the appeal is filed
before the highest appellate authority, involving S. 6A(2) or (3), the dealer
will be entitled to take other incidental issues like rate of tax, computation,
penalty, etc. in the same order before the said highest appellate authority.
From such order of the highest appellate authority the further appeal will lie
to CSTAA.

This S. 18A is a
self-contained code giving procedural provisions also like time limit for filing
appeal, grant of stay, time limit for deciding appeal, etc. The
proposed S. 18A can be analysed as under :


S. 18(1)
: It provides that irrespective of any provisions under the General Sales Tax
Law of the State, the appeal against the order passed by the assessing authority
u/s.6A(2) or (3) of the CST Act should lie to the highest appellate authority of
the State. By explanation at the end of S. 18A, the meaning of the highest
appellate authority is provided. As per said Explanation, the highest appellate
authority means the Appellate Authority or Tribunal constituted under the
General Sales Tax Law except the High Court.

In other words, in Maharashtra, the highest appellate authority will be the Maharashtra Sales Tax Tribunal. Thus, from order of the assessing authority u/s.6A (2)/(3) appeal will be required to be filed directly before the Tribunal.

S. 18(2) : The time limit for filing appeal is prescribed by this sub-section, which is 60 days from service of impugned order. There appears to be no speaking power for condonation of delay in filing appeal.

By proviso to the said sub-section, it is provided that where the appeal is forwarded to the first appellate authority by the highest appellate authority as per proviso to S. 25(2), such pending appeal on appointed day should get transferred to the highest appellate authority. The appointed day will be notified in the official Gazette. So this will take place in future on a day as may be notified.

S. 18(3) : The highest appellate authority will pass appropriate order, after giving opportunity of hearing to both the parties.

S. 18(4) : Time limit for passing the order — As far as possible, the highest appellate authority should pass the order within six months from filing of appeal.

S. 18(5) : Powers of granting stay against the demand— It is stated that on making application to the highest appellate authority, it can grant stay after considering the tax already paid on the subjected goods in the said State or in other State. However, it is also provided that the highest appellate authority may ask to deposit certain amount as pre condition for admission of appeal.

3.    S.20:

Amendment is also proposed in S. 20 of the CST Act, 1956, which relates to appeals to CSTAA. The Ss.(1) is proposed to be substituted. The substituted Ss.(1) provides that the appeal against the order of the highest appellate authority of the State, determining issues relating to stock transfer or consignment of goods, insofar as they involve dispute of inter-state nature, will lie to CSTAA. The present Ss.(1) is narrow in scope, as it mentions order u/s.6A r/w S. 9. The substitution appears to correct a technical flaw in existing sub-section. Since the appeal to CSTAA is from the order of the highest appellate authority, it may be passed under particular appeal provisions and hence references to S. 6A may not be necessary here. This amendment appears to be for correcting the above position.

4.    S.22:

An amendment is also proposed in S. 22 to replace the words ‘pre-deposit’ as ‘deposit’. The amend-ment is procedural in nature.

By another amendment in S. 22, Ss.(1B) is proposed to be inserted. This appears to fill up the lacuna in present provision. There is no speaking provision for directing refund of tax to the dealer or to other State. This insertion is to give power to CSTAA to direct a particular State to refund the tax which is not due to it or to transfer the same to other State to whom CST belongs, based on appeal findings. The direction to refund will not be exceeding the amount which will be payable as CST.

Though the amendment is welcome, it has not tak-en care of all the issues, particularly arising under the Local Act. For example, in transferee State the dealer has paid Local tax and CSTAA considers it as inter-state sale from moving State, disallowing branch transfer claim. Now CSTAA can ask the transferee State to refund the amount equal to CST to moving State. However the purchasing dealer in transferee state will be at loss. He might have claimed set-off considering it as local purchase which is now considered as intersate purchase which will result in denial of his set-off claim. Remedial provisions are required to be provided to tackle such a situation.

 5.   S.25:

By one more amendment, the proviso to Ss.(2) of S. 25 is proposed to be omitted. This proviso provides for availment of first appeal by the dealer. However, now, since the said first appeal is sought to be avoided, the omission of this proviso is consequential.

  B)  Recent amendments in MVAT Act, 2002 :

    The Government of Maharashtra has issued Ordinance No. II of 2010, dated 18-2-2010, by which S. 9(1) of the MVAT Act has been amended. By this amendment the proviso to S. 9(1) is deleted from the statute book. This proviso puts a limitation on the Government that it cannot amend schedules to increase the rate after two years from 1-4-2005. However, due to removal of the said proviso, now the Government can change the rates after two years also. Thus, the Government has assumed wide powers about increasing the rate of tax in VAT schedules.

    By using the expanded powers, the Government of Maharashtra has issued Notification u/s. 9(1), dated 10-3-2010. By the said Notification changes are ef-fected in Schedule A and C. On most of the goods contained in Schedule C, the rate of tax is increased from 4% to 5% from 1-4-2010. The rate of tax on declared goods contained in Schedule C is retained at 4%, whereas on all other goods contained in Schedule C, the rate is increased to 5%.

On about 101 non-declared items contained in Schedule-C, the rate is increased from 4% to 5% from 1-4-2010. The same is done just before the Budget presentation.

[This is also against the accepted principle of uniformity of rate of tax in VAT regime.]

Amongst others, the changes will affect the necessities of common person like wheat and cereals/pulses, etc. The changes can be said to be of far-reaching effect. It will also affect the prices of goods, which are already high due to inflation and other reasons.

In fact, the Government of Maharashtra proposed to levy tax even on fabrics and sugar. However, by Circular 11T of 2010, dated 17-3-2010, it is clarified that the tax position in relation to sugar and fabrics will continue as it is at present and no change will take place from 1-4-2010. We hope that the Government will reconsider this mass increase in other items also, keeping into account the common good.

Transfer to job worker vis-à-vis requirement of F form

As per the provisions of the CST Act, 1956, inter-State sales covered by S. 3(a) are liable to CST in the moving State. Normally any movement outside the State is looked upon by the Sales Tax authorities as liable to tax. Therefore, even if the goods are moved to one’s own branch in other State or agent in other State, the sales tax authorities of the moving State may make presumption that the movement is because of sale and hence liable to tax. The movement of goods to own branch or agent cannot be considered to be sale, as there are no two separate entities to constitute such transfer as sale. However, it is possible that the dispatch to a branch may be in pursuance of pre-existing purchase order from any customer and in such case the transaction can be considered as inter-State sale. In fact such issues create lot of litigation. To overcome such disputes at the assessment stage itself, the CST Act has provided mechanism by way of S. 6A. The said Section is reproduced below for ready reference.

“S. 6A. Burden of proof, etc., in case of transfer of goods claimed otherwise than by way of sale :

(1) Where any dealer claims that he is not liable to pay tax under this Act, in respect of any goods, on the ground that the movement of such goods from one State to another was occasioned by reason of transfer of such goods by him to any other place of his business or to his agent or principal, as the case may be and not by reason of sale, the burden of proving that the movement of those goods was so occasioned shall be on that dealer and for this purpose he may furnish to the assessing authority, within the prescribed time or within such further time as that authority may, for sufficient cause, permit, a declaration, duly filled and signed by the principal officer of the other place of business, or his agent or principal, as the case may be, containing the prescribed particulars in the prescribed form obtained from the prescribed authority, along with the evidence of dispatch of such goods [1] and if the dealer fails to furnish such declaration, then, the movement of such goods shall be deemed for all purposes of this Act to have been occasioned as a result of sale.
     
(2) If the assessing authority is satisfied after making such inquiry as he may deem necessary that the particulars contained in the declaration furnished by a dealer U/ss.(1) are true, he may, at the time of, or at any time before, the assessment of the tax payable by the dealer under this Act, make an order to that effect and thereupon the movement of goods to which the declaration relates shall be deemed for the purpose of this Act to have been occasioned otherwise than as a result of sale.

Explanation : In this Section, ‘assessing authority’, in relation to a dealer, means the authority for the time being competent to assess the tax payable by the dealer under this Act.”

As seen from the Section, the burden is cast upon the moving dealer to prove that the movement to branch/agent or principal, as the case may be, is not in pursuance of any sale. Prior to 11-5-2002, the moving dealer can produce satisfactory evidence about dispatch, etc. It was also optional on his part to produce ‘F form’ to support his claim, but it was not mandatory. After amendment on 11-5-2002 in the CST Act the production of F form to establish the claim of branch transfer/transfer to agent, etc. has become compulsory. Therefore the production of F form has got importance and it is also sometime a cause of litigation. In this brief note the requirement of production of F form has been discussed in light of certain circulars/judgments.

As is clear from S. 6A of the CST Act, the F form is required when the goods are transferred to branch or agent. The concept of branch as well as agent is well known in the commercial world. Branch is a part of the transferor entity. Agent relationship will be created based on terms of the parties. As known, an agent is a separate entity than the transferor, but he represents the transferor and acts on his behalf. It is said that agent steps in the shoes of principal. There may be written agreement for the same or may be inferred from the relevant circumstances or documents. Generally agents work on commission basis. Thus the relationship created is of principal and agent and when the principal transfers the goods to agent he has to obtain F form from the agent.

The other situation is that the dealer may be sending goods to a party in other State for job work. Here the job worker will charge his job work charges to his customer i.e., the transferor. It can be seen that here the relationship is principal to principal. In other words the relationship between transferor and job worker is not of principal and agent or transfer to branch, etc. Therefore the provisions of S. 6A are not applicable in such cases and F forms are not required to be exchanged. However the situation was confusing and many dealers exchanged the F forms or asked for the said forms from respective parties. The Commissioner of Sales Tax, Maharashtra State realising the situation rightly issued circular bearing No. 16T of 2007, dated 20-22007. By this Circular the Commissioner of Sales Tax explained the nature of relationship as agent. In the circular it was further clarified that when the dealer sends the goods to job worker, the relationship is as principal to principal and F form is not required to be obtained from such job worker outside the State. The implication was also that the job worker in Maharashtra was not required to issue F form to his other State customer. Thus the situation became very clear and beyond doubt.

However, thereafter there came a judgment from the Allahabad High Court reported in the case of Mis. Ambica Steel Ltd. v. State of Uttar Pradesh, (12 VST 216). In this case the issue was out of a writ petition. The petitioner in that case had sent iron and steel ingots to various companies situated outside the State of Uttar Pradesh for the purpose of converting them into iron and steel rounds, bars and flats. The converted material was to be sent back to the petitioner in Uttar Pradesh. The petitioner company also received iron and scrap from various firms outside the State of Uttar Pradesh for the purpose of converting the same into iron and steel billets and ingots with a direction to return the converted goods to those firms. The issue before the Court was whether the petitioner is required to submit the declaration in Form F in respect of the transaction of job work performed by it or got done by others. The Department authorities were relying upon Cir-cular issued by Commissioner of Trade Tax, U.P. to insist on such forms.

In the Circular dated November 28, 2005 issued by the Commissioner of Trade Tax, Uttar Pradesh, it was mentioned that ul s.6A of the Central Sales Tax Act, 1956 form F is required to be filed in respect of all transfers of goods which are otherwise than by way of sale including goods sent or received for job work or goods returned.

Allahabad High Court observed that S. 6 of the Central Sales Tax Act, 1956 is the charging Section creating liability to tax on inter-State sales and by reason of S. 6A(2) a legal fiction has been created for the purpose of the Act that transaction has occasioned otherwise than as a result of sale. S. 6A puts the burden of proof on the person claiming transfer of goods otherwise than by way of sale and not liable to tax under the Central Act. The burden would be on dealer to show that movement of the goods had been occasioned not by reason of any transaction involving any sale of goods, but by reason of transfer of such goods to any other place of business or to the agent or principal, as the case may be, for which the dealer is required to furnish prescribed declaration form. If the dealer fails to furnish such declaration, by reason of legal fiction, such movement of goods would be deemed for all purposes of the Act to have been occasioned as a result of sale. The High Court held that if the petitioner claims that it is not liable to tax on transfer of goods from U.P. to a place outside State, then it would have to discharge the burden placed upon it ul s.6A by filing declaration in form F. It would be immaterial whether the person to whom the goods are sent for or received after job work is a bailee. The requirement to file declaration in form F is applicable in cases of goods returned also, held High Court. Thus Hon. High Court dismissed the Writ Petition.

Thus the Allahabad High Court held that F form is required even in case of job work transactions and goods return transaction. It can be respectfully said that the said judgment requires reconsideration in light of above-discussed facts and legal position about agent and principal. However it is also a law that till the binding judgment is not unsettled by proper higher forum, etc., it has to be followed. It is also required to be noted that the judgment of any High Court under the Central Act is binding on all the lower authorities in all the States of India unless the Jurisdictional High Court of the particular state has laid down anything different. This principle of law is clear from judgment in case of Maniklal Chunilal & Sons Ltd. v. CIT, (24 ITR 375).

Therefore the situation that now arises is that for transfer of goods to job worker, the sender will be required to obtain F form from him even if he is in other than D. P. State. Similarly when the job worker sends goods back to his customer, he will be required to obtain F form from his principal (customer).

The other implication created by this judgment is that the authorities may insist on furnishing of F form even for sales return. For example, a dealer in Maharashtra has sold the goods to a dealer in V.P., the dealer in V.P. may be returning back the goods to the vendor in Maharashtra as sales returns. In such circumstances also it cannot be said that the goods are sent back by the V.P. dealer to Maharashtra dealer as agent, etc. The transaction is as principal to principal and requirement of F form cannot arise. However in the light of the above judgment the F forms may be insisted upon.

Thus it can be said that some unwarranted burden about exchange of F forms has now arisen. Fortunately, in Maharashtra the Commissioner of Sales Tax has again understood the problems faced by the dealers. Therefore he has come out with a fresh Circular bearing No. ST of 2009, dated 29-1-2009. In this Circular the Commissioner of Sales Tax has reconfirmed the position spelt out by him in his earlier Circular 16T of 2007. Therefore it can be said that the dealers in Maharashtra will not be required to obtain the F forms in case of job work transfers or in case of sales return in spite of the above judgment of Allahabad High Court. However this Circular will not have any effect in other States and the dealers in other States will be governed by the above judgment and may insist on F forms for their transactions with Maharashtra dealers. As clarified in Circular No. ST of 2009, dated 29-1-2009 the Maharashtra dealers will be entitled to issue the same to facilitate their parties in other states. Thus an appreciable practical way has been found out by the Commissioner of Sales Tax, Maharashtra.

Let’s hope that the correct legal position will be clarified by competent authority like Larger Bench of Allahabad High Court or Supreme Court or High Court/s of other State/s by which the dealers will be saved from such unproductive work of issuing forms.

Important Issues

fiogf49gjkf0d

VAT

Software — Whether Sales Tax (VAT) or Service Tax :


Recently by budget amendments (Finance Bill 2008), Service
Tax is contemplated on software services. Software is also considered as taxable
goods under the Sales Tax (VAT) laws. Thus a question arises as to whether
software will be taxable to Service Tax or Sales Tax (VAT). The issues related
to the above dilemma can be discussed briefly as under :

To initiate, it will be necessary to refer to legal
background of the subject. Under the Maharashtra Value Added Tax Act, 2002 (MVAT
Act, 2002) sale of goods is liable to tax. In entry C-39, intangible goods are
covered as liable to tax @ 4%. For purpose of entry C-39, intangible goods means
those goods which are specified in the Notification under the said entry.

The said entry and the notification thereunder reads as
under :

“39. Goods of intangible or

incorporeal nature as may

be notified from time to

time by the State Govt. 4% 1-4-2005

in the Official Gazette. to till date”


The Notification issued under C-39 is as under :

Notification

Finance Department, Mantralaya, Mumbai-400032

Date : 1-6-2006

Maharashtra Value Added Tax Act, 2002.

No. VAT-1505/CR-114/Taxation 1 — In exercise of the powers
conferred by entry 39 of Schedule ‘C’ appended to the Maharashtra Value Added
Tax Act, 2002 (Mah. IX of 2005) and in supersession of Government Notification,
Finance Department, No. VAT-1505/CR-114/Taxation-1, dated the 1st April 2005,
the Government of Maharashtra hereby specifies the following goods of intangible
or incorporeal nature for the purposes of the said entry, namely :


Sr. No.
Name of the goods of intangible or incorporeal nature

(1)
Patents

(2)
Trademarks

(3)
Import licences including exim scrips, special import licences and duty-free
advance licences.

(4)
Export permit or licence or quota

(5)
Software packages

(6)
Credit of duty entitlement Passbook

(7)
Technical know-how

(8)
Goodwill

(9)
Copyright

(10)
Designs registered under the Designs Act, 1911.

(11)
SIM cards used in mobile phones

(12)

Franchise,
that is to say, an agreement by which the franchisee is granted
representational right to sell or manufacture goods or to provide service or
undertake any process identified or associated with the franchisor, whether
or not a trademark, service mark, trade name or logo or any symbol, as the
case may be, is involved.

(13)
Credits of duty-free replenishment certificate

(14)
Credit of duty-free Import Authorisation (DFIA)

It can be seen that software packages are included in the
above Notification under entry C-39 and hence, as such, software packages are
liable to Sales Tax @ 4%. Therefore it is necessary to find out whether software
is sold as ‘goods’ so as to be liable under MVAT Act 2002 or software services
are provided so as to be liable to Service Tax, but not Sales Tax.

The next issue therefore will be the nature of development of software. Software development can be of two types. Software can be developed which is meant for free marketing. These are known as off-the-shelf or branded softwares. In case of Tata Consultancy Services v. State of A.P. and Others, (137 STC 620), the Hon. Supreme Court has held that such ‘off-the-shelf’ softwares are liable to sale tax as sale of goods. The Supreme Court observed as under:

“In our view, the term ‘goods’ as used in article 366(12) of the Constitution of India and as defined under the said Act are very wide and include all types of movable properties, whether those properties be tangible or intangible. We are in complete agreement with the observations made by this Court in Associated Cement Companies Ltd. (2001) 4 SCC 593; (2001) 124 STC 59. A software programme may consist of various commands which enable the computer to perform a designated task. The copyright in that programme may remain with the originator of the programme. But the moment copies are made and marketed, it becomes goods, which are susceptible to Sales Tax. Even intellectual property, once it is put on to a media, whether it be in the form of books or canvas (in case of painting) or computer discs or cassettes, and marketed would become ‘goods’. We see no difference between a sale of a software programme on a CD/floppy disc from a sale of music on a cassette/CD or a sale of a film on a video cassette/CD. In all such cases, the intellectual property has been incorporated on a media for purposes of transfer. Sale is just of the media, which by itself has very little value. The software and the media cannot be split up. What the buyer purchases and pays for is not the disc or the CD. As in the case of paintings or books or music or films, the buyer is purchasing the intellectual property and not the media, i.e., the paper or cassette or disc or CD. Thus a transaction of sale of computer software is clearly a sale of ‘goods’ within the meaning of the term as defined in the said Act. The term ‘all materials, articles and commodities’ includes both tangible and intangible / incorporeal property which is capable of abstraction, consumption and use and which can be transmitted, transferred, delivered, stored, possessed, etc. The software programmes have all these attributes.

At this stage it must be mentioned that Mr. Sorabjee had pointed out that the High Court has, in the impugned judgment, held as follows :

“……..In our view, a correct statement would be that all intellectual properties may not be ‘goods’ and therefore branded software with which we are concerned here cannot be said to fall outside the purview of ‘goods’ merely because it is intellectual property; so far as ‘un-branded software’ is concerned, it is undoubtedly intellectual property, but may perhaps be outside the ambit of ‘goods’.”

Mr. Sorabjee submitted that the High Court correctly held that unbranded software was ‘un-doubtedly intellectual property’. Mr. Sorabjee submitted that the High Court fell in error in making a distinction between branded and un-branded software and erred in holding that branded software was ‘goods’. We are in agreement with Mr. Sorabjee when he contends that there is no distinction between branded and unbranded software. However, we find no error in the High Court holding that branded software is goods. In both cases, the software is capable of being abstracted, consumed and used. In both cases the software can be transmitted, transferred, delivered, stored, possessed, etc. Thus even unbranded software, when it is marketed/ sold, may be goods. We, however, are not dealing with this aspect and express no opinion thereon because in case of unbranded software other questions like situs of contract of sale and/ or whether the contract is a service contract may arise.”

In view of above observations, once the softwares are held to be sold, liable to Sales Tax, the question of attracting Service Tax cannot arise. Normally, branded softwares (off-the-shelf) will be liable to Sales Tax.

The other kind of softwares are customised softwares.

In case of customised software, there can be two situations. A developer can develop the software as per specification of customer as his property.

For example, the developer of software can develop the software as per customer’s specification, but copyright in the software remains with the developer. Subsequently, the developer will transfer the said software to the customer against agreed price. In this case though it is customised software, still it can be said to be sale of the goods. Though the Supreme Court has not directly resolved the above issue in case of Tata Consultancy Services v. State of A.P. and Others, (137 STC 620), there are observations which go to suggest that customised software can also be liable to Sales Tax. The relevant observations are already reproduced above.

Accordingly, the above type of customised software can be liable to Sales Tax. In this respect, reference can also be made to the determination order passed by the Commissioner of Sales Tax, Maharashtra State in case of Mastek Ltd. (DDQ 11-2001/ Adm-5/83/B-7 dated 31-8-2004).

In this case, it was held that though the software was a customised software, since the property in the software belonged to the developer, which was transferred against price, it was a taxable transaction under Sales Tax.

The other way by which customised software can be developed is that the software is developed as a property of the customer. In other words, in this kind of development, the copyright in the software remains with customer right from inception. The customised software is developed as property of the customer and copyright belongs to such customer. In such case, there is no question that the software first belongs to the developer and subsequently transferred to the customer against price. In this case, since the software belonged to the customer itself, there is nothing which the developer can transfer to him. Under above circumstances, the transaction will be that of rendering of software development services. It cannot be liable to Sales Tax and thus it may be liable to Service Tax.

However, the issue about the nature of transaction of software as to sale or service is very delicate. The above is a broad thinking on the subject. There may be various other possibilities. For example, a case may arise about modifying or improving the existing software. The developer in such a case may be providing further modules to already existing software. The module itself may be a kind of software. Under such circumstances, the issue will be whether the charges received by the developer are for sale of software or for rendering of services.

If above  situation  is tested  in the light  of earlier discussion, it has to be concluded that providing modules for improving the software is nothing but rendering of services. The module, though prepared separately, has to be merged into existing software to improve it. The existing software is belonging to the customer. Thus by providing module the developer is in effect improving the existing software. There is no question of independent existence of module prepared by developer so as to become ‘goods’ by itself. The charges will be for providing service and not sale of any goods. Thus there can be various kinds of situations. The nature of transaction is required to be ascertained by finding out the copyright status in the software so developed. It is expected that the discussion above will be useful for further deliberations on the issue.

Recent  Amendments to Maharashtra VAT Rules

The Government of Maharashtra, vide Notification dated 14th March 2008, has made certain amendments to the Maharashtra VAT Rules, 2005 particularly in Rules 17, 18 and 81, pertaining to filing of returns by the dealers. The Commissioner of Sales Tax has also issued a Notification dated 14th March 2008, whereby certain dealers shall now file e_return for the periods commencing from 1st February 2008 onwards.

The existing return forms have been replaced by new return forms. The Commissioner of Sales Tax has issued a Trade Circular No. 8T of 2008, dated 19th March 2008, explaining above amendments and the procedure to be followed by dealers in respect of payment of taxes and filing of returns. Relevant portion of the Trade Circular is reproduced below for the benefit of our readers:

“(3) Introduction:

The Government, by Notification No. VAT/1507 / CR-94/Taxation-1, dated 14th March 2008, has carried out certain amendments to Rule 17 and Rule 18 of Maharashtra Value Added Tax Rules, 2005 pertaining to filing of return. The amendment also provides for filing of e-return by certain categories of dealers. The rule authorised the Commissioner of Sales Tax to notify the date for mandatory filing of e-return by certain categories of dealers. In pursuance of this delegation the Commissioner of Sales Tax has issued the Notification dated 14th March 2008. It has now been made mandatory for registered dealers whose tax liability in the previous year was Rs.1 crore or more to file returns electronically for the periods starting on or after 1st February 2008.

(4) Electronic filing of returns:

Sub-rule (5) of Rule 17 is substituted. The substituted sub-rule provides for filing of returns electronically. The registered dealer liable to file return electronically should first make the payment of tax along with interest, if any, in chalan 210 in the designated banks. As per the Notification, the registered dealers whose tax liability during the previous year was Rs. one crore or more, shall make payment and file electronic returns as provided in the said sub-rule (5). For the purposes of the Notification, the expression ‘tax liability’ has the same meaning as assigned to it in the Explanation-I to sub-rule (4) of the said Rule 17.

(4.1) These dealers shall file the return electronically in the respective form applicable to them. The templates of new return form are provided on the new website of the Sales Tax Department www.mahavat.gov.in. Every dealer to whom the above Notification applies shall download the relevant template of the form and after making data entry in the relevant field, upload it using his digital signature. The uploading shall be done on or before the due date prescribed for filing of the returns. The system shall generate an acknowledgement in duplicate.

(4.2) However, if the dealer does not have or has not used digital signature, then he shall submit a copy of the acknowledgement duly signed by an authorised person within 10 days from the uploading of the return to the respective authority specified in sub-rule (2). For the time being, if a dealer is with LTU, a copy of the acknowledgement may be submitted to their respective officer of the Large Taxpayers Unit (LTU),who is regularly in liaison with the dealer.

(4.3) To facilitate filing of e-return, detailed guidance note explaining the procedure to file of e- return is placed on the website www.mahavat.gov.in. If any dealer requires further assistance for filing of e-return, he may contact the respective liaison officer who has been assigned for this job. If the dealer requires further assistance in filing e-return, he or his authorised representative may visit respective Sales Tax authorities, wherein he will be guided regarding the e-filing of return. A dedicated help desk is also created in Mazgaon Office to answer the queries pertaining to e-returns. The dealer may contact the help desk at 022-23735621/022-23735816.

(4.4) Since this is the first month for filing of e-return, the dealers may face some difficulties in preparing and uploading the electronic return. Considering the likely difficulties faced by the dealers, a concession is provided only for this month to upload the e-return even after the due date i.e., 21st March 2008, but on or before 31st March 2008. The e-return uploaded up to 31st March 2008 shall not be treated as late, provided the payment of tax as per return is made on or before due date. This concession is applicable only for the first month and for the subsequent period the dealers will remain required to upload the return on or before the due date.

(5) Change in return    Forms:

The earlier return Forms 221, 222, 223, 224 and 225 have been replaced with the new returns Forms-231, 232, 233, 234 and 235, respectively. These Forms are made available on the website of the Department (www.mahavat.gov.in and www.vat.maharashtra.gov.in). The dealer can download these Forms from the menu download section of the website. All the returns, including  the returns for the earlier period, should now be filed in the aforesaid new return Forms.

(5.1) The new return Forms are applicable to all dealers including those who are not required to file electronic returns. The efforts are being made to make these Forms available at all the locations in the State. However, the dealers except the dealers required to file e-return may file returns in the old Forms 221 to 225. This facility will be available only in the respect of returns which are to be filed before 31st March 2008. Thus, all the returns filed after 1st April 2008 (including the returns for the earlier period, if any) should invariably be in the new return Forms.

(5.2) Another amendment is made to sub-rule (1) and sub-rule (3) of Rule (5) of the Central Sales Tax (Bombay) Rules, 1957 to provide for electronic return. The old return Form IIIB is now replaced by new Form IIIE. Therefore, dealers filing returns on or after 1st February 2008 shall file return in the new Form.

(6) Filing    of returns    by oil companies:

The first amendment to sub-rule (2) provides that notified oil companies shall file a copy of their return in Form 235 with the Joint Commissioner of Sales Tax (LTU), Mumbai within 3 days of filing of the return in Form 235.

7) Returns of dealers covered by Package Scheme of Incentives:
By this amendment  a new procedure is prescribed for certain dealers under Package Scheme of Incentives. The amendment provides that if the dealer holds a certificate of entitlement under any Package Scheme of Incentives except the Power Generation Promotion Policy, 1998, then the dealer shall file return to the registering authority having jurisdiction over the respective place of business of the dealer, in respect of which he holds the certificates of entitlement.

The proviso appended to this clause states that if the deale, ‘has two or more entitlement certificates issued to him, then he shall file the required return with that registering authority which has jurisdiction over the place of business pertaining to the entitlement certificate whose period of entitlement ends later. This return should show aggregate figures of all sales and purchases pertaining to all the eligible units of the dealer. A complimentary amendment is also carried out in Rule 81.

(8) No separate return  :

Earlier by clause (c) of sub-rule (2) of Rule 17 certain dealers were permitted to file separate returns for their respective places or constituents of the business. The said Rule is now deleted. Therefore, the permissions granted earlier, if any, stands automatically cancelled.
 
(9) Yearly return by deemed dealers:

The Explanation to clause (8) of S. 2 defines certain persons and authorities to be deemed dealers. These dealers were required to file return as per the regular periodicity applicable to dealers. By this amendment, it is provided that every dealer to whom the Explanation to clause (8) of S. 2 applies shall file annual return if his tax liability during the previous year is Rs.1 crore or less. The annual return is to be filed within 21 days from the end of the year. However, the facility to file annual return is not automatic. The dealer covered by the Explanation to clause (8) of S. 2 will have to apply to the Joint Commissioner of Sales Tax (Returns) in Mumbai and to the respective Joint Commissioner of Sales Tax (VAT Administration) in the rest of the State to be entitled to file annual return. There is no prescribed format of the application. The annual return can be filed only after the Joint Commissioner of Sales Tax concerned grants the required permission.

10. Change in periodicity for newly registered dealers:

Sub-rule (1) of Rule 18 has been amended. So far newly registered dealers were required to file quarterly returns. It is now provided that these dealers shall file six-monthly returns for the period starting from 1st April 2008.”

Supervisory PE threshold as prescribed in India-Germany treaty needs to be reckoned w.r.t each separate project.

 2 JDIT v. M/s. Krupp Uhde Gmbh
(2009 TIOL 78 ITAT Mum.)
Article 5(2)(i) of India-German Double Tax Avoidance Agreement (treaty)
A.Y. : 1998-99. Dated : 7-1-2009

Issue :

  •     Supervisory PE threshold as prescribed in India-Germany treaty needs to be reckoned w.r.t each separate project.

  •     In absence of emergence of PE, onshore technical services are liable to tax @ 10% of gross fee.

Facts :

The assessee, a German company (herein GermanCo), was engaged in the business of providing technical know-how/licence, basic engineering services, and supervisory services in connection with construction or installation of specified machineries/assembly projects. The assessee rendered services to various Indian companies. A large part of the services was rendered on offshore basis. In connection with on-shore supervisory activities involving various projects, personnel of the GermanCo were present in India in aggregate for more than 6 months duration — though, presence in respect of each project was of less than 6 months. The GermanCo offered the amount for taxation as fees for technical services chargeable @ 10% on gross basis in terms of Article 12 (2) of India-Germany DTAA.

The Assessing Officer (AO) rejected the contention of the assessee and held that the GermanCo had PE in India. In view of the AO, for determining whether or not Supervisory PE emerged, duration of all the projects in a particular year had to be aggregated. In view of the AO, since the German Co had PE in India, the benefit of concessional rate of 10% provided in the treaty was not available and the amount had to be assessed under domestic law @ 30% by applying provisions of S. 115A of the Act.

On further appeal, the CIT(A) accepted GermanCo’s contention that offshore services are not chargeable to tax in India. The Department did not object to this aspect in further appeal before the Tribunal. The controversy before the Tribunal was therefore confined to taxation of onshore services.

As regards on-shore supervisory activities, the CIT

(A) accepted the assessee’s contention and held that : (i) threshold of 6 months provided in the treaty is required to be applied to each project separately;

(ii) since none of the project sites involved presence of more than 6 months, no PE emerged for GermanCo; (iii) in absence of PE, the fees for Supervisory activities was chargeable @ 10% in terms of Article 12 of DTAA.

Against the above finding, the Department filed further appeal to the Tribunal, primarily objecting that the CIT(A) erred in applying 6 months threshold to each project separately.

Held :

The ITAT held :

    (a) The Tribunal referred to Construction and related PE provisions of India-Germany DTAA. It also referred to similar provisions of India’s treaties with China, USA, Canada and Italy. It concluded that unlike similar treaty provisions of India with China, USA, Canada and Italy, there is nothing in the language of India-Germany treaty to indicate that different sites on which work is carried on by the assessee can be considered together in determining whether or not the Construction/Supervisory PE has emerged for the German Co.

(b) Reference was made to commentary of Klaus Vogel and the book ‘Principles of International Taxation’ to conclude that each project site duration needs to be considered separately, particularly when different contracts have no effective interconnection with each other.

     
(c) The Tax Department contended that overall project duration needs to be considered for determining length of supervisory project of GermanCo. The Tribunal rejected the contention of the Revenue that the date of commencement or the duration of the project should be considered for determining trigger of supervision PE for the assessee. According to the Tribunal, such reckoning would lead to absurd results since there could be instances where contracts for construction of building, supply of plant and machinery, installation, commissiong in respect of a project may be awarded to independent parties and each party may have involvement of differing duration.

     
(d) After considering the language of the treaty, the Tribunal held that the intervening period caused on account of factors such as seasonal shortage of material, labour difficulties, time needed for material to dry, etc cannot be excluded.

    (e) One of the contentions of the taxpayer was that since income-tax is linked to a given assessment year, the threshold of construction PE needs to be considered for each year separately. The assessee claimed that Supervisory PE was not triggered if work during a given tax year involved period of less than 6 months though the overall project duration exceeded 6 months. The Tribunal rejected the contention and held that the prescribed period of 6 months has to be computed, irrespective of the tax years involved. For instance, where an activity starts in January and ends in July, total period is 6 months – though period falling in each of the two financial years is less than 6 months.

In absence of emergence of PE, onshore technical services are liable to tax @ 10% of gross fee.

 2 JDIT v. M/s. Krupp Uhde Gmbh
(2009 TIOL 78 ITAT Mum.)
Article 5(2)(i) of India-German Double Tax Avoidance Agreement (treaty)
A.Y. : 1998-99. Dated : 7-1-2009

Issue :

  •     Supervisory PE threshold as prescribed in India-Germany treaty needs to be reckoned w.r.t each separate project.

  •     In absence of emergence of PE, onshore technical services are liable to tax @ 10% of gross fee.

Facts :

The assessee, a German company (herein GermanCo), was engaged in the business of providing technical know-how/licence, basic engineering services, and supervisory services in connection with construction or installation of specified machineries/assembly projects. The assessee rendered services to various Indian companies. A large part of the services was rendered on offshore basis. In connection with on-shore supervisory activities involving various projects, personnel of the GermanCo were present in India in aggregate for more than 6 months duration — though, presence in respect of each project was of less than 6 months. The GermanCo offered the amount for taxation as fees for technical services chargeable @ 10% on gross basis in terms of Article 12 (2) of India-Germany DTAA.

The Assessing Officer (AO) rejected the contention of the assessee and held that the GermanCo had PE in India. In view of the AO, for determining whether or not Supervisory PE emerged, duration of all the projects in a particular year had to be aggregated. In view of the AO, since the German Co had PE in India, the benefit of concessional rate of 10% provided in the treaty was not available and the amount had to be assessed under domestic law @ 30% by applying provisions of S. 115A of the Act.

On further appeal, the CIT(A) accepted GermanCo’s contention that offshore services are not chargeable to tax in India. The Department did not object to this aspect in further appeal before the Tribunal. The controversy before the Tribunal was therefore confined to taxation of onshore services.

As regards on-shore supervisory activities, the CIT

(A) accepted the assessee’s contention and held that : (i) threshold of 6 months provided in the treaty is required to be applied to each project separately;

(ii) since none of the project sites involved presence of more than 6 months, no PE emerged for GermanCo; (iii) in absence of PE, the fees for Supervisory activities was chargeable @ 10% in terms of Article 12 of DTAA.

Against the above finding, the Department filed further appeal to the Tribunal, primarily objecting that the CIT(A) erred in applying 6 months threshold to each project separately.

Held :

The ITAT held :

    (a) The Tribunal referred to Construction and related PE provisions of India-Germany DTAA. It also referred to similar provisions of India’s treaties with China, USA, Canada and Italy. It concluded that unlike similar treaty provisions of India with China, USA, Canada and Italy, there is nothing in the language of India-Germany treaty to indicate that different sites on which work is carried on by the assessee can be considered together in determining whether or not the Construction/Supervisory PE has emerged for the German Co.

(b) Reference was made to commentary of Klaus Vogel and the book ‘Principles of International Taxation’ to conclude that each project site duration needs to be considered separately, particularly when different contracts have no effective interconnection with each other.

     
(c) The Tax Department contended that overall project duration needs to be considered for determining length of supervisory project of GermanCo. The Tribunal rejected the contention of the Revenue that the date of commencement or the duration of the project should be considered for determining trigger of supervision PE for the assessee. According to the Tribunal, such reckoning would lead to absurd results since there could be instances where contracts for construction of building, supply of plant and machinery, installation, commissiong in respect of a project may be awarded to independent parties and each party may have involvement of differing duration.

     
(d) After considering the language of the treaty, the Tribunal held that the intervening period caused on account of factors such as seasonal shortage of material, labour difficulties, time needed for material to dry, etc cannot be excluded.

    (e) One of the contentions of the taxpayer was that since income-tax is linked to a given assessment year, the threshold of construction PE needs to be considered for each year separately. The assessee claimed that Supervisory PE was not triggered if work during a given tax year involved period of less than 6 months though the overall project duration exceeded 6 months. The Tribunal rejected the contention and held that the prescribed period of 6 months has to be computed, irrespective of the tax years involved. For instance, where an activity starts in January and ends in July, total period is 6 months – though period falling in each of the two financial years is less than 6 months.

Services to Subsidiary in India by deputing personnel of affiliated companies constitute Service PE.

 1 Lucent Technologies International Inc v. DCIT

(2009 TIOL 161 ITAT Del)/(28 SOT 98) Section/Article : Article 5 India — USA Double Tax Avoidance Agreement A.Ys. : 1997-98 to 2000-01. Dated : 19-12-2008

Issue :

  •     Services to Subsidiary in India by deputing personnel of affiliated companies constitute Service PE.

  •     Payment towards licence for use of copyrighted software provided as part of equipment supply is not royalty.


Facts :

The assessee, US Company (USCO), is a leading supplier of hardware and software used for GSM cellular radio telephone system. The USCO supplied telecommunication hardware and software to its customers in India. USCO had an Indian subsidiary (herein WOS) which undertook the work of installation and providing after-sales services to the customers of USCO in India.

USCO had entered into a contract with one Indian telecom company by name Escotel Mobile Communications Ltd. (herein Escotel). In terms of the agreement between USCO and Escotel, USCO was to supply hardware and software to Escotel while the services of installation were to be provided by WOS. In terms of the contract with Escotel, USCO had the responsibility of designing, manufacturing, supplying and delivering all hardware and software. The contract also required USCO to undertake installation, testing, commissioning and achieve final acceptance of the system by the customer. A part of responsibility of the inspection, installation and supervising the testing and commissioning was that of the Indian WOS. To some extent there was an overlap of responsibilities of USCO vis-à-vis that of WOS. As part of the supply contract, the assessee also provided licence for use of computer software which was required for the purposes of functioning of GSM network.

For enabling the WOS to discharge its obligation, USCO made available to WOS personnel who were the employees of the affiliates of USCO. Such employees were under the control of USCO and the WOS was required to pay remuneration to USCO. USCO claimed that it incurred no tax liability in India as the hardware was supplied from outside India. The assessee also claimed that payment received for the licence agreement for use of computer software was business income and was not royalty chargeable in terms of Article 12 of DTAA. Reliance for this was placed on the decision of Special Bench in case of Motorola Inc v. DCIT, (96 TTJ 1) (Delhi SB). The AO claimed that the USCO attracted tax liability in India on the ground that, in the circumstances of the case, USCO had PE in India. The AO claimed that (i) USCO had PE in the form of WOS being its dependent agent; (ii) that premises of WOS were available at the disposal of the employees who were deputed by USCO; (iii) that negotiation and conclusion of the contract happened in India. In respect of software supply, the Department claimed that software licence fees was chargeable as royalty income.

Held :

The ITAT accepted the department’s contention and held that USCO had PE in India on account of the following features :

    (1) Having regard to the terms of the contract with the customer, not only Indian WOS but also USCO was responsible for turnkey functioning of the project of the GSM network. The ITAT noticed that the agreements with customer in India made USCO and WOS responsible for the turnkey completion of the GSM project individually and severally. The responsibility to Escotel was such that USCO had to complete installation should WOS fail in any manner. Conversely, WOS had responsibility of arranging for hardware and software should USCO fail in its responsibility. Having noted this, the ITAT concluded that the arrangement was ‘in short a consortium or partnership’ between USCO and WOS.

(2) The ITAT noted that the terms of agreement between Escotel and USCO and WOS also required of WOS to provide warranty in respect of the hardware supply made by USCO. This, according to the Tribunal, supported that the WOS was acting on behalf of USCO.

     
(3) The ITAT noted that USCO made available the personnel (though employees of the affiliates of USCO) to WOS for the purpose of enabling the WOS to discharge the responsibility of installation, commissioning, etc. of the GSM equipments. Such personnel were made available for remuneration. The ITAT concluded that in terms of the treaty, the service PE was triggered when the USCO provided services to its affiliate WOS even for a day. Since USCO provided services to ICO with the help of personnel who were under USCO’s control, the ITAT concluded that the USCO had service PE in terms of Article 5(2)(l)(ii) of the treaty.

     
(4) On the aspect of taxation of consideration received for software licence agreement, the ITAT noted that the facts of the case of USCO were at par with the facts which operated in the case of Motorola (supra). Relying on the Special Bench decision, the ITAT accepted the assessee’s contention that the licence fee was business income and was not royalty.

Compilers’ remarks :

The ITAT was not concerned with nor has dealt with the aspect of determination of income which is attributable to USCO’s activities in India to the extent the ITAT concluded that USCO had PE in India.

Payment towards licence for use of copyrighted software provided as part of equipment supply is not royalty.

 1 Lucent Technologies International Inc v. DCIT

(2009 TIOL 161 ITAT Del)/(28 SOT 98) Section/Article : Article 5 India — USA Double Tax Avoidance Agreement A.Ys. : 1997-98 to 2000-01. Dated : 19-12-2008

Issue :

  •     Services to Subsidiary in India by deputing personnel of affiliated companies constitute Service PE.

  •     Payment towards licence for use of copyrighted software provided as part of equipment supply is not royalty.

Facts :

The assessee, US Company (USCO), is a leading supplier of hardware and software used for GSM cellular radio telephone system. The USCO supplied telecommunication hardware and software to its customers in India. USCO had an Indian subsidiary (herein WOS) which undertook the work of installation and providing after-sales services to the customers of USCO in India.

USCO had entered into a contract with one Indian telecom company by name Escotel Mobile Communications Ltd. (herein Escotel). In terms of the agreement between USCO and Escotel, USCO was to supply hardware and software to Escotel while the services of installation were to be provided by WOS. In terms of the contract with Escotel, USCO had the responsibility of designing, manufacturing, supplying and delivering all hardware and software. The contract also required USCO to undertake installation, testing, commissioning and achieve final acceptance of the system by the customer. A part of responsibility of the inspection, installation and supervising the testing and commissioning was that of the Indian WOS. To some extent there was an overlap of responsibilities of USCO vis-à-vis that of WOS. As part of the supply contract, the assessee also provided licence for use of computer software which was required for the purposes of functioning of GSM network.

For enabling the WOS to discharge its obligation, USCO made available to WOS personnel who were the employees of the affiliates of USCO. Such employees were under the control of USCO and the WOS was required to pay remuneration to USCO. USCO claimed that it incurred no tax liability in India as the hardware was supplied from outside India. The assessee also claimed that payment received for the licence agreement for use of computer software was business income and was not royalty chargeable in terms of Article 12 of DTAA. Reliance for this was placed on the decision of Special Bench in case of Motorola Inc v. DCIT, (96 TTJ 1) (Delhi SB). The AO claimed that the USCO attracted tax liability in India on the ground that, in the circumstances of the case, USCO had PE in India. The AO claimed that (i) USCO had PE in the form of WOS being its dependent agent; (ii) that premises of WOS were available at the disposal of the employees who were deputed by USCO; (iii) that negotiation and conclusion of the contract happened in India. In respect of software supply, the Department claimed that software licence fees was chargeable as royalty income.

Held :

The ITAT accepted the department’s contention and held that USCO had PE in India on account of the following features :

    (1) Having regard to the terms of the contract with the customer, not only Indian WOS but also USCO was responsible for turnkey functioning of the project of the GSM network. The ITAT noticed that the agreements with customer in India made USCO and WOS responsible for the turnkey completion of the GSM project individually and severally. The responsibility to Escotel was such that USCO had to complete installation should WOS fail in any manner. Conversely, WOS had responsibility of arranging for hardware and software should USCO fail in its responsibility. Having noted this, the ITAT concluded that the arrangement was ‘in short a consortium or partnership’ between USCO and WOS.

(2) The ITAT noted that the terms of agreement between Escotel and USCO and WOS also required of WOS to provide warranty in respect of the hardware supply made by USCO. This, according to the Tribunal, supported that the WOS was acting on behalf of USCO.

     
(3) The ITAT noted that USCO made available the personnel (though employees of the affiliates of USCO) to WOS for the purpose of enabling the WOS to discharge the responsibility of installation, commissioning, etc. of the GSM equipments. Such personnel were made available for remuneration. The ITAT concluded that in terms of the treaty, the service PE was triggered when the USCO provided services to its affiliate WOS even for a day. Since USCO provided services to ICO with the help of personnel who were under USCO’s control, the ITAT concluded that the USCO had service PE in terms of Article 5(2)(l)(ii) of the treaty.

     
(4) On the aspect of taxation of consideration received for software licence agreement, the ITAT noted that the facts of the case of USCO were at par with the facts which operated in the case of Motorola (supra). Relying on the Special Bench decision, the ITAT accepted the assessee’s contention that the licence fee was business income and was not royalty.

Compilers’ remarks :

The ITAT was not concerned with nor has dealt with the aspect of determination of income which is attributable to USCO’s activities in India to the extent the ITAT concluded that USCO had PE in India.

S. 9 and Article 5 & 7, India-Italy DTAA : Supply of machinery and raw material to WOS, no PE

fiogf49gjkf0d

New Page 2

DCIT v. Perfetti SPA

(2008) 113 TTJ 701 (Del.)

A.Y. : 1997-98. Dated : 31-10-2007

3. S. 9, Income-tax Act; Articles 5 & 7, India-Italy DTAA.


Issues :

(i) Whether business connection and income taxable in
India ?

(ii) Whether PE having taxable income in India ?


Facts :

The assessee company was a resident of Italy. It had a
wholly-owned subsidiary company in India. Managing Director of the WOS was
appointed by the assessee company, which also paid part of his salary outside
India. The assessee company had supplied machinery and raw materials to its WOS
and had not filed return of its income in India, on the ground that in terms of
India-Italy DTAA, its income was not taxable in India.

The AO issued notice u/s.163(1)(a) of the Act to the WOS
asking the assessee company to file return. After considering the
representations of the assessee company, the AO observed that the assessee
company had business connection in India and its income was deemed to have
accrued and arisen in India, since :

(i) It had supplied machinery on a continuous basis over a
long period;

(ii) By virtue of payment of salaries of Managing Director
and other expatriates, the assessee company had total control over management
and affairs of the WOS;

(iii) Orders for machinery were placed from India without
any written contract or negotiations, which showed business connection between
the assessee company and the WOS;

(iv) The machinery was overinvoiced; and

(v) The supply was made on CIF basis and hence the assessee
company was required to supply the goods in India.

Before CIT(A), the assessee company had contended that it did
not carry out any business activity in India as : the order for supply of
machinery and raw material was placed at Italy; the goods were also shipped at
airport in Italy; it did not retain any right in the disposal of goods; and it
sent technicians, food technologists and process specialists for developing
products and processes best suited for Indian environment and these personnel
were not connected with installation or running of machinery. The Customs
authorities had not raised any objection regarding the valuation of the goods,
which supported the assessee company’s contention that the supply was made on
principal-to-principal basis.

As regards control over management and affairs of the WOS,
the assessee company had submitted that the WOS acts as an independent legal
entity and takes its own decisions in day-to-day financial matters and that the
AO had not confronted it with the material brought on record. The CIT(A)
concluded that the contract was executed at Italy.

The Tribunal observed that having regard to the facts brought
on record, it appeared that findings of the AO were merely based upon
presumptions. He had not brought any evidence on record, either that the
employees of the assessee company installed machinery for the WOS, or that the
assessee company had used its dominant position to over-invoice the machinery.
The findings of the CIT(A) were also not disputed. Based on facts and
circumstances, since the contract was executed in Italy and the sale was made on
principal-to-principal basis at arm’s length, it was covered by CBDT’s Circular
No. 23, dated July 23, 1969. Mere existence of business relation does not give
any right to the AO to assess any income in India. The AO had also not brought
any evidence to prove the assessee company’s PE in India or as to what business
was conducted by it during the assessment year in question or what profit or
income was earned by it on supply of machinery and raw material. Thus, the
findings of the AO were presumptuous. The AO had not discharged the onus upon
him. The Tribunal further observed that under Article 5 of India-Italy DTAA, the
term PE includes several kinds of places. However, the AO had not proved
existence of any such place vis-à-vis the assessee company. Also, Article
5(6) of India-Italy DTAA clarifies that mere control of one enterprise over the
other does not constitute a PE. The AO merely presumed 20% as the profit on the
supplies, but did not bring any evidence to prove it.

Held :


(i) S. 9(1) of the Act was not attracted as the assessee
company had merely supplied machinery and raw material on
principal-to-principal basis on arm’s length price to the WOS.

(ii) In the absence of the PE of the assessee company in India, Articles 5
and 7 of India-Italy DTAA were not attracted and hence, no part of its income
taxable in India.

levitra

S. 195, S. 245N, S. 245R, and Articles 5, 7, 12 of India-USA DTAA : TDS on hardware and software contracts

fiogf49gjkf0d

New Page 2

Airports Authority of India, In re (AAR)
[Unreported]

Dated : 28-2-2008

2. S. 195, S. 245N, S. 245R, Income-tax Act; Articles 5, 7,
12, India-USA DTAA.

Issue :

Obligation to deduct tax and rate for deduction of tax on
Hardware Contract and Software Contract.

Facts :

The applicant was a PSU operating airports in India. It had
entered into two separate contracts, named Hardware Repair Support Contract
(‘Hardware Contract’) and Software Maintenance Support Contract (‘Software
Contract’), with an American company. In respect of contracts having
substantially similar terms and conditions, the applicant had sought ruling of
AAR earlier (see 273 ITR 437). The possible reasons for seeking a fresh ruling
were that technically the transaction is a separate transaction and that in case
of the American company, the tax authorities had taken a different view in the
course of its assessment proceedings.

The Hardware Contract provided that : the applicant shall
send the hardware to the American company outside India; the American company
shall repair the hardware outside India; and the applicant shall take delivery
of hardware duly repaired by the American company outside India.

In the context of the Hardware Contract, the issues raised
for determination were :

(a) Whether the payment received by the American company
was liable to tax in its hands in India, and

(b) If the payment was taxable in the hands of the American
company, what should be the rate at which tax should be deducted by the
applicant ?

In the context of the Software Contract, the issues raised
for determination were :

(a) Whether deputation of engineers by the American company
to India for installation and testing of required software constituted its PE;

(b) Whether the payment received by the American company
was liable to tax in its hands in India; and

(c) If the payment was taxable in the hands of the American
company, what should be the rate at which tax should be deducted by the
applicant ?

In its earlier ruling, the AAR had held that the American
company did not have a PE in India (which was also conceded by the counsel for
the Revenue). In respect of Hardware Contract, the payment received by it was
not income from furnishing services as defined in Article 12 of India-USA DTAA,
but it was business profits within the meaning of Article 7(7) of India-USA DTAA
and since it did not have a PE in India, it was not taxable in India. In respect
of the Software Contract, the applicant had contended that the defects in the
software would also be attended to outside India and that the visit of the
American company’s engineer is only for a short period and incidental. Hence,
amount paid for repair of software should also represent business income and
should not be chargeable to tax in India. Even if the payment was treated as
‘fees for included services’, as per MOU appended to India-USA DTAA, the visit
would not be covered within the meaning of ‘included services’. Even if the
amount is so treated, in view of limited number of visits, it may be apportioned
between ‘fees for included services’ and ‘business income’. The Revenue had
contended that the payment was ‘fees for included services’ under Article
12(4)(a), as well as ‘royalty’ under Article 12(3(a), of India-USA DTAA, since
the applicant’s agreements of 2003 are only supplementary to the original
agreements of 1993. The AAR had then proceeded to consider Article 7 and Article
12, and had concluded that insofar as software and documentation were concerned,
the applicant had acquired a right to use the same subject to certain
conditions, and as regards repair of software, payment received by the American
company would be ‘fees for included services’ under Article 12(4)(a) and would
be outside the purview of Article 7(7). Accordingly, in view of Article 12(2)
the payment would be taxable in India.

In case of the present ruling, the Revenue contended that for
earlier ruling, the AAR was not apprised of the facts relating to PE and that
its counsel had wrongly conceded and further that subsequent investigation in
the course of assessment proceedings revealed the existence of PE. To satisfy
itself about prima facie sustainability of the Revenue’s contention, the
AAR examined the assessment orders relating to the American company. It observed
that there was no definite finding supported by reasons on the existence of PE.
The fact that the American company admitted having an installation PE had no
bearing on the aspect whether a PE was set up in the context of the Hardware
Contract and the Software Contract. The AAR expressed the probability that since
the entire activity of hardware repair took place outside India and as the
hardware was sent outside India and its delivery after repair was also taken
outside India by the applicant, there was very little part which the liaison
office could have played. Further, from the sporadic visits of a few days by the
American company’s personnel, it was difficult to draw the inference of
existence of PE.

As regards the Revenue’s contention about the American
company having a dependent agent PE, the AAR observed that there was nothing in
the agreement which indicated that the agent was assigned any role or
responsibility under the Hardware Contract. The AAR did not get any satisfactory
reply from the counsel of the Revenue on the request to clarify whether any
activity related to the contract was undertaken by the so-called PE. The AAR
declined to reconsider its earlier ruling on the ground that the Revenue’s
counsel had wrongly conceded or that the applicant had not made proper
disclosure on the issue of PE.

The AAR then considered the Revenue’s contention about the maintainability of the application and the AAR’s jurisdiction in view of the embargo in proviso (i) to S. 245R(2), on the ground that the question raised in the application was already pending before the Income-tax authority. The AAR observed that the question of tax deduction cannot be said to be pending before the Income-tax authority and hence, the application was not hit by the embargo. It further observed that the issue relating to tax deduction at source was ‘in relation to’ the tax liability of the American company and therefore, it was within the purview of the definition of ‘advance ruling’ in S. 245N(a) and (b).

The counsel for the applicant stated that it was desirous of getting answer to the second question regarding its obligation to deduct tax at source and once that was answered, it was not desirous of getting answer to the first question. Hence, the AAR treated the first question as withdrawn by the applicant. Similarly, in respect of the Software Contract, only the question regarding the rate of tax deduction survived as other questions were not pressed.

Held:
(i) As regards the Hardware Contract, the applicant was not legally required to deduct tax on payments made by it to the American company.
(ii) As regards the Software Contract, the tax was required to be deducted @ 10%.

S. 115C, S. 115D, S. 115E : Interest on NRO deposit with banking company is investment income : TDS at 20%.

fiogf49gjkf0d

New Page 2V. Ravi Narayanan,
In re (AAR)

(Unreported)

A.Y. : 2008-09. Dated : 3-3-2008

1. S. 115C, S. 115D, S. 115E, Income-tax Act.

Issues :


(i) Whether deposit in NRO account made with convertible
foreign exchange is ‘foreign exchange asset’ ?

(ii) Whether interest earned on such deposit is ‘investment
income’ qualifying for benefit u/s. 115E of the Act ?

(iii) What should be the rate of TDS on such interest ?


Facts :

The applicant had left India during the relevant previous
year and was a non-resident during that year. He proposed to open a Non-Resident
Ordinary (‘NRO’) account with a bank in India. The intended source of deposits
in the NRO account was remittances from outside India. He contended that the
interest earned on such deposits would be ‘investment income’ u/s.115C of the
Act and accordingly, applicable rate of tax should be 20% u/s.115E of the Act.
He was informed that since banks in India do not treat this as ‘investment
income’, tax would be deducted @ 30%.

The AAR considered the provisions of S. 115C, S. 115D and S.
115E of the Act, which are contained in Chapter XIIA of the Act. The AAR
observed that the applicant is a citizen of India, who is a non-resident. Hence,
he would qualify to claim benefit u/s.115E of the Act. Thereafter, the AAR
considered the provisions of the Companies Act, 1956 and the Banking Regulation
Act, 1949 in order to test whether NRO deposit would constitute ‘specified
asset’ being deposits with Indian company. The AAR concluded that an Indian bank
governed by the Banking Regulation Act is also a company which is not a private
company as defined in the Companies Act, 1956 and therefore, a deposit made with
it would be a ‘specified asset’ within the meaning of S. 115C(f)(iii) of the
Act.

The representative of the Revenue had contended before the
AAR that :

(a) though NRO deposit is acquired with convertible foreign
exchange, its maturity proceeds are not repatriable;

(b) hence such a deposit does not constitute a ‘foreign
exchange asset’ u/s.115C of the Act;

(c) as such, interest earned on it does not qualify as
‘investment income’ u/s.115C of the Act; and

(d) since it is not ‘investment income’, tax should be
deducted @ 30%.

The AAR observed that the question is whether repatriability
of the deposit was a requirement and found that it was not a requirement under
Chapter XIIA of the Act.

Held :


(i) Deposit made in NRO account with a banking company,
which is not a private company, by remitting convertible foreign exchange,
would be ‘foreign exchange asset’ u/s.115C(b) of the Act.

(ii) Interest earned on deposit in NRO account mentioned in
(i) above would be ‘investment income’ u/s.115C(c) of the Act and would be
subject to tax @ 20% u/s.115E.

(iii) Deposit with a banking company is a ‘specified asset’
u/s.115C(f) of the Act.

(iv) Banks paying interest on the deposit in NRO account
mentioned in (i) above are required to deduct tax @ 20%.


levitra

S/s. 43B & 145A – Service tax on unrealised service charges cannot be added back to the income

fiogf49gjkf0d
3. (2013) 82 DTR 303 (Mum)
Pharma Search vs. ACIT
A.Y.: 2007-08 Dated: 2.5.2012

S/s. 43B & 145A – Service tax on unrealised service charges cannot be added back to the income


Facts:

The assessee was engaged in the business of rendering consultation in pharmaceuticals, chemicals and drugs. In the P & L A/c, the assessee has shown fees for rendering consultancy services net of service tax. The service charges of Rs. 32 lakh was not realised and outstanding at the year end. The Assessing Officer was of the view that the service tax should have been shown as receipts in the P & L A/c on the principle laid down by the Honourable Supreme Court in the case of Chowringhee Sales Bureau (P) Ltd. vs. CIT [87 ITR 542] and also as per the provisions of section 145A. The Assessing Officer made an addition of Rs. 3,91,680/- on account of service tax on the ground that the assessee ought to have made payment of the service-tax in order to claim deduction as per provisions of section 43B.

Held:

As per the service tax law, service tax is payable as and when the payments/fees for underlying service provided are realised. As the assessee has not received the sum till the end of the financial year, question of paying the same did not arise at all. If for any reason the payment for services rendered is not realised, there was no liability as to payment of service tax. Thus, the service tax law stands on a different footing as compared to other laws like Central excise or VAT.

The application of section 145A is restricted to purchase and sale of goods only, and does not extend to service contracts. Therefore, the action of the Assessing Officer in invoking provisions of section 145A and adding service-tax to gross receipts is incorrect in as much as against the very basic principles of section 145A.

The rigours of section 43B might be applicable to the case of sales-tax or excise duty, but the same could not be said to be the position in case of service tax because of two reasons. Firstly, the assessee is never allowed deduction on account of service tax which is collected on behalf of the Government and is paid to the Government account. Therefore, a service provider is merely acting as an agent of the Government. Secondly, section 43B(a) uses the expression “any sum payable”. If there is no liability to make the payment to the credit of the Central Government because of nonreceipt of payments from the receiver of the services, then it cannot be said that such service tax has become payable in terms of section 43B(a).

levitra

Educational Institution: Exemption u/s. 10(22):A. Y. 1998-99: Denial of exemption disputing genuineness of transaction: Contributor to assessee denying the transaction: Assessee should be given opportunity to cross-examine the disputant:

fiogf49gjkf0d
Sri Krishna Educational and Social Trust vs. ITO; 351 ITR 178 (Mad):

For the A. Y. 1998-99, the Assessing Officer made additions denying exemption u/s. 10(22) of the Income-tax Act, 1961, disputing the genuineness of a transaction wherein the contributor to the assessee had denied transaction. The assessee was not given the opportunity to cross-examine the said person. The Tribunal upheld the decision of the Assessing Officer. The Tribunal held that the assesee did not have the right to cross-examine the witness who made the adverse report, especially when the records did not indicate that the assessee had made any attempt to produce witnesses.

 On appeal by the assessee, the Madras High Court reversed the decision of the Tribunal and held as under:

 “i) When the authorities entertained a doubt about the genuineness of the transaction, the Tribunal ought to have afforded the assessee an opportunity to cross examine the disputant. The Revenue had not accepted the explanation given by the assessee. The assessee would not have expected one of the contributors to have denied the factum of contribution. This view was inevitable because but for this the assessee would not have opted to cross-examine the contributor.

 ii) Therefore, when there was unexpected change of facts, the party should not be deprived of the opportunity to cross-examine the witness branded as the assessee’s witness. The Evidence Act also permits a party to cross-examine his own witness under stated circumstances.

 iii) Unless it is proved that the income derived was covered u/s. 10(22) it could not be decided whether the addition u/s. 68 was possible or not. Therefore, the matter was remitted to the Assessing Officer for further consideration in the light of the legal position.”

levitra

Capital or revenue receipt: Test: A. Y. 1997- 98: assessee receiving amount in terms of release agreement: Compensation for loss of source of income: Capital receipt: Not taxable:

fiogf49gjkf0d
Khanna and Annadhanam vs. CIT; 351 ITR 110 (Del):

The assessee is a firm of Chartered Accountants. Since 1983, the assessee had an arrangement with a foreign firm whereunder the foreign firm referred work to the assessee through a Calcutta firm in respect of clients based in Delhi and nearby areas. The arrangement was reduced to writing in 1992. In 1996, the foreign firm wanted a firm of Chartered Accountants of Bombay to represent its work in India. Accordingly, an agreement was entered into on 14-11-1996, which was called a release agreement, under which the assessee was to no longer represent the foreign firm in India and thereafter the foreign firm would not refer any work to the assessee. In consideration of the termination of the services of the assessee, the assessee received an amount of Rs. 1,15,70,000/- in terms of the release agreement. The assessee claimed the amount to be capital receipt. The assessing Officer assessed the amount as professional income. The CIT(A) deleted the addition. The Tribunal upheld the decision of the Assessing Officer.

On appeal by the assessee, the Delhi High Court reversed the decision of the Tribunal and held as under:

“i) The fact that the assessee continued its business or its usual operations even after termination of an agency is of no consequence. If the receipt represents compensation for the loss of a source of income, it would be capital and it matters little that the assessee continues to be in receipt of income from its other similar operations.

 ii) There was no evidence that the assessee had entered into similar arrangements with other international firms of Chartered Accountants. The arrangement with the foreign firm was in operation for a fairly long period of 13 years and had acquired a kind of permanency as a source of income. When that source was unexpectedly terminated, it amounted to the impairment of the profit-making structure or apparatus of the assessee. It was for that loss of the source of income that the compensation was calculated and paid to the assessee.

 iii) The compensation was thus a substitute for the source. Therefore, the amount of Rs. 1,15,70,000/- received by the assessee in terms of the release agreement represented a capital receipt, not assessable to tax.”

levitra

Capital gains: Forfeiture of earnest money: Section 51 r/w. s. 4: A. Y. 2007-08: Earnest money forfeited on cancellation of sale agreement is capital receipt: Not taxable as income:

fiogf49gjkf0d
CIT vs. Meera Goyal; 30 Taxman.com (Del):

The assessee entered into an agreement to sell his house property to a company and in terms of agreement received certain sum as earnest money Since purchaser failed to pay balance consideration by stipulated period, the assessee forfeited the earnest money and claimed same as capital receipt. The Additional Commissioner on reference u/s. 144A directed the Assessing Officer to the effect that earned money so received and forfeited was to be adjusted against the cost of property and capital gain was to be worked out on the basis of the resultant cost as and when the property was sold. However, the Assessing Officer held that entire transaction was a sham transaction in which purchaser attempted to book bogus losses. He accordingly made addition of the forfeited amount. The Commissioner (Appeals) deleted the addition. The Tribunal upheld the order of Commissioner (Appeals) observing that the earnest money was received through banking channels and genuineness of the receipt was not in dispute.

On appeal by the Revenue, the Delhi High Court upheld the decision of the Tribunal and held as under:

“i) The Tribunal has rightly noted that the provisions of section 51 would come into play as it specifically covers this type of a transaction. Once the transaction has been held to be genuine, there is no question of the transaction being without any consideration.

ii) Consequently, there is no merit in the revenue’s appeal, much less any substantial question of law.”

levitra

Recovery: Stay of demand pending appeal: Section 220(6) : A. Y. 2010-11: Stay can be granted on the basis of the merits even if there is no financial hardship:

fiogf49gjkf0d
UTI Mutual Fund vs. ITO (Bom); WP(L) No. 523 of 2013 dated 06-03-2013:

In respect of the A. Y. 2010-11, the application of the petitioner u/s. 220(6) for keeping the demand in abeyance till the disposal of the appeal was rejected by the Assessing Officer. The Assessing Officer refused to follow the order of the Bombay High Court (see. UTI Mutual Fund vs. ITO; 345 ITR 71 (Bom); wherein stay was granted in similar circumstances for the preceding year. CIT also rejected application for stay.

On a writ petition filed by the Petitioner challenging the order of rejection, the Department relied on the order of the Karnataka High Court in CIT vs. IBM India Pvt. Ltd.(Kar); ITA No. 31 of 2013 dated 04-02-2013, taking the view that in a revenue matter an interim order should be passed only in the case of genuine financial hardship and not otherwise.

The Bombay High Court allowed the writ petition and held as under:

“i) The order of the Karnataka High Court cannot be read to mean that consideration of whether an assessee has made out a strong prima facie case for stay of enforcement of a demand is irrelevant. Nor is the law to the effect that except a case of financial hardship, no stay on the recovery of demand can be granted even though a strong prima facie case is made out.

 ii) In considering whether a stay of demand should be granted, the Court is duty bound to consider not merely the issue of financial hardship if any, but also whether a strong prima facie case raising a serious triable issue has been raised which would warrant a dispensation of deposit. That is a settled position in the jurisprudence of our revenue legislation. In CEAT Ltd. vs. UOI; 2010 (250) E.L.T. 200 (Bom), the Division Bench of this Court has held as follows. “If the party has made out a strong prima facie case, that by itself would be a strong ground in the matter of exercise of discretion as calling on the party to deposit the amount which prima facie is not liable to deposit or which demand has legs to stand upon, by itself would result in undue hardship of the party.”

 iii) Where a strong prima facie case is made out calling upon the petitioner to deposit, would itself occasion undue hardship. Where the issue has raised a strong prima facie case which requires serious consideration as in the present case, the requirement of predeposit would itself be a matter of hardship.

iv) Finally, we express our serious disapproval of the manner in which the Revenue has sought to brush aside a binding decision of this Court in the case of the assessee on the issue of the stay on enforcement for the previous year. The rule of law has an abiding value in our legal regime. No public authority, including the Revenue, can ignore the principle of precedent. Certainty, in tax administration is of cardinal importance and its absence undermines public confidence.

 v) For these reasons, we direct that pending the disposal of the appeals for the A. Y. 2010-11 and for a period of six weeks thereafter, no coercive steps shall be taken against the assessee for the recovery of the demand in pursuance of the impugned notices dated 25-02-2013.”

levitra

Advance Tax – Levy of interest u/s. 234A/234B/234C is mandatory and the interest could be levied without specific direction in the assessment order.

fiogf49gjkf0d
Karanvir Singh Gossal vs. CIT & Anr. [2012] 349 ITR 692 (SC)

The short point that was involved in the case before the Supreme Court was whether levy of interest u/s. 234A/234B of the Income-tax Act, 1961 ( “the Act”), is mandatory or not. The Supreme Court observed that at one point of time, there was a doubt on the nature of interest payable by the assessee u/s. 234A/234B of the Act and that the controversy was finally settled by its five judge bench decision in the case of CIT vs. Anjum M.H. Ghaswala [2001] 252 ITR 1.

According to the Supreme Court, the position that emerged after the judgment in Anjum Ghaswala’s case (supra) was that if interest is leviable in a given case u/s. 234B/234C, then in such a case that levy is mandatory and compensatory in nature. The recitation by the Assessing Officer directing institution of penal proceedings was not obligatory and penal proceedings could be initiated for such default without a specific direction from the Assessing Officer.

The Supreme Court noted that in the said judgment, it had been held that in appropriate cases, the Chief Commission had an authority to waive the interest.

 The Supreme Court observed that in the present case, the assessee had placed reliance on the Circular issued by the Central Board of Direct Taxes, which had been referred to and mentioned in Anjum Ghaswala’s case (supra) and that this aspect had not been considered by the High Court in its impugned order, and it was not considered even by the Tribunal.

 For the above reasons, the Supreme Court set aside the impugned orders of the Tribunal as also of the High Court. The Supreme Court directed the Tribunal to consider whether the assessee would be entitled to waiver of interest under the Circular bearing No.400/234/95-IT(B) dated 23rd May, 1996, which had been referred to in the case of Anjum Ghaswala (supra).

[Note: Since the decision of the Punjab and Haryana High Court is not available, it is not clear as to how the reference of initiation of penalty proceedings is made in paragraph 2 above. In the context and considering the cases referred to, the reference to penalty proceedings seems inadvertent. It should instead be read as “the recitation by the Assessing Officer directing levy of interest is not obligatory and interest could be levied for such default without a specific direction from the Assessing Officer.]

levitra

Export – Profits derived from export of granite not eligible for deduction under section 80HHC

fiogf49gjkf0d
Tamil Nadu Minerals Ltd. vs. CIT [2012] 349 ITR 695 (SC) Manufacture –

Mining of granite from quarries and exporting them after cutting, polishing, etc. tantamounts to manufacture.

The following question of law arose from determination before the Supreme Court in Civil Appeal No.2997 of 2004.

“Whether the assessee is entitled to claim deduction to the extent of profits referred to in s/s. (IB) of section 80HHC of the Income-tax Act, 1961, derived from export of goods – in this case, granite, for the assessment year 1988-89?”

The Supreme Court answered above question against the assessee in view of its judgment in the case Gem Granites vs. CIT reported in [2004] 271 ITR 322 (SC). In Civil Appeal Nos. 7472-7473 of 2004 the following question of law arose for determination before the Supreme Court.

“Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in law in holding that the assessee is entitled to investment allowance on the activities of the assessee, viz., mining granite from quarries and exporting them after cutting, polishing etc., which tantamount to manufacture for the purpose of section 32A of the Income-tax Act, 1961?

The Supreme Court held that this issue was squarely covered in favour of the assessee, vide its judgment in the case of CIT v. Sesa Goa Ltd. [2004] 271 ITR 331 (SC).

levitra

Co-operative Society – Income from underwriting commission and interest on PSEB Bonds and IDBI Bonds derived by a banking concern is income from banking business and hence qualified for deduction u/s. 80P(2)(a)(i).

fiogf49gjkf0d
CIT vs. Nawanshahar Central Co-op. Bank Ltd. (2012) 349 ITR 689 (SC)

The following two questions, arose for determination before the Supreme Court: (a) Whether the High Court was justified in holding that the respondent-assessee was entitled for deduction u/s. 80P(2)

(a)(i) of the Income-tax Act, 1961, in respect of income from underwriting commission and interest on PSEB Bonds and IDBI Bonds?

 (b) Whether the High Court was justified in affirming the decision of the Tribunal that the income earned by the assessee which was derived from underwriting the issue of bonds and investments in PSEB Bonds was in the nature of income from banking business and hence qualified for deduction u/s. 80P(2)(a)(i) of the Income Tax Act, 1961 ?

The Supreme Court dismissed the appeals filed by the Department in view of its decision in CIT vs. Nawanshahar Central Co-op. Bank Ltd. (2007) 289 ITR 6 (SC).

levitra

Business Expenditure – Interest paid in respect of borrowings for acquisition of capital assets not put to use in the concerned financial year is allowable as a deduction u/s. 36(1)(iii).

fiogf49gjkf0d
Vardhman Polytex Ltd. vs. CIT (2012) 349 ITR 690 (SC)

The assessee, who was engaged in the business of yarn, filed its return of income for the assessment year 1992-93 declaring its taxable income at Rs. 3,59,86,359/-. A revised return thereafter was filed declaring taxable income of Rs. 3,48,09,071/-. In the computation of income filed alongwith the revised return, the assessee claimed additional deduction amount of Rs. 1,97,290/- and Rs. 9,80,000/- on account of interest u/s. 36(1)(iii) and up front fees respectively. The claim was made on account of loans raised for set up of a new unit at Baddi (HP). The Assessing Officer, in view of the fact, that the loan was raised for setting up a new unit for creating a capital asset which was yet to come into production, disallowed the interest, relying upon Explanation 8 to section 43(1).

The Commissioner of Income Tax (Appeals) allowed the appeal of the assessee and the Tribunal rejecting the appeal of the Revenue approved the order passed by the Commissioner of Income Tax (Appeals).

The Full Bench of the Punjab and Hariyana High Court reversed the order of the Tribunal [CIT vs. Vardhaman Polytex Ltd. – 299 ITR 152 (P & H) (FB)] holding that the loan was not raised for the purpose of running of the business for its day to day requirements, but for the purpose of creating additional assets, new capacity at a new location and as such the interest on the loan was not deductible u/s. 36.

The Supreme Court reversed the order of the High Court following its judgement in Deputy CIT vs. Core Healthcare Ltd. reported in (2008) 298 ITR 194(SC).

levitra

Charitable Trusts – Depreciation on Cost of Assets Allowed as Application of Income

fiogf49gjkf0d
Issue for Consideration

U/s. 11 of the Income Tax Act, 1961, a charitable or religious trust, subject to certain conditions,is entitled to exemption in respect of income from property held under trust for charitable or religious purposes, to the extent that such income is applied for charitable or religious purposes, or accumulated for charitable or religious purposes.

The CBDT has clarified vide its circular number 5 – P(LXX-6) dated 19th June 1968 that for the purposes of such exemption u/s. 11, the income of a trust is to be taken in the commercial sense, and not as computed under the provisions of the Income Tax Act. In other words, the income, that is eligible for exemption, is the one that has been determined as per the books of account. This position clarified by the CBDT is also confirmed by the decisions of the various high courts .

Taking this into account, various high courts have also held that that depreciation had necessarily to be deducted in computing the commercial income, as depreciation was a necessary accounting adjustment to income. Further, various courts, including the Supreme Court in the case of M. Ct. M. Tiruppani Trust vs. CIT 230 ITR 636, have held that all capital expenditure laid out in furtherance of the objects and purposes of the trust would be treated as an application of the income.

The question that has arisen before the courts as to whether, when a trust has claimed the capital expenditure on acquisition of an asset as an application of income for the purposes of claiming exemption u/s. 11, whether depreciation on such asset was also allowable as a deduction in computing the income of the trust. While the Bombay, Punjab and Haryana and Delhi High Courts have taken the view that depreciation would be allowable as a deduction even in such cases where the capital expenditure had been allowed as an application of income for charitable purposes, the Kerala High Court has taken a contrary view, holding that such depreciation should be added back to the income of the trust as disclosed in its books of account.

Institute of Banking Personnel Selection’s case:

The issue came up before the Bombay High Court in the case of CIT vs. Institute of Banking Personnel Selection 264 ITR 110. In that case, the assessee was a charitable trust registered under the Bombay Public Trusts Act, 1950, as well as u/s. 12A of the Income Tax Act. It claimed depreciation on buildings, the cost of which had been allowed as a deduction in earlier years. It also claimed depreciation on furniture and fixtures which had been received by transfer from another trust, whose income was also exempt u/s. 11, and which had claimed the cost of such furniture and fixtures as an application of income in earlier years. The Assessing Officer disallowed the depreciation on buildings as well as on furniture and fixtures, on the grounds that capital expenditure incurred was allowed as a deduction from the income of the assessee, and that if depreciation was allowed, it would result in double deduction as full capital cost of furniture and fixtures had been allowed.

 The Bombay High Court referred to its earlier decisions in the cases of CIT vs. Munisuvrat Jain Temple Trust (1994) Tax LR 1084 and DIT(E) v Framjee Cawasjee Institute 109 CTR 463. In the first case, it had been held that the income of a charitable trust was liable to be computed in normal commercial manner, although the trust might not be carrying on any business and the assets in respect whereof depreciation was claimed might not be business assets. It was also held that section 32 of the Income Tax Act would not apply to such depreciation, and that income was to be computed after providing for allowance for normal depreciation, and deducting such depreciation from gross income of the trust.

 In Framjee Cawasjee Institute’s case, it was held that though the amount spent on acquiring the assets had been treated as application of income of the trust in the year in which the income was spent on acquiring those assets, that did not mean that in computing income from those assets in subsequent years, depreciation in respect of those assets could not be taken into account.

The Bombay High Court followed its earlier decisions and took the view that depreciation was allowable even on those assets whose actual cost had been allowed as a deduction in computing the income of the earlier years. A view similar to that of the Bombay High Court has been taken by the Punjab and Haryana High Court in the case of CIT vs. Market Committee, Pipli 330 ITR 16 and by the Delhi High Court in the case of DIT vs. Vishwa Jagriti Mission 73 DTR (Del) 195.

Lissie Medical Institutions’ case:

The issue also came up before the Kerala High Court in the case of Lissie Medical Institutions vs. CIT 76 DTR (Ker) 372.

In this case, the assessee was a charitable institution registered u/s.12A, and running a hospital. It acquired medical equipment, such as x-ray units, scanning machines, etc., the expenditure for acquisition of which was treated as application of income for charitable purposes u/s. 11. In computing the income from the hospital, the assessee also claimed depreciation on such equipments, on assets acquired during the year as well as on assets acquired during earlier years.

The Assessing Officer was of the view that the assessee’s case was that of a double deduction of capital expenditure, since acquisition of assets was treated as acquisition of income for charitable purposes, and the value of the assets stood fully written off. On appeal, the tribunal, following the judgment of the Supreme Court in the case of Escorts Ltd vs. Union of India 199 ITR 43, confirmed such disallowance.

On a further appeal by the assesee, the Kerala High Court observed that if the assessee treated an expenditure on acquisition of assets as application of income for charitable purposes u/s. 11, and the assessee also claimed depreciation on the value of such assets, then in order to reflect the true income that was available for application for charitable purposes, the assessee should write back the depreciation amount in the accounts to form part of the income to be accounted for application for charitable purposes. If this was not done, according to the Kerala High Court, the income which would be available for application for charitable purposes got reduced by the depreciation amount, which in the court’s view was not permissible u/s. 11. The net effect in a case where an assessee claimed depreciation in respect of an asset the full value of which was claimed as an application of income for charitable purposes, such notional claim of depreciation became cash surplus available with the assessee, which remained outside the books of account of the trust, unless it was written back, which was not done by the trust.

The Kerala High Court observed that it did not think it was permissible for a charitable institution to generate income outside the books in this fashion. The Kerala High Court noted that in all the other decisions cited before it of the other high courts, none of the courts had examined the aspect of availability of income to the trust on write back of the depreciation, in cases where depreciation was claimed as a notional cost after the assessee claimed 100% of the cost incurred for it as application of income for charitable purposes, the depreciation so claimed was to be added back as income available.

Interestingly, the Kerala High Court, on a consideration of the clarification of the CBDT filed before it, observed that based on the decisions of other high courts, all the charitable institutions were generating unaccounted income equal to the depreciation amount claimed on a year-to-year basis, which was nothing but black money, and that this aspect had not been considered in any of these decisions.

The Kerala High Court also was of the view that the issue was covered by the decision of the Supreme Court in Escorts’ case (supra), where the Supreme Court had observed that “the mere fact that a baseless claim was raised by some overenthusiastic assessees who sought a double allowance or that such claim may perhaps have been accepted by some authorities is not sufficient to attribute any ambiguity or doubt as to the true scope of the provisions as they stood earlier”.

However, considering the fact that depreciation had been allowed for several years to the assessee, the Kerala High Court observed that the assessee could not be taken by surprise by disallowing depreciation, which was being allowed for several years. It therefore allowed the assessee to write back the depreciation for the year before it, and even for previous years, and carry forward such income for application for subsequent years.

Observations

The CBDT, in spite of its clarification vide its circular number 5 – P(LXX-6) dated 19th June 1968 that for the purposes of such exemption u/s. 11, the income of a trust is to be taken in the commercial sense, and not as computed under the provisions of the Income Tax Act put forward following the interesting contention before the Kerala High Court that seem to have appealed to the court to a great extent :

“The CBDT is of the considered view that where an assessee has acquired an asset, through application of income and has also claimed this amount as expenditure in its income and expenditure account, depreciation on such assets would not be allowable to the assessee. Such notional statutory deductions like depreciation, if claimed as deduction while computing the income of the property held under trust under the relevant head of income, is required to be added back while computing the income for the purpose of application in the income and expenditure account. This would imply that the correct figure of surplus from the trust property is reflected in the income and expenditure account of the trust to determine the income for the purposes of application under section 11 of the Income Tax Act. This would reduce the possibility of revenue leakage which may be a cause for generation of black money.”

One fails to understand as to why depreciation should be written back in the books of account of the assessee, when it is otherwise a charge on the profits of the year and is required to be provided for as per the accounting standards and practices. The accounts will represent a fallacious view where on one side it provides for the depreciation and on the other side it credits a write back of the same depreciation. Again, it is impossible to fathom as to how black money could ever be generated by not writing back depreciation, because there is no outflow of funds from the trust, depreciation is merely a notional entry in accordance with accounting standards and practices. At best, there is a reduction in the commercial profit of the trust.

Perhaps, what the CBDT desired was that in computing the commercial income for the purposes of grant of exemption, the amount of such depreciation should be added back and treated as income available for application for charitable purposes, since the cost of the assets had been treated as an application of income for charitable purposes. This desire however, is not set out in the provisions of the Act and in any case is contrary to its own circular clarifying that the profit of the trust is the one that is understood in the commercial sense and as a consequence thereof has to be computed in the manner as is computed by a commercial man, i.e after providing for depreciation on the assets used by it, irrespective of the fact that the cost of it is treated as an application of income and as a consequence of such treatment is allowed, as a deduction in computing the income of the trust.

Can such depreciation ever be regarded as an income of the trust in commercial terms? In the context of repayment of loan scholarships by scholars who had taken loans by way of scholarships for their studies from a trust, the CBDT had clarified, vide Circular No. 100 dated 24-01-1973 that when such loans were given, they should be treated as an application of income for charitable purposes, but that the re-payment of the loans should then be regarded as income of the trust. No such clarification is issued in the context of application of income qua the capital assets and incidental claim if depreciation thereon. The said circular in fact, supports the view of the assessee, where it goes on to state that the repayment of loan by a trust originally taken is an application of income in the hands of the trust. The Bombay High Court, in the case of CIT vs. Trustees of Kasturbhai Scindia Commission Trust 189 ITR 5, had held that return of a loan by a debtor to a creditor could never constitute an income, even though the trust might have got a deduction as an application for charitable purposes for the amount of loans given, in the year of grant of such loans. By the same logic, depreciation provided by a trust can never be added back as its income, as it is never commercially considered to be income.

The Punjab and Haryana High Court in the Market Committee’s case (supra) has rightly observed, in relation to the argument that allowance of such depreciation amounted to a double deduction and therefore was covered by the decision in the Escorts’ case (supra), that it was not a double deduction. The court observed that the income of the assessee being exempt, it was only claiming that depreciation that was required to be reduced from the income for determining the percentage of funds that were to be applied for the charitable purposes. According to the Punjab and Haryana High Court, it was therefore not a case of a double benefit, and that the decision in the Escorts’ case (supra) was distinguishable.

Similarly, the Delhi High Court in the Vishwa Jagriti Mission’s case (supra), while noting the various High Court decisions holding that depreciation was a necessary deduction in computing the commercial income, observed that the allowance of depreciation was necessary on commercial principles. It distinguished the Escorts’ case on the grounds that the Supreme Court, in that case, was not concerned with the case of a charitable trust involving the question as to whether its income should be computed on commercial principles in order to determine the amount of income available for application to charitable purposes, but was dealing with a case where a deduction was allowed in computing business profits and depreciation was also being claimed while computing business profits. In case of charitable trusts, what was relevant was only the concept of commercial income as understood from the accounting point of view, and there was an authority for the proposition that depreciation was a necessary charge in computing the net income. The Delhi high court also noted that the Supreme Court was concerned with a case where the assessee had claimed deduction of the cost of an asset u/s. 35, which allowed deduction for capital expenditure incurred on scientific research, and the question was whether, after claiming deduction in respect of the cost of the asset u/s. 35, whether the assessee could again claim deduction on account of depreciation in respect of the same asset. The Supreme Court in that case had observed that under general principles of taxation, double deduction was not intended unless clearly expressed and , the case before it was not one of that type.

A capital expenditure is treated as an application of income for charitable purposes, under the Act, while depreciation is a deduction in computing the income itself, which is available for application for charitable purposes. These are two different things. Claiming the cost of an asset as an application for charitable purposes is not the same thing as providing depreciation in computing the profit available for spending for charitable purposes. This is therefore not a case of a double deduction.

The better view of the matter therefore seems to be that of the Bombay, Punjab and Haryana and Delhi High Courts which holds that reduction of depreciation from the income is not a double deduction. The view taken by the Kerala High Court requires reconsideration.

Law will Take its Own Course

fiogf49gjkf0d
‘Law will take its own course’ – we hear this phrase whenever there is a serious law and order situation, a case involving a politician, a celebrity or a rich and mighty.

What does this phrase mean? For a layperson, it connotes that justice will be done – the guilty will be punished while a person who is not guilty will be not harassed and acquitted within a reasonable time. The law will treat all persons equally and equitably. Is this a utopian expectation?

When an ordinary person is accused of a wrongdoing, he is arrested immediately for investigation; for him getting bail becomes a nightmare; he or she has to spend days in jail. We saw this when two young girls were arrested for making a comment on the Facebook, we saw this when artists drew cartoons which were critical of the political system or politician. On the other hand, when MLAs allegedly thrashed a police officer within the precincts of the Legislative Assembly, one had to wait for the accused MLAs to surrender and the Home Minister declared that the CCTV footage is inconclusive. When politicians make a hate speech, the arrest has to wait till the enquiry is complete. So much for the law taking its own course!

Does the law take its own course? One wonders! In fact, often, the law does not have its own course at all. Law enforcing agencies and persons with political patronage can influence and drag the law on the course that they want or desire to suit their convenience. At times, law enforcing agencies are used by the government of the day to serve its political goals.

When somebody says that law will take its own course, possibly he or she actually means that after getting bail the law will be made to take a long winding course before reaching any logical conclusion, if at all it reaches any such conclusion. In fact, when a celebrity or a politician uses that phrase and expresses his great respect for and belief in the legal system in general and judiciary in particular, he actually expresses his ability to influence or delay the legal process; he believes in the proverb – ‘This too shall pass’. We have a film celebrity facing prosecution for hit-and-run accident and hunting of blackbucks. Both the cases are pending for over a decade while the celebrity is leading his normal life.

Recently, the Supreme Court gave its verdict in Mumbai Blasts case 20 years after the event occurred. Conviction of a large number of persons has been upheld. But the media focussed on only one celebrity convict. There is already a clamour for leniency and pardon for him on the ground that he has gone through mental torture all these years and that is a good enough punishment. A retired judge of the Supreme Court, the film fraternity and many others are pleading his case. We forget there are other convicts who have gone through similar agony, some of whom had unwittingly become part of the whole episode and the law took its own course in their case.

While often the law does not take the desired course, at times the law makers avoid enacting an effective law so that there is no question of law taking its own course. (We are still waiting for the law on Lokpal.) Then at times, the law makers enact the law that suits them and ensure what course the law should take. In the Income tax Act there are provisions (existing and proposed) to curb unaccounted money. If a person buys or sells immovable property or buys shares of unlisted company etc. at less than the prescribed value, the difference is charged to tax on the presumption that unaccounted money has exchanged hands. If a charitable trust receives anonymous donations, the trust is taxed on the premises that such donations are out of unaccounted money. In the Finance Bill, 2013 there is also a provision for disallowing deduction to the donor for cash donations made to political parties. But there is no provision to tax political parties for the anonymous donations received by them so long as the amount of each donation in the accounts does not exceed Rs. 20,000.

 According to a study conducted by the Association of Democratic Reform (working across the country for transparency in political and electoral system), a very substantial portion of the contributions collected as donations or `sale of coupons’ by political parties is in cash or anonymous. One has to only guess the source or nature of these funds. All such collections are exempt from income tax in the hands of political parties. Article 14 of the Constitution of India strikes at arbitrariness and ensures fairness and equality of treatment. But it also permits rational classification. And after all, political parties are a class by themselves!

Sanjeev Pandit
Editor

levitra

A Bird at the Window

fiogf49gjkf0d
It was a beautiful spring morning. Disciples had gathered in a hall to listen to a discourse by Buddha. People were eagerly awaiting his arrival and looking forward to an enlightening discourse. Buddha entered the hall and a hushed silence enveloped the disciples as everyone became quiet. Buddha took his seat and was about to commence his talk when a strange thing happened. A pretty little bird flew in and alighted on the window. It looked around at the august gathering, fluttered its pretty little wings and burst out in a melodious song. After delighting the onlookers with its clear notes, the bird spread its wings and flew away. Buddha commenced his discourse. He just told the gathering that the lesson of the day was over! The little bird had taught everything that Buddha wanted to teach on that day!

The questions for us are:

 • What was the lesson taught by the bird!

• What was the message that Buddha gave!

The message was: lead a simple peaceful life. Our lives should be like that of the bird: ‘come to the window of the world, live a natural peaceful carefree life, look, admire and enjoy what is around, sing our song and fly away free from all cares, without a trace of attachment to what is left behind in essence, live in the present. Be like the bird – it was neither haunted by the past nor filled with anxieties of the future. It sang in the present’. Questions which arise are: Can we ever live such a life? Is it possible to lead such a peaceful serene life?

I believe it is possible. Was our life not like that when we were children? Our days were filled with fun and laughter. We went around playing, singing without a care. We were not even worried about the unfinished homework which we had to do and take to the school the next day. We built sand castles on the sea shores, not bothered that the next tide will wash away all that we had carefully built. Our lives were like that described in the ghazal sung by Jagjit Singh…

At the end of the day, tired and exhausted we went to sleep and migrated to the land of dreams which had rainbows and rivers, stars and moon and we were princes or princesses just enjoying. Yes, life was carefree like that of the little bird at the window. Let us then, take a lesson from the little bird and learn to live a carefree life. In other words, a life of acceptance and not expectations.

We live when we are true to ourselves and are not living to please others. Our only obligation is to be true to ourselves. I am not for a moment suggesting a selfish, self-centred life because a life led to please our inner self can never be selfish or self cantered.

One recalls the story of Akbar and Tansen. Akbar considered Tansen to be the greatest singer, which Tansen never accepted. According to Tansen, his Guru Swami Haridas was the greatest, and he, Tansen, was no match. Akbar wanted to call Swamiji to his court to listen to him. Tansen told him that that was not possible. One had to go to Swami Haridas, and wait till Swamiji chose to sing. Tansen took Akbar where Swamiji used to stay and made him wait till Swami Haridas chose to sing. As divine music flowed from Swamiji, calm prevailed and the whole atmosphere became peaceful. Akbar listened with rapt attention and became totally spellbound.

He had no doubt and was totally convinced that Swami Haridas was the greatest. He still could not understand as to why Tansen, a disciple of Swamiji could not reach the heights attained by Swamiji. When asked by Akbar, Tansen explained: He said, “It is simple. While I sing for you, Swami Haridas only sings for God!”

It is only when we dedicate our work to God that music flows in and from our life and we become like the bird on the window who came, sang, gave us pleasure and left without expectation – it was free.

So, let us offer our work to God and be free.

levitra

Sections 32 read with section 72 – Brought forward unabsorbed depreciation is allowed to be set off against long term capital gains

fiogf49gjkf0d
1. (2012) 54 SOT 450 (Mumbai)
Suresh Industries (P.) Ltd. vs. Asst.CIT
ITA No.5374 (Mum.) of 2011
A.Y.: 2007-08. Dated: 10.10.2012

Sections 32 read with section 72 of the Income Tax Act, 1961 – Brought forward unabsorbed depreciation is allowed to be set off against long term capital gains.

For the relevant assessment year, the assessee’s claim for setting off current year’s unabsorbed depreciation and brought forward unabsorbed depreciation against current year’s long term capital gains was rejected by the Assessing Officer and by the CIT(A). The Tribunal allowed the assessee’s claim.

The Tribunal held as under: The law regarding set off of unabsorbed depreciation up to 01-04-1996 was very liberal and set off was allowable against any income. This was also upheld by the Supreme Court in the case of CIT vs. Virmani Industries (P.) Ltd. [1995] 216 ITR 607/83 Taxman 343. However, the law regarding such set off was changed by the Finance Act (No. 2) of 1996 and from assessment years 1997-98 to 2002-03 the unabsorbed depreciation was put at par with business losses u/s. 72.

 However, the status quo has been restored from assessment year 2003-04 and, therefore, the ratio laid down by the Supreme Court in the case of Virmani Industries (P.) Ltd. (supra) once again holds good and, therefore, now unabsorbed depreciation can be set off against any income. Because of the legal fiction created by the provisions of section 32(2), brought forward unabsorbed depreciation merges with current year’s depreciation.

The treatment given to current year’s depreciation is equally applicable to brought forward unabsorbed depreciation. Therefore, brought forward unabsorbed depreciation is also allowed to be set off against long term capital gains.

levitra

Salary: Benefit or perquisite: A. Ys. 1996-1997 to 2001-02: Assessees directors of company CRS: CRS effected its sale through franchisees which were owned by HUFs of assesses: Assessing Officer treated personal expenses of assessees and their family members paid by company as income of assessee’s by invoking section 2(24)(iv): Addition not proper:

fiogf49gjkf0d
CIT vs. Srivatsan; 213 Taxman 413 (Mad): 30 Taxman. com 423 (Mad):

The assessees were directors of the company ‘CRS’ which was engaged in the business of retail-selling of silk sarees and other textiles. ‘CRS’ effected its sale through franchisees which were owned by different HUFs of the assessee. Said franchisees were paid commissions for the sale effected by them. The Assessing Officer treated the personal expenses of the assessees and their family members (Franchisee commission paid to different HUF) paid by the company as the income of the Directors, by invoking the provisions of section 2(24)(iv). The Tribunal held that the personal expenses met out of the company’s money could not be treated as income in the hands of the assessees u/s. 2(24)(iv) as the money had not been paid directly to them, but to the franchisees, which their HUF owned.

In appeal, the Revenue contended that when the factum of each of the Directors, having received benefit towards the personal expenses, was not disputed, it was irrelevant and immaterial whether such expenses were directly paid by the company or through franchisees. The Madras High Court upheld the decision of the Tribunal and held as under:

 “i) The Tribunal has taken note of the following aspects and has given the specific findings:-

a) CRS paid franchise commission to various firms owned by HUF of Directors.

b) This has been done on the basis of agreement entered into which were in force.

c) The payment by CRS on the basis of franchise agreement to various persons cannot be treated as payment to Directors who have substantial interest in the company and section 2(24)(iv) cannot be invoked.

ii) The findings rendered by the Tribunal do not warrant any interference, as it is supported by factual matrix and legal reasoning.”

levitra

Revision : S. 263 : Commissioner should consider explanation offered by assessee and not set aside assessment order for consideration by AO

New Page 1

9 Revision : S. 263 of Income-tax Act, 1961 : A.Y. 1992-93 :
Commissioner should consider explanation offered by assessee in response to
notice and decide the question : He is not to set aside the assessment order for
consideration of the explanation by the AO.


[Smt. Leela Choudhury v. CIT, 167 Taxman 1 (Gau.)]

For the A.Y. 1992-93, the assessment of the assessee was
completed u/s.143(3) of the Income-tax Act, 1961. The Commissioner found that
the Assessing Officer had not made enquiry as regards the investment in the
house property. Therefore the Commissioner issued a show-cause notice to the
assessee in exercise of his power u/s.263. The assessee contended that the house
property in question was owned by her and the investments made therein from her
own sources. She submitted the yearly investments made by her in the house
property in question along with her return for the assessment year in question,
balance sheets for the period 31-3-1988 to 31-3-1992, showing the position of
her assets and liabilities; and the details of the funds available with the
assessee. The Commissioner, after considering the explanation of the assessee
and documents brought on record, by his order dated 1-11-1996, directed the
Assessing Officer to examine the matter in proper manner and complete the
assessment in accordance with law.

The Gauhati High Court allowed the writ petition filed by the
assessee challenging the revision order passed by the Commissioner u/s.263 of
the Act and held as under :

“(i) The foundation for the exercise of the power being the
formation of an opinion or conclusion, there is no escape from the view that
the Commissioner must record his conclusion in the matter before setting aside
an order of assessment in exercise of the powers conferred u/s.263. It will
again be futile to embark upon any discussion as to the ‘intensity’ or
‘strength’ of the conclusion that must be reached by the Commissioner before
setting aside an assessment u/s.263, as the answer to the said question would
really depend upon the facts that may be confronting the Commissioner in any
given case. The position can be best resolved by saying that, in certain
situations, the opinion or conclusion recorded would be the final opinion,
while in other situation, it may be ‘less than final’. What would be necessary
is to take note of the fact that there has to be an opinion that the
assessment which has been set aside is, indeed, erroneous and prejudicial to
the interest of the Revenue. Furthermore, the power u/s.263 being
quasi-judicial, such conclusion must be reached after hearing the assessee,
which is mandated by the statute itself and after recording the reasons for
the conclusions reached, a requirement, imposition of which would be
consistent with the well-settled principles for exercise of quasi-judicial
powers.

(ii) It could be noticed from the impugned order of the
Commissioner that the Commissioner had not recorded any opinion that the order
of assessment of the assessee for the A.Y. 1992-93 was erroneous and
prejudicial to the interest of the Revenue. The said opinion was recorded in
the show-cause notice issued to the assessee and the same must be understood
to be a highly rebuttable view. Such view/opinion was required to be recorded
after hearing the assessee and after holding the necessary enquiry.

(iii) On receipt of the show-cause notice the assessee
submitted an elaborate reply laying material before the Commissioner to show
that sufficient proof of her income was laid before the Assessing Officer to
enable the said authority to come to the conclusion that the investments in
the house property were made from the known sources of income of the assessee.
The said materials were in the form of balance sheets and details of the funds
available to the assessee from time to time. In the above facts, the assessee
contended that the assessment order in question was not erroneous and
prejudicial to the interest of the Revenue.

(iv) The Commissioner, on receipt of the reply of the
assessee, could not have ignored the same. Rather, it was incumbent on the
Commissioner to consider the explanations offered and on that basis to record
his opinion/conclusion as to whether he still considered the assessment order
in question to be erroneous and prejudicial to the interest of the Revenue
and, if so, reasons therefor. The Commissioner did not do so. Instead, in its
order, the Commissioner had recorded that the assessee had filed a written
submission giving an exhaustive explanation and enclosing copies of various
deeds, certificates, etc., which were required to be verified in detail. The
Commissioner, in the above facts, set aside the assessment order and directed
the Assessing Officer to make a fresh assessment after examining the
submissions and contentions advanced by the assessee and after due scrutiny of
the documents adduced.

(v) The course of action adopted by the Commissioner was
clearly impermissible in law in the absence of a finding that on consideration
of the explanation submitted and for reasons shown, the assessment had to be
treated to be erroneous and prejudicial to the interest of the Revenue.
Unfortunately, the Commissioner did not do so, which omission would have the
effect of rendering the impugned order legally fragile.

(vi) In view of the above, the instant writ petition was to
be allowed.”


levitra

Convergence with International Financial Reporting Standards (‘IFRS’) — Impact on fundamental accounting practices and regulatory framework in India

IFRS — fast gaining adoption and acceptance globally :

The use of International Financial Reporting Standards (IFRS) as a universal financial reporting language is gaining momentum across the globe, especially as compared to a few years ago where a number of different national accounting standards existed. More than 100 countries now require or allow use of IFRS and by 2011 the number is expected to increase to 150. Some of the major countries that are seeking to converge/adopt IFRS by 2011 include Canada, Korea, India and Brazil.

The last two years have also seen significant momentum in the United States on converging from US GAAP to IFRS. The momentum started with the US Securities and Exchange Commission allowing foreign companies listed in the US to file financial statements prepared in accordance with IFRS (without a reconciliation to US GAAP) and continued with a proposal to evaluate IFRS convergence for all US Listed companies between 2014 and 2016.

Convergence with IFRS in India :

In line with the global trend, the Institute of Chartered Accountants of India (ICAI) has proposed a roadmap for convergence with IFRS for certain defined entities (listed entities, banks and insurance entities and certain other large-sized entities) with effect from accounting periods commencing on or after April 1, 2011. Large-sized entities are defined as entities with turnover in excess of Rs.100 crores or borrowings in excess of Rs.25 crores.

Accordingly, as part of its convergence strategy, the ICAI has classified IFRS into the following broad categories :

Category I : IFRS which can be adopted immediately or in the immediate future in view of no or minor differences (for example, construction contracts, borrowing costs, inventories).

Category II : IFRS which may require some time to reach a level of technical preparedness by the industry and professionals, keeping in view the existing economic environment and other factors (for example, share-based payments).

Category III : IFRS which have conceptual differences with the corresponding Indian Accounting Standards and where further dialogue and discussions with the IASB may be required (consolidation, associates, joint ventures, provisions and contingent liabilities).

Category IV : IFRS, the adoption of which would require changes in laws/regulations because compliance with such IFRS is not possible until the regulations/laws are amended (for example, accounting policies and errors, property and equipment, first-time adoption of IFRS).

Impact of IFRS convergence on fundamental accounting practices :

Harmonising existing Indian accounting standards with IFRS will have an impact on some fundamental accounting practices followed in India. A few of these are enumerated below:

Use of fair value concept :

Indian GAAP requires financial statements to be prepared on historical cost except for fixed assets which could be selectively revalued. Use of fair value is presently limited for testing of impairment of assets, measurement of retirement benefits and ‘mark-to-market’ accounting for derivatives. Under IFRS, there is a growing emphasis on fair value. In addition to the requirements under Indian GAAP, the carrying amounts of the following assets and liabilities are based on fair value under IFRS :

  •     Initial recognition of all financial assets and financial liabilities is at fair value

  •     Subsequent measurement of all derivatives, all financial assets and financial liabilities held for trading or designated at fair value through profit or loss, and all financial assets classified as available-for-sale, are measured at fair value

  •     Non-current provisions are measured at fair value, which is derived by discounting estimated future cash flows

  •     Share-based payment awards are measured at fair value

  •     Option available for measurement of property, plant and equipment at fair value, subject to certain conditions

  •     Option available for measurement of intangible assets at fair value, subject to certain conditions

  •     Option available for measurement of Investment property at fair value.

Substance over form :

Considering the overall theme of substance over form, IFRS mandates preparation of consolidated financial statements to reflect the true picture of the net worth to various stakeholders. Exceptions for preparation of consolidated financial statements are very limited. In India, currently consolidated financial statements are mandatory only for listed companies and that also only for the annual financial statements and not the interim financial statements.

Similarly, Indian accounting continues to be driven by the written contract and the form of the transaction – as opposed to the substance. Consider, upfront fees charged by a telecom service provider. Under Indian GAAP, several companies recognise such up front fees as income because it is contractually non-refundable and is contractually received as fees for the activation process. Under IFRS, the fee is accounted for in accordance with the sub-stance of the transaction. Under this approach, the customer pays the upfront activation fee not for any service received by the customer, but in anticipation of the future services from the telecom company. Thus, despite the non-refundable nature of the fees, revenue recognition would be deferred over the estimated period that telecom services will be provided to the customer.

Inconsistencies with existing laws and regulations:

As per the preface to the Indian accounting standards, if a particular accounting standard is found to be not in conformity with a law, the provisions of the said law will prevail and the financial statements shall be prepared in conformity with such law. However, under IFRS, the entity needs to comply with all the accounting standards and other authoritative literature issued by IASB in order to comply with IFRS. If entities adopt accounting practice as approved by another regulatory authority or in conformity with a law, which is not in accordance with IFRS, the financial statement so prepared would not be considered to be in compliance with IFRS.

Disclosures:

In India, Schedule VI to the Companies Act, 1956, which prescribes a detailed format for preparation and disclosure of financial statements, lays great emphasis on quantitative information such as quantitative details of sales, amount of transactions with related parties, production capacities, CIF value of imports and income and expenditure in foreign currency, etc. Contrary to the same, IFRS is more focused on qualitative information for the stakeholders, such as terms of related party transactions, risk management policies, currency exposure for the entity with sensitivity analysis,etc. To more correctly report the liquidity position of the entity, IFRS also . requires segregation of all assets/liabilities into current and non-current portions. Presently under Indian GAAP even long-term deposits and advances are disclosed under current assets, loans and advances, thereby not reflecting the true position.

Exceptional  and extraordinary    items:

Indian GAAP requires companies to disclose significant events which are not in the ordinary course of business as extraordinary items and material items as exceptional to facilitate the reader to consider the impact of these items on the reported performance. Under IFRS there is no concept of extraordinary or exceptional since all events/transactions are in the normal course of business and if an item is material, it can be disclosed separately, but cannot be termed as ‘extraordinary’ or ‘exceptional’.

Restatement of financial statements:

Under Indian GAAP, changes in accounting policies or rectification of errors (prior period items) are recognised in the current year’s profit and loss account (for errors) and are generally recognised prospectively (for changes in accounting policies). Under IFRS, the prior period comparatives are re-stated in both cases. Indian GAAP does not have the concept of restatement of comparatives except in case of special-purpose financial statements prepared for public offering of securities.

Determination of functional currency:
 
Entities in India prepare their general purpose financial statements in Indian rupees. However under IFRS, an entity measures its assets, liabilities, revenues and expenses in its functional currency, which is the currency that best reflects the economic substance of the underlying events and circumstances relevant to the entity i.e.,the currency of the primary economic environment in which the entity operates. Functional currency of an entity may be different from the local currency.

For example, consider an Indian entity operating in the shipping industry. For such an entity it is possible that a significant portion of revenues may be derived in foreign currencies, pricing is determined by global factors, assets are routinely acquired from outside India and borrowings may be in foreign currencies.  All these factors need  to be considered to determine  whether  the Indian rupee is indeed the functional   currency  or whether   another  foreign currency  better  reflects the economic  environment that most impacts  the entity.

Other significant aspects  :

Under Indian GAAP, provision has to be made for proposed dividend, although it may be declared by the entity and approved by the shareholders after the balance sheet date. Under IFRS, dividends that are proposed or declared after the balance sheet date are not recognised as liability at the balance sheet date. Proposed dividend is a non-adjusting event and is recorded as a liability in the period in which it is declared and approved.

Impact  of existing laws  and  regulations:

Accounting standard-setting in India is subject to direct or indirect oversight by several regulators, such as the National Advisory Committee on Accounting Standards (NACAS) established by the Ministry of Corporate Affairs, the Reserve Bank of India (RBI),the Insurance Regulatory and Development Authority (IRDA) and the Securities and Ex-change Board of India (SEBI). Further, the Indian Companies Act, ;1956 (the Act) directly provides guidance on accounting and financial reporting matters. Courts in India also have the powers to endorse accounting for certain transactions – even if the proposed accounting treatment may not be consistent with Generally Accepted Accounting Principles.
 
Companies Act:

The requirements of Schedule VI of the Act, which currently prescribes the format for presentation of financial statements for Indian companies, is substantially different from the presentation and disclosure requirements under IFRS. For example, the Act determines the classification for redeemable preference shares as equity of an entity, whereas these are to be considered as a liability under IFRS. Also, Schedule XIV of the Act provides minimum rates of depreciation – such minimum depreciation rates are also inconsistent with the provisions of IFRS.

Regulatory  guidelines  :

The Reserve Bank of India (RBI) and Insurance Regulatory and Development Authority (IRDA) regulate the financial reporting for banks, financial institutions and insurance companies, respectively, including the presentation format and accounting treatment for certain types of transactions. For example, the RBI provides detailed guidance on provision relating to non-performing advances, classification and valuation of investments, etc. Several of these guidelines currently are not consistent with the requirements of IFRS.

The Securities and Exchange Board of India has also prescribed guidelines for listed companies with respect to presentation formats for quarterly and annual results and accounting for certain transactions, some of which are not in accordance with IFRS e.g., Clause 41 of the Listing Agreement permits companies to publish and report only standalone quarterly financial results, however IFRS considers only consolidated financial statements as the primary financial statements for reporting purpose.

Court procedures:

Courts in India commonly approve accounting under amalgamation/restructuring schemes, which may not be in accordance with the accounting principles/standards. Under the current accounting/ legal framework such legally approved deviations from the accounting standards/principles are acceptable.

Income tax:

Computation of taxable income is governed by detailed provisions of the Indian Income Tax Act, 1961. Convergence with IFRS will require significant changes/ clarifications from the tax authorities on treatment of various accounting transactions.

For example, consider unrealised losses and gains on derivatives that are required to be marked-to-market under IFRS. Different taxation frameworks are possible for the tax treatment of such unrealised losses and gains. The treatment of such unrealised losses/ gains will need to be addressed in line with the convergence time frame. It is imperative that tax authorities are engaged sufficiently in advance to decide on such critical aspects of taxation.

One of the risks of IFRS convergence without adequate involvement of all stakeholders and adequate regulatory changes is that financial statements prepared using the’ converged’ Indian standards may still not fully comply with IFRS issued by the International Accounting Standards Board (IASB). This would be very unfortunate as Indian entities that may be required to present IFRS-compliant financial statements to stakeholders outside India (overseas stock exchanges, overseas regulators, investors and alliance partners) would still need to reconcile with such’ converged’ IFRS financial statements prepared using the Indian framework, with IFRS financial statements that are globally accepted.

Accordingly, at the onset of the convergence, there is a need to develop an enabling regulatory frame-work and infrastructure that would assist and facilitate IFRS convergence. The Government would need to frame and revise laws in consultation with the NACAS and the ICAL Similarly, regulators such as the RBI, IRDA and SEBI would need to consider accepting IFRS in substitution of the present set of specific accounting rules prescribed by them.

As the timelines for convergence approach, all entities will have to consider their own roadmap and gear up for complying with the GAAP differences. Convergence to IFRS will be time-consuming, challenging and will require complete support and sponsorship of the Board of Directors/Members of Audit Committee/Senior Management. Given the task and challenges, all entities should ensure that their convergence plans are designed in a manner to achieve the objective of doing it once, but doing it right.

How will convergence with IFRS affect audit procedures ?

IFRS

The use of International Financial Reporting Standards (IFRS)
as a universal financial reporting language is gaining momentum across the globe
especially from the position only seven years ago where numerous different
national standards existed.

In line with the global trend, the Ministry of Corporate
Affairs (MCA) has notified a plan for convergence with IFRS in a phased manner.

Convergence with IFRS will also need careful analysis of the
present auditing standards. Auditing standard-setters may also need to assess
the requirement of auditor obtaining requisite IFRS knowledge which can be
evidenced through a certification process.

Auditing standard-setters will need to address the impact on
auditing procedures for the changes proposed in the accounting principles due to
convergence with IFRS.

Under IFRS, management is required to make several estimates
in the below-mentioned areas in applying accounting policies that have a
significant effect on the amounts recognised in the financial statements.

Audit of non-current assets :

Property, plant and equipment :

IFRS requires an asset to be depreciated over its own useful
life instead of rates suggested under regulations (like Schedule XIV to the
Companies Act). Further, significant components of an asset are depreciated
separately. The estimate of useful life of assets needs to be reassessed at
least once every balance sheet date.

The audit procedures relating to fixed assets would need to
be designed to obtain sufficient appropriate audit evidence whether the
management’s assessment of useful life is appropriate. The auditor may require
performance of inquiry procedures with the plant engineers to assess the
reasonableness of the process for estimating the useful lives and identification
of components within individual assets that have a different useful life and
needs to be separately depreciated. Companies would also need to maintain
suitable audit trail for the basis for estimation of useful life and
identification of components.

Intangible assets :

The depreciation/amortisation of an intangible asset depends
on whether its useful life is finite or indefinite (indefinite does not mean
infinite). An intangible asset has an indefinite useful life when, based on an
analysis of all relevant factors, there is no foreseeable limit to the period
over which the asset is expected to generate net cash inflows for the entity.

An intangible asset with indefinite useful life is not
depreciated; instead it is tested for impairment every balance-sheet date.

Classification of intangible assets acquired in business
combination (like brands, trademarks, customer relationships) needs to be
assessed closely by the auditor. For instance, in assessing whether the useful
life of a brand is indefinite or finite, the auditor may need to assess the
following factors :


  • How well and for how long has the brand been established in the market ?
    If the brand is mature and contributes significant value to the business and
    therefore its abandonment would represent an unrealistic decision, then this
    might be an indicator of an indefinite useful life.




  • How stable is the industry in which the brand is used ? In rapidly
    changing industries it is less likely that a brand will be identified as
    having an indefinite useful life.




  • Is the brand expected to become obsolete at some point in the future ?




  • Is the brand used in a market that is subject to significant, enduring
    entry barriers ?




  • Is the useful life of the brand dependent
    on the useful lives of other assets of the entity ? If so, what are the
    useful lives of those assets ?




Embedded leases under IFRIC 4 :

The purpose of IFRIC 4 — ‘Determining whether an arrangement
contains a lease’, is to identify an arrangement which, in substance, is or
contains a lease (even if the contract does not use the term lease). For
instance, A Company has a contract with its supplier (job worker) whereby the
Company is contractually bound to get 10,000 units of goods manufactured by the
supplier. The supplier has installed a machinery to manufacture and supply the
goods for the contract.

Price terms are as under :


  • For first 10,000 units — Rs.22 per unit




  • 10,001 onwards — Rs.10 per unit




  • In case of any shortfall as compared to 10,000 units, a penalty of Rs.12
    per unit of shortfall shall be levied.



An analysis of the arrangement would indicate that up to
initial 10,000 units, the Company is bound to pay Rs.120,000 (10,000 x 12) to
the contract manufacturer (as there is a penalty of Rs.12 per unit for any
shortfall in offtake by the Company up to 10,000 units) and this would be
nothing other than lease rent for the asset being used. The balance amount of
Rs.10 (22 – 12) per unit would be job work charges for the manufacture of goods.

A lease arrangement conveys rights to use an asset for agreed
period of time in return for a payment or series of payments.

The assessment whether an arrangement is or contains a lease
is based on whether :


  • fulfilment of the arrangement is dependent on the use of a specific asset
    or assets; and




  • the arrangement conveys a right to use the asset(s).



A challenge to audit-embedded lease arrangements is to derive sufficient appropriate audit evidence that a specific asset(s) would be used throughout the arrangement. Further, audit procedures need to include determining fair values of embedded lease component and other components of the arrangement. This would involve judgment on the part of the company and a process to be set for determining appropriate audit trail for the basis of determination of fair value.

Appropriate representation may also be needed from the Company for identification of all embedded lease arrangements.

Investment property :
Investment properties include properties that are either held to earn rental income or capital appreciation, or are held with undetermined use. Investment properties are measured at cost or at fair value every balance-sheet date. If the client measures investment properties at cost, it still needs to disclose its fair value.

Audit procedures must include procedures to assess the classification of property as ‘Investment Property’. Further, the audit procedures may be performed on the appropriateness of assumptions/ factors considered in deriving the fair value of the Investment Properties.

Audit of Business Combinations and Consolidation :

Consolidation :
Unlike Indian GAAP, the definition of a subsidiary focusses on the concept of control and has two parts, both of which need to be met in order to conclude that one entity controls another :

  •     the power to govern the financial and operating policies of an entity;   
  •  to obtain benefits from its activities.

Thus, if a Company A holds 80% of the issued share capital of Company B and another investor C holds balance 20% of the share capital and participates in the management (through shareholders agreement) of the Company, then Company A cannot treat Company B as a subsidiary, as it cannot unilat-erally control that Company.

Thus, the auditor needs to verify the shareholder’s rights for classification of an investee as subsidiary.

Appropriate representation may also need to be sought from the company for non-existence of participative rights with minority shareholders.

Consolidation of special purpose entities :
A special purpose entity (SPE) is an entity created to accomplish a narrow and well-defined objective, e.g., a vehicle into which trade receivables are securitised. The principles discussed above for identifying control apply equally to an SPE. The control concept in SIC-12 is based on the substance of the relationship between an entity and an SPE, and considers a number of indicators.

Audit procedures that auditor may need to apply to identify whether the SPE needs to be consolidated need to be established.

Appropriate representation may also need to be sought from the company for identification of all SPEs.

Accounting policies across the Group :
The separate financial statements of subsidiaries, joint ventures and associates are prepared based on their accounting policies. However for the purpose of consolidation with parent company, all the sub-sidiaries, associates, joint ventures and SPEs need to prepare IFRS financial statements with the same accounting policies as that of the parent company.

Auditors need to verify consistency in application of IFRS accounting policies throughout the group. Thus auditors of the parent company may need to engage actively with the management and auditors of the subsidiary, joint ventures and associates to assess application of consistent accounting policies within the group.

Business combinations :

A business combination is defined as ‘a transaction or other event in which an acquirer obtains control of one or more businesses’.

In relation to business combination, the following audit procedures may need to be performed :

  •     Verify the date of actual transfer of control to the acquirer i.e., the date of acquisition. An appointed date as per agreement or court scheme cannot be termed as date of acquisition.

  •     Verify valuation reports as at acquisition date relating to assets transferred, liabilities incurred and equity interests issued by the acquirer. Verify the reasonableness of the assumptions used for valuation purposes.

  •     Verify intangibles assets that qualify for recognition. Verify the reasonableness of the assumptions used in the valuation of assets acquired, liabilities and contingent liabilities assumed.


Audit of income statement items :

Revenue : linked transactions :
In some cases, two or more transactions may be linked so that the individual transactions have no commercial effect on their own. For instance, a Company may enter into a contract to buy 100,000 units of goods from a vendor for Rs.1.5 per unit when market price for the goods is Rs.4 per unit (thus a cost savings of Rs.250,000). At the same time, the Company shall subscribe to the debentures of the vendor for Rs.400,000, whereby the vendor has a call option over the debentures to settle the liability at Rs.150,000 in all. Such transactions are linked transactions as the individual contracts have no commercial effect of their own.

In these cases it is the combined effect of the two transactions together that is accounted for. Audit procedures for linked transactions may include :

  •     Verify whether two or more transactions are linked based on the substance of the transaction.

  •     Verify identification of components in the overall arrangement.

  •     Verify allocation of consideration to the different components of the arrangement either on relative fair value method or on residual fair value method.

  •     Verify the basis for recognition of revenue for every delivered component of the arrangement.

Share-based payments :
Share-based payments under IFRS are measured at fair value, unlike Indian GAAP that allows use of intrinsic value method. The auditors need to verify the underlying assumptions relating to the fair value of the instruments. If the client has subsidiaries, the audit procedures are required to verify the extent of grants given to employees of the subsidiary company.

The auditor needs to verify the classification of the share-based payment into equity-settled and cash-settled share-based payment for the parent and subsidiary. Under certain circumstances, the classification of share-based payment could differ in the books of parent and subsidiary. For instance, subsidiary issues options to its employees that it settles by issuing its own shares. Upon termination of employment, the parent entity is required to purchase the shares of the subsidiary from the former employee. In such cases, as the subsidiary has an obligation to deliver its own equity instruments, the arrangement should be classified as equity-settled in its financial statements. However, the arrangement should be classified as cash-settled in the consolidated financial statements of the parent.

Audit of presentation of financial statements :

Current and non-current classification :
IFRS requires the assets and liability to be segregated into current and non-current assets/liabilities. Thus the audit procedures are required to determine the entity’s business cycle and thereby classification into current/non-current.

Disclosure of segment information :
IFRS requires segment disclosure based on the components of the entity that management monitors in making decisions about operating matters (the ‘management approach’). Such components (operating segments) are identified on the basis of internal reports that the entity’s ‘Chief operating decision maker’ (CODM) reviews regularly in allocating resources to segments and in assessing their performance.

Audit of segment information under IFRS would also lead to additional audit procedures like :

  •     Identification of the entity’s CODM;

  •     Audit of information reviewed by the CODM in the decision-making process; and

  •     Use of accounting policy for internal review.

The auditor might face challenges in performing audit procedures relating to information used by the management for decision-making process, as this information is always considered as strictly confidential and for internal use. Further, the information reviewed by the CODM (for instance, contribution margin analysis) may not be in strict compliance with GAAP. Hence test of completeness and accuracy of such financial information may be difficult.

Others :

Audit of IT system controls :
Entities where the use of Information systems is dominant (ERPs like SAP or Oracle) may require modifications in the IT configuration to track the information as required under IFRS. In such a scenario, the auditor would also require to test the new IT controls.

Audit of opening IFRS balance sheet :
To audit the opening balance sheet of the client, the auditor may prepare an audit programme to assist engagement team in issuing an audit opinion on the opening IFRS balance sheet prepared prior to the first complete set of IFRS financial statements. The audit programme may include the following audit steps :

  •     Understand the client’s transition process

  •     Update the understanding of the client’s business environment for transition matters

  •     Review compliance of the selected IFRS accounting policies with IFRS

  •     Assess the completeness and accuracy of the client’s gap analysis

  •     Identify IFRS balances with significant and/or high-risk gaps

  •     Identify appropriate audit objectives relating to gaps

  •     Evaluate the design and test the effectiveness of relevant internal controls

  •     Evaluate audit evidence and conclude.

Conclusion :
An entity may expect significant changes to its balance sheet and income statement due to transition to IFRS. It is essential for an auditor to carefully evaluate the IFRS impact areas both at the time of first-time adoption of IFRS and on a go-forward basis.

The auditor would need to suitably modify the design of its audit procedures to obtain sufficient appropriate audit evidence that the financial statements are not materially misstated.

Given the enhanced use of fair value in the presentation/preparation of IFRS financial statements and use of management judgment, the auditor will have to constantly be abreast of the client’s products/services, business and the related industry developments.

Income : Statutory and contractual interest awarded by arbitrator accrues from year to year

New Page 1

5 Income : Accrual of : A.Y. 1996-97 : Compensation/interest
awarded by arbitrator : Statutory and contractual interest accrues from year to
year : Other compensation is not taxable.


[Konkan Barge Builders P. Ltd. v. ITO, 297 ITR 39 (Bom.)]

The assessee had signed two contracts with MDL for
fabrication of panels from steel plates and for erection of panels. There was a
dispute between the assessee and MDL, pursuant to which an arbitrator came to be
appointed. The arbitrator passed an award in favour of the assessee in an amount
of Rs.1,12,66,929 as compensation and interest. The Assessing Officer treated
the interest awarded of Rs.43,99,404 as a revenue receipt and added it to the
total income for the A.Y. 1996-97. The Tribunal confirmed the addition.

On appeal by the assessee the Bombay High Court held as under
:

“(i) If interest were awarded and the arbitrator was not
seeking to give effect to or to recognise a right to interest conferred by the
statute or contract, it would not be taxable. On the other hand, if the
interest arose by virtue of the statute or by agreement and the arbitrator or
the High Court merely gives effect to that right in awarding of interest on
the amount of compensation, then it would be a revenue receipt which would be
taxable.

(ii) The amount of interest was assessable as income.

(iii) Interest was awarded at the rate of 12% per annum
from July 31, 1989, till payment or the date of decree on this award,
whichever was earlier. The interest income accrued from year to year and the
entire amount of interest could not be assessed in the year of receipt.”



levitra

House property : S. 23 : Annual value is the rent received/receivable by owner from tenant, even if tenant receives higher rent by subletting property

New Page 1

4 House Property : Annual value : S. 23 of Income-tax Act,
1961 : Property sublet by tenant : Annual value is the rent received or
receivable by the assessee-owner from the tenants, irrespective whether the
tenants have received higher rents by subletting the properties.


[CIT v. Akshay Textiles Trading & Agencies (P) Ltd.,
214 CTR 316 (Bom.)]

In the appeal filed by the Revenue, the following questions
were raised before the Bombay High Court :

(i) Whether on the facts and in the circumstances of the
case and in law, the rent paid by ultimate user will be treated as Annual
Letting Value of the property as against rent received by the assessee ?

(ii) Whether on the facts and in the circumstances of the
case and in law, the Tribunal was justified in holding that the annual letting
value has to be determined with reference to the annual rent received by the
assessee and not what has been received by its tenants from the ultimate
users ?

The Bombay High Court held that the annual value of the
properties let out by the assessee is the rent received or receivable by the
assessee-owner from the tenants, irrespective of whether the tenants have
received higher rents by subletting the properties.

levitra

Expenditure on lease rent : S. 37 : Lease rent paid in lump sum for 20 years : Revenue expenditure

New Page 1

3 Expenditure on lease rent : Capital or revenue : S. 37 of
Income-tax Act, 1961 : A.Y. 1997-98 : Lease rent for premises paid in lump sum
for 20 years : Revenue expenditure.


[CIT v. UCAL Fuel Systems Ltd., 296 ITR 702 (Mad.)]

For the A.Y. 1997-98, the assessee claimed as revenue
expenditure sums of Rs.30 lakhs and Rs.8 lakhs paid for taking land and building
on lease for 20 years for the purpose of setting up the new unit at an
industrial estate at Pondichery. The Assessing Officer disallowed the claim
treating it as capital expenditure. Tribunal allowed the claim.

On appeal by the Revenue, the Madras High Court upheld the
decision of the Tribunal and held :

“Had the assessee chosen to pay the rent annually for each
and every year of lease, such expenditure would have to be regarded as revenue
expenditure. The fact that the payment was made in a lump sum for the entire
duration of the lease did not alter the character of its being a revenue
expenditure.”


levitra

Capital Gain : Compulsory acquisition — If compensation award and major part of compensation received in later years, capital gain cannot be assessed in year of handing over possession

New Page 1

2 Capital gain : Accrual : A.Y. 1984-85 : Compulsory
acquisition of land : Land acquired and possession taken on 23-12-1983
i.e., A.Y. 1984-85 : Small part of compensation received by assessee in
A.Y. 1985-86 : Compensation award was given on 18-9-1986 : As-sessee
received balance compensation on 3-9-1987 : Capital gain cannot be assessed in
A.Y. 1984-85.


[CIT v. Prem Kumar, 214 CTR 452 (All.)]

The assessee’s land was acquired under the Land Acquisition
Act, 1894. The land acquisition notification was issued on 15-11-1975. S. 17(4)
of the Land Acquisition Act was applied. Possession of the land
was taken on 23-12-1983 (i.e., in A.Y. 1984-85). A small part of the
compensation that is Rs.25,000, was received by the assessee on 11-7-1984 (i.e.,
in A.Y. 1985-86). Compensation award was given by the
Collector/Land Acquisition Officer on 18-9-1986. The balance compensation of
Rs.1,77,708 was received by the assessee on 3-9-1987. The Tribunal held
that no capital gain is exigible to tax in A.Y. 1984-85.

The Allahabad High Court dismissed the reference application
filed by the Revenue and held as under :

“(i) In substance relying upon the aforesaid authorities
and also relying upon the definition given in S. 2(47) of the Income-tax Act,
1961, the contention of the Department is that for determining the assessment
year in which capital gain should be taxed, it is the date of transfer which
has to be considered and because u/s.16 of the Land Acquisition Act, 1894, the
title passes to the Government upon taking the possession, therefore, the date
of transfer in compulsory land acquisition would be the date on which
possession is taken.

(ii) We have considered the matter and we are of the
opinion that the contention of the Department in respect of the A.Y. 1984-85
overlooks the vital facts, namely, that where S. 17 of the Land Acquisition
Act, 1894 has been invoked for the purposes of acquisition of land, possession
can be taken even where no award of compensation has been given.

(iii) If we accept the contention of the Department, it
would mean that the assessee whose land has been acquired will have to file a
return disclosing the amount of capital gain arising to him without even
knowing what the amount of that capital gain would be, because that amount can
become known to him only after the award has been given. ‘Lex non cogit ad
impossibilia’ is age-old maxim meaning that the law does not compel a man
to do which he cannot possibly perform. Requiring the assessee to file a
proper and complete return by including the income under the head ‘Capital
gain’ would be impossible for the assessee, in cases of the nature referred
above.

(iv) The assessee was required to invest the capital gain
in the specified securities, like capital gain bonds issued from time to time
or in a residential house under the various provisions of the Income-tax Act,
1961, from S. 54 onwards within the time specified therein as computed from
the date of transfer. It is obvious that in order to invest the money in the
specified items, the assessee must first receive the money. Therefore,
accepting the contention of the Department would mean depriving the assessee
of those benefits or tax relief in all cases where S. 17 of the Land
Acquisition Act, 1894, has been applied.

(v) The Tribunal was justified in holding that no capital
gain is exigible to tax in A.Y. 1984-85 on the facts and circumstances of the
case.”



levitra

Assessment — Prima facie adjustments — When there are conflicting judgments or interpretations of a Section, prima facie adjustment contemplated u/s.143(1)(a) was not applicable and in such cases there was no liability to pay additional tax u/s.143(1A).

New Page 17 Assessment — Prima facie adjustments — When
there are conflicting judgments or interpretations of a Section, prima facie
adjustment contemplated u/s.143(1)(a) was not applicable and in such cases
there was no liability to pay additional tax u/s.143(1A).

[Kvaverner John Brown Engg. (India) P. Ltd. v.
ACIT, (2008) 305 ITR 103 (SC)]

During the relevant assessment years, the
appellant claimed deduction u/s.80-0 in respect of qualifying income brought
into India in convertible foreign exchange. In its return, the appellant
indicated the qualifying income as the gross figure. By way of adjustment
u/s.143(1)(a), the Income-tax Officer restricted the qualifying income to the
net figure. In other words, the assessee claimed the gross income earned in
foreign exchange as the qualifying income, whereas the Income-tax Officer
granted deduction by restricting the claim of the assessee to the net income.

On December 17, 1997, whether the eligible income
should be taken at the gross figure or net figure, was the question for
interpretation. There were several conflicting decisions on this point.
Therefore, according to the appellant, S. 143(1)(a) was not applicable and
consequently the appellant was not liable to pay the additional tax
u/s.143(1A).

The Supreme Court observed that the only point
raised by the appellant was that it was not liable to pay additional tax, as
S. 143(1)(a), as it stood during the relevant year, was not applicable to the
facts of this case, because a moot point had arisen which could not have been
a matter for adjustment under that Section and which point needed
consideration and determination only under regular assessment vide S. 143(3)
of the 1961 Act. The Supreme Court held that for the A.Ys. 1996-97 and 1997-98
with which it was concerned, one of the main conditions stipulated by way of
the first proviso to S. 143(1)(a), as it stood during the relevant time,
referred to prima facie adjustments. The first proviso permitted the
Department to make adjustments in the income or loss declared in the return in
cases of mathematical errors or in case where any loss carried forward or
deduction or allowance which on the basis of information available in return
was prima facie admissible, but which was not claimed in the return or
in cases where any loss carried forward or deduction or allowance claimed in
the return which on the basis of information available in the return, was
prima facie inadmissible. In the present case, therefore, when there were
conflicting judgments on interpretation of S. 80-0, the Supreme Court was of
the view that prima facie adjustments contemplated u/s.143(1)(a) were
not applicable and therefore the appellant was not liable to pay additional
tax u/s.143(1A) of the Act.

levitra

Appeal to the High Court — Finding of facts recorded by the Tribunal that machinery was not idle for the entire block period — hence it was not necessary to go into the connotation of the word ‘used’ appearing in S. 32 of the Act.

New Page 1

6 Appeal to the High Court — Finding of facts
recorded by the Tribunal that machinery was not idle for the entire block period
— hence it was not necessary to go into the connotation of the word ‘used’
appearing in S. 32 of the Act.

[Dy. CIT v. N. K. Industries Ltd., (2008)
305 ITR 274 (SC)]

The Supreme Court was concerned with the block
period April 1, 1988, to February 24, 1999. The main contention advanced on
behalf of the Department was that for allowance of deduction for depreciation,
the asset must not only be owned by the assessee but it must also be used for
the purposes of business or profession of the assessee. It was the case of the
Department that the word ‘used’ in S. 32 of the Income-tax Act, 1961, refers to
actual use of the asset; that having regard to the scheme of the Income-tax Act,
1961, and particularly, after the introduction of the concept of ‘block of
assets’, actual use is the only requirement apart from ownership for allowance
of depreciation u/s.32. It was also the case of the Department that an important
question of law arose for determination before the High Court; that the High
Court has failed to examine the said question; and that it had erred in
dismissing the tax appeals only on the ground that no substantial question of
law had arisen.

The Supreme Court observed that in the present
case, the Tribunal had examined the statements of certain witnesses and after
analysing the material on record, it had come to the conclusion on facts that
there was nothing to show that the machinery, namely, expellers remained idle
for the entire block period April 1, 1988 to February 24, 1999. The Supreme
Court after having examined the record itself, agreed with the view expressed by
the Tribunal on the facts of the present case. The Supreme Court was of the view
that hence, it is not necessary for it to go into the larger question of law
regarding the connotation of the word ‘used’ appearing in S. 32 of the
Income-tax Act, 1961. The Supreme Court dismissed the appeal for the aforesaid
reasons. The question of law was however kept open.

levitra

Depreciation — Higher depreciation could not be allowed on the motor trucks used in business of running them on hire, unless there is an evidence that the assessee was in the business of hiring out motor vehicles.

New Page 15 Depreciation — Higher depreciation could not
be allowed on the motor trucks used in business of running them on hire,
unless there is an evidence that the assessee was in the business of hiring
out motor vehicles.

[CIT v. Gupta Global Exim P. Ltd., (2008)
305 ITR 132 (SC)]

The Assessing Officer (AO) took the view that the
assesseé was, during the relevant assessment year, in the business of timber
trading and it was only occasionally that the trucks owned by the assessee
were given out on hire to outside parties and, hence, the assessee was not in
the business running the trucks on hire and, therefore, the assessee was not
entitled to claim higher rate of depreciation at 40%. This finding of the
Assessing Officer was reversed by the Commissioner of Income-tax (Appeals). It
was held by the Commissioner of Income-tax (Appeals) that the transportation
income of 12,50,639 by way of running the subject vehicles on hire was an
integral part of the assessee’s business and that its inclusion under the head
‘Business income’ was not disputed even by the Assessing Officer. This finding
of the Commissioner of Income-tax (Appeals) was affirmed by the Tribunal. The
High Court had refused to interfere on the ground that the matter involved
essentially questions of fact. On an appeal to the Supreme Court, it held that
generally, the Supreme Court does not interfere with the concurrent finding of
facts recorded by the authorities below. However, in this case, the Supreme
Court was of the opinion that a neat substantial question of law arose for
determination which needed interpretation of the depreciation table given in
Appendix I to the Income-tax Rules, 1962.

The Supreme Court held that under item (2)(ii) of
heading III, higher rate of depreciation is admissible on motor trucks used in
a business of running them on hire. Therefore, the user of the same in the
business of the assessee of transportation is the test.

According to the Supreme Court, in the present
case, none of the authorities below (except the Assessing Officer) had
examined the matter by applying the above test. The Assessing Officer had
given his finding that the assessee was not in the business of transportation
as he was only in the business of trading in timber logs. That, the burden was
on the assessee to establish that it is the owner of motor lorries and that it
used the said motor lorries/trucks in the business of running them on hire.

In the view of the Supreme Court, the entire
approach of the Commissioner of Income-tax (Appeals) was erroneous when he had
stated that the transportation income of Rs.12,50,639 by way of running the
subject vehicles on hire was an integral part of the appellant’s business and
its inclusion in the head ‘Business income’ is not disputed even by the AO.
According to the Supreme Court, mere inclusion of Rs.12,50,639 in the total
business income is not the determinative factor for deciding whether trucks
were used by the assessee during the relevant year in a business of running
them on hire. The Supreme Court therefore set aside the judgment of the High
Court and remitted the matter to the Commissioner of Income-tax (Appeals) for
de novo examination of the case in accordance with law.

levitra

Business Expenditure — S. 42(1) — Special provisions for prospecting for mineral oil — Production sharing contract accounts is an independent accounting regime — Foreign exchange losses on account of foreign currency transaction is allowable as a deductio

New Page 14 Business Expenditure — S. 42(1) — Special
provisions for prospecting for mineral oil — Production sharing contract
accounts is an independent accounting regime — Foreign exchange losses on
account of foreign currency transaction is allowable as a deduction.

[CIT v. Enron Oil and Gas India Ltd.,
(2008) 305 ITR 75 (SC)]

The respondent-Enron Oil and Gas India Ltd. (‘the
EOGIL’), a company incorporated in Cayman Islands was engaged in the business
of oil exploration. In 1993, the Government of India through the Petroleum
Ministry invited bids for development of concessional blocks. EOGIL offered
its bid for the development of concessional blocks. A consortium of EOGIL with
RIL was given the contract. Later on, ONGC joined. EOGIL with RIL and ONGC
executed a production sharing contract (PSC) with the Government of India.
EOGIL was entitled to a participating interest of 30% in the rights and
obligations arising under the PSC. RIL was also entitled to participating
interest of 30%. ONGC was entitled to a participating interest of 40%. EOGIL
was designated as the operator under the said PSC.

Vide Notification No. 1997, dated March 8, 1996,
u/s.293A of the Income-tax Act, 1961 (‘the 1961 Act’), each co-venturer was
liable to be assessed for his own share of income. They were not to be treated
as an association of persons.

EOGIL filed its return of income for the
assessment year 1999-2000 declaring its taxable income of Rs. 71,19,50,013
u/s.115JA.

During the year, EOGIL debited its profit and
loss account by exchange loss of Rs.38,63,38,980. The Assessing Officer
disallowed this loss on the ground that it was a mere book entry and actually
no loss stood incurred by the assessee.

The decision of the Assessing Officer was
challenged in appeal by EOGIL before the Commissioner of Income-tax (Appeals),
who after analysing PSC held that each co-venturer in this case had made
contribution at a certain rate, whereas the expenditure incurred out of the
said contribution stood converted on the basis of the previous month’s average
daily means for the buying and selling rates of exchange which exercise
resulted in loss/profit on conversion. Under the circumstances, according to
the Commissioner of Income-tax (Appeals), it could not be said that the
assessee had incurred notional loss. In fact, during the course of
proceedings, the Commissioner of Income-tax (Appeals) found that during the
A.Ys. 1995-96 and 1996-97 the assessee had earned profits which stood taxed by
the Department. He further found that one co-venturer (ONGC) had gained
Rs.293.73 crores during the A.Y. 1997-98 because the Indian rupee had
appreciated as compared to foreign currency and the Department had taxed the
same, but when during the assessment year in question there is a loss on
account of such conversion, the Department has refused to allow the deduction
for such conversion losses. According to the Commissioner of Income-tax
(Appeals), the Department cannot blow hot and cold. Consequently, it was held
that just as the foreign exchange gain was taxable, loss was allowable
u/s.42(1) of the Income-tax Act in terms of the PSC. Therefore, the
Commissioner of Income-tax (Appeals) allowed as deduction, the loss of Rs.
38,63,38,980.

Aggrieved by the order passed by the Commissioner
of Income-tax (Appeals), the Department carried the matter in appeal to the
Income-tax Appellate Tribunal objecting to the deletion made by the
Commissioner of Income-tax (Appeals) on the ground that the loss was only a
book entry. Before the Tribunal the matter pertained to the A.Ys. 1999-2000,
199899, 2000-01 and 1996-97. However, for the sake of convenience, the
Tribunal focussed its attention on the facts and figures given for the A.Y.
1999-2000. Before the Tribunal, the Department contended that the assessee
borrows in USD and repays in the same currency for the preparation of the
balance sheet. The loans, according to the Department, were stated at
prevalent exchange rates and the loss arrived at was charged to the profit and
loss account. Therefore, according to the Department, the said loss was a book
entry and it was not an actual loss in foreign exchange caused to the assessee.
This argument of the Department was rejected by the Tribunal. It was held that
the assessee was a foreign company. It carried out business activity in India.
It had to maintain its accounts in rupees for the purpose of income-tax, that
the PSC had to be read with S. 42(1) of the Income-tax Act, which entitled the
assessee to claim conversion loss as deduction, particularly when the said PSC
provided for realised and unrealised gains/losses from the exchange currency.
According to the Tribunal, the assessee was maintaining its accounts in rupees
and such accounts had to reflect the loan liability under consideration as the
loan had been taken for the Indian activity. Therefore, according to the
Tribunal, the liability arising as a consequence of depreciation of the rupee
had to be considered both for accounting and tax purposes. Accordingly, the
Tribunal refused to interfere with the findings returned by the Commissioner
of Income-tax (Appeals).

The above concurrent finding stood confirmed by
the judgment delivered by the Uttarakhand High Court.

On further appeal, the Supreme Court observed
that the only question which needed consideration was whether the assessee was
entitled to claim deduction for foreign exchange losses on account of foreign
currency translation. In other words, whether loss arising on account of
foreign currency translation is allowable deduction or not and conversely
whether the gains on account of foreign currency translation is to be treated
as a receipt liable to tax. Analysing the provisions of S. 42(1), the Supreme
Court held that it was clear that the said Section was a special provision for
deductions in the case of business of prospecting, extraction/production of
mineral oils. S. 42(1) provides for admissibility in respect of three types of
allowances provided they are specified in the PSC. They relate to expenditure
incurred on account of abortive exploration, expenditure incurred before or
after the commencement of commercial production in respect of drilling or
exploration activities and expenses incurred in relation to depletion of
mineral oil in the mining area. If one reads S. 42(1) carefully, it becomes
clear that the above three allowances are admissible only if they are so
specified in the PSC.

Accordingly, the Supreme Court noted that the PSC
in question provided for both capital and revenue expenditures. It also
provided for a method in which the said expenses had to be accounted for. The
Supreme Court held that the said PSC was an independent accounting regime
which included tax treatment of costs, expenses, incomes, profits, etc. It
prescribed a separate rule of accounting. In normal accounting, in the case of fixed assets, generally when currency fluctuation results in an exchange loss, addition is made to the value of the asset for depreciation. However, under the PSC, instead of increasing the value of expenditure incurred on account of currency variation in the expenses itself, EOGIL was required to book losses separately. The said PSC prescribed a special manner of accounting which was at variance with the normal accountingstandards. The said ‘PSC accounting’ obliterated the difference between capital and revenue expenditure. It made all kinds of expenditure chargeable to the profit and loss account without reference to their capital or revenue nature. But for the PSC accounting there would have been disputes as to whetherthe expenses were of revenue or capital nature. In view of the special accounting procedure prescribed by the PSC, Accounting Standard 11 had to be ruled out.

The Supreme Court observed that Appendix C pre-scribed the manner in which a contractor is required to maintain his accounts. It stipulated that each of the co-venturers had to follow the computation of Income-tax under the 1961 Act. Clause 1.6.1. of appendix C referred to currency exchange rates. It stated that for translation purposes between USD and INR, the previous month’s average of the daily means of buying and selling rates of exchange as quoted by SBI shall be used for the month in which revenue, costs, expenditure, receipts or incomes are recorded. The Supreme Court therefore, held that clause 1.6.1 of appendix C provided for translation. The Supreme Court noted that subsequent to the award of the concession, EOGIL along with RIL and ONGC executed the PSC with the Government of India. Under the said PSC, each co-venturer remitted money, known as cash call to the bank account of the operator in the USA. The expenditure for the joint venture was made out of the said account. The trial balance was required to be prepared at the end of the month in USD, which was then required to be translated on the basis of accounting procedure mentioned in Appendix C to the PSC. The Supreme Court held that the cash call in other words was not a loan. Cash cali was a contribution. It was made by each co-venturer at a certain rate, whereas the expenditure against it had to be converted on the basis of the exchange rates as provided for in the PSC, which stated that the same had to be converted on the basis of the previous month’s average of the daily means of buying and selling rates of exchange. The above analysis showed that the capital contribution had to be converted under the PSC at one rate, whereas the expenditure had to be converted at a different rate. This exercise resulted in loss/ profit on conversion. Under the PSC, the respondent had to convert revenue, costs, receipts and incomes. If EOGIL had a choice to prepare its accounts only in USD, there would have been no loss/profit on account of currency translation. It is because of the specific provision in the PSC for currency translation that loss/profit accrued to EOGIL. The Supreme Court further held that in the PSC, the foreign company provides the capital investment and cost and the first proportion of oil extracted is generally allocated to the company which uses oil sales to recoup its costs and capital investment. The oil used for that purpose is termed ‘cost oil’. Often a company obtains profit not just from the ‘profit oil’, but also from the ‘cost oil’. Such profits cannot be ascertained without taking into account translation losses. Moreover, taxes are embedded in the profit oil. If these concepts are kept in mind, then it cannot be said that ‘translation losses’ under the PSC are illusory losses.

Appeal by the Revenue — Merely because in some cases the Revenue has not preferred appeal that does not operate as a bar for the Revenue to prefer an appeal in another case where there is a just cause.

New Page 12 Appeal by the Revenue — Merely because in
some cases the Revenue has not preferred appeal that does not operate as a bar
for the Revenue to prefer an appeal in another case where there is a just
cause.

[C. K. Gangadharan & Anr. v. CIT, (2008)
304 ITR 61 (SC)]

By order dated March 13, 2008, a reference was
made to a larger Bench of the Supreme Court and the order, of reference,
inter alia, read as follows :

”In view of the aforesaid position, we are of the
opinion that the matter requires consideration by a larger Bench to the extent
whether the Revenue can be precluded from defending itself by relying upon the
contrary decision.”

The Supreme Court made it clear that it was not
doubting the correctness of the view taken by it in the cases of Union of
India v. Kaumudini Narayan Dalal, (2001) 249 ITR 219, CIT v. Narendra
Doshi, (2002) 254 ITR 606 and CIT v. Shivsagar Estate, (2002) 257
ITR 59 to the effect that if the Revenue has not challenged the correctness of
the law laid down by the High Court and accepted it in the case of one
assessee, then it is not open to the Revenue to challenge its correctness in
the case of other assessees, without just cause. The Supreme Court after
noting its decisions in Bharat Sanchar Nigam Ltd. v. Union of India,
(2006) 282 ITR 273 (SC), State of Maharashtra v. Digambar, (1995) 4 SCC
683, Government of West Bengal v. Tarun K. Roy, (2004) 1 SCC 347,
State of Bihar Ramdeo Yadav, (1996) 3 SCC 493 and State of West Bengal
v. Devdas Kumar, (1991) Supp (1) SCC 138, observed that if the assessee
takes the stand that the Revenue acted mala fide in not preferring
appeal in one case and filing the appeal in other case, it has to establish
mala fides. The Supreme Court accepted the contention of the learned
counsel for the Revenue that there may be certain cases where because of the
small amount of revenue involved, no appeal is filed or where policy decisions
have been taken not to prefer appeal where the revenue involved is below a
certain amount. Similarly, where the effect of the decision is revenue
neutral, there may not be any need for preferring the appeal. All these
provide the foundation for making a departure.

The Supreme Court held that merely because in
some cases the Revenue has not preferred appeal that does not operate as a bar
for the Revenue to prefer an appeal in another case where there is just cause
for doing so or it is in public interest to do so or for a pronouncement by
the higher court when divergent views are expressed by the Tribunals or the
High Courts.

levitra

Exemption — Local Authority — Marketing Committee to provide facilities for marketing of agricultural produce in a locality is not a ‘local authority’ and there fore its income is not exempt u/s.10(20) (after amendment by Finance Act, 2002). Its income is

New Page 13 Exemption — Local Authority — Marketing
Committee to provide facilities for marketing of agricultural produce in a
locality is not a ‘local authority’ and there fore its income is not exempt
u/s.10(20) (after amendment by Finance Act, 2002). Its income is exempt
u/s.10(26AAB) from 1-4-2009.

[Agricultural Produce Market Committee,
Narela v. CIT & Anr., (2008) 305 ITR 1 (SC)]

The appellant-Committee was established under
the Delhi Agricultural Produce Marketing (Regulation) Act, 1998 (the 1998
Act). The provisions of the said 1998 Act enjoined upon the appellant to
provide facilities for marketing of agricultural produce in Narela, Delhi.
This is apart from performing other functions and duties such as
superintendence, direction and control of markets for regulating the
marketing of agricultural produce.

For the A.Y. 2003-04, the appellant-Committee
claimed exemption from payment of tax on the income earned by it, on the
ground that it was a ‘local authority’ within the meaning of S. 10(20) of
the Income-tax Act, 1961 (the 1961 Act). It relied upon the definition of
‘local authority’ in S. 2(1)(l) of the said 1998 Act. The Assessing Officer
rejected the appellant’s claim for exemption relying upon Circular No.
8/2002, dated August 27, 2002 issued by the Central Board of Direct Taxes.
The view taken was that the amended provisions of S. 10(20) of the 1961 Act
were not attracted to ‘Agricultural Produce Marketing Societies’ or
‘Agricultural Market Boards’ even when they may be local authorities under
the Central or State legislation.

Aggrieved by the said order, the appellant
filed an appeal before the Commissioner of Income-tax (Appeals) who upheld
the view taken by the Assessing Officer and declined the exemption claimed
by the appellant.

A further appeal by the appellant, before the
Tribunal, also failed.

Aggrieved by the decision of the Tribunal, the
appellant moved the High Court by way of an appeal u/s.260A of the 1961 Act.
The Delhi High Court following its earlier judgment in the case of
Agricultural Produce Market Committee, Azadpur v. CIT, (ITA No.
749/2006), dismissed the appellant’s appeal.

On further appeal, the Supreme Court noted that
prior to the Finance Act, 2002, the said 1961 Act did not contain the
definition of the words ‘local authority’. Those words came to be defined
for the first time by the Finance Act, 2002, vide the Explanation/
definition clause.

After hearing the parties, the Supreme Court
observed that u/s.3(31) of the General Clauses Act, 1897, ‘local authority’
was defined to mean “a municipal committee, district board, body of port
commissioners or other authority legally entitled to the control or
management of a municipal or local fund. The words ‘other authority’ in S.
3(31) of the 1897 Act have been omitted by Parliament in the
Explanation/definition clause inserted in S. 10(20) of the 1961 Act, vide
the Finance Act, 2002. Therefore, it was not correct to say that the entire
definition of the words ‘local authority’ was bodily lifted from S. 3(31) of
the 1897 Act and incorporated by Parliament, in the Explanation to S. 10(20)
of the 1961 Act. This deliberate omission was important. The Supreme Court
noted that various High Courts had taken the view prior to the Finance Act,
2002, that AMC(s) is a ‘local authority’. That was because there was no
definition of the words ‘local authority’ in the 1961 Act. Those judgments
proceeded primarily on the functional tests as laid down in the judgment of
the Supreme Court in the case of R. C. Jain [(1981) 2 SCC 308].

In the case of R. C. Jain, the test of ‘like
nature’ was adopted as the words ‘other authority’ came after the words
‘Municipal Committee, District Board, Body of Port Commissioners’.
Therefore, the words ‘other authority’ in S. 3(31) took colour from the
earlier words, namely, ‘Municipal Committee, District Board or Body of Port
Commissioners’. This is how the functional test was evolved in the case of

R. C. Jain. The Supreme Court held that
Parliament in its legislative wisdom had omitted the words ‘other authority’
from the said Explanation to S. 10(20) of the 1961 Act. The said Explanation
to S. 10(20) provides a definition to the words ‘local authority’. It is an
exhaustive definition. It is not an inclusive definition. The words ‘other
authority’ do not find place in the said Explanation. Even according to the
appellant(s), AMC(s) was neither a Municipal Committee nor a District Board
nor a Municipal Committee nor a Panchayat. Therefore, according to the
Supreme Court, the functional test and the test of incorporation as laid
down in the case of R. C. Jain, was no more applicable to the Explanation to
S. 10(20) of the 1961 Act.

However, the Supreme Court felt that the
question still remained as to why Parliament had used the words ‘Municipal
Committee’ and ‘District Board’ in item (iii) of the said Explanation.
According to the Supreme Court, Parliament defined ‘local authority’ to mean
— a panchayat as referred to in clause (d) of Article 243 of the
Constitution of India, Municipality as referred to in clause (e) of Article
243P of the Constitution of India. However, there was no reference to
Article 243 after the words ‘Municipal Committee’ and ‘District Board’. It
appeared that the Municipal Committee and District Board in the said
Explanation were used out of abundant caution. In 1897 when the General
Clauses Act was enacted there existed in India, Municipal Committees and
District Boards and it was quite possible that in some remote place a
District Board still existed. The Supreme Court in conclusion observed that
having taken the view that AMC(s) is neither a Municipal Committee nor a
District Board under the Explanation to S. 10(20) of the Act, it refrained
from going into the question : whether the AMC(s) is legally entitled to the
control of the local fund, namely, Market Fund, under said 1998 Act, because
vide the Finance Act, 2008, income of AMC(s) is exempted under sub-section
(26AAB) of S. 10 with effect from April 1, 2009.

levitra

Penalty S. 271(1)(c) Explanation 5 : Assessee admitted acquisition of asset in statement u/s.132(4) : Immunity to be granted

New Page 1

6 Penalty : S. 271(1)(c) Explanation 5 of Income-tax Act,
1961 : A. Ys. 1984-85 and 1988-89 : In statement u/s.132(4), assessee admitted
acquisition of asset in A.Y. 1987-88 and offered income of Rs.3,50,000 spread
over 5 years from A.Y. 1984-85 to 1988-89 : Immunity under Explanation 5 should
be granted.


[CIT v. Kanhaiyalal, 214 CTR 611 (Raj.)]

In the course of a search action, in a statement u/s.132(4)
of the Income-tax Act, 1961, the assessee accepted the acquisition of the asset
of value Rs.3,50,000 in the A.Y. 1987-88 and offered the amount to tax spread
over in the A.Ys. 1984-85 to 1988-89. The Assessing Officer imposed penalty
u/s.271(1)(c) of the Act and refused to grant immunity under Explanation 5, on
the ground that the whole of the amount should have been offered in the A.Y.
1987-88. The Tribunal deleted the addition and held that the assessee is
entitled to immunity under Explanation 5.

On appeal by the Revenue, the Rajasthan High Court upheld the
decision of the Tribunal and held as under :

“Immunity under Explanation 5 of S. 271(1)(c) is not taken
away for the simple reason that income disclosed by assessee in his statement
u/s.132(4) for a particular year was spread over in the returns of several
years, more so, when the Assessing Officer had also made assessment in
assessment years as returned by the assessee, though after making some quantum
reshuffling.”



levitra

Reassessment : Notice to agent of non-resident assessee : Limitation : S. 149(3), S. 163(2) Specific order u/s.163(2) not necessary : Notice issued u/s.148 after expiry of two years is time-barred

New Page 1

8 Reassessment : Notice to agent of non-resident : Limitation
: Ss. 149(3) and Ss. 163(2) of Income-tax Act, 1961 : A.Y. 1996-97 : MC filed
return as agent of non-resident assessee : No specific order u/s.163(2) as agent
: Order not necessary : Notice u/s.148 issued to assessee on 14-1-2000, after
expiry of two years is time-barred u/s.149(3).


[CIT v. Madhwan Bashyam, 214 CTR 335 (Del.)]

For the A.Y. 1996-97, M/s. Mariben Corporation (MC) filed the
return of income as agent of the non-resident assessee on 24-6-1996. On
14-1-2000, the Assessing Officer issued notice u/s.148 of the Income-tax Act,
1961 and served on the assessee on 31-1-2000. Before the Tribunal, the assessee
contended that in view of the provisions of S. 149(3), the notice should have
been served to the assessee on or before 31-3-1999 and therefore the notice was
time-barred. The Revenue contended that no order was passed to the effect that
MC was the agent of the assessee and therefore the provisions of S. 149(3) are
not applicable. The Tribunal accepted the contention of the assessee and held
that the notice issued to the assessee u/s.148 of the Act, was barred by time.

On appeal by the Revenue, the Delhi High Court upheld the
decision of the Tribunal and held as under :

“(i) On a plain reading of S. 163(2), it appears that when
an order adverse to the assessee/agent is passed by the Assessing Officer,
then a written order is required to be made. However, if there is no objection
to the agent continuing the proceedings on behalf of the assessee, no specific
order needs to be passed by the Assessing Officer. If a person filing a return
as an agent of the assessee is not accepted as an agent for further
proceedings, then the Assessing Officer must pass an order, so that the agent
or assessee can file an appeal. But as in the present case, if the proceedings
have gone on as if there is no objection to the person filing a return being
treated as an agent of the assessee, no specific order needs to be passed in
this regard.

(ii) Under the circumstances, there is no error in the view
taken by the Tribunal in coming to the conclusion that the notice was issued
to the assessee beyond the period prescribed by law.”


levitra

Penalty u/s.271C and u/s.271B : Failure to deduct tax u/s.194C : Partner only matriculate, assessee new firm, followed advice given by its CA : Penalty cancelled

New Page 1

7 Penalty for failure to deduct tax at source : Ss.194C,
Ss.271C and Ss.273B of Income-tax Act, 1961 : A.Ys. 2000-01 and 2001-02 : New
firm : Partner a matriculate : Assessee explained that it was not advised by its
Chartered Accountant that it was liable to deduct tax at source u/s.194C :
Explanation bona fide : Penalty cancelled.


[CIT v. Fourways International, 166 Taxman 461 (Del.)]

In the A.Ys. 2000-01 and 2001-02, the assessee had made
certain payments for fabrication charges, but had not deducted tax at source.
The Assessing Officer held that the assessee has failed to deduct tax at source
u/s.194C of the Income-tax Act, 1961 without reasonable cause and therefore
imposed penalty u/s.271C of the Act. The contention of the assessee was that it
was not advised by its Chartered Accountant that it was liable to deduct tax at
source u/s.194C of the Act and therefore the failure to deduct tax at source was
bona fide. The assessee therefore contended that there is no
justification of imposition of penalty u/s.271C of the Act. The Tribunal
accepted the contention of the assessee and cancelled the penalty.

On appeal by the Revenue, the Delhi High Court upheld the
decision of the Tribunal and held :

“(i) The Tribunal found the explanation to be bona fide.
The Tribunal concluded that the assessee was not avoiding its liability and
had cooperated with the Revenue in the payment of tax. It also held that the
assessee has not been correctly advised by its Chartered Accountant in regard
to its liability.

(ii) We may note that S. 273B of the Act does not make a
levy of penalty u/s.271C of the Act mandatory. The assessee would not be
liable to penalty if he is able to prove that there was a reasonable cause for
failing to deduct the tax. The assessee in the present case had given an
explanation which found favour with the Tribunal. We think that the view taken
by the Tribunal is one that could have possibly been taken in the matter. It
is not perverse as to warrant interference or which gives rise to a
substantial question of law.”



levitra

Search and seizure — Whether the High Court was justified in holding that the Additional Director (Investigation) do not have jurisdiction to authorise Joint Director to effect search ? — Matter left open since it had become academic.

New Page 1

3 Search and
seizure — Whether the High Court was justified in holding that the Additional
Director (Investigation) do not have jurisdiction to authorise Joint Director to
effect search ? — Matter left open since it had become academic.


[DCIT v. Dr. Nalin Mahajan,
(2009) 314 ITR 340 (SC)]


The Delhi High Court (257 ITR
123) had inter alia held that the Additional Director (Investigation) did not
have the power to issue any authorisation or warrant to the Joint Director as he did not have any statutory authority to
issue such authorisation or warrant. Consequently, the High Court declared the
Notification dated 6th September, 1989 as not valid to that extent.

The aforesaid decision of the
High Court was challenged before the Supreme Court.

The Supreme Court found that the
above question had become academic because after the impugned judgment, the
Commissioner of Income-tax, Delhi, had issued order u/s.132B of the Act for
release of cash, for release of jewellery and for release of the books of
account that were seized during the search and seizure operations conducted
u/s.132(1), which indicated that the matter had become final so far as the
assessment and recovery of tax was concerned. The Supreme Court therefore did
not examine the issues raised in the civil appeal and dismissed the civil appeal
keeping the questions of law raised therein expressly open.


levitra

Assessment — Intimation u/s.143(1)(a) — Effect of amendment of S. 143(1A) by Finance Act, 1993 — Whether retrospective in case of reduction of loss ? — Matter remanded to the High Court.

New Page 1

1 Assessment —
Intimation u/s.143(1)(a) — Effect of amendment of S. 143(1A) by Finance Act,
1993 — Whether retrospective in case of reduction of loss ? — Matter remanded to
the High Court.


[CIT v. Ashok Paper Mills,
(2009) 315 ITR 426 (SC)]

In an appeal against the
decision of the learned Single Judge passed in the writ petitions, the Division
Bench of the Gauhati High Court (250 ITR 673) found that there was no challenge
to the decision of the learned Single Judge about the constitutional validity of
the provisions of Ss.(1A) of S. 143 of the Act and therefore it was only
required to deal with the second limb of the order related to the
retrospectivity of the provisions of the aforesaid sub-section substituted by
the Finance Act, 1993.

The Division Bench of the High
Court, referring to the decisions of the Supreme Court in CIT v. Hindustan
Electro Graphites Ltd., (2000) 243 ITR 48 and in ACIT v. J. K. Synthetics
Ltd., (2001) 251 ITR 200, held that the Act or omission for which no
income-tax was payable as per law in force at a given time, could not be
subjected to additional tax with retrospective
effect and thus dismissed the appeal.

In an SLP filed in a connected
tax reference which was decided following the above decision of the Gauhati High
Court, the Supreme Court remanded the matter to the High Court for considering
it afresh in the light of its judgment in
ACIT v. J. K. Synthetics Ltd. (supra).


levitra

Penalty — Concealment of income — Penalty could be imposed u/s.271(1)(c) of the Act even if the returned income as well as the assessed income is a loss.

New Page 1

2 Penalty —
Concealment of income — Penalty could be imposed u/s.271(1)(c) of the Act even
if the returned income as well as the assessed income is a loss.


[CIT v. Moser Baer India Ltd.,
(2009) 315 ITR 460 (SC)]

The assessee had filed a return
of income declaring a loss of Rs.2,72,12,620. In the course of the assessment
proceedings it was found that although the assessee had excluded the income of
floppy units II and III from its total income by claiming exemption u/s.10A and
u/s.10B of the Act, the depreciation in respect of these units had been deducted
from its income. The assessee had explained that the claim for depreciation was
a clerical mistake. The assessee filed a further application withdrawing its
claim of deduction u/s.10B of the Act in respect of floppy unit II for the
assessment year in question, since that unit had incurred a loss.

The Assessing Officer computed
the total income at Rs. Nil after adjusting the brought forward
losses/depreciation of Rs.47,01,433.11. The Assessing Officer disallowed the
depreciation in respect of floppy unit II and III of Rs.4,81,83,139. The
Assessing Officer also initiated penalty proceedings u/s.271(1)(c) of the Act.
An order imposing penalty of Rs.4,43,28,488 u/s.271(1)(c) of the Act came to be
passed.

The Commissioner of Income-tax
(Appeals) allowed the appeal holding that since the tax payable on the total
income as assessed was nil, there was no positive income, and therefore, the
penalty could be levied.

On an appeal to the Tribunal by
the Revenue, the assessee filed a cross-objection to support the order of the
Commissioner of Income-tax (Appeals) additionally on the ground that the
Assessing Officer had not recorded his satisfaction in the assessment order that
the penalty proceedings ought to be initiated against the assessee.

The Tribunal inter alia,
relied on the decision of the Delhi High Court in CIT v. Ram Commercial
Enterprises Ltd., (2000) 246 ITR 568 and concluded that the Assessing Offer
had not recorded a specific satisfaction before initiating the penalty
proceedings against the assessee and accordingly, the entire penalty proceedings
were set aside.

The High Court dismissed the
appeal of the Revenue following the decision of the Supreme Court in Virtual
Soft Systems Ltd. (2007) 289 ITR 83 (SC) in which it was held that no penalty
could be levied u/s.271(1)(c) of the Act, prior to amendment made to S. 271 by
the Finance Act, 2002, where there is no positive assessed income on which any
tax is payable.

The Supreme Court reversed the
judgment of the High Court in view of the decision of its Larger Bench in CIT
v. Gold Coin Health Food Pvt. Ltd., (2008) 304 ITR 308 and remitted the
matter to the Tribunal for considering the question regarding concealment.

levitra

Disallowance : u/s.43B : Contribution to P.F. and ESI within two to four days after grace period, before filing of return — Amount deductible.

New Page 1

1 Business expenditure : Disallowance u/s. 43B of Income-tax
Act, 1961 : A.Y. 2001-02 : Contributions to Provident Fund and Employees’ State
Insurance within two to four days after grace period but before filing return :
Amount deductible.


[CIT v. Dharmendra Sharma, 297 ITR 320 (Del.)]

Dealing with the scope of S. 43B of the Income-tax Act, 1961
for the A.Y. 2001-02, the Delhi High Court held as under :

“Contributions made towards Provident Fund and Employees’
State Insurance within 2 to 4 days after the grace period, but before filing
the return are entitled to the benefit provided u/s. 43B.”


levitra

Vote We Must !

Editorial

We are now well into the national election season with the run-up to the Lok Sabha polls, with the newspapers full of reports of alliances and break-ups between various political parties and groupings. Reading about these developments and actions of politicians with absolute disregard for ethics and principles, one wonders as to whose interests our politicians really have at heart — that of the voters whom they are supposed to represent, or their own. It is but natural that one feels revolted by the type of money-based or caste-based politics practised in India, and seeks to maintain a distance from politics. This disgust for politics ultimately gets reflected in our abstention from voting in the elections. Is this however the right approach for educated professionals to take ?

In India, one faces so many problems in day-to-day life — corruption, official apathy, violence, etc. — that one takes the easy way out, by trying to ensure that one does not have to face the issue directly. We tend to believe that so long as the issue does not directly impact us, we should ignore it, not get involved, but just carry on with our day-to-day lives. This tendency of most of us to isolate ourselves from the problems faced by our society and our refusal to tackle them head-on, has resulted in further aggravation of the problems. Most people now realise, after the recent terrorist attacks, that pretending that a problem does not exist does not make the problem go away or diminish — it only increases, till it ultimately threatens to engulf all of us.

If we wish to maintain or improve our lifestyles and those of future generations, if we cherish our freedom, we cannot function in isolation from the society that we live in. We have to contribute to ensuring that the principles that we cherish are protected. We cannot just be passive bystanders. As educated professionals, we owe it to ourselves and to our society to act as a catalyst for change. One of the essential action points for this is ensuring that we vote in elections.

Given the disgust of most educated people with politics, there have been many suggestions made to improve the quality of politics and the system of elections. One such suggestion has been the grant of a right to voters to cast a negative vote — i.e., a vote for none of the candidates. This, it is felt, would indicate to candidates that the voters are not satisfied with any of the candidates standing for election. While this would be a means of sending out a message to politicians, it would not be sufficient by itself.

 

Today, in any case, it is amply clear to politicians that the educated electorate is frustrated with the type of politics one witnesses of late in this country. Yet, one does not see any inclination from our existing bunch of politicians to mend their ways, because they feel there is no alternative to them. What is really needed is an alternative that voters can look forward to, an alternative based on principles and ethics, and an attitude of service to the country and to its people. Fortunately, this election seems to bring a ray of hope, as one sees professionals willing to take the plunge into the cesspool of politics.

Under such circumstances, it is essential that we exercise our rights as voters to show our support to candidates who are eager and willing to usher in change, who are not willing to sacrifice their principles for money, and who can help in stemming the rot that has set in into our political system. At the municipal level, in Mumbai in the recent past, we have seen some deserving candidates being elected with the aid of citizen’s groups interested in improving the governance of their areas. We need to take this forward, so that the entire country is run by politicians interested in improving the lot of the people, and who are accountable to the people.

It is also perhaps time that the manner in which ministers are appointed should undergo a change, so that meritorious persons can be appointed regardless of their political affiliations. This would however require major changes to our political system, which would be possible only when we have a majority of our politicians interested in a change for the better.

Normally, one witnesses mass voting by uneducated voters, organised by politicians. One hopes that this time one will witness mass voting by educated professionals and the business class, who wish to ensure a better future for their country and for themselves. Each one of us needs to take the small step of voting in this election towards this end. Only then do we have the right to demand a better future for ourselves and future generations.

Gautam Nayak

levitra

Tax Deduction at Source in THE Absence of PAN

Editorial

The 1st of April 2010 is not just All Fools Day. It is the
day on which section 206AA of the Income Tax Act comes into effect. This section
basically provides that in cases where tax is deductible at source and the payee
does not furnish his Permanent Account Number (PAN) to the payer, or where the
PAN furnished is invalid, or does not belong to the payee, tax would be
deductible at the actual rate of tax deductible at source (TDS) or 20%,
whichever is higher. This provision will have far-reaching consequences for all
businesses and taxpayers.

Firstly, this provision does not apply only to resident
payees, but also to non-residents and foreign companies which may not have a
presence in India. There are many foreign companies who are paid royalty or fees
for technical services by Indian companies, foreign companies otherwise not
having anything else to do with India. Even in such cases, the tax laws seem to
require such foreign companies to obtain a PAN, or else suffer a higher rate of
TDS. On a practical level, most foreign companies not having a presence in India
are reluctant to obtain a PAN in India, for fear of having to file tax returns
in India, or having further obligations on account of obtaining PAN, etc. Even
if they are willing to obtain a PAN, the procedural requirement of getting their
documents certified by the Indian consulate or embassy in their home country,
acts as a definite dampener and obstacle to their applying for a PAN.

Further, in many cases, the burden of the additional tax
would not fall upon the foreign companies but on the Indian payer companies,
since the foreign companies insist upon receiving their payments tax-free. One
understands that the purpose of ensuring that every payee has a PAN is to
facilitate tax credit under the electronic mode in the Tax Information Network.
In cases where the tax is borne by the Indian payee, is this purpose really
served or does it just add to the cost of the Indian companies?

So far as resident payees are concerned, the income tax
department seems to believe that everybody should have a PAN. In a way, the tax
department is seeking to counter its inefficiency in finding tax evaders through
this measure. Today, PAN is already rquired for most transactions, such as
opening of a bank account, opening of a demat account, subscription to mutual
funds above a limit, share applications above a limit, etc. However, there are
often cases where a person does not have a PAN, and he can give a declaration
instead. It is therefore possible that certain recipients may still not have a
PAN. In such cases, having a higher rate of TDS seems to be justified, to ensure
that such recipients of income are part of the tax net, and if they choose to
remain outside the tax net, they are penalised for it.

The problem however is in cases where the PAN is misstated,
and therefore appears to be of another person or to be invalid. Wherever human
efforts are involved, there are bound to be mistakes. Further, we have to accept
that a large part of our population is not yet fully literate or conversant with
English, and therefore unable to correctly provide the PAN. The presumption of
the tax authorities seems to be that every recipient of income is well trained,
knowledgeable and efficient. While this may be true in a large part for larger
businessmen in bigger cities, the same does not hold good for all depositors or
small businessmen in smaller towns or villages. Common errors can and should be
expected.

In such cases, the payee may be disproportionately penalised
for common clerical errors. While a taxpayer having taxable income can adjust
such excess deduction against his normal tax liability,
persons with income below the taxable limit may have to wait for their refunds,
and lose out in the process. The provision could therefore have the negative
effect of driving certain transactions into the black economy, to avoid these
problems.

The requirement of stating the PAN on all correspondence
between the payee and the payer also seems to be an overdose. Would it mean that
all businesses or depositors should now put their PAN on their letterheads?

Also, while the burden on the taxpayers and public is being
increased, the tax department has to realise that it does have a corresponding
obligation to improve the quality of its services. The process of giving tax
credit has to be improved and made error free, so that no person is deprived of
the legitimate tax payments made on his behalf. TDS payments lying in suspense
in the Tax Information Network have to be sorted out by follow up with the tax
deductor, and proper credit has to be given to the correct deductee. The process
of refunds has to be improved, and speeded up.

It may also be advisable for the tax department to restrict
the applicability of this provision only to resident payees, given the
underlying intention behind the provision. The documentation procedures for
obtaining PAN by foreign companies should also be simplified, so that obtaining
PAN is not regarded as a nuisance. A proper online facility needs to be provided
to all tax deductions free of charge to verify the correctness of the PAN. It is
only then that the provisions would work without causing undue hardship to many.

Gautam Nayak

levitra

Sons of the Soil — Bad Economics ?

Editorial

With this issue, the Journal enters the 40th year of its
publication. While we continue to update you on the latest developments relevant
to the profession, during the course of this year, we also intend to bring you
articles which would provide an insight into what the profession can expect in
the future.


The last couple of months have seen certain political parties
canvassing the ‘sons of the soil’ theory in Maharashtra, and violence being
committed against immigrants from certain other parts of the country. Similar
stands have been taken at times by politicians in different States as well. An
emotional appeal is sought to be made against immigration, on the ground that it
results in jobs being snatched away from locals by the immigrants. Violence is
certainly morally and legally indefensible, and needs to be condemned. Given the
fact that the immigrants are also Indians, and are entitled under the
Constitution to equal opportunities, such a stand is legally indefensible. The
short-term losses caused to industry and trade are clearly visible. The larger
question is — does immigration really adversely financially affect the local
people in the long run ?

It is now universally acknowledged that a country or region
which welcomes immigrants prospers. An expanding workforce facilitates faster
growth, since most immigrants are young and therefore productive.

The classic case of immigration facilitating prosperity is
that of the USA, which has had a high rate of immigration. A large part of the
US economic success is due to the inflow of migrants into that country over the
last couple of centuries. London has become the world’s financial capital,
helped greatly by its policy of welcoming migrants. Countries that take in
immigrants, such as Sweden, Ireland, the USA and the UK, have done better
economically than countries which do not.

The very economic growth of Mumbai itself can largely be
attributed to the influx of immigrants. What would the economy of Mumbai have
been today if it were not for the Parsis, the Marwaris and the Gujaratis, who
came from other places and set up their businesses in Mumbai ?

A United Nations Secretary General report of May 2006 on
International Migration and Development has important findings on the subject,
which equally apply to intra-country migration between different regions.
Growing income differentials have spurred migration. Advanced economies need
migrant workers to fill jobs that cannot be outsourced and that do not find
local workers willing to take up at going wages. As younger generations become
better educated, they are less willing to take up lower paid and physically
demanding jobs. Migration may reduce wages or lead to higher unemployment among
low-skilled workers; however, most migrants complement the skills of domestic
workers instead of competing with them. By performing tasks that either would go
undone or cost more, migrants allow natives to perform other, more productive
and better-paid jobs. They also maintain viable economic activities that would
otherwise be outsourced. By enlarging the labour force and the pool of consumers
and by contributing their entrepreneurial capacities, migrants boost economic
growth in receiving countries.

The report notes that for the full benefits of migration to
be realised, the rights of migrants must be respected. States have the
obligation and must take effective action to protect migrants against all forms
of human rights violations and abuse, and also combat all forms of
discrimination, xenophobia, ethnocentrism and racism. In turn, migrants, just as
citizens, have the obligation to abide by the laws and regulations of receiving
States. Migration policy needs to be complemented by strategies to manage
diversity and promote cross-cultural learning. Migrants have been and continue
to be indispensable to the prosperity of many countries. The leaders of those
countries have a responsibility for shaping public opinion accordingly,
especially through communication strategies that articulate and explain how
existing migration policies are consistent with society’s ability to accommodate
and integrate migrants.

Besides this, what the Government needs to ensure is that
migration is properly managed by ensuring that our public spaces are not
encroached upon by migrants (whether hailing from Maharashtra or outside) for
their stay.

Reservation of jobs for locals is also not the solution.
Reservation in any form is harmful, as it ultimately leads to favouritism,
corruption, suppression of merit and lower productivity. For obvious reasons,
our politicians seek to push through various types of reservations. For
sustainable growth, we must encourage merit, irrespective of the caste or place
of origin of the person.

The only form of help that a meritorious person from a
backward or disadvantaged background needs to come up in life is equal
opportunity and, if required, economic assistance to study — his merit and his
will to succeed will thereafter ensure that he comes up in life, and that the
country as a whole benefits. One hopes that the day is not too far off when
India will move in that direction, notwithstanding the best efforts of some of
her politicians to the contrary !


Gautam Nayak

levitra

Litigation — Public Sector undertakings — Clearance of Committee on Disputes — Time for reference within a period of one month is not rigid — Delay in approaching the Committee does not make it illegal but the delay should not be due to lethargy.

New Page 1

1 Litigation — Public Sector undertakings —
Clearance of Committee on Disputes — Time for reference within a period of one
month is not rigid — Delay in approaching the Committee does not make it
illegal but the delay should not be due to lethargy.

[CIT v. Oriental Insurance Co. Ltd.,
(2008) 304 ITR 55 (SC)]

The assessee, an insurance company was covered by
the Insurance Act, 1938. According to the appellant, every insurance company
has to be assessed u/s.44 of the Income-tax Act, 1961 as per Rule 5 of the
First Schedule. An assessment was made and the same was upheld by the
Commissioner of Income-tax (Appeals). The Income-tax Appellate Tribunal
deleted the addition made. The Tribunal accepted the stand of the
respondent-insurance company. The question arose as to whether the Department
would prefer appeals and/or file petitions without obtaining necessary
clearance from the Committee of Disputes (in short ‘the COD’) constituted in
terms of order of the Supreme Court. According to the High Court, it was
necessary to refer the matter to the said Committee. The High Court held that
the same was to be done within a period of one month in terms of the order of
the Supreme Court in Oil and Natural Gas Commission v. Collector of Central
Excise, (2004) 6 SCC 437. The High Court dismissed the appeal. The High
Court held that since this Court had set the time frame, there was no scope
for any deviation therefrom.

On an appeal to the Supreme Court, it was
clarified that there was actually no rigid time frame indicated by it. The
emphasis on one month’s time was to show the urgency needed. Merely because
there is some delay in approaching the Committee that does not make the action
illegal. The Committee is required to deal with the matter expeditiously, so
that there is no unnecessary backlog of appeals which ultimately may not be
pursued. In that sense, it is imperative that the concerned authorities take
urgent action, otherwise the intended objective would be frustrated. There is
no scope for lethargy. It is to be tested by the Court as to whether there was
any indifference and lethargy and in appropriate cases refuse to interfere. In
the instant case the Supreme Court found that factual position was not that.
The Supreme Court therefore, set aside the order of the High Court and
directed consideration of the question of desirability to proceed in the
matter before it on receipt of the report from the concerned Committee.

 

Learned counsel for the Department submitted to
the Supreme Court that even if the Committee has declined to grant permission,
it was still open to raise the issues in appropriate proceedings. The Supreme
Court expressed no opinion in that regard, but observed that where the
Committee has declined to deal with the matter on the ground of belated
approach, the same cannot be sustained. The Committee has to consider the
matter on merits.

The Supreme Court further observed that where
permission has been granted by the Committee, there is no impediment on the
Court to examine the matter and take a decision on merits. But where there is
no belated approach, the matter has to be decided. The Court has to decide
whether because of unexplained delay and lethargic action it would decline to
entertain the matters. That would depend on the factual scenario in each case,
and no straitjacket formula can be adopted.

levitra

TDS : S. 194LA of Income-tax Act, 1961 : Compensation for acquisition of agricultural land : Collector had no jurisdiction to deduct tax at source : Deduction illegal.

New Page 1

7. TDS : S.
194LA of Income-tax Act, 1961 : Compensation for acquisition of agricultural
land : Collector had no jurisdiction to deduct tax at source : Deduction
illegal.



[Risal Singh v. UOI, 321 ITR 251
(P&H)]

The petitioners received
compensation for acquisition of their agricultural land. While disbursing the
compensation, the Collector made deduction of tax at source and remitted the
amount to the Revenue. The Collector rejected the petitioners’ objection stating
that the deduction has been made on the instructions of the Haryana Urben
Development Authority.

On a writ petition filed by the
petitioners, the Revenue contended that alternative remedy is available to the
petitioners to seek refund after getting assessment done. The Punjab and Haryana
High Court allowed the petition and held as under :


“(i) In the absence of
jurisdiction to deduct tax from compensation for agricultural land, the
stand of the Income-tax Department that since there was a remedy of getting
the assessment done and to receive refund could not be accepted.

(ii) The Collector could not
have made deduction without determining the jurisdictional fact that
compensation was for property other than agricultural land. Thus deduction
of tax at source without determining the plea of the petitioner that the
land was agricultural land was not justified. The amount was said to have
been remitted to the Income-tax Department which was illegal.


(iii) We allow this petition and
direct the Income-tax Department to refund the amount to the Collector within
one month from the date of receipt of a copy of this order. Thereafter, the
Collector will determine whether compensation paid is for property other than
agricultural land or otherwise and whether deduction of tax at source was
permissible under any provisions of law. Whether deduction is permissible or not
will be decided by the Collector within two months from the date of receipt of a
copy of this order. If deduction is found not permissible, the amount will be
refunded to the petitioners not later than three months from receipt of a copy
of this order.”

levitra

Deemed profit : S. 41(1) of Income-tax Act, 1961 : A.Y. 1996-97 : Outstanding liability : Continued as liability in the books : Liability not written back : Liability cannot be said to have ceased to exist : It cannot be treated as income u/s.41(1).

New Page 1

5. Deemed profit
: S. 41(1) of Income-tax Act, 1961 : A.Y. 1996-97 : Outstanding liability :
Continued as liability in the books : Liability not written back : Liability
cannot be said to have ceased to exist : It cannot be treated as income
u/s.41(1).


[CIT v. GP International Ltd.,
229 CTR 86 (P&H)]

For the A.Y. 1996-97, the
Assessing Officer made an addition of Rs.3,30,000 in respect of the outstanding
amount payable to one M/s. ACP relying on the provisions of S. 41(1) of the
Income-tax Act, 1961. The Tribunal found that the assessee has continued to show
the liability as the outstanding liability and has not written back the same.
The tribunal therefore deleted the addition.

On appeal by the Revenue, the
Punjab and Haryana High Court upheld the decision of the Tribunal and held as
under :

“The assessee having shown the
amount payable by it to another company as an existing liability in its books
and not written back the same, it cannot be said that the aforesaid liability
has ceased to exist and, therefore it cannot be treated as income by invoking
the provisions of S. 41(1).”

 

levitra

Manufacture : Exemption u/s.10A, u/s. 10AA of Income-tax Act, 1961 : A.Y. 2004-05 : Definition in Exim Policy applicable : Has wide and liberal meaning : Blending and packing of tea qualifies for exemption.

New Page 1

6. Manufacture :
Exemption u/s.10A, u/s. 10AA of Income-tax Act, 1961 : A.Y. 2004-05 : Definition
in Exim Policy applicable : Has wide and liberal meaning : Blending and packing
of tea qualifies for exemption.


[Girnar Industries v. CIT, 187
Taxman 136 (Ker.)]

The assessee was an industrial
unit located in the special economic zone, engaged in blending and repacking of
tea for export. For the relevant assessment year i.e., A.Y. 2004-05, it claimed
deduction of export profit in respect of the blended tea exported from the
industrial unit u/s.10A. The assessing authority denied the deduction on the
ground that ‘blending’ did not answer the description of manufacture or
processing before the definition clause of ‘manufacture’ contained in S. 2(r) of
the Special Economic Zones Act, 2005 was incorporated in the provisions of S.
10AA with effect from 10-2-2006. The Tribunal upheld the decision of the
Assessing Officer.

On appeal by the assessee the
Delhi High Court reversed the decision of the Tribunal and held as under :


“(i) Prior to the passing of
the Special Economic Zones Act, 2005, the assessee’s industry was located in
the zone previously known as ‘Cochin Export Processing Zone’ which is a Free
Trade Zone covered by S. 10A. It is clear from the provisions of S. 10A that
deduction is of the profits and gains derived by the industrial undertaking
from the export of articles, etc., manufactured or produced by it.

(ii) In substance, the
provisions of S. 10A and provisions S. 10AA, which were introduced later on,
serve the very same purpose of granting exemption on the profit earned by
the industrial units in the FTZ/SEZ. These provisions introduced in the
Income-tax Act are essentially for implementation of the EXIM Policy
periodically announced by the Government providing incentives to the
export-oriented units located in the FTZ/SEZ mainly to augment the foreign
exchange earnings. In fact, though S. 10A does not contain a definition for
‘manufacture’, definition of the said term contained in S. 2(r) of the SEZ
Act has been incorporated in S. 10AA with effect from 10-2-2006. Admittedly,
the said definition covers blending also. Therefore, blending and packing of
tea done by the assessee qualified for exemption u/s.10AA from 10-2-2006
onwards.

(iii) The question to be
considered was whether the benefit was available to the assessee for the A.Y.
2004-05 for the reason that the then existing provision of S. 10A did not
contain a definition clause. Admittedly, S. 10A also provides for exemption
in respect of goods manufactured or produced and sold by units in the FTZ.
Undoubtedly, the exemption to industries in the FTZ is granted based on the
EXIM Policy framed by the Government periodically. The definition of
‘manufacture’ as per the EXIM Policy is given a very wide definition to take
in even processing involving conversion of something to another thing with a
distinct name, character and use. Even refrigeration of an item, which
involves only freezing, repacking, labelling, etc., is also covered by the
definition of ‘manufacture’. Blending of tea is mixing of different
varieties of tea produced in estates located in different regions having
different altitudes, climatic conditions, etc. It is common knowledge that
new flavours of tea are generated by blending its different varieties.

(iv) Since the purpose of
exemption u/s.10A is to give effect to the EXIM Policy of the Government,
the definition of ‘manufacture’ contained in the EXIM Policy is applicable.
For the purpose of the said provision, ‘manufacture’ as defined under the
EXIM Policy has a wide and liberal meaning covering tea blending as well
and, therefore, blending and packing of tea qualifies for exemption u/s.10A.

(v) Besides that, the
assessee-industry, presently in the SEZ engaged in the same process of
blending and packing of tea, was specifically brought under the exemption
clause through incorporation of S. 2(r) of the SEZ Act in the provisions of
S. 10AA. Therefore, the later amendment is only clarificatory and the
definition of ‘manufacture’ contained in S. 2(r) of the SEZ Act incorporated
in S. 10AA with effect from 10-2-2006, which is essentially the same as the
definition contained in the EXIM Policy, applies to S. 10A also. Therefore,
blending of tea was a manufacturing activity which entitled the assessee to
exemption u/s.10A for the A.Y. 2004-05.”


 

levitra

Deemed profit : S. 41(1) of Income-tax Act, 1961 : Remission or cessation of trading liability : A.Y. 2004-05 : Trading liability shown as outstanding in books and not written back : No remission or cessation of liability merely on account of passage of t

New Page 1

4. Deemed profit
: S. 41(1) of Income-tax Act, 1961 : Remission or cessation of trading liability
: A.Y. 2004-05 : Trading liability shown as outstanding in books and not written
back : No remission or cessation of liability merely on account of passage of
time : S. 41(1) not attracted : Addition not just.


[CIT v. Smt. Sita Devi Juneja,
187 Taxman 96 (P & H)]

For the A.Y. 2004-05, the
Assessing Officer made an addition of Rs.1.47 crores on account of outstanding
sundry credit balances as on 31-3-2004, relying on the provisions of S. 41(1) of
the Income-tax Act, 1961. CIT(A) held that there was no cessation or remission
of liability and deleted the addition. The Revenue’s appeal was dismissed by the
Tribunal.

On appeal by the Revenue, the
Punjab and Haryana High Court upheld the decision of the Tribunal and held as
under :


“(i) It was the conceded
position that in the
assessee’s balance sheet, the liability of Rs.1.47 crores had been shown,
which was payable to the sundry creditors. Such liability shown in the
balance sheet indicated the acknowledgement of the debt payable by the
assessee. Merely because such liability was outstanding for the last six
years, it could not be presumed that the said liability had ceased to exist.

(ii) It was also conceded
position that there was no bilateral act of the assessee and the creditors,
which indicated that the said liability had ceased to exist. In absence of
any bilateral act, the said liability could not have been treated to have
ceased. In view of these facts, the Commissioner (Appeals) as well as the
Tribunal had rightly come to the conclusion that the Assessing Officer had
wrongly invoked the Explanation I to S. 41(1) and made the aforesaid
addition on the basis of presumptions, conjectures and surmises.

(iii) It had been further
found that the Assessing Officer had failed to show that in any earlier year
allowance of deduction had been in respect of any trading liability incurred
by the assessee.

(iv) It was also not proved
that any benefit was obtained by the assessee concerning such a trading
liability by way of remission or cessation thereof during the concerned
year. Thus, there did not accrue any benefit to the
assessee, which could be deemed to be the profit or gain of the assessee’s
business, which would otherwise not be the assessee’s income. It had been
further found as a fact that the assessee had filed the copies of accounts
of sundry creditors signed by the concerned creditors. In view of this fact,
it was to be opined that the ITAT had rightly come to the conclusion that
confirmations from the creditors were produced.”

 



levitra

Appellate Tribunal : Ruling of Authority for Advance Rulings : Not binding on Tribunal : Tribunal can decide in consonance with ruling.

New Page 1

 2 Appellate
Tribunal : Ruling of Authority for Advance Rulings : Not binding on Tribunal :
Tribunal can decide in consonance with ruling.



[CIT v. P. Sekar Trust, 321 ITR
305 (Mad.)]

In this case the Tribunal had
decided an issue before it accepting the ruling of the Authority of Advance
Ruling in Advance Ruling P. No. 10 of 1996, In re (1997) 224 ITR 473 (AAR).

In the appeal filed by the
Revenue, the question raised was as to whether the Tribunal was justified in
following the decision in the Advance Ruling
Authority which does not have binding effect on the assessee’s case.

The Madras High Court held as
under :


“(i) The ruling of the
Authority for Advance Ruling is not binding on others, but there is no bar
on the Tribunal taking a view or forming an opinion in consonance with the
reasoning of the Authority for Advance Ruling de hors the binding nature.

(ii) Since the Tribunal had
not rested its decision on the ruling of the Authority for Advance Rulings,
but had taken in aid and relied on the decision of the Court, the question
of law did not arise for consideration from the order of the Tribunal.”

 



levitra

Deemed dividend : S. 2(22)(e) of Income-tax Act, 1961 : Assessee company received funds from sister concern PE Ltd. for expansion of production capacity as advance for commercial purpose to be adjusted against monies payable by PE Ltd. in subsequent years

New Page 1

3. Deemed
dividend : S. 2(22)(e) of Income-tax Act, 1961 : Assessee company received funds
from sister concern PE Ltd. for expansion of production capacity as advance for
commercial purpose to be adjusted against monies payable by PE Ltd. in
subsequent years : Provisions of S. 2(22)(e) not attracted.


[CIT v. Creative Dyeing &
Painting (P) Ltd., 229 CTR 250 (Del.)]

The assessee company was engaged
in dyeing and printing of cloth and was acting as an ancillary unit of PE Ltd.,
a sister concern, for the last several years. In order to increase its export
business and to compete with the international standards and garment exports
M/s. PE Ltd. suggested modernisation and expansion of the plant and machinery of
the assessee company. Towards this project M/s. PE Ltd. paid to the assessee
company an amount equal to 50% of the project cost as advance to be adjusted
against the entitlement of the moneys of the assessee company payable by PE Ltd.
in the subsequent years. The Assessing Officer treated the said advance amount
as deemed dividend u/s.2(22)(e) of the Income-tax Act, 1961 and made addition
accordingly. The Tribunal deleted the addition, holding that the payment of an
advance for a commercial purpose to the assessee company by its sister concern
is not deemed dividend u/s.2(22)(e) of the Act.

On an appeal filed by the
Revenue, the Delhi High Court upheld the decision of the Tribunal and held as
under :


“(i) The contention that
since PE Ltd. is not into the business of lending of money, the payments
made by it to the assessee company would be covered by S. 2(22)(e)(ii) and
consequently payments even for business transactions would be a deemed
dividend is not acceptable.

(ii) The provision of S.
2(22)(e)(ii) is basically in the nature of an Explanation. That cannot
however, have bearing on interpretation of the main provision of S. 2(22)(e)
and once it is held that the business transactions do not fall within S.
2(22)(e), one need not go further to S. 2(22)(e)(ii).

(iii) The provision of S.
2(22)(e)(ii) gives an example only of one of the situations where the
loan/advance will not be treated as a deemed dividend, but that’s all. The
same cannot be expanded further to take away the basic meaning, intent and
purport of the main part of S. 2(22)(e). This interpretation is in
accordance with the legislative intention of introducing S. 2(22)(e).

(iv) Therefore, the Tribunal
was correct in holding that the amounts advanced for business transaction
between the parties, namely, the assessee company and PE Ltd. was not such
to fall within the definition of deemed dividend u/s.2(22)(e).”


 

levitra

Agricultural land : Capital Gain : Capital asset : S. 2(14)(iii) of Income-tax Act, 1961 : A.Y. 2001-02 : Measurement of distance from municipality : To be measured in terms of the approach by road and not by a straight-line distance on horizontal plane o

New Page 1

 1 Agricultural
land : Capital Gain : Capital asset : S. 2(14)(iii) of Income-tax Act, 1961 :
A.Y. 2001-02 : Measurement of distance from municipality : To be measured in
terms of the approach by road and not by a straight-line distance on horizontal
plane or as per crow’s flight.


[CIT v. Satinder Pal Singh, 229
CTR 82 (P&H)]

For the purposes of determining
as to whether an agricultural land constitutes a capital asset, the Tribunal
held that the distance from the municipal limits has to be measured as per the
road distance and not as per the straight-line distance on a horizontal plane or
as per crow’s flight.

On appeal by the Revenue, the
Punjab and Haryana High Court upheld the decision of the Tribunal.

 

levitra

Unaccounted income : A.Y. 2001-02 : Value of closing stock given to bank higher than value as per books : Difference added as unaccounted income : Difference in value of closing stock should be reduced by similar difference in opening stock.

New Page 1

 12 Unaccounted income : A.Y. 2001-02 : Value of closing stock given to bank
higher than value as per books : Difference added as unaccounted income :
Difference in value of closing stock should be reduced by similar difference
in opening stock.


[CIT v. Capital Tyres Manufacturing Unit, 176 Taxman
178 (Delhi)]

For the A.Y. 2001-02 the AO found that the assessee had
hypothecated its stock with the bank for availing overdraft facility and that
the value of the stock declared to the bank was much higher than the value of
stock declared in its books of account. The AO rejected the assessee’s
explanation in respect of the difference and made an addition of the
difference as unaccounted income. The CIT(A) held that the addition made on
account of the difference of valuation of the closing stock has to be reduced
by the similar difference in the opening stock. The Tribunal confirmed the
decision of the CIT(A).

On appeal by the Revenue, the Delhi High Court
upheld the decision of
the Tribunal and held : “Both the authorities had taken into account the
opening and closing stock of last year and had rightly excluded the inflated
stock pertaining to the immediately preceding year. Thus, the approach of the
Tribunal could not be said to be perverse or erroneous.”


levitra

Interest : Head of income : S. 28 and S. 56 of Income-tax Act, 1961 : A.Y. 1992-93 : Construction business : Development of properties : Interest on deposit of surplus money received from customers : Interest income is assessable as business income and no

New Page 1

 10 Interest : Head of income : S. 28 and S. 56 of
Income-tax Act, 1961 : A.Y. 1992-93 : Construction business : Development of
properties : Interest on deposit of surplus money received from customers :
Interest income is assessable as business income and not as income from other
sources.

[CIT v. Lok Holdings, 308 ITR 356 (Bom.)]

The assesee firm was in the construction business. It
received monies from the purchasers of flat as advance. Interest received from
the deposit of the surplus amount was treated by the assessee as business
income. For the A.Y. the Assessing Officer assessed the interest income as
‘income from other sources’. On a finding that the entire interest sprang from
the business activity of the assessee and not out of any independent activity,
the Tribunal allowed the assessee’s claim and held that the interest income
was business income.

On appeal by the Revenue, the Bombay High Court upheld the
decision of the Tribunal and held :

“The Tribunal was justified in holding that the interest
income received by the assessee was assess able as business income.”

 


levitra

Interest : Waiver or reduction : S. 220(2A) of Income-tax Act, 1961 : A.Ys. 1993-94 to 1995-96 : Conditions need not co-exist : Those are alternatives : No reasoning given : Order refusing waiver set aside for fresh disposal.

New Page 1

 11 
Interest : Waiver or reduction : S. 220(2A) of

Income-tax Act, 1961 : A.Ys. 1993-94 to 1995-96 : Conditions need not co-exist
: Those are alternatives : No reasoning given : Order refusing waiver set
aside for fresh disposal.

[M. V. Amar Shetty v. Chief CIT, 309 ITR 93 (Kar.)]

For the A.Ys. 1993-94 to 1995-96 the assessee had made an
application u/s.220(2A) of the Income-tax Act, 1961 for waiver of interest
levied u/s.220(2) of the Act. The Chief Commissioner rejected the assessee’s
request on the ground that the assessee had not fulfilled condition (iii) of
S. 220(2A). Assessee’s writ petition challenging the rejection was dismissed
by the single judge of the Karnataka High Court.

The Division Bench of the Karnataka High Court allowed the
assessee’s appeal, set aside the rejection order of the Chief Commissioner and
held as under :

“(i) S. 220(2A) of the Income-tax Act, 1961, prescribes two
grounds by reason of which a reduction or waiver of the amount of interest
paid or payable by an assessee can be sought, viz., (i) payment of such
amount has caused or would cause genuine hardship to the assessee; and (ii)
default in the payment of the amount on which interest has been paid or was
payable U/ss.(2) was due to circumstances beyond the control of the assessee.
Since the word ‘and’ is absent after clause (i) of Ss.(2A) of S. 220 and the
word ‘and’ is inserted after clause (ii) of Ss.(2A) of S. 220, the two
circumstances are mutually exclusive and it is only when a situation where
clause (ii) occurs that the condition under clause (iii) is not applicable to
a case falling under clause (i) of Ss.(2A) of S. 220. All the three conditions
laid down in subsection (2A) of S. 220 need not co-exist before interest can
be waived under the said provision.

(ii) In the order refusing relief U/ss.(2A) of S. 220,
however, while there was a passing reference to ill health of the assessee
there was no application of mind on clause (i) and clause (ii) of Ss.(2A) of
S. 220. The order merely stated that the assessee had not satisfied any of the
conditions and in particular had not co-operated with the Department in filing
of the returns, nor in the assessment proceedings/payment of tax demand,
therefore the assessee’s petition was rejected. There was no reasoning with
regard to the genuine hardship of the assessee or on the fact that the default
in the payment of the amount was due to circumstances beyond the control of
the assessee.”

The order of the Single Judge was set aside and the
authorities were directed to consider the request made by the assessee for
waiver of interest.

 


levitra

Interest : S. 234B of Income-tax Act, 1961 : A.Ys. 1996-97 and 1997-98 : Assessee non resident compay was employed by another non-resident company : Failure by employer to deduct tax at source : Employee not liable to pay interest u/s.234B.

New Page 1

9
Interest : S. 234B of Income-tax Act, 1961 : A.Ys. 1996-97 and 1997-98 :
Assessee non
resident compay was employed
by another non-resident company : Failure by employer to deduct tax at source
: Employee not liable to pay interest u/s.234B.


[CIT v. Tide Water Marine International Inc., 309
ITR 85 (Uttarakhand)]

The assessee, a non-resident foreign company, was engaged
in the business of mineral oils by another non-resident foreign company. For
the A.Ys. 199697 and 1997-98 the employer company did not deduct tax at source
u/s.195 of the Income-tax Act, 1961 on payments to the assessee. While
assessing the assessee’s income u/s.143 of the Act the Assessing Officer
charged interest u/s.234B of the Act. The Tribunal held that the interest was
not payable by the assessee.

On appeal by the Revenue, the Uttarakhand High Court upheld
the decision of the Tribunal and held as under :

“There was no illegality in the Tribunal’s order since the
assessee could not be made liable to pay the interest u/s.234B of the Act as
it was the duty of the non-resident foreign company which had engaged the
assessee to deduct the tax at source.”

 

levitra