C.A
Month: April
Electoral Bonds: Bonding Money and Power?
Politics is the gentle art of getting
votes from the poor and campaign funds from the rich, by promising to protect
each from the other – Oscar Ameringer
Election buzz is getting louder. A notable
change in this election from a financial perspective is that of funding of
elections via electoral bonds. The Finance Act, 2017 brought a far-reaching and
even questionable change that restricts citizens’ fundamental right to know
where the money comes from. The Finance Minister called it “substantial
improvement in transparency”. One can say this is a substantial example of
false equivalence.
Elections like everything else require
money. It is well known that power chases money and money seeks out power. One
of the greatest threats to democracy is money manipulating power. Electoral
Bonds (EB) compound these perennial problems manifold and even legitimise what
is fundamentally against the interest of citizens. Here is how the scheme
works:
a. EB are as much or more opaque than earlier
systems:
i. They are bearer instruments and a political
party does not have to disclose the name of the donors to anyone ever (as they
don’t even know it);
ii. Companies are not required to disclose the
names of political parties to whom they give bonds;
b. The cap on corporate political funding of 7.5%
of last three years’ net profits was removed at the same time;
c. F.Y. 2017-18 data shows1
i. 53% of all income (donations) of six
political parties came from Income from Unknown Sources2
amounting to Rs. 689.44 crore
including 31% from EB (Rs. 215 crore) and Rs. 354.38 crore from voluntary
contributions below Rs. 20,000 where donor details are unknown (F.Y. 2017-18);
ii. Six national political parties received 90%
of all donations from companies and 10% from 2,772 individual donors ;
iii. The ruling party got 80% of its total income
from unknown sources.
As a wise citizen, you can connect the dots.
C K Prahalad3 gave an
interesting perspective a decade ago: “I cannot but assume that private funding
of elections of this magnitude is predicted on making an appropriate return.
Given the risky nature of the investment in elections, politicians as venture
capitalists, we can assume, will not settle for a less than ten-fold return.”
In the Indian context, it is hard to
understand why companies should fund important institutions and events of
democracy to this extent with anonymity? Why should corporates not disclose how
much and where the EB were given if they are only participating in the
democratic process? Why should political parties not disclose cash and non-cash
funding? Why should political parties not be audited by a panel approved by ECI
and CAG as proposed by an ADR report? Till this happens, I am not sure if
political parties really represent people and their interest!
Opaque funding through EB could easily be
legitimising corruption for favours granted by those in power in a way that can
never be known. While politicians are never known for matching words and
actions, one didn’t expect it from this government. Clean money without source
is akin to unclean money and is a slap on the face of ‘transparency’.
__________________________________________________
1 From Association of Democratic Reforms (ADR)
website/reports.
2 Unknown sources means – income declared in
tax returns but without giving sources of donations below Rs. 20,000 and
includes donation via electoral bonds, sale of coupons, etc.
3 Seventh Nani Palkhivala Memorial Lecture,
January, 2010
Raman Jokhakar
Editor
Love – Hate
?Discover
the redemption power of love’
Martin Luther King Jr.
Love and hate : both are very strong
emotions. They are actually two sides of the same coin. The irony is that at
times, with change in environment – the person we love is the person we hate.
Graham Greene says `I hate him for the very quality that once made me love him’.
The issue is: what is the difference between love and hate. Hate has been
defined as having strong feeling of hostility and / or antipathy. In my view –
love is giving without expectation and is based on the concept of `let go’
whereas `hate’ results from failure of expectations and is based on the concept
of `hold on’. Osho says : `love is happy when it gives something’ – whereas
hate is based on an unfulfilled demand / need expectation. Love expands and
grants space whereas hate contracts. Love accepts individuality – hate arises
because of failure of desire to control and change the other person. Love is a
mood reader. Hate is blind to the mood of the other person. Paul Coelho says :
`one is loved because one is loved. No reason is needed in loving’. Love is
always unconditional whereas `hate’ has a reason.
Love is the breath of life. Secret of basis
of lifelong love is understanding. Love is the essence of life – without love,
life is like an empty vessel. Love could be for a person, pet or place. It has
no boundary. Love need not be person-oriented. It could be love for nature, for
any of the performing arts, for a place. Love for books, and knowledge and
above all our unconditional love for God – our Creator.
The antidote to hate is forgiveness coupled
with other side of the coin ?love’.
?Forgiveness’ relieves and benefits both the
forgiver and the one who is forgiven. Gandhi says that forgiveness can only be
practised by the strong. The author has already expressed his view on a
previous writing on ?forgiveness’. I also believe that if one can forgive and
forget, it would make forgiveness divine. However, it is easy to forgive but
difficult to forget. One can only forget by the grace of God. Hence to really
get out of hate seek – nay crave His grace to forget. It would relieve you of
negativity and lead to love. Jesus said ?love thy enemy’. Even on the cross,
Jesus prayed for forgiveness of his tormentors when he prayed `Father, forgive
them’.
It is rightly said that ?a person who
truly loves one cannot but love all’. I believe that a person who loves God
cannot ever feel hate. In essence, he falls in love with himself and there
is no duality in love.
Thus ultimate of love is loving yourself.
This can happen only when you forgive yourself – stop repenting your mistakes
and ensure that you don’t repeat them. This happens when we are
mindfully-conscious of our actions and behaviour. Love for oneself is
the basis of loving others. Azim Jamal advises : ?If you yearn for love – be
loved, treat everyone you meet with love’.
I
would conclude by quoting Peter Usitnov :
?Love
is an endless act of forgiveness’.
THE FUGITIVE ECONOMIC OFFENDERS ACT, 2018 – AN OVERVIEW – PART 1
In the recent
past, there have been quite a few instances of big time offenders including
economic offenders (For example, Vijay Mallya, Lalit Modi, Nirav Modi, Mehul
Choksi, Deepak Talwar, Sanjay Bhandari, Jatin Mehta, Prateek Jindal etc.),
fleeing the country to escape the clutches of law. The Parliament has therefore
enacted a new law, to deal with such offenders by confiscating the assets of
such persons located in India until they submit to the jurisdiction of the
appropriate legal forum.
In this Part 1
of the article, we have attempted to give an overview of some of important
aspects of The Fugitive Economic Offenders Act, 2018 [the FEO Act or the Act].
1. INTRODUCTION
The FEO Bill, 2018
was introduced in the Lok Sabha on 12th March, 2018 but the same
could not be passed both the houses of parliament were prorogued on 6th
April, 2018. Hence, the FEO Ordinance,
2018 was promulgated on 21st April, 2018 which came into force
immediately. The FEO Bill, 2018 was passed by Parliament on 25th
July, 2018 and received the assent of the President on 31st July,
2018. Section 1(3) of the FEO Act provides that it is deemed to have come in to
force w.e.f. 21st April, 2018 and section 26(1) repeals the FEO
Ordinance, 2018.
2.
NEED AND RATIONALE FOR FEO ACT
2.1 After approval of the proposal of the Ministry
of Finance to introduce the Fugitive Economic Offenders Bill, 2018 in
Parliament, the Press Release dated 1st March, 2018, issued by the
Ministry of Finance, Government of India, explained the background of the FEO
Bill, 2018, as follows:
“Background
There have been
several instances of economic offenders fleeing the jurisdiction of Indian
courts, anticipating the commencement, or during the pendency, of criminal
proceedings. The absence of such offenders from Indian courts has several
deleterious consequences – first, it hampers investigation in criminal cases;
second, it wastes precious time of courts of law, third, it undermines the rule
of law in India. Further, most such cases of economic offences involve
non-repayment of bank loans thereby worsening the financial health of the
banking sector in India. The existing civil and criminal provisions in law are
not entirely adequate to deal with the severity of the problem. It is,
therefore, felt necessary to provide an effective, expeditious and
constitutionally permissible deterrent to ensure that such actions are curbed.
It may be mentioned that the non-conviction-based asset confiscation for
corruption-related cases is enabled under provisions of United Nations
Convention against Corruption (ratified by India in 2011). The Bill adopts this
principle. In view of the above context, a Budget announcement was made by
the Government in the Budget 2017-18 that the Government was considering to introduce
legislative changes or even a new law to confiscate the assets of such
absconders till they submit to the jurisdiction of the appropriate legal
forum.”
2.2 The Statement of Objects and Reasons of the
FEO Bill, provides as follows:
“Statement of objects and reasons
There have been several instances of economic
offenders fleeing the jurisdiction of Indian courts anticipating the
commencement of criminal proceedings or sometimes during the pendency of such
proceedings. The absence of such offenders from Indian courts has several
deleterious consequences, such as, it obstructs investigation in criminal
cases, it wastes precious time of courts and it undermines the rule of law in
India. Further, most of such cases of economic offences involve non-repayment
of bank loans thereby worsening the financial health of the banking sector in
India. The existing civil and criminal provisions in law are inadequate to deal
with the severity of the problem.
2. In order to address the said problem and
lay down measures to deter economic offenders from evading the process of
Indian law by remaining outside the jurisdiction of Indian courts, it is
proposed to enact a legislation, namely, the Fugitive Economic Offenders Bill,
2018 to ensure that fugitive economic offenders return to India to face the
action in accordance with law.
3. The said Bill, inter alia, provides for:
(i) the definition of the fugitive economic offender as an individual who has
committed a scheduled offence or offences involving an amount of one hundred
crore rupees or more and has absconded from India or refused to come back to
India to avoid or face criminal prosecution in India; (ii) attachment of the
property of a fugitive economic offender and proceeds of crime; (iii) the
powers of Director relating to survey, search and seizure and search of
persons; (iv) confiscation of the property of a fugitive economic offender and
proceeds of crime; (v) disentitlement of the fugitive economic offender from
putting forward or defending any civil claim; (vi) appointment of an
Administrator for the purposes of the proposed legislation; (vii) appeal to the
High Court against the orders issued by the Special Court; and (viii) placing
the burden of proof for establishing that an individual is a fugitive economic
offender on the Director or the person authorised by the Director.
4. The Bill seeks to achieve the above
objectives.”
2.3 Shri Piyush Goyal, then holding charge as
Finance Minister explained the rationale for the FEOA in the Rajya Sabha debate
on 25th July, 2018, as under:
“Sir, there have been many instances of economic
offenders in last several decades, fleeing from the jurisdiction of the Indian
Courts, sometimes in anticipation of commencement of proceedings or sometimes
during the pendency of proceedings. Sir, you are not able to impound of those
leaving the country, except through due process of law. The current laws as
they stand today, have its own limitations in stopping people who flee the
country in anticipation or during the pendency of the proceedings. The absence
of such offenders from the Indian courts has very deleterious consequences. The
existing civil and criminal laws do not allow us to adequately deal with the
severity of the problem, since they are not available or present.
Criminal law
does not allow us to push in for punishment, impound their properties and deal
with their properties. Therefore, it was felt necessary to provide an
effective, expeditious and constitutionally permissible deterrent to ensure
that such people do not runaway or, if they runaway, confiscate their
properties. In this context, in the Budget for
2017-18, the hon’ble Finance Minister had announced the intention of the
Government to introduce legislative changes or even a new law to confiscate
assets of such absconders till they submit themselves before the jurisdiction
of the appropriate legal forum. We are not only confiscating their assets but
we are also providing how the confiscated property will be managed and disposed
of, so that dues of Government of India, State Governments and banks, etc., can
be recovered from them.”
2.4 The Preamble to the FEO Act
provides as follows:
“An Act to
provide for measures to deter fugitive economic offenders from evading the
process of law in India by staying outside the jurisdiction of Indian courts,
to preserve the sanctity of the rule of law in India and for matters connected
therewith or incidental thereto.”
2.5 On 30th November, 2018 in the
meeting at Buenos Aires, India suggested following Nine Point Agenda to G-20
for action against Fugitive Economic Offences and Asset Recovery:
1. “Strong and active cooperation across
G-20 countries to deal comprehensively and efficiently with the menace fugitive
economic offenders.
2. Cooperation in the legal processes such
as effective freezing of the proceeds of crime; early return of the offenders
and efficient repatriation of the proceeds of crime should be enhanced and
streamlined.
3. Joint effort by G-20 countries to form a
mechanism that denies entry and safe havens to all fugitive economic offenders.
4. Principles of United Nations Convention
Against Corruption (UNCAC), United Nations Convention Against Transnational
Organized Crime (UNOTC), especially related to “International Cooperation”
should be fully and effectively implemented.
5. FATF should be called upon to assign
priority and focus to establishing international co-operation that leads to
timely and comprehensive exchange of information between the competent
authorities and FIUs.
6. FATF should be tasked to formulate a
standard definition of fugitive economic offenders.
7. FATF should also develop a
set of commonly agreed and standardized procedures related to identification,
extradition and judicial proceedings for dealing with fugitive economic
offenders to provide guidance and assistance to G-20 countries, subject to
their domestic law.
8. Common platform should be set up for
sharing experiences and best practices including successful cases of
extradition, gaps in existing systems of extradition and legal assistance, etc.
9. G-20 Forum should consider initiating
work on locating properties of economic offenders who have a tax debt in the
country of their residence for its recovery.”
2.6 From the above, it is apparent that the
government is making all possible efforts to compel the FEOs to submit
themselves before the jurisdiction of the appropriate legal forum.
3. OVERVIEW OF THE ACT AND THE RULES
3.1 The FEO Act is divided in three Chapters
containing 26 sections and one Schedule listing the sections and description of
various offences.
3.2 Various rules have been made by the Central
Government for various matters for carrying out the provisions of the FEO Act.
The present list of rules is as follows:
|
Sr. No. |
Particulars of the Rules |
Effective Date |
|
1. |
Fugitive Economic Offenders (Manner of Attachment of Property) Rules, (Issued in suppression of the Fugitive |
24th August, 2018 |
|
2. |
Declaration of Fugitive Economic Offenders (Forms and Manner of Filing (Issued in suppression of the Fugitive |
24th August, 2018 |
|
3. |
Fugitive Economic Offenders (Procedure for sending Letter of Request (Issued in suppression of the Fugitive |
24th August, 2018 |
|
4. |
Fugitive Economic Offenders (Procedure for Conducting Search and (Issued in suppression of the Fugitive |
24th August, 2018 |
|
5. |
Fugitive Economic Offenders (Manner and Conditions for Receipt and (Issued in suppression of the Fugitive |
24th August, 2018 |
3.3 Some
Salient Features of the FEO Act
a.
The FEO Act is deemed to have come into force on 21st April
2018 i.e. the date of issuance of the FEO Ordinance, 2018.
b.
The FEO Act extends to whole of India including Jammu and Kashmir.
c.
The Act provides for measures to deter fugitive economic offenders from
evading the process of law in India by staying outside the jurisdiction of
Indian courts, to preserve the sanctity of the rule of law in India and for
matters connected therewith or incidental thereto.
d.
Section 3 of the FEO Act provides that the provisions of the Act apply
to any individual who is, or becomes a Fugitive Economic Offender [FEO] on or
after the date of coming into force of the Act i.e. 21st April,
2018.
e.
Section 4(3) provides that the authorities appointed for the purposes of
the Prevention of Money-laundering Act, 2002 shall be the Authorities for the
purposes of the Act.
f.
Section 18 provides that no civil court shall have jurisdiction to
entertain any suit or proceeding in respect of any matter which the Special
Court is empowered by or under the Act to determine and no injunction shall be
granted by any court or other authority in respect of any action taken or to be
taken in pursuance of any power conferred by or under the Act.
4. FUGITIVE ECONOMIC OFFENDER [FEO]
4.1 The term ‘Fugitive Economic Offender’ or FEO
is the main stay of the FEO Act, as the Act provides for action against FEOs
and the significance of the definition of FEO cannot be undermined. Section
2(1)(f) of the Act defines the term FEO, as follows:
“(f) “fugitive
economic offender” means any individual against whom a warrant for arrest in
relation to a Scheduled Offence has been issued by any Court in India, who –
(i) has left India so as to avoid criminal prosecution;
or
(ii) being abroad, refuses to return to India to
face criminal prosecution;”
Thus, a person is
considered to be a FEO, if he satisfies the following conditions:
a) He is an individual;
b) a warrant for arrest in relation to a
Scheduled Offence has been issued by any Court in India against him;
c) he is a fugitive i.e. he (i) has left India
so as to avoid criminal prosecution; or (ii) being abroad, refuses to return to
India to face criminal prosecution.
4.2 Only
an Individual to be declared as FEO
From the definition
in section 2(1)(f) and provisions of section 3 (Application of Act), section
4(1) (Application for declaration of FEO and procedure therefore), section
10(1) (Notice), section 11 (Procedure for hearing application) and section 12(1)
(Declaration of FEO), makes it abundantly clear that only an individual can be
declared as a FEO.
Thus, prima
facie, the provisions of the FEO Act should not have application to a
company or Limited Liability Partnership [LLP] or partnership firm or other
association of persons.
However, as an
exception, section 14 dealing with ‘Power to disallow civil claims’ provides
that on declaration of an individual as a FEO, any Court or Tribunal in India
in any civil proceeding before it may, disallow any company or LLP (as defined
in section 2(1)(n) of the LLP Act, 2008) from putting forward or defending any
civil claim, if such an individual is (a) filing the claim on behalf of the
company or the LLP, or (b) promoter or key managerial personnel (as defined in
section 2(51) of the Companies Act, 2013) or majority shareholder of the
company or (c) having a controlling interest in the LLP.
Section 12(2) of
the FEO Act provides that on declaration of an individual as a FEO, the Special
court may order that any of the following properties stand confiscated to the
Central Government (a) the proceeds of crime in India or abroad, whether or not
such property is owned by the fugitive economic offender; and (b) any other
property or benami property in India or abroad, owned by the fugitive economic
offender. The assets owned by LLPs in which the FEO having controlling interest
or Companies in which the FEO is promoter or key managerial personnel or
majority shareholder, can be confiscated only if it is established that such
LLP or Company is benamidar of the FEO or the property held by the company or
LLP represents proceeds of crime. Further, it appears that the courts can lift
the corporate veil in appropriate cases and rule that the property standing in
the name of the company or LLP is actually the property of the Individual FEO
and the same is liable for confiscation.
4.3 Warrant
of Arrest
For an individual
to be declared as a FEO, it is necessary that (a) a warrant of arrest has been
issued against him by a Court in India; (b) such warrant is in relation to a
Scheduled Offence, whether committed before or after the date of coming in to
force of the FEO Act i.e. 21-04-18; (c) it is immaterial whether the warrant
was issued before, on or after 21-04-18 as long as the same is pending on the
date of declaration as FEO; and (d) if the warrant of arrest stands withdrawn
or quashed as of the date of declaration as FEO, then the individual cannot be
declared a FEO.
4.4
Fugitive
The term ‘fugitive’
has not been defined in the FEO Act. Concise Oxford Dictionary defines a
‘fugitive’ as
a person who has escaped from the captivity or is in hiding. To be considered a
FEO the individual should
have (a) has left India so as to avoid criminal prosecution; or (b) being
abroad, refuses to return to India to face criminal prosecution.
Section 11(1) of
the Act provides that where any individual to whom notice has been issued under
sub-section (1) of section 10 appears in person at the place and time specified
in the notice, the Special Court may terminate the proceedings under the Act.
Thus, if the alleged FEO returns to India at any time during the course of
proceedings relating to the declaration as a FEO (prior to declaration) and
submits to the appropriate jurisdictional court, the proceedings under the FEO
Act cease by law.
4.5 Procedure
to declare an individual as FEO
The FEO Act, inter
alia, provides for the procedure to declare an individual as FEO, which is
as follows:
(i) Application of mind by the Director or other
authorised office to the material in his possession as to whether he has reason
to believe that an individual is a FEO.
(ii) Documentation of reason for belief in
writing.
(iii) Provisional attachment (without Special
Court’s permission) by a written order of an individual’s property (a) for
which there is reason to believe that the property is proceeds of crime, or is
a property or benami property owned by an individual who is a FEO; and (b)
which is being or is likely to be dealt within a manner which may result in the
property being unavailable for confiscation. In cases of provisional
attachment, the Director or any other officer who provisionally attaches any
property under this section 5(2) is required to file an application u/s. 4
before the Special Court, within a period of thirty days from the date of such
attachment.
(iv) Making an application before the special court
for declaration that an individual is a FEO (Section 4);
(v) Attachment of the property of a FEO and
proceeds of crime (Section 5);
(vi) Issue of a notice by the special court to the
individual alleged to be a FEO (Section 10);
(vii) Where any individual to whom notice has been
issued appears in person at the place and time specified in the notice, the
special court may terminate the proceedings under the FEO Act. (Section 11(1))
(viii) Hearing of the application for declaration as
FEO by the Special Court (Section 11);
(ix) Declaration as FEO by Special Court by a
speaking order (Section 12);
(x) Confiscation of the property of an individual
declared as a FEO or even the proceeds of crime (Section 12);
(xi) Supplementary application in the Special Court
seeking confiscation of any other property discovered or identified which
constitutes proceeds of crime or is property or benami property owned by
the individual in India or abroad who is a FEO, liable to be confiscated under
the FEO Act (Section 13)
(xii) Disentitlement of a FEO from defending any
civil claim (Section 14); and
(xiii) Appointment of an Administrator to manage and
dispose of the confiscated property under the Act
(Section 15).
4.6 Manner
of Service of notice
Section 10 dealing
with Notice, provides for two alternative prescribed mode of service of notice
on the alleged FEO: (a) through the contracting state (s/s. (4) and (5); and
(b) e-service.
Notice through Contract State
Section 2(1)(c) of
the Act defines Contracting State as follows:
“Contracting
State” means any country or place outside India in respect of which
arrangements have been made by the Central Government with the Government of
such country through a treaty or otherwise;”
Section 10(4)
provides that a notice under s/s. (1) shall be forwarded to such authority, as
the Central Government may notify, for effecting service in a contracting
State.
Section 10(5)
provides that such authority shall make efforts to serve the notice within a
period of two weeks in such manner as may be prescribed.
Service of notice
through the contracting state is possible only when alleged FEO is suspected or
known to be in a contracting state with which India has necessary arrangements
through a treaty or otherwise.
E-service of Notice
Section 10(6)
provides that a notice under s/s. (1) may also be served to the
individual alleged to be a FEO by electronic means to:
(a) his electronic mail address submitted in
connection with an application for allotment of Permanent Account Number u/s.
139A of the Income-tax Act, 1961;
(b) his electronic mail address submitted in
connection with an application for enrolment u/s. 3 of the Aadhaar (Targeted
Delivery of Financial and Other Subsidies, Benefits and Services) Act, 2016; or
(c) any other electronic account as may be
prescribed, belonging to the individual which is accessed by him over the
internet, subject to the satisfaction of the Special Court that such account
has been recently accessed by the individual and constitutes a reasonable
method for communication of the notice to the individual.
4.7 India’s
First Declared FEO
As per the news
report appearing in the New Indian Express dated 19th January, 2019,
Mr. Vijay Mallya is the first businessman to be declared an FEO under the FEO
Act. In absence of the copy of the court’s order being available in public
domain as yet, the key points of the special court’s order, as appearing in the
text of the new report, is given for reference.
“Businessman
Vijay Mallya’s claim that the Indian government’s efforts to extradite him were
a result of “political vendetta” was “mere fiction of his
imagination”, a special PMLA court observed in its order.
Mallya, accused
of defaulting on loans of over Rs 9,000 crore, was on January 5 declared a
fugitive economic offender (FEO) by special Judge M S Azmi of the Prevention of
Money Laundering Act (PMLA) court.
The judge, in
his order that was made available to media Saturday, said, “Mere statement
that the government of India had pursued a political vendetta against him and
initiated criminal investigations and proceeding against him cannot be ground
for his stay in UK.”
Besides these
bare statements, there is nothing to support as to how the government of India
initiated investigation and proceedings to pursue political vendetta, the judge
said in his order.
“Hence the
arguments in these regards are mere fiction of his imagination to pose himself
as law-abiding citizen,” he added.
The court said
the date of Mallya leaving India was March 2, 2016, and on that day admittedly
there was offence registered by the Central Bureau of Investigation (CBI) and
the Enforcement Directorate (ED).
Mallya laid much stress on the fact that he went
to attend a motorsports council meeting in Geneva on March 4, 2016.
“Had it
been the case that he went to attend a pre-schedule meeting and is a
law-abiding citizen, he would have immediately informed the authorities about
his schedule to return to India after attending his meeting and
commitment,” Azmi observed.
Therefore, in
spite of repeated summons and issuance of warrant of arrest, he had not given
any fix date of return, therefore it would be unsafe to accept his argument
that he departed India only to attend a pre-schedule meeting, he said.
The judge stated
that the ED application cannot be read in “piece meal” and must be
read as whole.
The satisfaction
or the reasons to believe by ED that Mallya was required to be declared as an
FEO appears to be based upon the foundation that despite repeated efforts, he
failed to join investigation and criminal prosecution.
Even the efforts
taken by way of declaring him as a proclaimed offender have not served the
desired purpose, he added.
Azmi said the
intention of the FEO Act is to preserve the sanctity of the rule of law and the
expression “reason to believe” has to be read in that context.
The reasons
supplied by the ED were the amount involved – Rs 9,990 crore, which is more
than Rs 100 crore which is the requirement of the Act.
As pointed out,
the summons issued were deliberately avoided, the passport was revoked,
non-bailable warrants were issued and he was also declared a proclaimed
offender, the judge said.
These appear to
be sufficient reasons to declare him an FEO, the judge observed.
Mallya is the first businessman to be declared an
FEO under the FEO Act which came into existence in August 2018.
The ED, which
had moved the special court for this purpose, requested the court that Mallya,
currently in the United Kingdom, be declared a fugitive and his properties be
confiscated and brought under the control of the Union government as provided
under the act.”
The various factors
considered by the court, as mentioned in the news report above, are important
for consideration. The special court has rejected the arguments of (a) that the
Indian government’s efforts to extradite him were a result of “political
vendetta”; (b) that he departed India only to attend a pre-schedule
meeting; (c) satisfaction or the reasons to believe by ED that Mallya was
required to be declared as an FEO appears to be based upon the foundation that
despite repeated efforts, he failed to join investigation and criminal
prosecution; and (d) since the proceedings of his extradition had begun in UK
and with those underway, Mallya cannot be declared a Fugitive.
In this connection,
it would be pertinent to mention that the Westminster’s Magistrates’ Court,
London, UK in the case of The Govt of India vs. Vijay Mallya, dated 10th
December, 2018 after detailed examination of various issues raised in
respect of Govt of India’s Extradition Request in its 74 page Judgement
available in public domain, found a prima facie case in relation to three
possible charges and has sent Dr. Vijay Mallya’s case to the Home Secretary of
State for a decision to be taken on whether to order his extradition.
4.8 Applications
in Other Cases
In a recent new
report in Hindustan Times, it is mentioned
that the Enforcement Directorate [ED] has also submitted applications to
have Jewellers Nirav Modi and Mehul Choksi declared fugitives under the FEO Act
after they left India, where they are accused in a Rs. 14,000 scam at Punjab
National bank. These applications are likely to be heard by the same special
court.
4.9 Appeals
Section 17 of the Act provides that an appeal shall lie from any
judgment or order, not being an interlocutory order, of a Special Court to the
High Court both on facts and on law.
Every appeal u/s.
17 shall be preferred within a period of 30 days from the date of the judgment
or order appealed from. The High Court may entertain an appeal after the expiry
of the said period of 30 days, if it is satisfied that the appellant had sufficient
cause for not preferring the appeal within the period of 30 days. However, no
appeal shall be entertained after the expiry of period of 90 days. The Bombay
High Court in the case Vijay Vittal Mallya vs. State of Maharashtra
(Criminal Appeal No. 1407 of 2018) vide order dated 22nd
November, 2018, while dismissing the Mallya’s appeal for stay of the
proceedings u/s. 4 of the FEO Act, held that for an appeal to lie against an
order of the special court, the said order would have to determine some right
or issue.
5. CONCLUDING REMARKS
The FEO Act is a
huge step towards creating a deterrent effect for economic offenders and would
certainly help the government bring alleged fraudsters such as Vijay Mallya,
Nirav Modi, Mehul Choksi and such other offenders to justice.
In Part 2 of the
Article we will deal with remaining other important aspects of the FEO Act and
the Rules.
DETERMINING THE LEASE TERM FOR CANCELLABLE LEASES
FACT PATTERN
A lease contract of a
retail outlet in a shopping mall allows for the lease to continue until either
party gives notice to terminate the contract. The contract will continue
indefinitely until the lessee or the lessor elects to terminate it and includes
stated consideration required during any renewed periods (referred to as
“cancellable leases” in the rest of the document). Neither the lessor nor the
lessee will incur any contractual cash payment or penalty upon exercising the
termination right. The lessee constructs leasehold improvements, which cannot
be moved to another premise. Upon termination of the lease, these leasehold
improvements will need to be abandoned, or dismantled if the lessor so
requests.
QUESTION
Can the lease term go
beyond the date at which both parties can terminate the lease (inclusive of any notice period)?
TECHNICAL DISCUSSION
View 1:
No. The lease term cannot go beyond the date where the lessee can enforce a
right to use the underlying asset, i.e. the end of the notice period. The
existence of economic penalties (eg; cost of shifting) does not create
enforceable rights and obligations.
The definition of “lease
term” in Ind AS 116 refers to lessee’s rights and reads as follows:
The
non-cancellable period for which a lessee has the right to use an underlying
asset, together with both:
a) Periods covered by an option to extend the
lease if the lessee is reasonably certain to exercise that option; and
b) Periods covered by an option to
terminate the lease if the lessee is reasonably certain not to exercise that
option.
B34 of Ind AS 116 contains
further guidance and states:
In
determining the lease term and assessing the length of the non-cancellable
period of a lease, an entity shall apply the definition of a contract and
determine the period for which the contract is enforceable. A lease is no
longer enforceable when the lessee and the lessor each has the right to
terminate the lease without permission from the other party with no more than
an insignificant penalty.
Appendix A of Ind AS 116
clarifies that the word “contract” is defined in other standards and
used in Ind AS 116 with the same meaning, i.e. “an agreement between two or
more parties that creates enforceable rights and obligations”.
For example, paragraphs 10
and 11 of Ind AS 115 include the following more detailed guidance about “contracts”:
10. A contract is an
agreement between two or more parties that creates enforceable rights and
obligations. Enforceability of the rights and obligations in a contract is a
matter of law. Contracts can be written, oral or implied by an entity’s
customary business practices. The practices and processes for establishing
contracts with customers vary across legal jurisdictions, industries and
entities. In addition, they may vary within an entity (for example, they may
depend on the class of customer or the nature of the promised goods or
services). An entity shall consider those practices and processes in
determining whether and when an agreement with a customer creates enforceable
rights and obligations.
11. Some
contracts with customers may have no fixed duration and can be terminated or
modified by either party at any time. Other contracts may automatically renew
on a periodic basis that is specified in the contract. An entity shall apply
this Standard to the duration of the contract (ie the contractual period) in
which the parties to the contract have present enforceable rights and
obligations.
Both B34 and the definition
of a contract in Appendix A of Ind AS 116 is cross-referenced to BC127 in the
Basis of Conclusions of IFRS 16, specifically deals with “cancellable leases”
as follows:
Cancellable
leases
For the
purposes of defining the scope of IFRS 16, the IASB decided that a contract
would be considered to exist only when it creates rights and obligations that
are enforceable. Any non-cancellable period or
notice period in a lease would meet the definition of a contract and, thus,
would be included as part of the lease term. To be part of a contract, any
options to extend or terminate the lease that are included in the lease term
must also be enforceable; for example the lessee must be able to enforce its
right to extend the lease beyond the non-cancellable period. If optional
periods are not enforceable, for example, if the lessee cannot enforce the
extension of the lease without the agreement of the lessor, the lessee does not
have the right to use the asset beyond the non-cancellable period.
Consequently, by definition, there is no contract beyond the non-cancellable
period (plus any notice period) if there are no enforceable rights and
obligations existing between the lessee and lessor beyond that term. In
assessing the enforceability of a contract, an entity should consider whether
the lessor can refuse to agree to a request from the lessee to extend the
lease.
This conclusion is entirely
consistent with a “right-of-use model” based on recognising and measuring the
rights that the lessee controls and has had transferred to it by the lessor.
Including a renewal which the lessee cannot enforce without the agreement of
the lessor would unduly recognise in the right of use optional periods that do
not meet the definition of an asset. Even if the lessee has a significant economic
incentive to continue the lease, this does not turn a period subject to the
lessor’s approval into an asset because the lessee does not control the
lessor’s decision, unless the lessor’s termination right lacks substance. This
is a very high hurdle, which would be expected to be extremely rare and require
objective evidence.
View 2:
Yes, the lease term go beyond the date at which both parties can terminate the
lease.
Supporters of view 2
believe that an entity should evaluate the relevant guidance in the standard.
In considering the guidance in the standard, View 1 believes Ind AS 116 is
clear the lease term cannot be longer than the period in which the contract is
enforceable. However, Ind AS 116 is equally clear that a contract is
enforceable until both parties could terminate the contract with no more than
an insignificant penalty – which may be a period beyond the termination notice
period.
In the fact pattern above,
while the lease can be terminated early by either party after serving the
notice period, the enforceable rights in the contract (including the pricing
and terms and conditions) contemplate the contract can continue beyond the
stated termination date, inclusive of the notice period. In the fact pattern
above, there is an agreement which meets the definition of a contract (i.e., an
agreement between two or more parties that create enforceable rights and
obligations). However, the mere existence of mutual termination options does
not mean that the contract is automatically unenforceable at a point in time
when a potential termination could take effect.
Ind AS 116.B34 provides
explicit guidance on when a contract is no longer enforceable:
“A lease
is no longer enforceable when the lessee and the lessor each has the right to
terminate the lease without permission from the other party with no more than
an insignificant penalty.”
Therefore, when either
party has the right to terminate the contract with no more than insignificant
penalty there is no longer an enforceable contract. However, when one or both
parties would incur a more than insignificant penalty by exercising its right
to terminate – the contract continues to be enforceable. The penalties should
be interpreted broadly to include more than simply cash payments in the
contract. The wider interpretation considers economic disincentives.
While the IFRS16.BC127 does
not discuss the notion of “no more than insignificant penalty”, supporters of
View 2 believe that Ind AS116.B34 should be evaluated based on the wording in
the standard (i.e., taking into account the economic disincentives for the
parties). To the extent that the lessee has a more than insignificant economic
disincentives (e.g., significant leasehold investments) to early terminate the
lease, the 2nd sentence in B34 will not be applicable. However, on
the other hand, if one or both parties have only insignificant economic
disincentives to terminate, say, after five years, the lease is not considered
enforceable after five years and hence the lease term cannot exceed five years.
Ind AS116.B34 does not directly provide guidance as to how long the lease term
should be. Rather, it provides guidance as to when a contract is no longer
enforceable and thus no longer exists.
While Ind AS 116.B34 and
B35 provide guidance on evaluating the period in which a contract continues to
be enforceable and how to evaluate lessee and lessor termination options, they
do not address how to evaluate the lease term once the enforceable period of
the contract has been determined (i.e., at least until both parties no longer
have a more than insignificant penalty if they were to terminate the contract).
To determine the lease term, the parties would apply Ind AS 116.18-19 and
B37-40 (i.e., the reasonably certain threshold). “Reasonably certain” is a high
threshold and the assessment requires judgement. It also acknowledges the
guidance in Ind AS 116.B35 which indicates lessor termination options are
generally disregarded (“If only a lessor has the right to terminate a lease,
the non-cancellable period of the lease includes the period covered by the
option to terminate the lease.”)
Thus, in this fact pattern
above, it is possible that the lease term may exceed the notice period. The
lease term is the non-cancellable (notice) period together with the period
covered by the termination option that it is reasonably certain the lessee will
not exercise such termination option.
However, the lease term
cannot be no longer than the period the contract is enforceable (i.e., the
point in time in which either party may terminate the lease without permission
from the other with no more than an insignificant economic disincentive,
inclusive of any notice period).
If the facts were different
and the contract had an end date but contemplates the lease might be extended
if both the lessee and lessor agree to new terms and conditions (including new
pricing) there may be no enforceable contract but rather an invitation to enter
into new negotiations.
In light of the compelling
arguments in both views, the author recommends that the Ind AS Transition
Facilitation Group (ITFG) should address this issue in consultation with the
IASB staff or IFRIC.
REOPENING CASES OF INTIMATION u/s. 143(1)
ISSUE FOR CONSIDERATION
Section 147 of the Income Tax Act, 1961
provides for reassessment of income which has escaped assessment for any
assessment year. The section reads as under:
“Income Escaping Assessment
If the Assessing Officer has reason to
believe that any income chargeable to tax has escaped assessment for any
assessment year, he may, subject to the provisions of sections 148 to 153,
assess or reassess such income and also any other income chargeable to tax
which has escaped assessment and which comes to his notice subsequently in the
course of the proceedings under this section, or recompute the loss or the
depreciation allowance or any other allowance, as the case may be, for the
assessment year concerned (hereafter in this section and in sections 148 to 153
referred to as the relevant assessment year) :
Provided that where an assessment under
sub-section (3) of section 143 or this section has been made for the relevant
assessment year, no action shall be taken under this section after the expiry
of four years from the end of the relevant assessment year, unless any income
chargeable to tax has escaped assessment for such assessment year by reason of
the failure on the part of the assessee to make a return under section 139 or
in response to a notice issued under sub-section (1) of section 142 or section
148 or to disclose fully and truly all material facts necessary for his
assessment, for that assessment year:”
The issue of applicability of the above
referred proviso to section 147 has come
up before the courts in cases where no assessment has been made u/s. 143(3),
but merely an intimation has been issued u/s. 143(1). In other words, in cases
where more than 4 years have expired from the end of the relevant assessment
year, is the A.O. required to satisfy and establish that there was a failure on
the part of the assessee to disclose
fully and truly all material facts necessary for the assessment for a valid
reopening of the case? While the Madras High Court has taken the view that
the proviso applies even in cases of
intimation u/s. 143(1) and the A.O is
required to establish that there was a failure to disclose material facts
before reopening a case, the Gujarat High Court has taken a contrary view that
the proviso applies only in the case of
assessments u/s. 143(3).
EL FORGE’S CASE
The issue came up before the Madras High
Court in the case of EL Forge Ltd vs. Dy CIT 45 taxmann.com 402.
In this case, an intimation was issued u/s.
143(1) on 31st December, 1991 for assessment year 1989-90. The
assessing officer thereafter noticed that the assessee had claimed deduction
u/s. 80HH and 80-I on the total income before set off of unabsorbed losses of
earlier years. Therefore, as the assessing officer was of the view that the
assessee was not entitled to deduction under chapter VI-A, reassessment proceedings
were initiated u/s. 147 and a notice was issued u/s. 148 on 15th
December, 1997.
The assessee objected to the reopening of
the assessment, contending that as the reopening was made after a lapse of 4
years from the end of the assessment year, and as there was no failure on the
part of the assessee to disclose all material facts necessary for making the
assessment, the reopening was not valid.
The Commissioner (Appeals) rejected the
assessee’s claim and dismissed the appeal, holding that the reopening of the
assessment by the assessing officer was perfectly in order. The Tribunal held
that the assessee did not disclose fully and truly all material facts, and
therefore agreed with the finding of the assessing officer as well as the
Commissioner (Appeals). It held that the reopening of the assessment was
justified, as it was well within the period provided for under the proviso to
section 147.
Before the Madras High Court, besides pointing
out on behalf of the assessee that the notice u/s. 147 did not give any
independent reasons for reopening of assessment u/s. 147, it was argued that the details of the income
computation were very much before the assessing officer. The assessee therefore
claimed that the assessing officer had not shown that there was a failure to
disclose material facts necessary for assessment.
The Madras High Court observed that the
facts of the case showed that there was no denial of the fact that the assessee
had disclosed details of carry forward of the losses as well as the computation
of income, and that these details were very much before the assessing officer.
It observed that there was no denial of the fact that there was no failure on
the part of the assessee in disclosing the facts necessary for assessment, and
there was no allegation that the escapement of income was on account of failure
of the assessee to disclose fully and truly all material facts for assessment.
Applying the decision of the Supreme Court
in Kelvinator’s case, the Madras High Court accepted the argument of the
assessee that the assumption of jurisdiction beyond four years was hit by the
limitation provided under the proviso to section 147. The Madras High Court
therefore allowed the appeal of the assessee.
LAXMIRAJ DISTRIBUTORS’ CASE
The issue again came up before the Gujarat
High Court in the case of Pr CIT vs. Laxmiraj Distributors (P) Ltd 250
Taxman 455.
In this case, the assessee, a company, had
filed its return of income for assessment year 2009-10 on 13th
September, 2009. The return was accepted and an intimation was issued u/s.
143(1). Subsequently, a survey was carried out on the premises of the company.
During the course of such survey, several documents were seized and a statement
of a director of the company was recorded on 30th August, 2012.
The assessee also wrote a letter on 4th
September, 2012 to the assessing officer, in which it stated that the company
had verified its records for various years, that it might not be possible to substantiate certain
issues and transactions recorded in the regular books of account as required by
law, as it would take a lot of time and effort, and that it would like to avoid
protracted litigation. To avoid litigation and penalty and to buy peace, the
company stated that it would voluntarily disclose an amount of Rs. 9 crore as
it’s undisclosed income, comprising of Rs. 7.52 crore for assessment year
2009-10 towards share capital reserves and Rs. 1.48 crore for assessment year
2013-14 towards estimated profit for the year of survey. In such letter,
details of the companies to which 7.52 lakh shares were allotted with premium
of Rs. 6.77 crore were given.
In spite of such letter, the company did not
offer such income to tax. The assessing officer therefore issued notice on 13th
February, 2013 u/s. 148, to reopen the assessment for assessment year 2009-10.
The reason recorded for such reassessment was that the income disclosed as a
result of survey at Rs. 7.52 crore was over and above the income of Rs. 78.47
lakh returned in the original return of income.
In reassessment proceedings, an addition of
Rs. 7.52 crore as bogus share capital was made. The Commissioner (Appeals)
rejected the assessee’s appeal.
The ground of
validity of the notice of reopening was raised before the Tribunal for the
first time. The Tribunal permitted raising of such ground, since it touched
upon the very jurisdiction of the assessing officer to reassess the income.
The Tribunal held that reopening of
assessment was bad in law, and therefore it did not enter into the question of
correctness of the additions. The Tribunal referred to the Supreme Court
decisions in the case of ITO vs. Lakhmani Mewal Das 103 ITR 437, and Asst
CIT vs. Rajesh Jhaveri Stock Brokers (P) Ltd 291 ITR 500, and the decision
of the Gujarat High Court in the case of Inductotherm (India) (P) Ltd vs. M
Gopalan, Dy CIT 356 ITR 481, and proceeded to annul the reassessment on the
ground that the formation of belief by the assessing officer that income
chargeable to tax had escaped assessment was erroneous on account of the fact that there was no
corroborative evidence casting doubts on the assessee’s share capital received
up to the date of issue of the notice of reopening. According to the Tribunal, the
basic tenet of cause effect relationship between the reasons for reopening and
the taxable income having escaped assessment was not made out by the assessing
officer.
The Gujarat High Court observed that, in the
case of Rajesh Jhaveri Stock Brokers (P) Ltd (supra), the Supreme Court
highlighted a clear distinction between assessment under section 143(1) and
assessment made by the assessing officer after scrutiny u/s. 143(3). Such distinction was noticed in the background of the
notice of reassessment where the return of the assessee was accepted u/s.
143(1). The Supreme Court had observed that, in the scheme of things, the
intimation u/s. 143 (1) could not be treated to be an order of assessment, and
that being the position, the question of change of opinion did not arise. The
Gujarat High Court further observed that the ratio of the decision was
reiterated in a later judgement of the Supreme Court in the case of Dy CIT
vs. Zuari Estate Development & Investment Co Ltd 373 ITR 661.
The Gujarat High Court also referred to its
decision in the case of Inductotherm (supra), where the court observed
that even in case of reopening of an assessment where the return was accepted
without scrutiny, the requirement that the assessing officer had reason to
believe that income chargeable to tax had escaped assessment, would apply.
The Gujarat High Court further referred to
the Supreme Court decision in the case of Lakhmani Mewal Das (supra),
where it had been held that the reasons for the formation of the belief contemplated
by section 147 for the reopening of an assessment must have a rational
connection or relevant bearing on the formation of the belief. Rational
connection postulated that there must be a direct nexus or live link between
the material coming to the notice of the assessing officer and the formation of
his belief that there had been escapement of the income of the assessee from
assessment.
Culling out the ratio of those decisions,
the Gujarat High Court stated that what broadly emerged was that there was a
vital distinction between the reopening of an assessment where the return of an
assessee had been accepted u/s. 143 (1) without scrutiny, and where the
scrutiny assessment had been framed.
According to the Gujarat High Court, in the former case, the assessing officer
could not be stated to have formed any opinion, and therefore, unlike in the
latter case, the concept of change of opinion would have no applicability. The
common thread that would run through both sets of exercises of reopening of assessment
was that the assessing officer must have reason to believe that income
chargeable to tax had escaped assessment.
Looking at the facts of the case and the
observations of the Tribunal, the Gujarat High Court observed that the Tribunal
had evaluated the evidence on record in minutest detail, as if each limb of the
assessing officer’s reasons recorded for issuing notice of reassessment was in
the nature of an addition made in assessment order, which had either to be
upheld or reversed, which, according to the High Court, was simply
impermissible.
The Gujarat High Court referred to the
decision of the Delhi High Court in the case of Indu Lata Rangwala vs. Dy
CIT 384 ITR 337, where the Delhi High Court had taken the view that where
the return initially filed was processed u/s. 143(1), there was no occasion for
the assessing officer to form an opinion after examining the documents enclosed
with the return. In other words, the requirement in the first proviso to
section 147 of there having to be a failure on the part of the assessee “to
disclose fully and truly all material facts” did not at all apply whether the
initial return had been processed u/s. 143(1). In that case, the Delhi High
Court had taken the view that it was not necessary in such a case for the
assessing officer to come across some fresh tangible material to form reasons
to believe that income had escaped assessment.
The Gujarat
High Court thereafter considered the decision of the Madras High Court in the
case of EL Forge (supra) and expressed its inability to concur with the
view of the Madras High Court in the said case where it held that the condition
that there was a failure to disclose the material facts for the purposes of
assessment was required to be satisfied even in cases of intimation issued u/s.
143(1). According to the Gujarat High Court, the proviso to section 147 would
apply only in a case where an assessment
had been framed after scrutiny. In a case where the return was accepted u/s.
143(1), the additional requirement that income chargeable to tax had escaped
assessment on account of the failure on the part of the assessee to disclose
truly and fully all material facts, would simply not apply. According to the
Gujarat High Court, the decision of the Supreme Court in Kelvinator’s
case did not apply, to the facts of the
case before the court, as that was a case in which the original assessment was
framed after scrutiny.
The Gujarat High Court therefore allowed the
appeal of the revenue, quashing the conclusion of the Tribunal that the notice
of reopening of assessment was invalid.
OBSERVATIONS
Reading the proviso in the manner, as is read by the Gujarat High Court, would mean that in all
cases of the intimation u/s. 143(1) where other things are equal, the time
limit for reopening gets automatically extended to six years from the end of
the assessment year and that the requirement to satisfy the disclosure test has
to be met with only in cases of assessment u/s. 143(3) and is otherwise dispensed with in cases of intimation u/s. 143(1). On a reading
of the Proviso this does not appear to be the case and even on the touchstone
of common sense there appears to be a
case that the requirement to satisfy the disclosure test should not be
restricted to section 143(3) cases only. A failure by the AO to initiate the
proceedings u/s. 143(2) and again under the main provisions of section 147,
within the time prescribed under the respective provisions can not be remedied
by resorting to the reading of the proviso in a convenient manner that
gives a license to the AO to reopen a
case even after a lapse of a long time
and deny the finality to the proceedings in cases where there otherwise is not
a failure to disclose the material on the part of the assessee. Such an
understanding is strongly supported by the overall scheme of the Income tax
Act.
In cases where the assesssee has disclosed
the material facts and the AO has failed to have a prima facie look into
the facts, in time, and fails to pursue the matter appropriately, within the
prescribed time, it is reasonable to hold that his power to reopen a case comes
to an end irrespective of the fact that the assessment was not made u/s.
143(3).
Even otherwise, it is not unreasonable to
hold that in cases where the assessee has made an adequate disclosure of facts,
then the same are deemed to have been considered by the AO and therefore his
inaction, within the prescribed time, should be construed to be a case of a
change of opinion.
It is difficult to appreciate that the
standards that are applicable to the cases covered by section 143(3) are not
applied to cases covered by section 143(1) for no fault of the assessee more so when the assessee has no control over
the action or inaction of the AO. It is not the assessee who prevented the AO
from scrutinising the return of income. In fact, permitting the AO to have a
longer time than it is prescribed is giving him a premium for his inefficiency
of not having acted within the time when he should have.
The decision of the Gujarat High Court in Laxmiraj’s
case, is the one delivered on very peculiar facts involving an admission by the
assessee firm at the time of survey and not following it us with the offer for
tax in spite of admitted facts that were not denied by the assessee later on at
the time of even reassessment. The SLP file by the assessee against the
decision has been rejected by the Supreme Court 95 taxxmann.com
109(SC).
The Madras High Court in case of TANMAC India vs. Dy.CIT 78 taxmann.com 155 (Mad.) held
that if after issuing intimation u/s. 143(1) of the Act, the Assessing
Officer did not issue notice of scrutiny assessment u/s. 143(2) of the Act, it
would not be open for the Assessing Officer thereafter to resort to reopening
of the assessment. The High Court in deciding the case placed heavy reliance on
the decision of Delhi High Court in case of CIT vs. Orient Craft Ltd. 354
ITR 536 in which the distinction between scrutiny assessment and a
situation where return has been accepted u/s. 143(1) was narrowed down. The
Court had applied the concept of true and full disclosure even in case of
reopening assessment where return was accepted u/s. 143(1) of the Act.
It seems that the excessive reliance on the
ratio of the Supreme Court cases in Rajesh Jhaveri Stock Brokers’ case
(supra) and Zuari Estate & Investment Co.‘s case (supra) requires a fresh
consideration and perhaps was uncalled for. The issue in those cases has been about whether there could be a
change of opinion in a case where an intimation u/s. 143(1) was issued and
whether there was a need to have the
reason to believe that income has escaped income in such cases of intimation
and whether an intimation was different form an order. The issue under consideration, namely, the
application of the first proviso to section 147 was not an issue before
the court in both the cases. It is
respectfully submitted that in the below quoted part of the decision, the
Supreme Court inter alia held that the condition of the First Proviso to
section 147 were required to be satisfied for a valid reopening of a case
involving even an intimation issued u/s. 143(1) of the Act.
“The scope and effect of section
147 as substituted with effect from 1-4-1989, as also sections 148 to 152 are
substantially different from the provisions as they stood prior to such
substitution. Under the old provisions of section 147, separate clauses (a) and
(b) laid down the circumstances under which income escaping assessment for the
past assessment years could be assessed or reassessed. To confer jurisdiction
under section 147(a) two conditions were required to be satisfied firstly the
Assessing Officer must have reason to believe that income profits or gains
chargeable to income tax have escaped assessment, and secondly he must also
have reason to believe that such escapement has occurred by reason of
either omission or failure on the part
of the assessee to disclose fully or truly all material facts necessary for his
assessment of that year. Both these conditions were conditions precedent to be
satisfied before the Assessing Officer could have jurisdiction to issue notice
under section 148 read with section 147(a). But under the substituted section
147 existence of only the first condition suffices. In other words if the
Assessing Officer for whatever reason has reason to believe that income has
escaped assessment it confers jurisdiction to reopen the assessment. It is
however to be noted that both the conditions must be fulfilled if the case
falls within the ambit of the proviso to section 147.” The disclosure of
the material facts is a factor that can not be ignored even in the case of
intimation simply because the first proviso expressly refers only to the order
of assessment u/s. 143(3). It appears that the last word on the subject has yet
to be said and sooner the same is said by the Supreme Court, is better.
Rectification of mistake – Debatable issue –Adjusting the business loss against capital gain in terms of provisions of section 71(1) of the Act –View once allowed by the AO could not be rectified by him if the issues is debatable. [Section 154]
1. 3.
Pr.CIT-6 vs. Creative
Textile Mills Pvt. Ltd. [Income tax Appeal no 1570 of 2016 Dated: 13th February, 2019 (Bombay High Court)]
[Creative Textile Mills Pvt. Ltd vs.
ACIT-6(2); dated 28th October, 2015; ITA. No 7480/Mum/2013, AY : 2005-06,
Bench:C Mum. ITAT]
ACIT-6(2); dated 28th October, 2015; ITA. No 7480/Mum/2013, AY : 2005-06,
Bench:C Mum. ITAT]
Rectification
of mistake – Debatable issue –Adjusting the business loss against capital gain
in terms of provisions of section 71(1) of the Act –View once allowed by the AO
could not be rectified by him if the issues is debatable. [Section 154]
The
assessee is engaged in the business of Processing, Manufactures and Export of
Readymade Garments & Fabric, filed its return of income on 30.10.2005
declaring total loss of Rs. 4,37,23,576/-. The assessment order was passed on
31.12.2007 declaring total loss of Rs. 2,29,98,454/-. However, the AO made a
rectification of the assessment order u/s. 154 of the I.T. Act in its order on
the pretext that computation of loss has not been adjusted against the capital
gain and that excess loss has been allowed to the assessee and thus a sum of
Rs. 1,82,65,501/- was added on account of LTCG, against which an appeal was filed
before the CIT(A) on the ground, the order u/s. 154 was bad in law, void, ab
initio and was impermissible under the law.However, the ld. CIT(A) upheld
the order of AO.
Being aggrieved with the CIT(A) order, the assessee filed an appeal to
the ITAT. The Tribunal held that the assessee relied upon the judgment in case
of T.S.Balaram, ITO vs. Vokart Brothers & Others 82 ITR 50 (SC)
wherein it was held “that mistake apparent from the record must be an obvious
and patent mistake and not something which can be established by a long drawn
process and of reasoning on points on which there may be conceivably two
opinions. A decision on a debatable point of law is not a mistake apparent from
the record. The Ld AR further relied upon the cases of CIT vs. Victoria
Mills Ltd. [153 ITR 733], CIT vs. British Insulated Calender’s Ltd. [202
ITR 354], Addl. Second ITO vs. C.J. Shah [10 ITD 151 (TM)] and DCIT
vs. Shri Harshavardan Himatsingka [ITA No. 1333 to 1335/Kol/2012] (Bom. High
Court). In DCIT (Kol.) vs. Harshavardan Himatsingka, it was held
that the order passed by the AO u/s. 154 of the Act adjusting the business loss
against capital gain in terms of provisions of section 71(1) of the Act,
wherein assessee is entitled to carry forward the business loss without
adjusting the same from capital gain or the same is mandatory required to be
adjusted. It was further held by co-ordinate bench that this aspect of
provision of section 71(1) of the Act is also a subject matter of dispute and
there are case law both in favour and against the said proposition as
canvassed. Hence issue is debatable cannot be said that there was a mistake
apparent on record which could be rectified u/s. 154 of the Act, hence the
order passed by AO u/s. 154 of the Act is not sustainable. It was further seen that in the regular assessment,
certain disallowance/additions were made by the AO which was deleted by ld.
CIT(A) in further appeal and the appeal filed by the department against the
order of CIT(A) has also been dismissed by the Tribunal and the case had
already travelled up to the ITAT till then no such interference was drawn at
the time of regular assessment or during the appellate stage. In view of the
above, ITAT held that the order passed
by the AO u/s. 154 which was subsequently upheld by CIT(A) is void, ab
initio and the same is liable tobe set-aside and is not permissible under
the law.
Being aggrieved with the
ITAT order, the Revenue filed an appeal to the High Court. The Court held that
sub-section (1) of section 71 of the Act provides that where in respect of any
assessment year the net result of the computation under any head of income
other than “capital gains’ is a loss and the assessee has no income under the
head ‘capital gains’ he shall, subject to the provisions of this Chapter, be
entitled to have the amount of such loss set off against his income, if any,
assessable for that assessment year under any other head. This provision came
up for consideration before this Court in the case of Commissioner of Income
Tax vs. British Insulated Calendar’s Ltd. [202 ITR 354] in which it was
held that under sub-section (1) of section 71 of the Act the assessee has no
option in setting off the business loss against the heads of other income as
long as there was no capital gain during the year under consideration. The case
of the assessee does not fall under sub-section (1) of section 71 of the Act
since the assessee had declared capital gain. Such a situation would be covered
by subsection (2) of section 71 of the Act which reads as under;
“(2) Where in respect
of any assessment year, the net result of the computation under any head of
income, other than “Capital gains”, is a loss and the assessee has income
assessable under the head “Capital gains”, such loss may, subject to the
provisions of this Chapter, be set off against his income, if any, assessable
for that assessment year under any head of income including the head “Capital
gains” (whether relating to short-term capital assets or any other capital
assets)”.
In case of British
Insulated Calender’s (supra) this Court had in respect to sub-section 2 of
section 71 observed that “
in case of the assessee
declaring capital gain, he had an option to set off the business loss, whereas
no such option is given for sub-section (1)”. Before the High Court, of course,
the provision of sub-section 2 of section 71 of the Act was somewhat different
and the expression “ or, if the assessee so desires, shall be set off only
against his income, if any, assessable under any head of income other than
‘capital gains’” has since been deleted. Nevertheless, the question that would
arise is, whether even in the unamended form sub-section (2) of section 71 of
the Act mandates the assessee to set off its business loss against the capital
gains of the same year when this provision used an expression “may” as compared
to the expression “shall” used in s/s. (1).
In the present case, the Hon’ble Court was not called upon to judge the correctness of
interpretation of either the revenue or the assessee. However the court
observed that issue was far from being
clear. It was clearly debatable. In this position, the A.O, as per the settled
law, could not have exercised the rectification powers. The Income Tax Appeal
was dismissed.
Section 45 – Capital gains – Non-compete clause – Transfer of business – Amount is liable to be bifurcated and apportioned – Attributed to the non- compete clause is revenue receipts and remaining was to be treated as the capital receipt taxable as capital gains.
1. 2.
Pr CIT-17 vs. Lemuir Air
Express [ ITA no 1388 of 2016 Dated: 6th February, 2019 (Bombay High
Court)]
[ACIT-12(3)
vs. Lemuir Air Express; dated 9th October, 2015 ; ITA. No
3245/Mum/2008, AY : 2004-05 Bench: G
Mum. ITAT ]
Section
45 – Capital gains – Non-compete clause – Transfer of
business – Amount is liable to be bifurcated and apportioned –
Attributed to the non- compete clause is revenue receipts and remaining was to
be treated as the capital receipt
taxable as capital gains.
The
assessee is a partnership firm. The assessee was engaged in the business as
custom house agent, as also an air cargo agent. The activities of the assessee
would involve assisting the clients in air freight, forwarding for export etc.
During the year, the assessee transferred its business of international cargo
to one DHL Danzar Lemuir Pvt Ltd (“DHL” for short) as a going concern
for consideration of Rs. 54.73 crore. The assessee offered such receipt to tax
as capital gain. The A O did not accept this stand of the assessee. He noticed
that in the deed of transfer of business, there was a clause that the assessee
would not involve into carrying on the same business. According to the A.O,
therefore, in view of such non-compete clause in the agreement, the receipt could
be the assessee’s income in terms of section 28(va) of the Act and
consequentially taxable under the head ‘Profits and Gains of Business and
Profession’.
The
assessee carried the matter in appeal. The CIT(A) was of the opinion that the
entire sum of Rs. 54.73 crore was not paid for non-compete agreement. He
apportioned the total consideration into two parts namely a sum of Rs. 4.5
crore was attributed to the non-compete clause, the rest i.e Rs. 50.23 crore
(after deducting costs) was treated as the assessee’s capital receipt taxable
as capital gains. On this apportionment, the CIT(A) arrived at after taking
into consideration the profit of the firm for last two years from said
business.
Revenue
carried the matter in appeal before the Tribunal. The Tribunal, by the impugned
judgment, upheld the view of the CIT(A) inter alia observing that the
assessee had under the agreement in question transferred the entire business
and the non-compete clause was merely consequent to the transfer of business.
Being aggrieved with the
ITAT order, the revenue filed an appeal to the High Court. The Court observed
that the entire sale consideration of Rs. 54.73 crore could never have been
attributed to the non-compete clause contained in such agreement. The CIT(A)
applied logical formula to arrive at the apportionment between the value for
the sale of business and of non-compete clause in the agreement. No perversity
is pointed out in this approach of the CIT(A). The assessee which was engaged
in highly specialised business, transferred the entire business for valuable
consideration. Non-compete clause in such agreement was merely a part of the
understanding between the parties. What purchaser received under such agreement
was entire business of the assessee along with non-compete assurance. We notice
that Clause (va) of section 28 pertains to any sum whether received or
receivable, in cash or kind, under an agreement, inter alia for not carrying
out any activity in relation to any business or profession. A non-compete agreement
would therefore fall in this clause. Proviso to said Clause (va), however,
provides that the said clause would not apply, to any sum whether received or
receivable, in cash or kind, on account of transfer of right to manufacture,
produce or process any article or thing or right to carry on any business or
profession which is chargeable under the head Capital Gains. The assessee’s
receipt attributable to the transfer of business was correctly taxed by the
CIT(A) as confirmed by the Tribunal as giving rise to capital gain. It was only
residual element of receipt relatable to the non-compete agreement which was
brought within fold of Clause (va) of section 28 of the Act. In the result, the
appeal was dismissed.
Section 68 – Cash credits – Share application money – Identity, genuineness of transaction and creditworthiness of persons from whom assessee received funds – Allegation by AO about evasion of tax without any supporting evidence, is not justified.
1. 1.
The Pr. CIT-1 vs. Pushti
Consultants Pvt Ltd [Income tax Appeal no 1332 of 2016 Dated: 6th February, 2019 (Bombay High Court)].
[Pushti
Consultants Pvt Ltd vs. DCIT-1(2); dated 23rd March, 2015 ; ITA. No
4963/Mum/2012, AY 2008-09, Bench : C , Mum.
ITAT ]
Section
68 – Cash credits – Share application money – Identity, genuineness of
transaction and creditworthiness of persons from whom assessee received funds –
Allegation by AO about evasion of tax
without any supporting evidence, is not justified.
During
the course of the scrutiny proceedings, the A.O noticed that the assessee had
received share application money of Rs. 2.20 crore during the year under
assessment. The assessee substantiated its claim of share application money of
Rs. 2.20 crore received from Speed Trade Securities Pvt Ltd (“STSPL”
for short) by filing Board resolution and a letter from STSPL. The assessee
also filed details consequent to the summons issued u/s. 131 of the Act to the
director of STSPL. However, the A.O was not convinced with the same on the
ground that the board resolution of STSPL mentions that it will pay 50% of the
share application money i.e Rs. 2.20 crore and if the balance 50% of share
application money is not paid before 30.9.2008, the amount paid as share application
money will stand forfeited by the assessee. The A.O noted that STSPL has
sufficient funds to the extent of Rs. 14.33 crore available with it on
31.3.2009 (the extended period within which the balance amount of the share
application money has to be paid). In spite of having such huge funds at its
disposal, STSPL has allowed its investment to go in waste and claim loss in its
profit and loss account.
The A.O held that the
entire act of obtaining share application money and having it forfeited was an attempt
to evade tax. Thus, AO came to the conclusion that the share application money
was in fact the assessee’s own funds which were introduced under the garb of
share application money. Therefore,made an addition of Rs. 2.20 crore to
assessee’s income.
Being
aggrieved by the order of the A.O, the assessee filed an appeal to the CIT(A).
The CIT(A) dismissed the appeal upholding the view of the A.O and inter alia
placing reliance upon a decision of the Apex Court in the case of McDowell
& Co Ltd vs. Commercial Tax Officer1 (1985) 154 ITR 148 (SC) as being
applicable to the facts of this case,
thus, dismissing the assessee’s appeal.
On
further appeal of the assessee, the Tribunal held that the evidence on record
established the identity, capacity and genuineness of the share application
money received from STSPL. This is on the basis of the fact that the amounts
were received through proper banking channels, the ledger accounts, bank
statement and audited annual accounts of STSPL were also submitted which
supported the case of the assessee. Further the valuation report/certificate of
a Chartered Accountant to the effect that the valuation of shares would be Rs.
20.83 per share and therefore, the receipt of share application money at the aggregate
price of Rs. 20 i.e Rs. 10 as face value and Rs. 10 as premium was perfectly in
order. It also recorded the fact that the application money had been paid by
STSPL by selling its own investments/shares in the stock exchange through its
broker Satco Securities and Financial Ltd (Satco) and had received the money
from Satco for sale of its investments/shares. The statement of Bank of Baroda,
the banker of Satco reflected the payments to STSPL for sale of its own
investments/shares of stock exchange was also produced. In the aforesaid view,
the impugned order held that the investment of Rs. 2.20 crore by STSPL on the
basis of evidence on record was established, as the identity, capacity and
genuineness stood proved. In the above view, the impugned order allowed the
assessee’s appeal.
Being
aggrieved with the ITAT order, the Revenue filed an appeal to the High Court.
The Court held that the assessee has gone beyond the requirement of the law as
existing in the subject assessment year 2008-09 by having explained the source
in terms of section 68 of the Act. Besides, the reliance by the CIT (A) on the
decision of McDowell (supra) is not applicable to the facts of the
present case. The Apex Court in decisions in the cases of Union of India
& Anr. vs. Azadi Bachao Andolan &
Anr2 and Vodafone International Holdings 2 (2003) 263 ITR 706
(SC) B.V. vs. Union of India & Anr.3 also held that principles laid
down in the case of McDowell (supra) is not applicable across the board
to discard an act which is valid in law upon some hypothetical assessment of
the real motive of the assessee. Thus, imputing a plan on the part of the
assessee and STSPL to evade tax without any supporting evidence in the face of
the detailed facts recorded by the impugned order of the Tribunal, is not
justified. We find that the impugned order of the Tribunal being essentially a
finding of fact which is not shown to be perverse does not give rise to any
substantial of law. Hence, not entertained. Accordingly, the appeal is
dismissed.
Section 40A(2)(b) and 92BA – Specified domestic transactions – Determination of arm’s length price – Meaning of “specified domestic transactions” – Section 92BA applies to transactions between assessee and a person referred to in section 40A(2)(b) – Assessee having substantial interest in company with whom it has transactions – Beneficial ownership of shares does not include indirect shareholding – Amount paid to acquire asset – Not an expenditure covered by section 40A(2)(b)
6.
HDFC Bank Ltd. vs. ACIT; 410
ITR 247 (Bom): Date of order: 20th December, 2018 A. Y.: 2014-15
HDFC Bank Ltd. vs. ACIT; 410
ITR 247 (Bom): Date of order: 20th December, 2018 A. Y.: 2014-15
Section
40A(2)(b) and 92BA – Specified domestic transactions – Determination of arm’s
length price – Meaning of “specified domestic transactions” – Section 92BA
applies to transactions between assessee and a person referred to in section
40A(2)(b) – Assessee having substantial interest in company with whom it has
transactions – Beneficial ownership of shares does not include indirect
shareholding – Amount paid to acquire asset – Not an expenditure covered by
section 40A(2)(b)
By an
order dated 29/12/2016, the Assessing Officer held that three transactions were
specific domestic transactions and referred the case to the Transfer Pricing
Officer for determining arms length price. The three transactions were, loans
of Rs. 5,164 crore purchased by the assessee from the promoters (HDFC) and
loans of Rs. 27.72 crore purchased from the subsidiaries, payment of Rs. 492.50
crore by the assessee to HBL for rendering services and payment of interest of
Rs. 4.41 crore by the assessee to HDB trust. The assessee filed a writ petition
and challenged the order.
The Bombay
High Court allowed the writ petition and held as under:
“i) The assessee purchased the
loans of HDFC of more than Rs. 5,000 crore. HDFC admittedly held 16.39% of the
shareholdings in the assessee. If one were to go merely by this figure of 16.39% then, on a plain
reading of section 40A(2)(b)(iv) read with Explanation (a) thereto, HDFC would
not be a person who would have a substantial interest in the assessee. However,
the Revenue contended that the requirement of Explanation (a) of having more
than 20% of voting power is clearly established in the case because HDFC held
100% of the shareholding in another
company which in turn held 6.25% of shareholding in the assesee. When one
clubbed the shareholding of HDFC of 16.39% with the shareholding of the other
company of 6.25%( and which was a wholly owned subsidiary of HDFC) the
threshold of 20% as required under Explanation (a) to section 40A(2)(b) was
clearly crossed.
ii) HDFC on its own was not the
beneficial owner of shares carrying at least 20% of the voting power as
required under Explanation (a) to section 40A(2)(b). The Revenue was incorrect
in trying to club the shareholding of the subsidiary with the shareholding of
HDFC, in the assessee, to cross the threshold of 20% as required in Explanation
(a) to section 40A(2)(b). HDFC did not have a substantial interest in the
assesee, and therefore, was not a person contemplated u/s. 40A(2)(b)(iv) for
the present transaction to fall within the meaning of a specified domestic
transaction as set out in section 92BA(i).
iii) Moreover the assessee had
purchased the loans of HDFC. This was a
purchase of an asset. This transaction
of purchase of loans by the assessee from HDFC would not fall within the
meaning of a specified domestic transaction.
iv) As far as the second
transaction was concerned, the assessee held 29% of the shares in ADFC. In
turn, ADFC held 94% of the shares in HBL. The assessee held no shares in HBL.
The assessee could not be regarded as having a substantial interest in HBL.
v) It was not the case of the
Revenue that the assessee was entitled to at least 20% of the profits of the
trust. The trust had been set up exclusively for the welfare of its employees
and there was no question of the assessee being entitled to 20% of the profits
of such trust. This being the case, this transaction clearly would not fall
within 40A(2)(b) read with Explanation (b) thereto to be a specific domestic
transaction as understood and covered by section 92BA(i).
vi) None of the three
transactions that formed the subject matter of this petition fell within the
meaning of a specified domestic transaction as required u/s. 92BA(i) of the
Income-tax Act. This being the case, the Assessing Officer was clearly in error
in concluding that these transactions were specified domestic transactions and
therefore required to be disclosed by the assessee by filing form 3CEB. He
therefore could not have referred these transactions to the Transfer Pricing
Officer for determining the arms length price.”
Sections 69 and 147 – Reassessment – Where Assessing Officer issued a reopening notice on ground that assessee had made transactions of huge amount in national/multi commodity exchange but he had not filed his return of income and assessee filed an objection that he had earned no income out of trading in commodity exchange and he had actually suffered loss and, therefore, he had not filed return of income. Since, Assessing Officer had not looked into objections raised by assessee and proceeded ahead, impugned reassessment notice was unjustified
5.
Mohanlal Champalal Jain vs.
ITO; [2019] 102 taxmann.com 293 (Bom): Date of order: 31st January, 2019 A. Y.: 2011-12
Mohanlal Champalal Jain vs.
ITO; [2019] 102 taxmann.com 293 (Bom): Date of order: 31st January, 2019 A. Y.: 2011-12
Sections
69 and 147 – Reassessment – Where Assessing Officer issued a reopening notice
on ground that assessee had made transactions of huge amount in national/multi
commodity exchange but he had not filed his return of income and assessee filed
an objection that he had earned no income out of trading in commodity exchange
and he had actually suffered loss and, therefore, he had not filed return of
income. Since, Assessing Officer had not looked into objections raised by
assessee and proceeded ahead, impugned reassessment notice was unjustified
The
assessee, an individual was engaged in trading in commodity exchange. On the
premise that he had no taxable income, the assessee had not filed return of
income for the relevant assessment year. An information was received by the
Assessing Officer that as per NMS data and its details the assessee had made
transactions of Rs. 18.82 crore in national /multi commodity exchange. Further,
it was seen that the assessee had not filed his return of income. The Assessing
Officer concluded that profit/gain on commodity exchange remained unexplained
and also the source of investment in these transactions remains unexplained.
Therefore, the income chargeable to tax had escaped assessment within the
meaning of provisions of section 147 as no return of income has been filed by
the assessee.
The
assessee raised an objection that he had earned no income out of trading in
commodity exchange. He pointed out that the assessee’s sales turnover was Rs.
16.82 crore (rounded off) and he actually suffered a loss of Rs. 1.61 crore.
The Assessing Officer, however, rejected the objections. With respect to the
assessee’s contention of no taxable income, he stated that the same would be
subject to verification and further inquiry.
The Bombay
High Court allowed the writ petition filed by the assessee and held as under:
“i) The Assessing Officer has
proceeded on wrong premise that even when called upon to state why the
petitioner had not filed return of income, he had not responded to the said
query. The petitioner did communicate to the department that he had no taxable
income and therefore, there was no requirement to file the return. The
Assessing Officer did not carry out any further inquiry before issuing the
impugned notice. In the reasons, one more error pointed out by the petitioner
is that the Assessing Officer referred to the sum of Rs. 18.82 crore as total
transaction in the commodities. In the petition as well as in the objections
raised before the Assessing Officer, the petitioner pointed out that his sales
were to the tune of Rs.16.82 crore against purchases of Rs. 16.84 crore and
thereby, he had actually suffered a loss.
ii) The Assessing Officer has not
discarded these assertions. Importantly, if the Assessing Officer had access to
the petitioner’s sales in commodities, he could as well have gathered the
information of his purchases. Either on his own or by calling upon the
petitioner to provide such details, the Assessing Officer could and ought to
have verified at least prima facie that the income in the hands of the
petitioner chargeable to tax had escaped assessment. In the present case, what
the Assessing Officer aiming to do so is to carry out fishing inquiry. In fact,
even when the assessee brought such facts and figures to his notice, the
Assessing Officer refused to look into it.
iii) In the result, the impugned
notice is quashed and set aside.”
Sections 12AA, 147 and 148 – Charitable Trust – Cancellation of registration – Section 12AA amended in 2004 enabling cancellation of registration is not retrospective – Cancellation cannot be made with retrospective effect Reassessment – Notice u/s. 148 consequent to cancellation of registration – No allegation of fraud – Notice not valid
4.
Auro Lab vs. ITO; 411 ITR
308 (Mad): Date of order: 23rd January, 2019 A. Ys.: 2004-05 to 2007-08
Auro Lab vs. ITO; 411 ITR
308 (Mad): Date of order: 23rd January, 2019 A. Ys.: 2004-05 to 2007-08
Sections 12AA, 147 and 148 – Charitable Trust –
Cancellation of registration – Section
12AA amended in 2004 enabling cancellation of registration is not retrospective
– Cancellation cannot be made with retrospective effect
Reassessment – Notice u/s. 148 consequent to cancellation
of registration – No allegation of fraud – Notice not valid
The
assessee, a charitable trust, was granted registration by the Commissioner u/s.
12A of the Income-tax Act, 1961, as it stood prior to the year 1996 with
medical relief as the main object of the trust. The returns of income were
assessed periodically by the Department and assessment orders passed year after
year until the amendment to section 12AA
was introduced to specifically to empower the proper officer to cancel the
registration granted under the erstwhile section 12A of the Act. Subsequent to
the amendment, by an order dated 30/12/2010, the registration granted to the
assessee was cancelled on the allegation that the assessee failed to fulfil the
conditions required for enjoying the exemption available to the assessee
registered u/s. 12A. The Tribunal upheld the cancellation. Assessee preferred
appeal to the High Court which was pending. In the meanwhile, the Assessing
officer issued notices u/s. 148 of the Act and reopened the assessments for the
A. Ys. 2004-05 to 2007-08. The assessee’s objections were rejected. The
assessee filed writ petitions and challenged the validity of reopening.
The Madras
High Court allowed the writ petition and held as under:
“i) Until 2004, when section 12AA of the
Income-tax act 1961 was amended, there was no power under the Act to the
Commissioner or any other authority to revoke or cancel the registration once
granted to charitable trusts. Later, on June 1, 2010, by the Finance Act, 2010,
section 12AA(3) was further amended to include specifically registration
granted under the erstwhile section 12A of the Act also within the ambit of
revocation or cancellation as contemplated u/s. 2004 amendment.
ii) The powers of the Commissioner u/s. 12AA are
neither legislative nor executive but are essentially quasi-judicial in nature
and, therefore, section 21 of the General Clauses Act is not applicable to
orders passed by the Commissioner u/s. 12AA. Section 12AA(3) is prospective and
not retrospective in character. The cancellation of registration will take
effect only from the date of the order or notice of cancellation of
registration.
iii) The cancellation of the registration would
operate only from the date of the cancellation order, that is December 30,
2010. In other words, the exemption u/s. 11 could not be denied to the assessee
for and upto the A. Y. 2010-11 on the sole ground of cancellation of the
certificate of the registration.
iv) Unless the assessee had obtained registration
by fraud, collusion or concealment of any material fact, the registration
granted could never be alleged to be a nullity. It was evident that fact of the
cancellation of the registration triggered the reassessment proceedings and
evidently formed the preamble of each of the orders. And clearly, there was no
allegation of fraud or misdeclaration on the part of the assessee and the
Department was candid in confessing that the certificate was granted
erroneously. Therefore, reopening the assessment for the past years on account
of the cancellation order dated December
30, 2010, in the case of the assessee by the Assessing Officer was not permissible under the law and the
proceedings relating to the A. Ys. 2004-05 to 2007-08 were liable to be
quashed. Also, the assessment order relating to the A. Y. 2010-11 disallowing
exemption on the basis of cancellation order dated December 30, 2010, was
liable to be quashed.”
Section 68 – Cash credits – Capital gain or business income – Profits from sale of shares – Genuineness of purchase accepted by Department – Profits from sale cannot be treated as unexplained cash credits – Profit from sale of shares to be taxed as short/long term capital gains
3.
Principal CIT vs. Ramniwas
Ramjivan Kasat; 410 ITR 540 (Guj):Date of order: 5th June, 2017 A. Y.: 2006-07
Principal CIT vs. Ramniwas
Ramjivan Kasat; 410 ITR 540 (Guj):Date of order: 5th June, 2017 A. Y.: 2006-07
Section
68 – Cash credits – Capital gain or business income – Profits from sale of
shares – Genuineness of purchase accepted by Department – Profits from sale
cannot be treated as unexplained cash credits – Profit from sale of shares to
be taxed as short/long term capital gains
For the A.
Y. 2006-07, the Assessing Officer made additions to the income of the assessee
u/s. 68 of the Income-tax Act, 1961 on the ground that the assessee had sold
certain shares and the purchasers were found to be bogus. The second issue
was in respect of the treatment of the
income earned by the assesse on the sale of shares. The assesse contended that
the shares were in the nature of his investment and the income earned to be
treated as long term capital gains. The Department contended that looking to
the pattern of holding the shares, the frequency of transactions and other
relevant considerations, the assessee was trading in shares and the income was
to be taxed as business income.
The
Commissioner (Appeals) dismissed the appeal filed by the assessee. The Tribunal
found that the purchase of the shares was made during the month of April, 2004
and they were sold in the months of May, June and July, 2005, that the
purchases thus made during the Financial Year 2004-05 had been accepted in the
relevant A. Y. 2005-06 and that in the assessment made u/s. 143(3) r.w.s. 147
the purchases of the shares were accepted as genuine. The Tribunal therefore
held that no additions could have been made u/s. 68 when the shares were in the
later years sold and deleted the addition. On the second issue, the Tribunal
took the relevant facts into consideration and referred to the circular dated
29/02/2016, of the CBDT and held that the income was to be taxed as capital
gains, be it long term or short term, as the case might be, and not as business
income.
On appeal
by the Revenue, the Gujarat High Court upheld the decision of the Tribunal and
held as under:
“i) Circular dated 29/02/2016, issued by the CBDT
provides that in respect of listed shares and securities held for a period of
more than 12 months immediately preceeding the date of their transfer, if the assessee
desires to treat the income arising from the transfer thereof as capital gains
that shall not be disputed by the Assessing Officer and the Department shall
not pursue the issue if the necessary ingredients are satisfied, the only rider
being that the stand taken by the assessee in a particular year would be
followed in the subsequent years also and the assessee would not be allowed to
adopt a contrary stand in such subsequent years.
ii) The circular dated 29/02/2016 applied to the
assessee. The Tribunal was right in deleting the addition made u/s. 68 upon
sale of shares when the Department had accepted the purchases of the shares in
question as genuine and in holding that the share transaction as investment and
directing the Assessing Officer to treat the sum as short/long term capital
gains and not business income.”
Bank – Valuation of closing stock – Securities held to maturity – Constitute stock-in-trade – Valuation at lower of cost or market value – Proper – Classification in accordance with Reserve Bank of India guidelines – Not relevant for purposes of income chargeable to tax
2.
Principal CIT vs. Bank of
Maharashtra; 410 ITR 413 (Bom): Date of order: 27th February, 2018 A. Y.: 2005-06
Principal CIT vs. Bank of
Maharashtra; 410 ITR 413 (Bom): Date of order: 27th February, 2018 A. Y.: 2005-06
Bank – Valuation
of closing stock – Securities held to maturity – Constitute stock-in-trade –
Valuation at lower of cost or market value – Proper – Classification in
accordance with Reserve Bank of India guidelines – Not relevant for purposes of
income chargeable to tax
The
assessee claimed that the held-to-maturity securities constituted
stock-in-trade and were to be valued at cost or market value whichever was
less. The Assessing Officer disallowed the claim on the ground that the
assessee had shown the value at cost for earlier assessment years and therefore
it could not change the valuation. The Commissioner upheld the decision of the
Assessing Officer. The Tribunal held that irrespective of the basis adopted for
valuation in earlier years, the assessee had the option to change the method of
valuation of its closing stock to the lower of cost or market value provided
the change was bonafide and followed regularly thereafter, that the
held-to-maturity securities were held by the assessee as stock-in-trade and that
the receipts therefrom were business income.
On appeal
by the Revenue, the Bombay High Court upheld the decision of the Tribunal and
held as under:
“The order
of the Tribunal to the effect that the securities held to maturity were
stock-in-trade and the income on sales had been offered to tax as business
income, was correct. Merely because the Reserve Bank of India guidelines
directed a particular treatment to be given to a particular asset that would
not necessarily hold good for the purposes of income chargeable to tax.”
Section 260A – Appeal to High Court – Power of High Court to condone delay in filing appeal – Delay in filing appeal by Revenue – General principles – No reasonable explanation for delay – Delay cannot be condoned
1. CIT vs. Lata Mangeshkar
Medical Foundation; 410 ITR 347 (Bom): Date of order: 1st
March, 2018 A. Ys.: 2008-09 and 2009-10
Medical Foundation; 410 ITR 347 (Bom): Date of order: 1st
March, 2018 A. Ys.: 2008-09 and 2009-10
Section
260A – Appeal to High Court – Power of High Court to condone delay in filing
appeal – Delay in filing appeal by Revenue – General principles – No reasonable
explanation for delay – Delay cannot be condoned
Revenue
filed notice of motion for condonation of delay of 318 days in filing appeal.
The Bombay High Court dismissed the notice of motion and held as under:
“i) Section 260A(2A) of the Income-tax Act, 1961
allows the Court to admit an appeal beyond the period of limitation, if it is
satisfied that there was sufficient cause for not filing the appeal in time. It
cannot be accepted that in appeal by the Revenue, the delay has to be condoned,
if large amounts are involved, on payment of costs. Each case for condonation
of delay would have to be decided on the basis of the explanation offered for
the delay, i.e., is it bona fide or not, concocted or not or does it evidence
negligence or not. The object of the law of limitation is to bring certainty
and finality to litigation. This is based on the maxim “interest reipublicae ut
sit finis litium”, i.e., for the general benefit of the community at large,
because the object is every legal remedy must be alive for a legislatively
fixed period of time. Therefore, merely because the respondent does not appear,
it cannot follow that the applicant is bestowed with a right to the delay being
condoned. The officers of the Revenue should be well aware of the statutory
provisions and the period of limitation and should pursue its remedies
diligently.
ii) There was no proper explanation for the delay
on the part of the applicant. In fact, the affidavit dated 16/09/2017 stated
that, the applicant handed over the papers to his subordinate, i.e., the Deputy
Commissioner. This was also put in as one of the reasons for the delay. This
even though they appeared to be a part of the same office. In any case, the
date on which it was handed over to the Deputy Commissioner was not indicated.
Further, the affidavit dated 16/09/2017 also did not explain the period of time
during which the proposal was pending before the Chief Commissioner of
Income-tax, Delhi for approval. The Chief Commissioner of Income-tax was also
an officer of the Department and there was no explanation offered by the Chief
Commissioner at Delhi or on his behalf, as to why such a long time was taken in
approving the proposal. In fact, there was no attempt to explain it. The
applicant being a senior officer of the Revenue would undoubtedly be conscious
of the fact that the time to file the
appeal was running against the Revenue and there must be an averment in the application
of the steps he was taking to expedite the approval process. Further, there was
no proper explanation for the delay after having received the approval from the
Chief Commissioner at Delhi on May 29, 2017. No explanation was offered in the
affidavits dated 16/09/2017 and for having filed the appeal on July 20, 2017,
i.e., almost after two months. The delay could not be condoned.”
Article 7 of India-Singapore DTAA – No further profit attribution to an Indian agency PE where the commission is paid at arm’s length.
4.
TS-74-ITAT-2019(Mum) Hempel Singapore
Pte Ltd. vs. DCIT A.Y.: 2014-15 Date of Order: 8th
February, 2019
TS-74-ITAT-2019(Mum) Hempel Singapore
Pte Ltd. vs. DCIT A.Y.: 2014-15 Date of Order: 8th
February, 2019
Article 7 of India-Singapore DTAA – No
further profit attribution to an Indian agency PE where the commission is paid
at arm’s length.
FACTS
Taxpayer, a foreign company incorporated in
Singapore, was engaged in the business of selling protective coating/paints for
marine industry. Taxpayer had appointed its wholly owned subsidiary in India (I
Co) as a sales agent for rendering sales support services in India. For such
services I Co was remunerated at cost plus mark-up as commission on sales
effected in India. There was no dispute on the ground that I Co constituted
dependent agency PE (DAPE) for the Taxpayer in India under Article 5(4) of
India-Singapore DTAA.
Taxpayer contended that the cost plus mark
up to I Co was at arm’s length. Further, since the income attributable to the
DAPE in India was equal to the commission paid to I Co, the resultant income in
India was NIL.
AO, however computed an ad hoc amount
of 25 percent of sales in India as the income attributable to the DAPE in
India. Thus, the difference between such income and commission paid to ICo was
held as taxable in India.
The DRP affirmed the order of the AO.
Aggrieved, Taxpayer appealed before the
Tribunal.
HELD
- A foreign company is liable
to be taxed in India on so much of its business profits as is attributable to
its PE in India.
- The commission paid by the
Taxpayer to I Co was accepted to be at arm’s length in the transfer pricing
analysis of I Co for the relevant year.
- Further, once the commission
is accepted to be at arm’s length in the hands of the agent, a different view
cannot be taken in the case of non-resident principal who pays the commission
to the agent. This principle has been enunciated by Delhi High Court in the
case of DIT vs. BBC Worldwide Ltd.3
- If basis the transfer
pricing analysis undertaken, the remuneration paid to the Indian agent is held
to be at an arm’s length, there is no need to attribute further profits to the
agency PE. The above principle has been confirmed by the Hon’ble Supreme Court
in the case of Morgan Stanley & Co. Inc4 and the Hon’ble Bombay High Court in the case
of SET Satellite Singapore Pte Ltd5. For this purpose, it is
of no relevance if the transfer pricing analysis of the commission paid is done
in the hands of the agent and not the principal.
3. ITA Nos. 1341 of
2010 & ors. dated 30.09.2011
4. 292 ITR 416
5. (2008) 307 ITR 205
Article 13(4)(c), Article 7 of India-UK DTAA – the development and supply of a technical plan or a technical design does not amount to ‘making available’ technical knowledge, experience, skill, knowhow or process to the service recipient; amount paid for such services does not qualify as FTS.
3.
TS-76-ITAT-2019 (Mum) Buro Happold
Limited vs. DCIT A.Y.: 2012-13 Date of Order: 15th
February, 2019
TS-76-ITAT-2019 (Mum) Buro Happold
Limited vs. DCIT A.Y.: 2012-13 Date of Order: 15th
February, 2019
Article
13(4)(c), Article 7 of India-UK DTAA – the development and supply of a
technical plan or a technical design does not amount to ‘making available’
technical knowledge, experience, skill, knowhow or process to the service
recipient; amount paid for such services does not qualify as FTS.
FACTS
Taxpayer, a company incorporated in the UK
was involved in the business of providing engineering design and consultancy
services. Taxpayer also rendered these services to its Indian affiliate, I Co.
During the year under consideration, I Co made payments to the Taxpayer towards
provision of consulting services as well as towards a cost recharge of common
expenses incurred by the Taxpayer on behalf of the group.
Taxpayer contended that the consultancy
services did not qualify as “Fee for included services (FIS)” under the treaty
in the absence of satisfaction of the ‘make available’ condition. Further, in
absence of a PE in India, such income is not taxable in India. Taxpayer also
contended that the amount received towards cost recharge is not taxable in India,
since such amount was a part of cost allocation made by the Taxpayer on a
cost-to-cost basis without any profit element.
1. Explanation to section 9(2) of the Act
provides that interest, royalty and FTS paid to a non-resident shall be deemed
to accrue or arise in India whether or not non-resident has a place of business
or business connection in India, and whether or not non-resident renders
services in India. The Tribunal appears to have not applied explanation to
section 9(2) on agency commission on the basis that it is business income and
not in the nature of interest, royalty or FTS.
AO observed that the services rendered by
the Taxpayer included supply of design/drawing. AO held that as per Article 13(4)of the India–UK DTAA,
payment received for development and transfer of a technical plan or technical
design qualifies as FIS, irrespective of whether it also makes available
technical knowledge, experience, skill, knowhow, etc. Further, the cost recharge expense which are
related to and are ancillary to the provision of consulting engineering
services held as FIS will bear same character as that of FIS and, hence,
taxable in India.
Aggrieved, the Taxpayer appealed before the
CIT(A) who upheld AO’s order. The CIT(A) concluded that provision of a specific
design and drawing requires application of mind by various technicians having
knowledge in the field of architectural, civil, electrical and electronic
engineering, and overseeing its implementation and execution at site in India
by the Taxpayer’s technical personnel, amounts to making available technical
services and hence the amount received would be in the nature of FIS.
Aggrieved, Taxpayer appealed before the
Tribunal.
HELD
- A careful reading of Article
13 of the India-UK DTAA suggests that the words “development and transfer
of a technical plan or technical design” is to be read in conjunction with
“make available technical knowledge, experience, skill, knowhow or
processes”. As per the rule of ejusdem generis, the words “or
consists of the development and transfer of a technical plan or technical
design” will take color from “make available technical knowledge,
experience, skill, knowhow or processes”.
- The technical
designs/drawings/plans supplied by the Taxpayer are project-specific and cannot
be used by ICo in any other project in the future. Thus, the Taxpayer has not
made available any technical knowledge, experience, skill, knowhow or processes
while developing and supplying the technical drawings/designs/plans to I Co.
- Reliance was placed on the
Pune Tribunal decision in the case of Gera Developments Pvt. Ltd.2,
in the context of the FTS Article under the India-US DTAA. In Gera’s case it
was held that mere passing of project-specific architectural drawings and
designs with measurements does not amount to making available technical
knowledge, experience, skill, knowhow or processes. The Tribunal also held that
unless there is transfer of technical expertise skill or knowledge along with
drawings and designs and unless the recipient can independently use the
drawings and designs in any manner whatsoever for commercial purpose, the
payment received cannot be treated as FTS.
2.
[(2016) 160 ITD 439 (Pune)]
ASSESSMENT OF BUSINESS MODEL FOR NON-BANKING FINANCIAL COMPANIES (NBFCs)
INTRODUCTION
India Incorporated continues its journey
with the next phase of adoption of Ind As by Non-Banking Finance Companies
in two phases commencing from the accounting period beginning 1 April, 2018.
Whilst there are several implementation and transition challenges, assessment
of the business model is an important area which is likely to impact most
NBFCs.
The initial plan of the MCA was to implement
Ind AS for the entire gamut of financial service entities covering NBFCs, banks
and insurance entities, which has been deferred by a year for banks and by two
years for insurance companies. Accordingly, the discussion in this article is
restricted only to NBFCs.
It may be pertinent to note that the RBI
had constituted a Working Group to deal with the various issues relating
to Ind AS Implementation by Banks which had submitted a detailed
report in September, 2015 which may be equally important and
relevant to NBFCs since there is a fair degree of similarity in their business
models and the same would be also taken into account in the course of our
subsequent discussions.
BUSINESS MODEL ASSESSMENT FOR FINANCIAL
ASSETS (INCLUDING THE MEASUREMENT AND CLASSIFICATION)
Assessing the business model for holding
financial assets is the anchor on which the entire accounting for financial
assets rests. Before going into the assessment of the business model for
financial assets it is necessary to understand as to what constitutes a
financial asset, since for NBFCs it represents the single most important
component in the Balance Sheet and how its initial measurement is determined.
Meaning and Nature of Financial Assets Ind AS-32 defines a financial asset as any asset that is:
a) Cash
b) An equity instrument of another entity
c) A contractual obligation to receive cash or
another financial asset from another entity or to exchange financial assets or
financial liabilities with another entity under conditions that are potentially
favourable to the entity.
As can be seen
above, an equity instrument needs to be evaluated from the perspective of an
issuer and the same is defined in Ind AS-32 as any contract that
evidences a residual interest in the assets of an entity after deducting all
its liabilities. Accordingly, from the point of view of the holder an
equity instrument is an asset / instrument in which the entity does not have a
right to receive a fixed contractual amount of principal or interest.
Accordingly, by
default any instrument which does not meet the definition of an equity
instrument from an issuer’s perspective would be regarded as a debt instrument
in which there is generally a contractual cash flow involved.
Initial Measurement of Financial Assets
As per Ind AS-109
an entity shall initially measure its financial assets at their
fair value plus or minus any transaction costs that are directly attributable
to the acquisition of the financial assets in case of those falling under the
FVTPL category (discussed later).
The best evidence of the fair value on initial
recognition is normally the transaction price. However, if the NBFC determines that the fair
value based on quoted prices in an active market for identical items, or
based on observable and unobservable inputs like interest rates, yields, credit
spreads etc., is different, the same shall be recognised as a day one gain or
loss. The common areas where such adjustments are required are staff and
related party loans and refundable premises deposits which carry preferential
interest rates or no interest rates.
Classification of Financial Assets
Under Ind AS-109,
understanding the business model under which financial assets are held is the
key criterion for determining their classification and subsequent measurement
and accounting. Ind AS-109 requires that all financial assets are required to
be classified under the following three categories for subsequent measurement
purposes:
a) Amortised Cost
b) Fair value through profit or loss (FVTPL)
c) Fair value through other comprehensive income
(FVTOCI)
The classification
depends upon the following two criteria and options elected by the entity:
a) The entity’s business model for
managing the financial assets, and
b) The contractual cash flow characteristics
of the financial assets.
Further, there are separate
classification requirements for:
a) Equity Instruments
b) Debt Instruments
Equity
Instruments
Since equity instruments
do not involve the right to contractually receive fixed and determinable cash
flows whether through principal or interest, their classification is more dependent
upon the intention of whether it is “held for trading” (discussed
later). However, in situations in which the instruments are not held for
trading, the entity needs to exercise an irrevocable choice as to whether
it wants to elect the FVTOCI option. A tabulation of the choices
available is depicted hereunder:
Accordingly, all
equity instruments which are “held for trading” are required to be mandatorily
classified as FVTPL, whereas for all other instruments, the entity can make an
irrevocable option to classify the same as FVTOCI or elect the FVTPL option
(discussed later). The following are some of the key points which are
relevant regarding the FVTOCI classification of equity instruments:
a) Classification as FVTOCI is not mandatory
though it cannot be used for equity instruments “held for trading”.
b) The classification needs to be made on initial
recognition and is irrevocable.
c) The election can be made on an instrument by
instrument basis and is not an accounting policy choice.
d) If the entity elects this option then all fair
value changes on the particular instrument, excluding dividends, are recognised
through OCI and no recycling is permitted to Profit and Loss even on disposal,
though the cumulative gain or loss at the time of disposal may be transferred
within equity to retained earnings.
e) There are no separate impairment requirements.
f) Ind AS-101 gives the entity a choice to
designate the equity instruments on the basis of facts and circumstances that
exist on the date of transition to Ind AS.
Debt Instruments
The classification of debt instruments is dependent upon the business
model which refers to how an entity manages its financial assets so as to
generate cash flows i.e. whether the entity will collect the cash flows
by holding the financial asset till maturity or sell those assets or both.
A tabulation of the choices available is depicted hereunder:
The following are some of the key points which are relevant regarding
the FVTOCI classification of debt instruments:
a) For debt instruments meeting
the above prescribed criteria, FVTOCI classification is mandatory, unless
FVTPL option is exercised as discussed below.
b) For such debt instruments, interest income,
impairment and foreign exchange changes are recognised in profit and loss
whereas all other changes are recognised directly in OCI.
c) On derecognition, cumulative
gains and losses previously recognised in OCI are reclassified from equity to
profit and loss.
d) Ind
AS-101 gives the entity a choice to designate the debt instruments on the basis
of facts and circumstances that exist on the date of transition to Ind AS.
Option to Designate Financial Assets at FVTPL
Irrespective of the satisfaction of any of the above conditions for
amortised cost or FVTOCL designation, Ind AS-109 provides an option to
irrevocably designate a financial asset as measured at FVTPL if doing so eliminates
or significantly reduces a measurement mismatch, which is also referred to as
an ‘accounting mismatch’, which would otherwise arise if a different basis
is followed.
Though this is an accounting policy choice, it is not required to be applied
consistently for all similar transactions. Ind AS-109 provides the following
guiding principles to designate financial assets as measured at FVTPL:
a) When the financial asset is
part of a hedging relationship.
b) When the financial assets,
financial liabilities or both share a common risk such as interest rate risk
that gives rise to offsetting changes as part of the entity’s ALM policy.
c) When a group of financial
assets is managed and performance is evaluated on a fair value basis such as
investment management, venture capital companies or stock broking companies.
Held for
Trading
Apart from the option to designate financial assets at FVTPL as
discussed above, another important consideration for FVTPL designation is
whether the financial assets are “held for trading” for which Ind AS-109 has
provided certain guiding principles which are briefly discussed hereunder:
a) The financial assets are
acquired ‘principally’ for the purpose of selling in the near term e.g. stock
in trade held by a stock broker.
b) The financial asset is part of a portfolio of
financial instruments that are managed together and for which there is evidence
of a recent actual pattern of short-term profit taking.
c) ‘Trading’ generally reflects active and
frequent buying/selling with the objective of generating a profit from
short-term fluctuations in the price. However, churning of portfolio for risk
management purposes is not necessarily ‘trading’ activity.
Business Model Assessment
Guiding
Principles
The following are some of the guiding principles laid down in Ind AS-109
which need to be considered whilst assessing and determining the business model
for managing financial assets, in the context of debt instruments, some of
which have also been reiterated in the RBI Working Group Report, referred to
earlier in the context of Banks which may also be pertinent to NBFCs:
a) Assessing the entity’s business model for
managing financial assets is a matter of fact and not merely an assertion. It
has to be based on relevant and objective evidence including but not limited to
how the performance of the business model and the financial assets held within
the same are evaluated by the entity’s key management personnel, their risks and
how the personnel are compensated.
b) The assessment is based on how groups of
financial assets are managed to achieve a particular business objective and is not
an instrument by instrument analysis, though at another level it is also not an
entity level assessment.
c) A few exceptions against the stated portfolio
objectives may not necessitate a change in the business model e.g. a few sales
out of a portfolio which is on the “hold to collect” business model. In such
situations what needs to be considered are factors like the frequency, timing
and reasons for the sales and expectations of the future sales activity.
d) Business model assessment is done based on
scenarios reasonably expected to occur and not on exceptional or extreme
situations such as ‘worst case scenario’ or ‘stress case scenario’.
Amortised Cost –
Business Model Test
Some of the key
features for assessing the business model test of holding on to a financial
asset for amortised cost determination areas are as under:
a) To evaluate the entity’s business model to
hold financial assets to collect contractual cash flows, the frequency,
value and timing of sales in prior periods and the reasons for such sales have
to be analysed. Also, future expectations about such sales is required
to be analysed. It is important to bear in mind that higher or lower sales than
the previous expectations is not a prior period error.
b) In real time business it is not always
practical to hold all the financial assets until their maturity, regardless of
the business model. Hence, some amount of selling/buying or so called ‘churning
of portfolio’ is expected and permitted. However, if more than infrequent
number of sales are made out of a portfolio or those sales are more than
insignificant in value, then there will be a need to assess and
validate how such sales are consistent with the business model whose objective
is to collect contractual cash flows.
It would be useful
at this stage to analyse certain common situations where the business model
test of holding would not fail or fail from a practical perspective, before
getting into the assessment of the subsequent criteria of the contractual cash
flow test:
|
Circumstances when the business model test would not |
Circumstances when the business model test may generally fail |
|
Infrequent sales to meet unforeseen funding needs. |
Holding |
|
Purchases |
Loans |
|
Sales |
Portfolio |
|
Sales |
|
Amortised Cost –
Cash Flow Characteristics Test
Another equally
important test or criterion to be met for classification of financial assets as
subsequently measured at amortised cost is the characteristics of the cash
flows arising from the financial asset. Ind AS-109 provides that for this
purpose, the contractual terms of the financial asset should give rise on
specified dates to cash flows that are solely payment of principal and the
interest on the principal outstanding (SPPI).
Ind AS-109 defines
interest, for the purpose of the above assessment, as consideration for the
following:
a) the time value of money.
b) credit risk associated with the principal
amount outstanding during a particular period of time.
c) other basic lending risks (such
as liquidity risk) and costs (such as administration for holding
the financial asset).
d) profit margin.
Ind AS-109 defines
principal, for the purpose of the above assessment, as fair value of
the financial asset at the date of initial recognition. This initial amount may
change subsequently if there are repayments of the principal amount.
For the purposes of
the above assessment, principal and interest payments should be in the currency
in which the financial asset is denominated. The following are some of the practical
considerations which are relevant for assessing the SPPI test:
a) Modified (or imperfect) Time Value of Money
Element: This kind of situation arises when the financial asset’s interest
rate is reset periodically and the tenor of rate (benchmark rate) does not
match the tenor of interest period e.g. interest rate for a term loan is reset
monthly but rate is reset to one year rate. In such cases, entity will have to
assess whether the cash flows represent SPPI. This has to be demonstrated as
follows:
-
Compute (undiscounted) cash
flows as if benchmark rate tenor matches interest period and compare it with
cash flows (undiscounted) as per contractual terms (i.e. tenors do not match).
- Above computation has to be
done for entire period of the financial asset and hence consideration of facts
that affect future interest rates and estimation would be required.
- If the cash flows under
above two scenarios are significantly different then the modified time value of
money element does not represent SPPI.
b) Rates set by Regulators: These shall be
considered as proxy for time value of money element, provided it is set by
broadly considering the passage of time element and does not introduce exposure
to risks and volatility inconsistent with basic lending arrangement.
c) Pre-payment or extension options pass
the SPPI test, provided that the repayment amount substantially represents
unpaid principal and interest accrued as well as reasonable compensation for
early payment or extension of payment period.
d) Floating or Variable Rates: Provisions
that change the timing or amount of payments of principal and interest fail the
SPPI test unless it is a variable interest rate that is a consideration for the
time value of money and credit risk and other basic lending risk associated
with the principal outstanding and the profit margin.
Key
Implementation and Transition Challenges
The current requirements for classification and accounting for
investments by NBFCs were quite simple and hence shifting over to an Ind AS
regime is expected to present a fair share of challenges both in initial
transition and on-going implementation. Further, though all Ind AS requirements
are required to be applied retrospectively on the date of transition, Ind
AS-101 provides certain exceptions thereto, one of them being that the entity
should assess the business model criteria on the basis
of facts and circumstances on the date of transition. Finally, the measurement
basis for all financial assets on initial recognition would henceforth be at
the fair value for which also Ind AS-101 provides for prospective application
on or after the date of transition to Ind AS. In spite of the aforesaid
exemptions from retrospective application, NBFCs are likely to face certain
transition and on-going implementation challenges, which are briefly discussed
hereunder:
a) Treatment of existing
investments classified as current: As per the existing AS-13, all
investments that by their nature are readily realisable and are intended to be
held for not more than one year from the date on which they were made, are
regarded as current investments. Under Ind AS, all such investments may not
automatically meet the held for trading criteria especially in respect of
equity instruments, and especially if these are continuing for periods in
excess of one year on the date of transition. Accordingly, a fresh evaluation
of the purpose, nature and intention of such investments would need to be
undertaken to categorise them under the appropriate bucket. Also,
investments in mutual funds would generally fall under the FVTPL
category based on the “look through” test since there are no defined
contractual cash flows even in case of fixed maturity plans.
b) Documentation and business
model assessment: – The classification requirements based on the criteria
discussed above may not be straitjacketed in all cases and would need to be
documented in a fair degree of detail based on the activity level and type of
business of the NBFC. The existing risk management and ALM policies especially
in case of smaller and unlisted entities would need to be recalibrated to
capture the various scenarios under Ind AS.
c) Fair value determination:
The initial measurement of all financial assets at fair value would be a game
changer for many NBFCs. Whilst initially the transaction price would be the
fair value in many cases, this would need to be carefully evaluated in the case
of transactions with related parties, transactions not on an arm’s length basis
or transactions under duress, since in such cases the fair value at which other
market participants enter into the transactions would need to be considered which
would represent a day one gain or loss. Finally, the on-going assessment of the
fair value especially in case of financial assets which are not readily
tradeable or quoted on an active market would present challenges especially in
cases where there are not many observable inputs to determine the fair value,
since it could be based on significant judgements which more often than not
could be biased. This would make it inherently difficult for a comparison
between entities and also involve significant costs and efforts which may not
be always commensurate with the benefits.
d) Link with liquidity crisis:
The current liquidity crisis which has engulfed many NBFCs may necessitate
selling of portfolios of financial assets the impact of which on the continued
assessment of the business portfolio would need a closer assessment requiring a
reclassification of debt instruments and loans from amortised cost to FVTOCI
for subsequent measurement.
e) Judgements: Finally, the
assessment of the business model involves significant judgements and
assumptions which need to be constantly evaluated by the key management
personnel on several matters like determining the frequency and volume of sales
so as to rebut the business model of held to sale, whether interest rates reset
is on time value and the other criteria discussed earlier, the manner of
determining the pricing for financial assets and the inputs involved therein
since all of this would ultimately impact the business model assessment and the
consequential classification and measurement of financial assets. It may be
noted that the RBI working group has recommended the fixing of certain
thresholds to determine as to when the volume of sales could be considered frequent
so as to rebut the business model of “held to sale” criteria.
CONCLUSION
The above
evaluation is just the tip of the iceberg on a subject for which there may not
always be straitjacketed answers. However, the business model assessment is
here to stay and it would impact the way the financial statements are evaluated
and also impact the auditors and prove to be a bonanza for specialists to
develop fair values, who could laugh all the way to the bank!
Tax Planning/Evasion Transactions On Capital Markets And Securities Laws – Supreme Court Decides
Background
Carrying out
transactions on stock market to avoid tax is practiced. Using capital market
for tax evasion has recently been in news, for example, cases involving
long-term capital gains. A person may, for example, sell shares and book exempt
gains and soon thereafter buy such shares again from the market. At times, such
shares are sold within the family/group and therefore after some time,
transferred to the seller. In particular, what has also been alleged is that
transactions are carried not only with the sole purpose of generating capital
gain but also for manipulating volume and price on stock exchanges. The
question whether such transactions will get concessional tax treatment in tax
assessments is of course an important question. However, in this article, the
question is : how are such transactions treated under the Securities Laws?
Take a common
modus operandi to have been typically employed in the so-called long-term
capital gain transactions. A small listed company with low or non-existent
operations is used. A large quantity of shares is issued by way of preferential
allotment. The quantity of shares may be further increased through bonus issue.
During the period of one year for which such shares have to remain locked-in
(which is also the period of holding for availing of long term capital gains
benefits), the price of the shares is artificially inflated by a small group of
persons who trade within themselves at progressively higher prices. At the end
of this period, by which time the price of the shares is many times (often
50-100 times) more than the original price, the preferential allottees sell the
shares at such higher price. The initial buyer is alleged to have organised all
this. The preferential allottee thus obtains tax free long-term capital gains
(Finance Bill 2018 though seeks to charge 10% capital gains tax). However, in
the process, the capital market system is abused. Fake turnover at artificial
prices is recorded. If unchecked, this not only harms the credibility of the
capital markets but can also result in loss to investors. Several provisions of
Securities Laws specifically prohibit such artificial trading and manipulation.
There were
decisions of the Securities Appellate Tribunal that held, in effect, that the
mere fact that transactions were undertaken for purposes of obtaining tax
benefits, penal action will not necessarily follow. However, while such
decisions could be arguably held to be limited to their facts, it still leaves
an uneasy feeling.
Now, the
Supreme Court has given a detailed ruling. While we will consider the facts
before the Court and also what the Court said, it is important to note that the
Court did not specifically rule on the intent tax planning or even evasion in
such transactions. It did not consider the question whether the capital markets
can or cannot be used for such purposes. It, however, dealt with violation of
Securities Laws that often takes place in such cases and whether and when they
can be said to fall foul of Securities Laws. Hence, the decision has direct
relevance.
Facts of the
case
There were
several parties in the case before the Court but they fell in two broad
categories – the parties who carried out the transactions and the stock brokers
through whom such transactions were carried out.
The parties
entered into transactions that resulted in some persons making profits and
others making losses. This was said to have been done by entering into
transactions in the following manner. In the futures and options markets, one
party (or group) bought futures (or similar derivatives) from the other party
through the stock market mechanism at a particular price. These same parties
then entered into reverse transactions at a higher price, thus resulting in one
side earning profits while the other side was making losses. Take an example. A
transaction in futures of scrip X could be carried out by Mr. A purchasing 1000
futures at a price Rs. 100 each from Mr. B. This transaction would later be
reversed by selling such 1000 futures at a price or Rs. 140. Mr. A would earn a
profit of Rs. 40000 while Mr. B would make a loss of about the same amount.
These
transactions would be synchronised well and rarely, if at all, any other party
would – or even could – transact. Effectively, these persons would be almost
the only persons trading in such scrip.
SEBI found out
what was happening and penalised the parties and the brokers. The parties were
penalised for carrying out artificial trading and price manipulation. The stock
brokers, who are expected to act as gate keepers to the capital market and
exercise due diligence, were penalised for allowing such transactions to happen
through them.
The question
before the Supreme Court was whether such transactions violated the Securities
Laws and whether the parties and their stock brokers could be so punished ?
Ruling of
Court
The Supreme
Court had to deal with several aspects. The Court had to focus on how the
capital markets get affected by such transactions. Even if the purpose was
legitimate, the issue was whether the transactions contravened the Securities
Laws, if so, penal action would follow.
In particular,
it elaborately discussed the issue of synchronised trading. This is trading
where buyers and sellers match their transactions very closely in terms of
timing, volume and price. Thus, the net result is generally that, though the
market is open to all, the transactions get executed between connected parties.
The Court, discussed in detail certain decisions of SAT and ruled that
synchronised trading is not ipso facto illegal or violative of
Securities Laws.
However, it
noted that on the facts before it, the transactions were manipulative. The
price at which purchases and sales of futures and other derivatives was carried
out was not market driven but was pre-determined and therefore artificial. The
buying and selling price of such derivatives are usually related to the
underlying price of the shares/index with which they are linked. While of
course parties can buy at prices far away from such underlying price of the
scrip/index, if their judgement of the future tells them so, the Court found
that this was not so on the facts before it. The purchases and sales were
carried out at widely different prices on the same day and between the same
parties in a synchronised manner in terms of timing and volume. The conclusion
was only that the transactions for all practical purposes were bogus.
Interestingly,
a curious argument was advanced. Whether trading on the derivatives markets
could affect – and hence manipulate – the trading and price in the cash market?
For example, by manipulating say, the price of futures in Scrip X, can the
price of trading of Scrip X in the spot/cash market be affected? The SAT had
held that this was generally not possible in the type of transactions involved
in the present case. This was one of the reasons why SAT overturned the order
of Securities and Exchange Board of India. However, it is submitted the Supreme
Court, rightly pointed out that this was not the issue at all. It was not
SEBI’s case that the transactions in the derivatives markets were carried out
to manipulate the price in the spot/cash markets. SEBI’s case was that the
trading in the derivatives markets itself was artificial, bogus and
manipulative and this by itself was a violation of Securities Laws.
The Court also
rejected the argument that in case of futures, no delivery took place and hence
the transactions did not violate the provisions which prohibit dealing without
change of beneficial interest.
The Court
further described the meaning of unfair trade practices in securities particularly
in the context of the case. It stated, “Contextually
and in simple words, it means a practice which does not conform to the fair and
transparent principles of trades in the stock market. In the instant case, one
party booked gains and the other party booked a loss. Nobody intentionally
trades for loss. An intentional trading for loss per se, is not a
genuine dealing in securities. The platform of the stock exchange has been used
for a non- genuine trade. Trading is always with the aim to make profits. But
if one party consistently makes loss and that too in preplanned and rapid
reverse trades, it is not genuine; it is an unfair trade practice.”. The
Court pointedly noted that, “The non-genuineness of these transactions is
evident from the fact that there was no commercial basis to suddenly, within a
matter of minutes, reverse a transaction when the underlying value had not
undergone any significant change”. Once it held this, it was not difficult to
take the argument to the logical conclusion to hold that the trades were
violative of Securities Laws and uphold the penal action by SEBI.
The Court also
rejected the ruling of SAT that “only if there is market impact on account of
sham transactions, could there be violation of the PFUTP Regulations”. The
court held that fraudulent and unfair trade practices have no place whatsoever
in the capital market.
As far as the
stock brokers were concerned, the Court held that they could not be held liable
unless their own involvement could be demonstrated or it could be shown that
they acted negligently or in connivance with such traders.
Thus, the Court
upheld the penal actions against the traders but not against the stock brokers.
Tax
planning/avoidance/evasion through capital markets
The Court
steered clear of giving a specific and direct ruling on whether tax planning
through transactions in capital markets was by itself violative of Securities
Laws. However, it is submitted that it has given enough guidance on what the
approach should be. As discussed above, transactions that are manipulative or
fraudulent or apparently fake will by themselves be violative of Securities
Laws.
Conclusion
The decision
makes it clear that SEBI can examine transactions in light of how they are
carried out and whether they are violative of Securities Laws, irrespective of
whether or not the objective was tax planning, etc. Some tests are given on
whether such transactions would be held to be violative. The penal action under
Securities Laws will be in addition to any findings and consequences under tax
law.
Right to Information
PART A I DIRECTIONS OF SUPREME COURT
– Fee For RTI Application Should Not
Exceed Rs.50/, Rs. 5/- Per Page, Motive Need Not Be Disclosed
The Supreme
Court on March 20, 2018 capped the fee charged by high courts for responding to
queries filed under the RTI Act at Rs. 50 per application, bringing cheers to
activists seeking information under the transparency law.
The bench
comprising Justices A. K. Goel, R. F. Nariman and U. U. Lalit also asked the
high courts not to force applicants to disclose the reason for seeking
information under the Right to Information law.
On the fee: “We
are of the view that, as a normal Rule, the charge for the application should
not be more than Rs.50/- and for per page information should not be more than
Rs.5/-. However, exceptional situations may be dealt with differently. This
will not debar revision in future, if the situation so demands.”
On disclosure
of motive: With regard to the requirement of disclosure of motive for seeking
information, the Court ruled, “No motive needs to be disclosed in view of the
scheme of the Act.
On CJ’s
permission for disclosure of information: The Court noted that the requirement
of seeking permission of the Chief Justice or the concerned Judge for
disclosure of information “will be only in respect of information which is
exempted under the Scheme of Act.”
On transfer of
application to another public authority: The Court opined that while normally
the public authority should transfer the application to another public
authority if the information is not available, the mandate may not apply “where
the public authority dealing with the application is not aware as to which
other authority will be the appropriate authority”.
On disclosure
of information on matters pending adjudication: With regard to the Rules
debarring disclosure of information on matters pending adjudication, the Court
clarified that “the same may be read consistent with Section 8 of the Act, more
particularly sub-section (1) in Clause (J) thereof, bench passed the order on a
batch of petitions challenging the RTI rules of various high courts, and other
authorities like the Chhattisgarh Legislative Assembly, which imposed
exorbitant fees for application and photocopying.
Advocate
Prashant Bhushan, the counsel for NGO Common Cause, which was one of the
petitioners, said exorbitant fee was charged to disincentivise the general
public from seeking information. He also said the fee should not act as a
deterrent for information seekers.
The petition
filed by the NGO claimed that the Central Information Commission had repeatedly
asked the Allahabad High Court to modify its RTI rules, but its pleas were
ignored.
The Allahabad
High Court was charging Rs. 500 for a reply under the RTI Act, the petition
claimed.
A similar plea
was filed against the Chhattisgarh High Court which had dismissed a petition of
an applicant Dinesh Kumar Soni, and imposed a cost of Rs 10,000 on him for
seeking information.
In his
petition, Soni had challenged the Rule 5 and Rule 6(1) of the Chhattisgarh
Vidhan Sabha Secretariat Right to Information (Regulation of fees and costs)
Rules 2011, which require that a person making an application u/s. 6(1) of the
RTI Act was required to pay Rs. 300.
PART
B RTI ACT, 2005
– India’s
Right to Information in a mess
Over the years, the pendency of cases under
Right to Information (RTI) Act has shown an upward trend with close to two lakh
pending second appeal and complaint cases been reported under the Act across
the country.
According to the latest report “State of
Information Commissions and the Use of RTI Laws in India (Rapid Review 4.0)” by
Access to Information Programme, Commonwealth Human Rights Initiative (CHRI), a
New Delhi-based NGO, there were 1.93 lakh pending second appeal and complaint
cases in 19 Information Commissions at the beginning of this year as compared
to 1.10 lakh cases pending across 14 Information Commissions in 2015. The
report based on annual reports and websites of Information Commissions was
released at the Open Consultation on the Future of RTI: Challenges and
Opportunities held in New Delhi in the second week of March.
Maharashtra (41,537 cases), Uttar Pradesh
(40,248), Karnataka (29,291), Central Information Commission (23,989) and
Kerala (14,253) were the top five Information Commissions that accounted for 77
percent of the overall pendency. Pendency in Bihar, Jharkhand and Tamil Nadu
among others was not publicly known while Mizoram State Information Commission
(SIC) received and decided only one appeal case in 2016-17, said the report,
adding that SICs of Tripura, Nagaland and Meghalaya had no pendency at all. The
Central Information Commission and nine SICs (Gujarat, Haryana, Jammu &
Kashmir, Kerala, Maharashtra, Nagaland, Odisha, Uttarakhand and Uttar Pradesh)
displayed updated case pendency data on their websites.
Referring to RTI applications, the report
said that around 24.33 lakh RTI applications were filed across the Central and
14 state governments between 2015-17. The report mentioned that it was not
possible to get accurate figures in the absence of annual reports from several
Information Commissions. By a process of extrapolation it may be conservatively
estimated that up to 50 lakh RTI applications would have been submitted by
citizens during the same period, the report added.
About 24.77 lakh RTI applications were
reported in 2015 and it was based on data available for the years 2012-14
(where data was taken for the latest year for which an annual report was
available). The figure for 2015-17 appeared to be a little less but that might
be due to the absence of figures from several jurisdictions where RTI was used
more prolifically, added the report. Furthermore, around 2.14 crore RTI applications
were filed across the country since October, 2005, as per the data published in
the annual reports of Information Commissions accessible on their websites, the
report said, adding that if data was published by all Information Commissions
the figure might have touched 3 to 3.5 crores. Less than 0.5 percent of the
population seemed to have used RTI since its operationalisation, it further
added.
Despite the absence of their latest annual
reports, the Central Government (57.43 lakhs) and the state governments of
Maharashtra (54.95 lakhs) and Karnataka (20.73 lakhs million) continue to top
the list of jurisdictions receiving the most number of information requests.
Gujarat (9.86 lakhs) recorded more RTI applications than neighbouring Rajasthan
(8.55 lakhs) where the demand for an RTI law emerged from the grassroots.
Despite having much lower levels of literacy, Chhattisgarh (6.02 lakh) logged
more RTI applications than 100 percent literate Kerala (5.73 lakhs). Despite
being small states, Himachal Pradesh (4.24 lakhs), Punjab (3.60 lakhs) and
Haryana (3.32 lakhs) registered more RTI applications each than the
geographically bigger state of Odisha (2.85 lakhs). Manipur recorded the lowest
figures for RTI use at 1,425 information requests between 2005-2017. The SIC
did not publish any annual report between 2005 and 2011 and is yet to release
the report for 2016-17.
While the Central government, Andhra Pradesh
(undivided), Assam, Goa, Jammu & Kashmir, Kerala and Uttarakhand have
recorded an uninterrupted trend of increase in the number of RTI applications
received, Himachal Pradesh, Punjab, Sikkim, Nagaland and Tripura have reported
a decline in the number of RTI applications received in recent years and the
reasons for the drop in numbers, according to the report, requires urgent
probing. Arunachal Pradesh, Chhattisgarh, Haryana, Meghalaya, Gujarat, Mizoram,
Odisha and West Bengal have recorded a mixed trend where the RTI application
figures have fluctuated over the years. After seesawing in the initial years, Arunachal
Pradesh has reported a more than 82 percent decline in the number of RTI
applications received in 2015 against the peak reached in 2014. Mizoram also
showed a declining trend of 23 percent in 2016-17 after the peak scaled during
the previous year. West Bengal’s figures rose and dipped to less than 62
percent of the peak reached in 2010 but a rising trend was reported in 2015.
Referring to headless and non-existent SICs,
the report highlighted that there was no State Chief Information Commissioner
(SCIC) in Gujarat since mid-January 2018. While Maharashtra SIC was headed by
an acting SCIC since June 2017, there was no Information Commission in Andhra
Pradesh (after Telangana was carved out in June 2014). The State government had
assured the Hyderabad High Court that it would soon set up an SIC. More than 25
percent (109) of 146 posts in the Information Commissions were lying vacant.
Against 142 posts created in 2015, 111 Information Commissioners (including
Chief Information Commissioners) were working across the country. 47 percent of
the serving Chief Information Commissioners and ICs were situated in seven
states: Haryana (11), Karnataka, Punjab and Uttar Pradesh (9 each), Central
Information Commission, Maharashtra and Tamil Nadu (7 each). Six of these
Commissions were saddled with 72 percent of the pending appeals and complaints across the country.
The report further referred that 90 percent
of the Information Commissions were headed by retired civil servants and more
than 43 percent of the Information Commissioners were from civil services
background. This is the trend despite the Supreme Court’s directive in 2013 to
identify candidates in other fields of specialisation mentioned in the RTI Act
for appointment, argued the report. The report further mentioned that only 8.25
percent of the serving SCICs and ICs were women. Only 10 percent (8 out of 79)
of the Information Commissioners serving across the country were women. Three
of these women ICs were retired IAS officers while two were advocates and two
had a background in social service and education. One woman IC in Punjab had a
background in medicine.There were nine women ICs in 2015. The report said that
the websites of SICs of Madhya Pradesh and Bihar could not be detected on any
internet browser and the SICs of Madhya Pradesh and Uttar Pradesh had not
published any annual report so far. Jharkhand and Kerala SICs each had six
pending annual reports and Punjab had five while Andhra Pradesh had four
pending reports.
(Source: http://www.milligazette.com/news/16188-india-s-right-to-information-in-a-mess)
PART C INFORMATION
ON & AROUND
– Focus On
“Act Rightly” As Much As Right To Information Act, Says PM Modi
Twelve years after it was set up under the
Right To Information (RTI) Act, the Central Information Commission has a new
address — a five-storey environment friendly building in south Delhi, fitted
with information technology and video conference facilities. Earlier, the
highest appellate authority for RTI complaints used to function from two rented
accommodations.
“The greatest asset of a democracy is
an empowered citizen. Over the last 3.5 years we have created the right
environment that nurtures informed and empowered individuals,” said Prime
Minister Narendra Modi who inaugurated the new premises.
At a time when activists have accused the
government of holding back information, PM Modi said like the RTI Act, serious
attention should be paid to “Act Rightly”.
“Many times it has been seen that some
people misuse the rights given to the public for personal gains. The burden of
such wrong attempts is borne by the system”.
Activists say the government is yet to walk
the talk on transparency, and anti-corruption laws await proper implementation.
A Lokpal is yet to be appointed, four years
after the law was put in place. The chief information commissioner was
appointed by the present government after activists went to court. Of the 11
posts of information commissioner, four are vacant and four more retire this
year.
(Source:https://www.ndtv.com/india-news/focus-on-act-rightly-as-much-as-right-to-information-act-says-pm-modi-1821017)
u Ex-corporators
seek right to pursue RTI
Eight former corporators of the Thane
Municipal Corporation (TMC) have filed a criminal writ petition in the Bombay
high court seeking quashing of complaints registered against them by the Thane
police commissioner at the behest of the corporation and its commissioner. The
corporators have alleged that the complaint lodged against them was aimed at
discouraging them from seeking information under Right To Information (RTI) Act
about unauthorised and illegal construction being carried on in the municipal
limits of the corporation.
According to the petition filed by Sanjay
Ghadigaonkar and seven others, all of whom were former corporators in TMC, a
complaint was lodged against them by the Thane police as they had been seeking
information under RTI. The petition has alleged that they had been discouraged
by the corporation from seeking the information, but when it did not deter
them, the police complaints were lodged. The complaint has alleged that the
corporators were misusing the RTI Act for vested interests.
The petition also points to the fact that in
the recent session of the Vidhan Sabha, the chief minister Devendra Fadnavis
had clarified that there was no restriction on anyone from seeking information
under RTI and they cannot be prosecuted for seeking the information, but the
corporation had not heeded the same but had lodged complaints with the police
against them.
The petition while seeking an early hearing
has also prayed for restraining orders against the police from taking any
action against them as well as quashing of the complaints. The petition is
expected to come up for hearing in due course.
RTI shows Left leader’s murderer received
parole every month for 3 yrs.
A Right To Information (RTI) reply has
revealed that CPI(M) leader and murder convict P.K. Kunhanandan was given 15
days parole every month since 2015.
Kunhanandan, one of the convicts in the
murder case of slain leader T.P. Chandrasekharan, is serving a life-term for
the same.
The reply, sought by slain leader’s wife K.
K. Rema, also stated that barring two months (October and November 2017), the
convict had got parole repeatedly from 2015 to 2018.
Chandrasekharan, a local leader of CPI (M)
at Onchiyam in Kozhikode district, left the party in 2009 to form a new one,
Revolutionary Marxist Party (RMP); however, his political journey was cut
short, as he was brutally murdered on May 4, 2012, after his party won
considerable number of seats in a local body elections.
Fifteen CPI (M) workers were found guilty in
the case.
Rema is now reportedly considering legal
action against the state government.
(Source:http://www.business-standard.com/article/news-ani/kerala-rti-shows-left-leader-s-murderer-received-parole-every-month-for-3-yrs-118031900030_1.html)
– RTI being
strangled due to Maha’s neglect: Former CIC Gandhi
Former Central Information Commissioner
Shailesh Gandhi today said that the Right to Information Act was being
“strangled” due to the neglect of the state government.
Gandhi has written a letter to Chief
Minister Devendra Fadnavis asking him to fill the vacancies in the Information
Commission in the state.
“RTI is slowly being strangled in
Maharashtra by not appointing information commissioners. In Maharashtra, there
is vacancy of one Chief Information Commissioner and three commissioners. These
are not being filled despite repeated reminders,” Gandhi stated in his
letter to Fadnavis.
Gandhi said that the pendency at all the
commissions was now alarming and it was in turn killing the objective of the
Act which was transparency.
Sharing the figures of 31,474 pending cases
in four regions, Gandhi said, “Nashik region has 9,931 pending cases, Pune
has 8,647 cases, Amravati 8,026 cases and Mumbai(HQ) has 4,870 cases pending.
These cases are languishing for the want of information commissioners.”
His letter stated that it was a serious
matter and needed immediate attention and claimed that failure to do so would
allow the state to “succeed” in making the RTI Act
“redundant”.
“It will continue as a haven for
rewarding retired bureaucrats and other favourites. It will be an expense
account with no benefit to its citizens,” Gandhi wrote.
He said that Maharashtra was one of the
first states to enact the law when it came into effect in October, 2005 but the
state was now “reeling from the worst levels of pendency in years”.
(Source:http://www.business-standard.com/article/pti-stories/rti-being-strangled-due-to-maha-s-neglect-former-cic-gandhi-118031900500_1.html)
– Agents of
RTI justice, information commissions are its biggest bottleneck
A crippling staff shortage and vacancies in
crucial positions at the central and state information commissions is severely
undermining the Right to Information (RTI) Act, a study by NGOs Satark Nagrik
Sangathan (SNS) and Centre for Equity Studies (CES) has found.
According to the study, ‘Report Card on the
Performance of Information Commissions in India’, which looked at 29
information commissions, including the central information commission (CIC),
and is based on data gathered via 169 RTI pleas, the failure of the central and
state governments to proactively put out information in the public domain is
the second biggest bottleneck in the effective implementation of the Act.
The CIC and state information commissions
(SICs) are almost all functioning much below their sanctioned strength. The
CIC, for example, is four short of its sanctioned strength of 10 information
commissioners. Of these, four are set to retire this year.
Also, the Maharashtra, Nagaland and Gujarat
SICs are headless in the absence of a chief information commissioner. Kerala’s,
meanwhile, has only one information commissioner, out of a sanctioned strength
of five.
The information commissions serve the role
of watchdogs in the implementation of the RTI Act, approached by petitioners
when their pleas are either not accepted by a government agency, refused, or
elicit inadequate information.
According to the report, in 2016, the number
of appeals and complaints pending with 23 SICs stood at the “alarming figure of
1,81,852”, growing 9.5 per cent to 1,99,186 at the end of October 2017. The
Mizoram and Sikkim SICs had zero pendency as of October 2017, while information
wasn’t available for other states.
“The assessment found that several ICs were
non-functional or functioning at reduced capacity, as the posts of
commissioners, including that of the chief information commissioner, were
vacant during the period under review,” said the study, which covered the
period from January 2016 to October 2017.
According to the report, Telangana, Andhra
Pradesh and Sikkim had spells where the SICs didn’t function at all, while the
West Bengal SIC did not hear any complaints or appeals for nearly 12 months.
Not surprisingly, the date of resolution for a complaint/appeal filed with West
Bengal SIC in November 2017 was estimated at 43 years later by the NGOs (see
graphic).
Estimated time required for disposal of an
appeal/complaint filed on November 1, 2017.
In a situation of this kind, people have “no
recourse to the independent appellate mechanism prescribed under the RTI Act”,
the report pointed out.
“The transparency in public authorities
completely diminishes. They have no fear or accountability when this happens,”
said RTI activist Subhash Agrawal.
“The poorest of the poor use RTI for
information regarding basic entitlements such as ration cards. If it takes 5
years to get a response then what is the point? Justice delayed is justice
denied,” said Anjali Bhardwaj, co-convenor of the National Campaign for
People’s Right to Information and a founding member of the Satark Nagrik
Sangathan. There are outliers, of course. The SICs for Mizoram and Sikkim
disposed of appeals/complaints in less than a month.
The political side of it
State chief information commissioners, as is
the case with the central chief information commissioner, are appointed by the
government in consultation with the opposition. Agrawal said while not
appointing chiefs was often a government bid to dilute institutions, delayed
appointments resulted several times from a lack of coordination between the
chief minister and the leader of the opposition. “Mayawati and Mulayam Singh
didn’t see eye to eye, so it took a long time for the UP state commission to be
set up,” he added.
“Not having a chief (information
commissioner) is legally unsound. It is the commissioner who runs everything,
while everyone else is supposed to support him,” said Habibullah.
When the last resort crumbles:
The multitude of vacancies is a factor, of
course, but experts pointed out that it was the lack of transparency on the
part of the central and state governments that forced people to file RTI pleas
even for the most basic information.
“The government is not doing its job of suo
motu disclosure u/s. 4(1)(B) of the RTI Act, under which it has to update
information every 120 days,” said Wajahat Habibullah, the first chief
information commissioner.
Agrawal said
“more proactive disclosures by the government can cut the number of RTI pleas
filed by 70%”.
The ‘inexplicable’ overnight drop
The report pointed out how the CIC stated in
an RTI reply that the total number of appeals and complaints pending with it
stood at 28,502 as on 31 December 2016. However, according to its website, only
364 cases were pending with it on 1 January 2017, it added, terming the fall
“inexplicable”.
The returned complaints
Apart from the pendency, concerns have also
been raised about the high number of appeals and complaints returned to
petitioners, several for unspecified reasons, with many people wondering
whether this was a ploy to project lower pendency rates.
“This is extremely problematic as people,
especially the marginalised, reach the commissions after a great deal of
hardship and a long wait,” said the report.
“The number is so high that I suspect cases
were not rejected on solid grounds,” Habibullah added.
Bhardwaj said they had found instances where
cases were wrongfully returned.
She added that when the commissions returned
complaints, it “fails to perform its legal duty as a friend of the petitioner”.
“Many people are unlettered but they do have the right to information,” she
said.
The penalties, or the lack thereof
According to the RTI Act, the information
commissions can impose penalties of up to Rs 25,000 against public information
officers (PIOs) for violations of the RTI Act. However, according to the
report, penalties were rare.
The report added: “Penalties were imposed
in… only 4.1% of the cases where penalties were imposable!”
(Source:https://theprint.in/governance/agents-of-rti-justice-information-commissions-are-its-biggest-bottleneck/41229/)
– Govt
Orders Voluntary Info Disclosure Under RTI
With most of the departments and authorities
in the state yet to disclose voluntary information under Right to Information
(RTI) Act, the government on Friday directed all the concerned officials to
ensure the disclosures as per the transparency law within a week.
“With a view to maintaining conformity with
the provisions of Section 4 of J&K Right to Information Act, 2009, from
time to time, instructions have been issued, impressing upon all the
Administrative Secretaries, Heads of the Departments and Public Authorities of
the State to ensure effective implementation of the provisions of Section 4 of
the J&K RTI Act in letter and spirit by hosting all requisite information
on the official websites and updating them periodically,” reads a circular
issued by the government.
“However, it is being constantly observed
that some of departments are not implementing the provisions of Section 4 of
the Jammu & Kashmir Right to Information Act, 2009 and some of them have
yet not created their departmental websites.”
The J&K State Information Commission has
been persistently requesting for ensuring implementation of the provisions of
the J&K Right to Information Act, it said.
“Therefore all such departments as have not
so far created their own departmental websites are impressed upon to do so
within a fortnight and host the requisite material on the websites under the
provisions of Jammu & Kashmir Right to Information Act, 2009, on regular
basis. Further, all the Administrative Secretaries are enjoined upon to furnish
the status on this account to the General Administration Department as well as
State Information Commission within a week’s time positively.”
The CIC had shared details with the GAD about
the status of different departments regarding creation of websites, disclosure
u/s. 4 of the RTI Act, appointment of Public Information Officer and First
Appellate Authority.
The CIC has informed the GAD that many
departments were not disclosing the information as per the Act.
The CIC has also highlighted that the domain
name of GMC Jammu has expired on August 30 last year.
(Source:https://kashmirobserver.net/2018/local-news/govt-orders-voluntary-info-disclosure-under-rti-29164)
– Meghalaya
RTI Activist, Who Went After Cement Firms, Found Murdered
A right-to-information activist who was
working to expose alleged misuse of public funds in Meghalaya was found dead in
the northeast state, police said on Tuesday.
Poipynhun Majaw had been filing applications
under the Right to Information (RTI) Act to check alleged corruption in public
projects in Meghalaya’s Jaintia Hills Autonomous District Council.
His body was found near a bridge in
Khliehriat, the district headquarters of East Jaintia Hills, 120 kilometres
from state capital Shillong. He was also the president of Jaintia Youth
Federation.
Police said he was last seen riding a
motorcycle near the East Jaintia Hills deputy commissioner’s office on Monday
night.
“A wrench was found next to the body.
Preliminary inquest suggests the victim was hit on the head leading to his
death,” senior police officer AR Mawthoh said.
Recently, using replies he got from the
authorities under using the RTI route, he had alleged that cement firms have
been mining in the area without permission from the council.
(Source:https://www.ndtv.com/india-news/meghalaya-rti-activist-who-went-after-cement-firms-found-murdered-1826488)
– RBI: SMA details exempted from disclosure under
RTI
Contradicting its reply to an earlier right
to information (RTI) query, the Reserve Bank of India (RBI) has recently said
bank-wise information on special mention account (SMA) 1 and 2 is exempt from
disclosure u/s. 8 (1) (a) & (d) of the RTI Act. While SMA 1 refers to loans
where repayments are overdue between 31-60 days, SMA 2 loans are ones where
principal or interest is overdue between 61-90 days. Although these are
technically not non-performing assets (NPAs), but nonetheless indicate
‘incipient stress’. In April 2016, RBI had said in an RTI response that SMA 1
and 2 loans of all banks stood at Rs 6,24,119 crore at the end of December
2015, 9% higher than Rs 5,73,381 crore at the end of June 2015. It had further
said while SBI’s SMA-2 accounts stood at Rs 60,228 crore, or 5.17% of its total
advances, at PNB this exposure was approximately 6.31% of its total loan book
or Rs 24,824 crore. RBI’s executive director and appellate authority Uma
Shankar said on March 7, 2018, that there is no overriding public interest in
the disclosure of credit information. She added that section 45E of the RBI
Act, 1934, contains a specific bar against disclosure of credit information
collected by the central bank. “Though section 22 of the RTI Act, 2005, starts
with a non-obstante clause, the interpretation given to that section by CIC is
that it is not intended to override special enactments,” she said. She said SMA
data is collected by RBI solely for disseminating the information to other
banks having exposure to the accounts reported in SMA by banks.
(Source:http://www.financialexpress.com/industry/rbi-sma-details-exempted-from-disclosure-under-rti/1096387/)
RTI Clinic in April 2018: 2nd, 3rd,
4th Saturday, i.e. 8th, 15th and 22nd
11.00 to 13.00 at BCAS premises.
Hindu Succession Amendment Act– Poor Drafting Defeating Gender Equalisation?
Introduction
The Hindu Succession (Amendment) Act, 2005 (“2005
Amendment Act”) which was made operative from 9th September, 2005, was
a path-breaking Act which placed Hindu daughters on an equal footing with Hindu
sons in their father’s Hindu Undivided Family by amending the age-old Hindu
Succession Act, 1956 (‘the Act”).
However, while it ushered in great reforms it also left several
unanswered questions and ambiguities. Key amongst them was to which class of
daughters did this 2005 Amendment Act apply? The Supreme Court has answered
some of these questions which would help resolve a great deal of confusion.
The 2005 Amendment Act
The Hindu Succession (Amendment) Act, 2005
amended the Hindu Succession Act, 1956. The Hindu Succession Act, 1956, is one
of the few codified statutes under Hindu Law. It applies to all cases of
intestate succession by Hindus. The Act applies to Hindus, Jains, Sikhs,
Buddhists and to any person who is not a Muslim, Christian, Parsi or a Jew. Any
person who becomes a Hindu by conversion is also covered by the Act. The Act
overrides all Hindu customs, traditions and usages and specifies the heirs
entitled to such property and the order or preference among them. The Act also
deals with some important aspects pertaining to an HUF.
By the 2005 Amendment Act, the Parliament
amended section 6 of the Hindu Succession Act, 1956 and the amended section was
made operative from 9th September 2005. Section 6 of the Hindu
Succession Act, 1956 was totally revamped. The relevant portion of the amended
section 6 is as follows:
“6. Devolution of interest in coparcenary
property.?(1) On and from the commencement of the Hindu Succession (Amendment)
Act, 2005 (39 of 2005), in a Joint Hindu family governed by the Mitakshara law,
the daughter of a coparcener shall,?
(a) by birth become a coparcener in her
own right in the same manner as the son;
(b) have the same rights in the
coparcenery property as she would have had if she had been a son;
(c) be subject to the same liabilities in
respect of the said coparcenery property as that of a son, and any reference to
a Hindu Mitakshara coparcener shall be deemed to include a reference to a
daughter of a coparcener:
Provided that nothing contained in this
sub-section shall affect or invalidate any disposition or alienation including
any partition or testamentary disposition of property which had taken place
before the 20th day of December, 2004.”
Thus, the amended section provides that a
daughter of a coparcener shall:
a) become, by birth a coparcener in her own
right in the same manner as the son;
b) have, the same rights in the coparcenary
property as she would have had if she had been a son; and
c) be subject to the same liabilities in respect
of the coparcenary property as that of a son.
Thus, the amendment equated all daughters
with sons and they would now become a coparcener in their father’s HUF by
virtue of being born in that family. She has all rights and obligations in
respect of the coparcenary property, including testamentary disposition. Not
only would she become a coparcener in her father’s HUF but she could also make
a will for the same. The Delhi High Court in Mrs. Sujata Sharma vs. Shri
Manu Gupta, CS (OS) 2011/2006 has held that a daughter who is the eldest
coparcener can become the karta of her father’s HUF.
Key Question
One issue which remained unresolved was
whether the application of the amended section 6 was prospective or
retrospective?
Section 1(2) of the Hindu Succession
(Amendment) Act, 2005, stated that it came into force from the date it was
notified by the Government in the Gazette, i.e., 9th September,
2005. Thus, the amended section 6 was operative from this date. However, does
this mean that the amended section applied to:
(a) daughters born after this date;
(b) daughters married after this date; or
(c) all daughters, married or unmarried, but
living as on this date.
There was no clarity under the Act on this
point. The Maharashtra Amendment Act (similar to the Central Amendment) which
was enacted in June 1994 very clearly stated that it did not apply to female
Hindus who married before 22nd June, 1994. In the case of the
Central Amendment, there was no such express provision.
Prospective Application upheld
The Supreme Court, albeit in the context of
a different context, clarified that the 2005 Amendment Act did not seek to
reopen vesting of a right where succession has already taken place. According
to the Supreme Court, “the operation of the Statute is no doubt prospective in
nature…. Although the 2005 Act is not retrospective its application is
prospective” – G. Sekar vs. Geetha (2009) 6 SCC 99.
The Supreme
Court has held in Sheela Devi vs. Lal Chand, (2007) 1 MLJ 797 (SC),
that if the succession was opened prior to the Hindu Succession (Amendment) Act,
2005, the provisions of the 2005 Amendment Act would have no application. Thus,
a daughter can be considered as a coparcener only if her father was a
coparcener at the time of the 2005 Amendment Act coming into force – Smt. Bhagirathi vs. S Manivanan AIR
2008 Mad 250. In that case, the Madras High Court observed that the
father of the daughter had expired in 1975. It held that the 2005 Amendment Act
was prospective in the sense that a daughter was being treated as a coparcener
on and from 9th September 2005. It was clear that if a Hindu male
died after the commencement of the 2005 Amendment Act, his interest in the
property devolved not by survivorship but by intestate succession as
contemplated in the Act. The death of the father having taken place in 1975,
succession itself opened in the year 1975 in accordance with the earlier
provisions of the Act. Retrospective effect cannot be given to the provisions
of the 2005 Amendment Act.
The Full Bench of the Bombay High Court in Badrinarayan
Shankar Bhandari vs. Omprakash Shankar Bhandari, AIR 2014 Bom 151 has
held that the legislative intent in enacting clause (a) of section 6 was
prospective i.e. daughter born on or after 9th September 2005 will
become a coparcener by birth, but the legislative intent in enacting clauses
(b) and (c) of section 6 was retroactive, because rights in the coparcenary
property were conferred by clause (b) on the daughter who was already born
before the amendment, and who was alive on the date of Amendment coming into
force. Hence, if a daughter of a coparcener died before 9th September
2005, since she would not have acquired any rights in the coparcenary property,
her heirs would have no right in the coparcenary property. Since section 6(1)
expressly conferred a right on daughter only on and with effect from the date
of coming into force of the 2005 Amendment Act, it was not possible to take a
view that heirs of such a deceased daughter could also claim benefits of the
amendment. The Court held that it was imperative that the daughter who sought
to exercise a right must herself be alive at the time when the 2005 Amendment
Act was brought into force. It would not matter whether the daughter concerned
was born before 1956 or after 1956. This was for the simple reason that the
Hindu Succession Act 1956 when it came into force applied to all Hindus in the
country irrespective of their date of birth. The date of birth was not a
criterion for application of the Principal Act. The only requirement was that
when the Act was being sought to be applied, the person concerned must be in
existence/ living. The Parliament had specifically used the word “on and
from the commencement of Hindu Succession (Amendment) Act, 2005” so as to
ensure that rights which were already settled were not disturbed by virtue of a
person claiming as an heir to a daughter who had passed away before the
Amendment Act came into force.
Finally, the matter was settled by the Apex
Court in its decision rendered in the case of Prakash vs. Phulavati,
(2016) 2 SCC 36. The Supreme Court examined the issue in detail and
held that the rights under the Hindu Succession Act Amendment are applicable to
living daughters of living coparceners (fathers) as on 9th
September, 2005 irrespective of when such daughters were born. It further held
that any disposition or alienation including a partition of the HUF which may
have taken place before 20th December, 2004 (the cut-off date
provided under the 2005 Amendment Act) as per law applicable prior to the said
date would remain unaffected.
Thus, as per the above Supreme Court
decision, in order to claim benefit, what is required is that the daughter
should be alive and her father should also be alive on the date of the
amendment, i.e., 9th September, 2005. Once this condition was met,
it was immaterial whether the daughter was married or unmarried. The Court had
also clarified that it was immaterial when the daughter was born.
Further Controversy
Just when one thought that the controversy
had been settled by the Supreme Court, the fire was reignited. A new question
cropped up – would the 2005 Amendment Act apply to those daughters who were
born before the enactment of the Hindu Succession Act, 1956? Thus, could it be
said that since the daughter was born before the 1956 Act she could not be considered
as a coparcener? Hence, she would not be entitled to any share in the joint
family property? The Karnataka High Court in Pushpalata NV vs. V. Padma,
ILR 2010 KAR 1484 held that prior to the commencement of the 2005
Amendment, the legislature had no intention of conferring rights on a daughter
of a coparcener including a daughter. In the Act before the amendment the
daughter of a coparcener was not conferred the status of a coparcener. Such a
status was conferred only by the 2005 Amendment Act. After conferring such
status, right to coparcenary property was given from the date of her birth.
Therefore, it necessarily followed such a date of birth should be after the
Hindu Succession Act came into force, i.e., 17.06.1956. There was no intention
either under the unamended Hindu Succession Act or the Act after the amendment
to confer any such right on a daughter (of a coparcener) who was born prior to
17.06.1956. The status of a coparcener was conferred on a daughter of a
coparcener on and from the commencement of the 2005 Amendment Act. The right to
property was conferred from the date of birth. Both these rights were conferred
under the original Hindu Succession Act and, therefore, it necessarily followed
that the daughter who was born after the Act came into force alone would be
entitled to a right in the coparcenary property and not a daughter who was born
prior to 17.06.1956. The same view was taken again by the Karnataka High Court
in Smt Danamma and Others vs. Amar and Others, RFA NO. 322/2008 (Kar).
This 2nd decision of the
Karnataka High Court was appealed in the Supreme Court and the Supreme Court
gave its verdict in the case of Danamma @ Suman Surpur and Others vs.
Amar and Others, CA Nos. 188-189 / 2018. The Apex Court observed that
section 6, as amended, stipulated that on and from the commencement of the 2005
Amendment Act, the daughter of a coparcener would by birth become a coparcener
in her own right in the same manner as a son. It was apparent that the status
conferred upon sons under the old section and the old Hindu Law was to treat
them as coparceners since birth.
The amended provision now statutorily
recognised the rights of coparceners of daughters as well since birth. The
section used the words ‘in the same manner as the son’. It was therefore
apparent that both the sons and the daughters of a coparcener had been
conferred the right of becoming coparceners by birth. It was the very factum
of birth in a coparcenary that created the coparcenary, therefore the sons
and daughters of a coparcener became coparceners by virtue of birth.
Devolution of coparcenary property was the
later stage of and a consequence of death of a coparcener. The firststage of a
coparcenary was obviously its creation. Hence, the Supreme Court upheld the
provisions of the 2005 Amendment Act granting rights even to those daughters
who were born before the commencement of the Hindu Succession Act, 1956, i.e.,
before 17.06.1956. Thus, the net effect of the decisions on the 2005 Amendment
Act is as follows:
(a) The amendment applies to living daughters of
living coparceners as on 09.09.2005.
(b) It does not matter whether the daughters are
married or unmarried.
(c) It does not matter when the daughters are
born. They may be born even prior to the enactment of the 1956 Act, i.e., even
prior to 17.06.1956.
(d) However, if the father / coparcener died prior
to 09.09.2005, then his daughter would have no rights under the 2005 Amendment
Act.
Conclusion
An extremely sorry state
that such an important gender equalisation move has been marred by a case of
poor drafting! One wonders why these issues cannot be expressly clarified
rather than leave them for the Courts. It has been 12 years since the 2005
Amendment Act but the issues refuse to die down. One can think of several more
questions, which are waiting in the wings, such as, would the daughter’s
children have a right in their maternal grandfather’s HUF? Clearly, this
coparceners amendment loves controversy.
Ind AS 115 – Revenue From Contracts With Customers
The impact
of revenue is all pervasive and encompasses all entities. The standard brings
about a fundamental change in how entities will envision, recognise and measure
revenue. In this article the author briefly discusses the date of applicability
of Ind AS 115, the fundamental changes from current practice, key impacts for
certain industries and disclosure and other business implications. Given the
pervasive and fundamental impact of the standard, entities that have not
already started, should waste no time in preparing for Ind AS 115.
When does Ind AS 115
apply?
The Exposure Draft (ED)
issued by the ICAI states that the standard would apply from accounting periods
commencing on or after 1st April 2018.
However, it is not yet
notified by the Ministry of Corporate Affairs (MCA). In the past we have
observed instances where standards have been notified on the last day of the
financial year. Whilst there is no 100% guarantee that the standard would apply
from 1st April, 2018, companies should anticipate that it would be
notified by MCA before the end of the financial year, given the past
experience.
Whilst this is an unhappy
outcome, it may be noted that the ICAI had clarified the applicability date in
April 2017 and the ED was issued much earlier; providing enough opportunity to
prepare for implementation of the new standard. By the time this article is
published, it will be clear whether the standard has become applicable. It may
be noted that listed companies will have to churn out numbers under Ind AS 115
in the first quarter of 2018-19, and hence this is a highly onerous obligation,
than what may initially appear.
What are the fundamental
changes compared to the existing Ind AS 18 Revenue?
Ind AS 115 requires
perceiving revenue from the customer’s point of view; which is whether the
customer has received a stand-alone benefit from the goods or services it has
received. This is likely to impact accounting of connection, activation,
installation, admission, and similar revenue. This can be observed across
several industries, such as, telecom, power, cable television, education,
hospitality, etc. Consider for example, an electricity distribution
company installs an electric meter at the customer’s site. The meter certainly
benefits the customer, but it does not provide to the customer any independent
stand-alone benefit, because the meter is useless without the subsequent
transfer of power to the customer. Neither the customer can use the meter to
procure power from other distributors. Therefore, the customer has not received
any benefit from the meter on its own and consequently such connection income
is recognised overtime by the distribution company.
The other fundamental
change is that under Ind AS 115, an entity recognises revenue when control of
the underlying goods or services are transferred to the customer. This is
different from the current “risk and reward” model under Ind AS 18, where
revenue is recognised on transfer of risk and rewards to the customer. Consider
an entity transfers legal title and control of goods to a customer on free on
board (FOB) delivery terms. However, the entity reimburses the customer for any
damages or transit losses in accordance with its past practice. Under the Ind
AS 18, risk and reward model, some entities may have delayed recognition of
revenue till the time the customer has received and accepted the goods. This is
on the basis that the risk and rewards are transferred when the customer
receives and accepts the goods. Under the control model in Ind AS 115, revenue
will be recognised on shipment because control is transferred to customers at
shipment. As soon as the goods are boarded, the customer has legal title to the
goods, the customer can direct the goods wherever it wants and the customer can
decide how it wants to use those goods. In this situation, the entity will have
two performance obligations (1) sale of goods, and (2) reimbursing transit
losses. The total transaction price will be allocated between the goods and the
transit losses, and recognised when those respective performance obligations
are satisfied. However, in most situations, the performance obligation relating
to reimbursement of the transit losses may be insignificant, in which case it
may be ignored.
There are numerous other
changes that may not be fundamental, but still be very important. Take for
example, the discounting of retention monies. Currently under Ind AS 18 there
is debate on whether retention monies need to be discounted. This is because of
contradictory requirements in the standard. One view is that since revenue is
recognised at fair value, the retention monies need to be discounted to
determine the fair value of revenue. Ind AS 18 also states that “when the
arrangement effectively constitutes a financing transaction, the fair
value of the consideration is determined by discounting all future receipts
using an imputed rate of interest…………….The difference between the fair value
and the nominal amount of the consideration is recognised as interest revenue
in accordance with Ind AS 109.” This means that discounting is only required
when the arrangement contains a financing arrangement. Ind AS 18 was therefore
debatable.
On the other hand, Ind AS
115, is absolutely clear. Paragraph 62 states that “notwithstanding the
assessment in paragraph 61, a contract with a customer would not have a
significant financing component if any of the following factors exist: ………….(c)
the difference between the promised consideration and the cash selling price of
the good or service (as described in paragraph 61) arises for reasons other
than the provision of finance to either the customer or the entity, and the
difference between those amounts is proportional to the reason for the
difference. For example, the payment terms might provide the entity or the
customer with protection from the other party failing to adequately complete
some or all of its obligations under the contract.
Since retention monies are
held by customers as a measure of security to enforce contractual rights and
safeguard its interest, retention monies are not discounted under Ind AS 115.
Explain the five step model
in
Ind AS 115 and briefly
outline the impact on industry.
The model in the standard
is based on five steps, which are given below.
Step 1:
Identify the contract: A contract has to be enforceable and the transaction
price should be collectable on the day the contract is entered into. The
contract can be written or oral, but has to be enforceable. If the contract is
not enforceable revenue cannot be recognised.
Step 2:
Identify performance obligations: Within a contract there could be several
performance obligations. Performance obligations are basically distinct goods
and services within a contract from which the customer can benefit on its own.
Step 3: This
step requires determining the transaction price in the contract. Whilst in most
cases this would be fairly straight-forward, in certain contracts, it could be
complicated because of:
– Variable consideration (including application of the constraint)
– Significant financing component
– Consideration paid to a customer (for example, free mobile
offered to a customer that buys a telecom wireless package)
– Non-cash consideration
The standard deals in
detail on how to recognise, measure and disclose the above components.
Step 4: Allocate
the transaction price to the various performance obligations in the contract.
Step 5:
Recognise revenue when (or as) performance obligations are satisfied. This can
be at a point in time or over time.
The construct of the model
is very simple but when applied, can throw huge challenges and is very
different from current Ind AS 18. It may be noted, that there would be numerous
areas of differences and challenges for each industry. Below is a broad outline
of the impact of the standard and the interplay of the five steps on various
industries. It is a very brief summary of a few of the many issues, used only
for illustration purposes.
Real estate
Real estate entities offer
a 10:90 or similar schemes to customers. As per the scheme, the customer pays
10% of the contract value on signing the offer letter, followed by a 90%
payment when the unit is delivered to the customer. If real estate prices fall
significantly, the customer may simply decide not to take delivery, and allow
the 10% to be forfeited. In many jurisdictions, such contracts may not be
legally enforceable against the customer and when enforceable the legal system
could be a huge deterrent to recover the monies from the customer. If this is
the situation, there is no enforceable contract under Ind AS 115, and
consequently no revenue is recognised till such time the contract is enforceable
or the remaining 90% is received by the real estate entity.
Another hot topic for real
estate entities would be the method for recognition of revenue, i.e. whether
percentage of completion method (POCM) or completed contract method (CCM) would
apply when a building is constructed which has several units sold to different
customers. In this case, since the customer does not control the underlying
asset itself, as it is getting constructed, revenue is recognised only on
delivery of the real estate unit to the customer. This issue was discussed in
detail by IFRIC at a global level. IFRIC observed the following: although the
customer can resell or pledge its contractual right to the real estate unit
under construction, it is unable to sell the real estate unit itself without
holding legal title to the completed unit. Consequently, the real estate entity
is not eligible for overtime recognition of revenue. However, the standard
allows overtime recognition of revenue, in situations where the real estate entity
has the right to collect payments from the customer for work completed to date.
Such amounts should include cost and an appropriate margin. If the real estate
entity does not have such a right, in statute and contract, POCM recognition of
revenue is not allowed. In other words, revenue is recognised when the
completed unit is delivered to the customer. Real estate entities in India that
want to apply POCM should verify if the statute entitles them with such a
right. If such a right is provided in the statute, they should ensure that the
contract with the customer also provides such a right.
Pharmaceutical
Some Indian pharmaceutical
companies have sales in US, through a few large US distributors on a principal
to principal basis. However, the amount of revenue to be received from the US
distributors may be variable, as the contract may have a price capping
mechanism or provide an unlimited right of return to the US distributors. The
price capping mechanism ensures that if the entity sells the same products at a
lower price to other customers, the distributor would be entitled to a
proportionate refund.
The US distributors will
send a sales report containing quantity and value to the pharma company on a
quarterly basis. Under current standards, some pharmaceutical companies may not
recognise revenue on dispatch to the US distributor, but recognise revenue
based on reported sales at the end of each quarter; effectively treating the US
distributor as an agent. This is because the risks and rewards may not have
transferred to the US distributor who has an unlimited right of return and is
also entitled to the benefit from the price capping mechanism. Under Ind AS
115, the control of goods is transferred to the distributor on dispatch since
the US distributor has legal title and ownership of the goods.
The pharma company does not
have any rights to recover the products, except as a protective right in rare
situations. Consequently, the pharma company recognises revenue upfront when
the control of the goods is transferred to the distributor. Since revenue is
variable because of the price capping mechanism and the unlimited right of
return, the transaction price will need to be estimated in accordance with the
methodology prescribed in the standard.
Software Company
Many Indian software
companies applied the US GAAP accounting for Indian GAAP as well. Under US
GAAP, a software company needs to separately account for elements in a software
licensing arrangement only if Vendor Specific Objective Evidence (VSOE) of fair
value exists for the undelivered elements. An entity that does not have VSOE
for the undelivered elements generally must combine multiple elements in a
single unit of account and recognise revenue as the delivery of the last
element takes place. VSOE is not required under Ind AS 115. The standard
prescribes a methodology for determining and allocating the transaction price
to various elements, which uses VSOE but in its absence prescribes other
methods of determining the allocation of the transaction price to the various
elements.
Telecom
Telecom companies may offer
a free handset to customers along with a wireless telecom package (voice and
data). Currently, some telecom companies recognise the telecom package overtime
and the cost of the free handset is recognised as a sales promotion cost. Under
Ind AS 115, the total consideration will be split between the telecom package
and the handset, and recognised as those performance obligations are satisfied.
This would give a completely different revenue, cost and margin pattern
compared to current practice.
Engineering and
Construction
The standard contains a
detail set of requirements on how to account for contract modifications. For
example, an unpriced change order is common in construction contracts; wherein
the scope of work is changed by the customer but the price for the change is
not agreed. The standard would require that the revenue and cost estimates on
the contract are immediately updated, consequently percentage of completion
margins would change. The problem is that revenue from the change in scope is
variable and the standard requires caution in estimating the variable revenue,
whereas costs are fully estimated. Consequently, the initially estimated POCM
margins may decline.
Consumer products and other
industries
An entity may have sold
goods, but on request from the customer, would have held those goods in its
storage facility. This is often referred to as bill and hold sales and is
common across all industries. For example, some pharmaceutical companies may
have a stock pile program for vaccinations based on government directives or a
consumer goods company may hold goods sold at its storage location on request,
as the distributor may be short of storage space. Contrary to current practice,
under Ind AS 115, in many cases bill and hold sales may not qualify for revenue
recognition because the underlying goods are fungible. For example, the stock
pile program may not qualify for revenue recognition, if they are subject to rotation,
i.e., the entity can sell some from the pile to another customer and replace it
with fresh supplies. These arrangements do not meet the criterion for
recognition of revenue on bill and hold sales, though they may have fulfilled
the criterion under Ind AS 18.
Another common topic
relevant for a consumer goods and other companies is warranties. If the
warranties are sold separately, or warranty entails a service in addition to
assurance (such as an extended warranty period), they are accounted for as a
separate performance obligation, rather than as a cost accrual.
Currently, the entire
revenue is recognized upfront and estimated cost for warranty is provided.
Under Ind AS 115, revenue will be allocated between the goods and the warranty.
Revenue and cost of goods is recognised as soon as the goods are sold. Revenue
and cost on warranties is recognised overtime as the warranty service is
provided.
This will result in a
different revenue, cost and margin profile compared to current practice under
Ind AS 18. It may be noted, that if the warranties are assurance type
warranties, and not sold separately or contain extended terms, the accounting
under Ind AS 18 and Ind AS 115 is the same.
Which are the disclosure
requirements that are onerous?
There are numerous
disclosure requirements. Entities should not underestimate the disclosure
requirements. Here we discuss two key disclosure requirements.
1. Entities will be
required to provide disaggregated revenue information in the financial
statements. The standard requires such disclosure on the basis of major product
lines, geography, type of market or customer (government, non-government, etc.),
contract duration, sales channel, etc., whichever is the most
appropriate and relevant for the entity. The standard provides guidance on how
this disclosure is made, and suggests that existing information provided to the
CEO, board, analysts, etc. may be used, and one need not reinvent the wheel.
2. For contracts or orders
that require more than one year to execute, the standard requires disclosure of
(a) transaction price allocated to the unsatisfied or partially satisfied
performance obligations, and (b) time bands by which the obligations will be
fulfilled and revenue recognised. For the said purpose, quantitative or
qualitative measures can be used.
What are the business
implications of Ind AS 115?
Certainly when top line and
margins change compared to current accounting, it will have numerous
implications, such as on income-tax, bonuses that are dependent on
revenue/margins, revenue sharing arrangements, contract terms and conditions,
internal control over financial reporting, etc. For example, companies
may change the sales arrangement with their distributors, to provide them
control at the point of shipment, so that revenue can be recognised at
shipment, rather than when the customer accepts the goods.
Certain business implications may
not be immediately obvious. Some companies may accept onerous contracts, to
recover some portion of the fixed costs/capacity. The IFRIC is currently
discussing whether when providing for onerous contract full cost provision or
only incremental cost needs to be provided for. Now if full cost absorption is required,
more onerous losses get recognised earlier. This may be a deterrent for
companies to accept a contract that is onerous.
Perspectives On Fair Value Under Ind As (Part 2)
INTRODUCTION
Under Part 1 which was published in February 2018, we had discussed the broad principles underlying fair value measurement as enshrined in Ind AS 113- Fair Value Measurements. In this part, we would be broadly understanding the requirements for measurement and disclosure of fair value for various types of assets, liabilities and equity under various Ind ASs as indicated in Part 1, coupled with the benefits and perils of fair value accounting followed by certain practical considerations for first time adoption by Phase II entities based on the learnings gathered from the Phase I entities.
BROAD PRESCRIPTION ON FAIR VALUE UNDER CERTAIN Ind ASs:
As indicated earlier, the following are the main Standards which prescribe the use of fair value either for measurement, disclosure or assessment purposes.
Ind AS 36- Impairment of Assets:
The broad objectives of this Standard are as under:
a) To observe if there are any indicators of impairment of various assets.
b) To measure the recoverable amount and compare the same with the carrying value of the asset.
c) To impair the assets if the carrying value is greater than the recoverable amount.
The key consideration for assessing impairment is the determination of the recoverable amount which is defined as the higher of the “Value in Use” or “Fair value less Costs of Disposal”.
“Value in Use” for the purpose of the above assessment is determined by estimating the future cash flows that can be derived from the continuous use of the asset including its realisable value on ultimate disposal and discounting the same at an appropriate rate after considering the risk, premium or discount as applicable.The principles underlying the present value technique as per Ind AS 113 as discussed in Part 1 need to be kept in mind whilst estimating the future cash flows and the discount rate to be applied for arriving at the value in use.
The “Fair Value less Cost of Disposal” for the purpose of the above assessment refers to the amount arising from the sale of an asset or CGU in an arm’s length transaction less the cost of disposal. The costs of disposal includes legal costs, stamp duty and other similar levies, as applicable, cost of removing the asset and direct incremental costs to bring the asset into a selling condition. However, finance costs and income tax expenses need to be excluded whilst determining the cost of disposal. For determining the fair values, the principles as enunciated under Ind AS 113 as discussed in part 1 need to be kept in mind. However, there is no bar on the type of valuation technique to be used.
Apart from the other disclosures, Ind AS 36 requires the following specific disclosures dealing with fair value:
a) The basis used for determining the recoverable amount keeping in mind the fair value hierarchy as per Ind AS 113 discussed earlier.
b) The key assumptions and the discount rate considered for determining the value in use as defined above.
Ind AS 103- Business Combinations:
This Standard deals with the initial recognition of assets and liabilities in respect of business combinations which could be in the nature of acquisitions or amalgamation under common control transactions. In respect of business combinations accounted for under the “acquisition method”, the initial recognition of assets and liabilities is as under:
– Recognising and measuring all the identifiable assets, whether tangible or intangible, including those that are not previously recognised by the acquiree, and liabilities (including contingent liabilities) at fair value as determined as per Ind AS 113.
– Any contingent consideration which forms a part of the transaction also needs to be accounted at fair value in accordance with Ind AS 109 or 113, as applicable.
– Any goodwill resulting from the transaction needs to be tested annually for impairment in accordance with Ind AS 36 as discussed above.
This is one of the key Standards wherein extensive use of fair valuation is mandated. The broad principles governing fair valuation under Ind AS 113 would need to be kept in mind depending upon the nature of the assets and liabilities being acquired.
Further, apart from the other matters, the main challenge lies in identifying the intangible assets acquired as a part of the business combination which have not been recognised by the acquiree, but which meet the recognition and identifiability criteria and to allocate a fair value to them as a part of the overall consideration. This would require significant judgements based on the business rationale and other commercial considerations of the transaction. The broad principles governing the determination of fair value as discussed later, under Ind AS 38 – Intangible Assets would need to be kept in mind. The following are some of the broad categories related to intangible assets arising from acquisitions under business combination:
– Marketing
– Customer
– Artistic
– Contractual
– Technology
Ind AS 109- Financial Instruments:
This is another Standard which almost entirely rests on the premise of fair valuation. The underlying theme of the Standard is that all financial assets and liabilities should be initially measured at fair value as determined under Ind AS 113, which would normally be the transaction price, unless proved otherwise as discussed below.
Para B 5.1.2A of Ind AS 109 provides that the transaction price may need to be adjusted on initial recognition if there is a fair value as evidenced by a quoted price in an active market for an identical asset or liability (level 1) or based on a valuation technique that uses data only from observable markets (level 2).
The way the financial instruments are classified under Ind AS 109 drives their subsequent measurement.
Whilst the valuation of quoted financial instruments is quite straight forward, it is the valuation of unquoted and complex financial instruments, including derivatives, which poses various challenges given their hybrid nature and the difficulty in quantifying the associated risks. Whilst a detailed discussion of the valuation methods is beyond the scope of this study, the broad underlying principles are briefly touched upon hereunder.
For ease of understanding, financial instruments are classified into the following broad categories for valuation purposes:
a) Bonds and its variants
b) Forwards and futures
c) Call and put options
d) Equity Instruments
In respect of the instruments indicated in (a) to (c) above, determination of fair value needs to consider the various specific features like conversion options, put and call options, caps and floors and various other subjective assessments and judgements which are captured through various mathematical models. However, if such instruments are traded and quoted on a recognised stock exchange, the challenges in determining fair value are much less.
Equity Instruments:
The valuation of equity instruments is dependent on the underlying valuation of the company which has issued these instruments. For this purpose, the appropriate valuation methodology from amongst the various methods as discussed earlier would need to be considered dependent upon the nature of the business / industry and the purpose of the valuation whether on a going concern or liquidation basis etc.
A question which often arises in case of unquoted equity shares is the basis and frequency with which the fair value needs to be measured due to lack of credible recent information being available and consequently whether the cost can be considered as the fair value. In this context, para B 5.2.3 of Ind AS 109 provides that in limited circumstances, cost may be an appropriate estimate of fair value, especially in case if insufficient more recent information is available to measure fair value, or if there is a wide range of possible fair value measurements and cost represents the best estimate of fair value within that range. Further, para B5.2.4 of Ind AS 109 provides for a list of some of the following indicators, amongst others, where cost might not be representative of the fair value:
a) Significant change in the performance of the investee compared with budgets, plans or milestones.
b) Changes in expectation that the investee’s technical product milestones will be achieved.
c) Significant change in the market for the investee’s equity or its products or potential products.
d) Significant change in the global economy or the economic environment in which the investee operates.
e) Significant change in the performance of comparable entities, or in the valuations implied by the overall market.
Ind AS 28- Investments in Associates and Joint
Ventures:
The Standard provides that an investment in an associate or joint venture should be accounted by using the equity method under which the investment is initially recognised at acquisition cost. Subsequent to the acquisition, the difference between the cost of the investment and the investee’s share of the net fair value of the identifiable assets and liabilities, determined in accordance with Ind AS 113, is accounted as under:
– Goodwill – if the cost of the investment is greater than the investee’s share of the net fair value of the assets and liabilities. This goodwill is to be adjusted with the carrying value of the investment and is neither eligible for amortisation nor is it to be tested for impairment.
– Capital Reserve– if the investee’s share of the net fair value of the assets and liabilities is greater than the cost of the investment.
Further, such investments are to be tested for impairment in accordance with Ind AS 36 as a single asset.
Ind AS 38- Intangible Assets:
Any intangible asset which satisfies the recognition criteria as per the Standard shall be measured at cost. However, in the following situations, the intangible assets are required to be measured at fair value:
– Business Combinations – As discussed above, in such cases the cost shall be the fair value as on the acquisition date.
– Government Grants – In such cases, the entity shall recognise both the intangible asset and the grant initially at the fair value as per Ind AS 20 – Accounting for Government Grants and Disclosure of Government Assistance.
– Acquisition for non-monetary consideration– If any intangible asset is acquired in exchange of non-monetary considerations, the cost shall be the fair value of the asset given up or the fair value of the asset received which is more evident.
An entity has an option of choosing the revaluation model for subsequent measurement of intangible assets. However, for this purpose, the revaluations shall be done with sufficient regularity to ensure that the carrying value does not differ materiality from the fair value determined in accordance with Ind AS 113. Further, the entire class of intangible assets shall be subjected to revaluation. The frequency of revaluation depends upon the changes in the fair value of the intangible assets being revalued.
Whilst a detailed discussion of the valuation methods to be adopted for intangible assets is beyond the scope of this study, the broad underlying principles are briefly touched upon hereunder.
– Income Approach– As discussed earlier, this approach converts future cash flows to a single present value and discounting the same based on a rate or return that considers the relative risk of the cash flows. This approach is most commonly used to value technology and customer related intangibles, brands, trademarks and non-compete arrangements. The following variations to the income approach are also used to measure certain types of intangible assets:
a) Multi period excess earnings method as discussed earlier.
b) Relief from Royalty method– which is generally used for assets subject to licencing. The fair value of the asset under this method is the present value of the licence fee avoided by owning the asset (i.e. the savings in royalty).
c) With and without method – the value of the intangible asset in question is calculated by taking the difference between the business value estimated under two sets of cash flow projections for the whole business and without the intangible asset in question.
– Market Approach – This method is used for certain type of assets which trade as separate portfolios such as FMCG or pharmaceutical brands or licences.
– Cost Approach – This method is adopted for certain types of intangibles that are readily replicated or replaced such as software, assembled workforce etc.
Further, all intangible assets with a finite useful life need to be amortised and tested for impairment in accordance with Ind AS 36. Finally, all intangible assets with an indefinite useful life need to be tested annually for impairment.
Ind AS 102- Share Based Payments:
Ind AS 102 deals with the following types of share based payments:
– Equity settled share based payments
– Cash settled share based payments
– Share based payment transactions with alternatives
All transactions involving share based payments are recognised as expenses or assets over the underlying vesting period. Transactions with employees are measured on the date of grant and those with non-employees are measured when the goods or services are received.
In case of measurement of equity settled share based payment transactions, the goods or services received by an entity are directly measured at the fair value of such goods or services received. However, in case such fair value cannot be estimated reliably, the fair value is measured with reference to the fair value of the equity instruments granted.
In case of measurement of cash settled share based payment transactions, the goods or services received by an entity and the liability incurred will be measured at the fair value of the liability. This liability has to be re-measured at each reporting date, up to the date of settlement and changes in the fair value are to be recognised in the profit or loss for the period.
In case of transactions with employees, the fair value of the equity instrument must be used and if it is not possible, the intrinsic value may be used.
The term fair value is defined in the Standard as the amount for which an asset could be exchanged, a liability settled, or an equity instrument granted could be exchanged between knowledgeable, willing parties in an arm’s length transaction. This definition is different in some respects from the definition in Ind AS 113.
Ind AS 16– Property, Plant and Equipment:
Any item of property, plant or equipment which satisfies the recognition criteria as per the Standard shall be measured at acquisition cost.
An entity has an option of choosing the revaluation model for subsequent measurement of property, plant or equipment. However, for this purpose, the revaluations shall be done with sufficient regularity to ensure that the carrying value does not differ materiality from the fair value determined in accordance with Ind AS 113. Further, the entire class of property, plant or equipment shall be subjected to revaluation. The frequency of revaluation depends upon the changes in the fair value of the property, plant or equipment being revalued.
Whilst a detailed discussion of the valuation methods to be adopted for property, plant and equipment is beyond the scope of this study, the broad underlying principles are briefly touched upon hereunder.
– Market Value:– In case of real estate properties, the market approach is best suited by considering relevant information generated by market transactions for similar assets.
– Replacement Value:- In case of equipment, the replacement value is the most suitable method since that represents the price that an acquirer would pay after adjusting for obsolescence, physical wear and tear and other technological considerations.
Ind AS 40- Investment Property:
Any item of investment property which satisfies the recognition criteria as per the Standard shall be measured at acquisition cost.
Unlike in the case of property, plant and equipment and intangible assets, the subsequent measurement of investment property should be on the basis of the cost model. However, there is a mandatory requirement to disclose the fair value of investment property on the basis of a valuation by an independent valuer who holds a recognised and relevant professional qualification.
Whilst the fair value would need to be determined in accordance with the principles laid down in Ind AS 113, Ind AS 40 also lays down certain broad parameters, as under, for determining the fair value, which valuers would need to keep in mind.
– When measuring the fair value of investment property in accordance with Ind AS 113, an entity shall ensure that the fair value reflects, among other things, rental income from current leases and other assumptions that market participants would use when pricing investment property under current market conditions.
– There is a rebuttable presumption that an entity can reliably measure the fair value of an investment property on a continuing basis. However, in exceptional cases when the fair value of the investment property is not reliably measurable on a continuing basis (e.g. there are few recent transactions, price quotations are not current or observed transaction prices indicate that the seller was forced to sell) and alternative reliable measurements of fair value (for example, based on discounted cash flow projections) are not available, or if an entity determines that the fair value of an investment property under construction is not reliably measurable but expects the fair value of the property to be reliably measurable when construction is complete, it shall measure the fair value of that investment property either when its fair value becomes reliably measurable or construction is completed (whichever is earlier). In such cases, specific disclosures need to be given.
– If an entity has previously measured the fair value of an investment property, it shall continue to measure the fair value of that property until disposal (or until the property becomes owner-occupied property or the entity begins to develop the property for subsequent sale in the ordinary course of business) even if comparable market transactions become less frequent or market prices become less readily available.
Ind AS 41 – Agriculture:
This Standard applies to biological assets, agricultural produce at the point of harvest and government grants related to biological assets.
The fair value of biological assets and agricultural produce at the point of harvest shall be measured in accordance with Ind AS 113.
A biological asset needs to be measured on initial recognition as well as at the end of each reporting period at its fair value less cost to sell, unless the same cannot be determined in which case it needs to be measured at cost less accumulated depreciation and accumulated impairment losses.
Any agricultural produce harvested from an entity’s biological assets should also be measured at its fair value less the cost to sell at the point of harvest.
BENEFITS AND PERILS OF FAIR VALUE ACCOUNTING:
As is the case with any journey, the journey of fair value accounting under Ind AS also has a smooth ride and at the same time there are several roadblocks. Let us now briefly review its benefits as well as understand its perils and challenges.
Benefits of Fair Value Accounting:
Some of the major benefits of fair value accounting are discussed below:
– Realistic Financial Statements – Companies reporting under this method have financial statements that are more accurate than those not using this method. When assets and liabilities are reported for their actual value, it results in more realistic financial statements. When using this method, companies are required to disclose information regarding changes made on their financial statements. These disclosures are done in the form of footnotes. Companies have an opportunity for examining their financial statements with actual fair values, allowing them to make wise choices regarding future business operations.
– Benefit to Investors – Fair value accounting offers benefits for investors as well, since fair value accounting lists assets and liabilities for their actual value. Accordingly, financial statements reflect a clearer picture of the company’s health. This allows investors to make wiser decisions regarding their investment options with the company. The required footnote disclosures allow investors a way of examining the effects of the changes in statements due to fair values of the assets and liabilities.
– Timely Information – Since fair value accounting utilises information specific for the time and current market conditions, it attempts to provide the most relevant estimates possible. It has a great informative value for a firm itself and encourages prompt corrective actions.
– More data than historical cost – Fair value accounting enhances the informative power of the financial statements vis–a-vis the historical cost. Fair value accounting requires an entity to disclose extensive information about the methodology used, the assumptions made, risk exposure, related sensitivities and other issues that result in a more thorough financial statement.
– Mirrors Economic Reality – Proponents of fair-value accounting argue that using fair-value measurements is necessary for financial records to represent the economic reality of the business. Since conventional accounting only allows for asset values to be written down, book values tend to underestimate the value of assets. Fair-value accounting allows the value of investments as well as other assets (subject to choices being exercised) to be written up and down as market values change. Perils and Challenges of Fair Value Accounting:
Though there are several benefits in adopting fair value accounting, it is not without its fair share of perils and challenges, some of which are discussed hereunder:
– Frequent Changes – In times of volatility, values can change quite frequently which would lead to major swings in a company’s value and earnings. Publicly held companies find this difficult as investors may find it difficult to value the company when such swings take place. Additionally, the potential for inaccurate valuations can lead to audit problems, which are discussed separately.
– Less Reliable – Traditional accountants may find fair value accounting less reliable than historical costs. When an item has different values across different regions and entities, accountants must make a judgement call on valuing items on their books. If a company with similar assets or investments values items differently than another, issues may arise because of the differences in valuation methods.
–Inability to value certain Assets – Businesses with specialised assets may find it difficult to value these items on the open market. When no market information is available, accountants must make a professional judgement on the item’s value. Accountants must also make sure that all valuation methods used are viable and take into account all technical aspects of the item.
– Subjectivity – For assets that are not actively traded on a public exchange, fair-value measurements are subjectively determined. While the Accounting Standards provide a hierarchy of inputs for fair-value measurements, only level 1 inputs are unadjusted quoted market prices in active markets for identical items. If these are not available, the company either has to look to similar items in active markets, inactive markets for identical items, or unobservable company-provided estimates. These level 2 and level 3 estimates can also be a bone of contention between auditors and management.
Challenges for Auditors:
Whilst there are several challenges in adopting fair value accounting, by far the greatest challenge in implementing fair value accounting is faced by the auditors since they cannot abdicate their responsibilities on the ground that the fair values are determined by specialists and experts. In this context, SA-540 on Auditing Accounting Estimates, Including Fair Value Estimates, makes it clear that the auditors should identify and assess the risk of material misstatements and perform appropriate procedures to mitigate the same. However, several challenges are likely to be encountered by auditors in the course of their audit of the fair value estimates whether determined by the Management or the experts / specialists, due to the following factors:
– Fair value accounting estimates are expressed in terms of the value of a current transaction or financial statement item based on conditions prevalent at the measurement date;
-The need to incorporate judgements concerning significant assumptions that may be made by others such as experts employed or engaged by the entity or the auditor;
– The availability (or lack thereof) of information or evidence and its reliability;
– The choice and sophistication of acceptable valuation techniques and models;
– The need for appropriate disclosure in the financial statements about measurement methods and uncertainty, especially when relevant markets are illiquid; and
– The possibility of Management Bias in making estimates, selection of the method of valuation and finally the valuer itself (if there is a conflict of interest)!
SA-540 deals with the overarching requirement for the auditor to obtain sufficient appropriate audit evidence that fair value measurements and disclosures are in accordance with the entity’s applicable financial reporting framework. Within the SA, additional requirements tailor the requirements in other SAs to the audit of fair value; in particular, those dealing with the following matters:
– SA-315 – Understanding the entity and its environment and assessing the risks of material misstatement,
– SA-330 – Responding to assessed risks;
– SA-240 – Responsibilities relating to fraud;
– SA-570 – Going Concern;
– SA-620 – Using the work of an expert;
– SA-580 – Obtaining management representations; and
– SA-260 – Communicating with those charged with governance.
Thus it is imperative for the auditor to ensure that the requirements of the SAs are complied with by taking due care and exercising professional scepticism whilst auditing the fair value estimates and documenting the reasonableness of the management estimates and judgements regarding fair value, keeping in mind the principles laid down in Ind AS-113.
PRACTICAL CHALLENGES AND DECISIONS FOR IMPLEMENTATION BY PHASE II ENTITIES:
Key Learnings from Phase I Entities due to Adoption of Fair Value Accounting:
Some of the key learnings in the context of fair value accounting during the transition to Ind AS by phase I companies are of a net increase in the net worth of the top 100 listed entities due to adoption of fair value accounting in respect of investments (including in group companies) and property plant and equipment based on the options available on transition (which are discussed below) with a corresponding reduction in the Profit after Tax due to increased depreciation on property, plant and equipment as a result of fair value thereof.
Implementation Issues by Phase II Entities due to Adoption of Fair Value Accounting:
The transition to Ind AS by Phase II entities is already underway for the remaining listed entities and other entities having a net worth of more than Rs. 250 crores during the current financial year ending 31st March, 2018 and they would need to take certain decisions on the accounting choice from a fair value perspective keeping in mind the following matters, whilst transitioning to Ind AS.
Mandatory Fair Value Accounting:
In respect of the following areas fair value accounting would be mandatory, except that in certain cases an option has been given to adopt it either retrospectively or prospectively, as indicated there against, as provided for in Ind AS 101- First Time Adoption of Ind AS.
|
Area |
Transition Applicability |
|
Ind |
Retrospectively |
|
Ind |
Retrospectively |
|
Ind |
Retrospectively |
In respect of the first two items before taking any decision to adopt fair value retrospectively, the entity would need to take into account whether all the data and information is available to enable the computation of the fair value since origination, including but not limited to details of the cash flows and other data and assumptions required for valuation purposes. If the necessary data is not available or it is impractical and costly to reconstruct the same, the entity could adopt fair value prospectively from the date of transition. These decisions would accordingly have an impact on the net worth on the date of transition.
In respect of Ind AS 103, the entity has three options as under, to account for business combinations as per the acquisition method on a fair value basis, as provided in Ind AS 101:
a) To restate past business combinations retrospectively; or
b) To restate past business combinations from any other earlier date, in which case, all business combinations after that date would have to be restated; or
c) To apply Ind AS 103 prospectively.
This choice, like in the earlier two cases, would depend upon whether the necessary data and information is available as also the business rationale of the earlier acquisitions to enable fair values to be attributed to any intangibles especially against any goodwill which is accounted, whose amortisation would need to be reversed and it would need to be tested for impairment annually. Any such decisions could have a significant impact on the consolidated net worth.
Voluntary Fair Value Accounting:
The most significant decision for entities with regard to fair value on transition to Ind AS is whether to elect to measure an item of property, plant and equipment at the date of transition at its fair value and use that fair value as its deemed cost in accordance with para D5 of Ind AS 101.
Further, as per para D6 of Ind AS 101, a first-time adopter may elect to use a previous GAAP revaluation of an item of property, plant and equipment at, or before, the date of transition to Ind ASs as deemed cost at the date of the revaluation, if the revaluation was, at the date of the revaluation, broadly comparable to:
a) fair value; or
b) cost or depreciated cost in accordance with Ind ASs, adjusted to reflect, for example, changes in a general or specific price index.
The requirements discussed above also apply to intangible assets which meet the recognition and revaluation criteria as per Ind AS 38.
It needs to be noted that the above requirement is different from adopting the fair value model as laid down under Ind AS 16 and is a one-time decision to use the fair value as the new deemed cost which may have an immediate positive impact on the net worth but would impact the profitability on an ongoing basis if depreciation needs to be provided, unless the asset in question is land.
Finally, the above decisions on transition would have tax implications including under MAT, which have not been separately discussed but which would also need to be factored in before a final decision is taken.
CONCLUSION:
The above evaluation is just the tip of the ice-berg on a subject that is quite vast and complex. However, fair value accounting is here to stay and it would impact the way the financial statements are evaluated and also impact the auditors but prove to be a bonanza for valuation specialists who can laugh all the way to the bank!
5 Section 10A, proviso to Section 92C(4) – Section 92C(4) does not apply to income offered as part of voluntary transfer pricing (TP) adjustment. Voluntary TP adjustment being a notional income will not form part of turnover for computation of deduction u/s. 10A.
1. TS-116-ITAT-2018(PUN)
Approva Systems Pvt. Ltd vs. DCIT
ITA No.1051/PUN/2015
A.Y.: 2011-12
Date of Order: 12th March,
2018
Facts
Taxpayer, an Indian company
was a 100% export oriented unit engaged in the business of providing software
development service to its US affiliate (FCo), as a captive service provider.
Taxpayer was also eligible to claim deduction u/s. 10A 1.
For the relevant year under
consideration, Taxpayer voluntarily offered additional income to tax in respect
of its services to FCo, basis its transfer pricing (TP) documentation and claimed
a deduction u/s 10A on such additional income.
____________________________________________________________________________________________
1 There was litigation on the
issue of whether the Taxpayer was eligible to claim
deduction u/s 10A or 10B. The Tribunal in this decision held that the Taxpayer
was eligible to claim deduction u/s 10B.
AO contended that proviso
to section 92C(4) will apply to such income and no deduction can be allowed
u/s.10A. Without prejudice, since the Taxpayer failed to bring into India the
export proceeds in relation to the voluntary adjustment, it was not eligible to
claim deduction u/s. 10A in respect of such income.
Taxpayer contended that
such additional income represented the TP adjustment made to the profits of the
business and not the turnover and hence there was no requirement to realise the
same in convertible foreign exchange in India. Further Taxpayer contended that
the additional income was not determined by AO, but by itself on a voluntary
basis and hence proviso to section 92C(4) is not applicable in respect of such
income.
On appeal, the CIT(A) upheld
the order of AO. Aggrieved the Taxpayer appealed before the Tribunal.
Held
– The income which is
computed u/s. 92(1) in respect of an international transaction is a notional
income in the hands of Taxpayer.
– Section 92C(4) of the Act
requires the AO to compute the income of the Taxpayer as per the arm’s length
price (ALP) determined u/s. 92C(3). The proviso, to section 92C(4) further
provides that no deduction will be allowed to a Taxpayer u/s. 10A in respect of
such amount of income which is enhanced by AO having regard to the ALP u/s.
92C(3).
– In the present case, the
additional income was determined by the Taxpayer and not the AO. The Taxpayer
voluntarily offered an additional income to tax. Hence proviso to section 92C
(4) does not apply to such income. Reliance in this regard was placed on Austin
Medical Solutions Pvt. Ltd. vs. ITO (I.T. (TP) A. No.542/Bang/2012) and
IGate Global Solutions Ltd. vs. ACIT (2008) 24 SOT 3.
– As per section 10A
deduction is allowed on the profits derived from export of articles or things
or computer software upto an amount which bears to the profits of the Taxpayer,
the same proportion as the export turnover bears to the total turnover of the
Taxpayer. Once the additional notional income has been so offered to tax, it
forms part of profits of business.
Thus, the additional income notionally
computed u/s. 92(1) would form part of the profits of the Taxpayer for the
purpose of section 10A, however, such notional income does not qualify as
export turnover or total turnover. Hence there is no requirement to realis e
such income in the form of convertible foreign exchange in India. Hence
Taxpayer is eligible to claim deduction on such additional income.
4 S. 2(14), S. (47), S. 45, S. 92B of the Act; Exercise of right to nominate a person to exercise call option results in transfer of a capital asset. Since such exercise was as a result of an understanding or action in concert of various related parties, the transaction qualifies as a deemed international transaction.
TS-37-ITAT-2018 (Ahd-TP)
Vodafone India Services Pvt. Ltd. vs. DCIT
ITA No. 565/Ahd/17
A.Y: 2012-13;
Date of Order: 23rd January, 2018
Vodafone India Services Pvt. Ltd. vs. DCIT
ITA No. 565/Ahd/17
A.Y: 2012-13;
Date of Order: 23rd January, 2018
FACTS
The Taxpayer, an Indian company, was an indirect wholly-owned subsidiary (WOS) of a Netherlands entity (BV Co) and was a part of a global group of companies (V Group). V Group carried on its telecommunication business in India through an operating company, I Co. All the shares of I Co were indirectly controlled by BV Co through a number of subsidiaries, AEs, call options and other financial arrangements. One such entity through which BV Co indirectly held interest in I Co was an Indian company, Omega Telecom Holding (Omega). Omega held around 5% shares in ICo.
Prior to the Taxpayer becoming a part of V Group, it was held by Hutchinson Group (H Group). H Group purchased the stake in I Co through various unrelated third parties owing to the regulatory restrictions on investment in the telecom sector.
SMMS investment Private Limited (SMMS) was one such Indian company through which H Group acquired interest in I Co. SMMS held around 62% shares in Omega (another Indian Company) which translated to an indirect interest of 3% stake in I Co. The acquisition of Omega by SMMS was funded through certain loans and capital (equity and preference share) contributed by third party investors (Investors). Investors, thus, became 100% shareholders of SMMS. The loans taken by SMMS were guaranteed by the ultimate parent entity of H Group.
It was as a result of transfer of certain intermediary companies by H Group to BV Co that Taxpayer became an indirect subsidiary of BV Co.
Taxpayer entered into a Framework agreement in June 2007 (FA 2007) with the investor. In terms of FA 2007, the Taxpayer had a call option to acquire entire equity capital of SMMS at nominal consideration of 4 Cr. (even when the value of SMMS could have been much higher than 1,500 Cr.). The taxpayer also had right to nominate some other person to exercise the available option right.
In November 2011, Termination Agreement and Shareholders Agreement were signed. In terms of TA, Taxpayer terminated the call option and paid a termination fee of INR 21 Crores to the investors. Post the termination of the call and put options, SMMS issued shares to another Indian company, India Hold Co, as agreed under SHA. Issue of shares resulted in India Hold Co holding 75% shares in SMMS. Further, as per the SHA, investors effectively exited from SMMS India on buyback of shares by SMMS and consequently India Hold Co. became 100% shareholder of SMMS.
Taxpayer contended that options that it held vis-à-vis investors in respect of shares of SMMS India were a contractual right and not a property right. Therefore it did not qualify as capital asset. Without prejudice, termination of option does not result in transfer. Further, since the transaction was between two residents, it did not qualify as an international transaction.
AO held that the Taxpayer had two rights by virtue of the call option viz., the right to exercise the option of purchasing the shares of SMMS and the right to assign the call option. On termination of the call option, such rights were extinguished and resulted in transfer of a capital asset by the Taxpayer. Further, AO held that, various agreements entered into by the parties indicate that the terms of the transaction were, in essence, decided by BV Co. Thus, such a transaction would qualify as a deemed international transaction.
Aggrieved, Taxpayer appealed before the Tribunal.
HELD
Whether call option is a capital asset and whether there was a transfer of no cost asset
– The two rights viz. the right to purchase shares of SMMS from the Investors and the right to sell shares of SMMS to the Taxpayer granted under FA 2007 are independent rights, in the sense that if one of the rights is exercised, the other right would become infructuous.
– In essence, the Taxpayer had a right to nominate who could acquire shares of SMMS at the agreed price.
– In the present case, the Taxpayer did not acquire the shares of SMMS, but exercised the right to nominate the person who could acquire the share of SMMS. Such right clearly falls within the expanded definition of capital asset under the ITL.
– Undisputedly, the facts before the SC in the Taxpayer’s case for earlier years did not involve nomination or assignment and, hence, the question of whether a right to nominate can be treated as a capital asset was never considered by the SC. Without prejudice, post the amendment to the ITL expanding the definition of capital asset u/s. 2(14), the SC’s decision stating that pending exercise, an option does not qualify as a capital asset, is no longer applicable.
– The Taxpayer had exercised the right of nomination under the call option. Once the right is exercised, its existence comes to an end. Hence, exercise of right to nominate results in transfer of a capital asset under the ITL.
– All the agreements entered into by the parties are to be read together to understand the actual transaction. The rights were acquired by paying consideration and hence it is not correct to suggest that options were no cost asset.
Whether there is an international transaction and whether the TP provisions apply in the absence of a consideration?
– The Scheme of Arrangement implemented effectively ensured that SMMS shares which could have been acquired and held by taxpayer in India came to be held by AE of the Taxpayer (India Hold Co). Hence the transaction qualifies as an international transaction.
– The Taxpayer had a valuable right to purchase shares of I Co at a nominal consideration of ~INR4crores. Such a right was given up by the Taxpayer for “zero” consideration.
– The TP provisions enable determination of the ALP for an international transaction and, hence, they have a role to play in computation of income. As long as a transaction is capable of producing an income, the TP provisions will apply to compute the income in accordance with ALP.
– The termination if implemented at ALP could have resulted in an income in the form of capital gains and such income has to be computed having regard to the ALP of the transaction. Even in case where there is zero income but application of the ALP results in a consideration being assigned, then the income i.e., capital gains in this case, is to be computed basis such ALP.
– The TP provisions cease to apply only when a transaction is inherently incapable of producing an income and is applicable in cases where income is not reported or if an income is not taken into account in computation of taxable income. Reliance in this regard was placed on a Special Bench decision in the case of Instrumentarium Corporation Ltd. (171 taxmann.com 193).
– The Bombay HC decision in the Taxpayer’s own case for earlier years was concerned with determination of the ALP of shares issued by the Taxpayer, which was admittedly a transaction on capital account. It is a settled proposition that capital receipts cannot be brought to tax in the absence of a specific enabling provision. In other words, the ALP adjustment was proposed in respect of an item of income which could never be brought to tax. Thus, the ratio of that decision is not applicable in the present facts of the case.
3 Article 5 and 7 of India-UAE DTAA – AAR’s decision indicating that a group concern has a PE in India, cannot be a basis for concluding that the Taxpayer has a PE in India. In absence of FTS article in the DTAA, income from provision of technical personnel is taxable as business income, provided that Taxpayer has a PE in India as per the relevant DTAA.
TS- 27-ITAT-2018 (Mum)
Booz & Company (ME) FZ-LLC vs. DDIT
I.T.A. No. 4063/Mum/2015
A.Y: 2011-12;
Date of Order: 19th January, 2018
Booz & Company (ME) FZ-LLC vs. DDIT
I.T.A. No. 4063/Mum/2015
A.Y: 2011-12;
Date of Order: 19th January, 2018
Facts
Taxpayer, a company incorporated in UAE, was engaged in the business of
providing management and technical consultancy services. During the year, the
Taxpayer provided technical/professional personnel to its Indian associated
enterprise (ICo). The personnel were physically present in India for a period
of 156 days.
The Taxpayer contended that since DTAA does not have any specific
article on fees for technical services (FTS), the consideration received from
ICo is taxable as business income. However, in the absence of a PE in India,
the income received from ICo was not offered to tax by the Taxpayer.
AO observed that in respect of certain group companies including the
parent of the Taxpayer, AAR had given a common ruling that the said companies
had a PE in India. By placing reliance on AAR’s ruling, AO held that ICo
created a PE for the Taxpayer in India.
Aggrieved by the order of AO, Taxpayer appealed before the CIT(A) who
upheld the order of AO. Subsequently, Taxpayer appealed before the Tribunal.
Held
– The
ruling of the AAR in the case of group entities of the Taxpayer cannot be the
basis for determining the existence or otherwise of PE of the Taxpayer in
India, especially when AAR gave a common ruling without making any specific
reference to the provisions of the respective DTAA.
– ICo
did not earmark any specific or dedicated place for the personnel of the
Taxpayer, hence it cannot be said that the premises of ICo was under the
control or disposal of the Taxpayer. Thus ICo premises did not create a fixed
place PE for the Taxpayer in India.
– FCo
provided services to ICo and it is not a case where FCo was receiving any
services from ICo. Thus the question of dependent agent PE in India does not
arise.
– Since
the employees worked in India for an aggregate period of 156 solar days on all
projects taken together, the threshold for triggering Service PE clause is not
met.
– Thus
the income of the Taxpayer from provision of personnel is not taxable in India
INTERVIEW | ZIA MODY
QUALITY IS THE ONLY THING,
IN QUALITY IS EVERYTHING!
In celebration of its 50th
Volume – the BCAJ brings a series of interviews with people of eminence, the
distinct ones we can look up to, as professionals. Those people who have
reached to the top of their chosen sphere, people who have established a
benchmark for others to emulate.
This first interview is with
Mrs. Zia Mody. Zia is an advocate and solicitor, founder and managing partner
of AZB and Partners. She is considered an authority on corporate merger and
acquisition law in particular. Zia studied at Cambridge and Harvard both,
worked in the US for five years with Baker McKenzie and then in India. She
started her own firm which today is considered one of the best in India. A
wife, mother, winner of many awards, an active practitioner of the Bahai faith.
In this interview, Zia talks to
BCAJ Editor Raman Jokhakar and BCAJ Past Editors Ashok Dhere & Gautam Nayak
about her formative years, what she learnt from her mentors, the factors she
attributes to her success, the sacrifices that she had to make, her thoughts on
the laws in India, and more…..
(Raman Jokhakar): From being in employment
at a US law firm, to being a counsel, to leading your own law firm – yours has
been a multi-faceted career. Which part of it was the most enjoyable?
Well, the truth is that, in hindsight, the
most enjoyable part if you say of my career would be my time as a counsel in
the High Court. And although, I enjoy my work as M&A lawyer, for sure, I
think that the thrill of winning a matter which I got when I was younger is
probably the biggest thrill in my span as a lawyer.
(Gautam Nayak): In spite of being a first
generation law firm, I think you have overtaken most of the firms which are
much older and established firms in that sense. From being a first generation
firm to being a top rank firm is an amazing achievement. What do you attribute your success to?
A
combination of being there at the right time. When I came back from America, I
was in court for 10 years and the opportunity to start a firm was not there.
Then after Manmohan Singh’s policy in 1991 to about 1995, in those 4 years, a
lot of foreign friends who wanted their clients to set up shop, clients wanted
to set up shop, India opened up. So I was there at the right time. Because I
had foreign education and foreign training, my acceptability was much easier
for my foreign friends and clients. Again, in comparison we were
technologically savvy. We had star programme, which the older firms who were
giants then could not have. We had a computer for each lawyer; God forbid, the
other firms didn’t have. We spent more money, invested more money in getting
technologically better and also I think, frankly, I spoke the language better
to an American General Counsel, I knew what they were looking for.
(Gautam
Nayak): Maybe the initial impetus yes, came from these factors, but as
your firm grew in size, what factors made it work later?
Nayak): Maybe the initial impetus yes, came from these factors, but as
your firm grew in size, what factors made it work later?
There
again, a combination of being lucky to get such good talent and though not
always successful, trying my best to retain the talent. Sometimes you can and
sometimes you can’t. Then always emphasizing to everybody who walked in and
carried our card, that quality is the only thing, and in quality is everything
– hard work, loyalty to the letterhead, loyalty to the client – all comes out
of quality. So like in any service profession – what do you want to be – you
want to be the best and how do you get to be the best – when you hire the best
and how do you make them the best – by showing them the way.
(Raman Jokhakar): Role of your Mentors: you
worked here in India and in the US all these years. Would you like to share a
trait that has stayed relevant even today or over all these years?
As
a young professional, your prayers get answered if you get a good mentor. It’s not
choosing your job, it’s choosing your boss right? And, I think for me, both my
mentors, in America and in India, were really patient human beings because they
invested time in me and had affection for me. Both of which are key. You know
if you have a good mentor but he does not love you, it does not work as much as
if he loves you. So I think, a personal connect which I had, helped me a great
deal. Therefore, the person was willing to do more than he needed to.
Therefore, my duty as a mentee was to never let that mentor waste his time; to
learn all the time; to let him know that I am learning.
worked here in India and in the US all these years. Would you like to share a
trait that has stayed relevant even today or over all these years?
As
a young professional, your prayers get answered if you get a good mentor. It’s not
choosing your job, it’s choosing your boss right? And, I think for me, both my
mentors, in America and in India, were really patient human beings because they
invested time in me and had affection for me. Both of which are key. You know
if you have a good mentor but he does not love you, it does not work as much as
if he loves you. So I think, a personal connect which I had, helped me a great
deal. Therefore, the person was willing to do more than he needed to.
Therefore, my duty as a mentee was to never let that mentor waste his time; to
learn all the time; to let him know that I am learning.
(Raman
Jokhakar): And something that still rings true, even today – something that you
learnt during those times.
Honesty
to the matter. Every matter has to be dealt with honesty. You can nuance your
advice. You can have gradations of what you want to say. But stick to the
skeleton of what is an honest assessment of the matter. That is key.
to the matter. Every matter has to be dealt with honesty. You can nuance your
advice. You can have gradations of what you want to say. But stick to the
skeleton of what is an honest assessment of the matter. That is key.
(Gautam Nayak): Both you
and your husband have been and are very successful in your respective careers.
What is the role that you played in each other’s success?
So
I always again thank God, although my husband is a typical Gujju, he has
enormous respect for his wife. And, I think that is really why I have been able
to be successful. My profession has taken a toll in terms of time on my
marriage, not having conventional rule as a wife, not able to spend time with
my children as I would have liked to. My mother in law compensated a lot of my
absenteeism. But I think the luck that I had was that my husband was not
insecure. He is very proud of me. His father was a lawyer. So I never grew up
having to be worried about what my husband would feel. Because he was so
successful in his own mind and later on in life, that there was no feeling- How
she is so important, why is she on this TV show or something? It was– Great
that you are on this TV show! There was no competitiveness at home. This is
important.
(Raman
Jokhakar): Any special sacrifice that you felt you had to particularly make?
Time.
Time with my family.
(Raman
Jokhakar): If you look back at your career, in hindsight, is there anything
you feel you would have done differently?
No.
Except, maybe being less paranoid! (laughter)
(Gautam
Nayak): One of the significant issues which you may have faced when you
started your career, was that you were in a legal profession dominated by males
(Zia: Still is). Being a woman, how has it played out for you as a woman? For
other women professionals, what is your advice?
It
was hard. It is much better now. But it was hard. In early 1980s, as a young
woman going to court, which client is going to give you his matter to argue –
right? They would say (go away – gesture) It is much better now. I don’t
think it is much better still in Court, I think it is the same. But, in the
table space of our profession, it is much better. It is well paid – women get
more attracted to the profession. Frankly, their parents have changed. Today
our generation puts more value on a girl child than they did on our
sisters. Our fathers are much more
vested in educating us than the previous generations. That is what is making a
change.
(Gautam
Nayak): What is your advice to women professionals that they should follow
in order to succeed?
The same story – Quality, Focus and
Sacrifice. We can keep talking about what we want to, but as women, we have to
make that sacrifice. And sometimes it’s not worth it – it’s just not worth it.
It is different for every woman. I think I overdid it. I don’t think I will
recommend my life to many people. But each one has to strike their own balance.
Because, if all this is going to make you miserable personally, why would you
do it?
(Gautam
Nayak): You are legendary for your long working hours. Even today after
having so much success, you put in long hours. What is it that drives you even
today?
I
just can’t stand not being prepared. If I have a calendar tomorrow, I will
prepare. I want to know if I can add a little more value by having a pre-discussion,
by reading, by pre-reading material: I also want to know what laws have
happened, I look at what my knowledge management team pushes out, changes in
FEMA, changes in Companies Act, I will read the headlines. I think it is the
fear of not being up to date. Then of course, long hours are also because
clients want to meet, after clients finish, partners want to meet for views.
(Ashok Dhere): What are your hobbies?
I
had hobbies. (laughter) I used to write, I used to play the piano and I
used to do cooking classes with Tarla Dalal. But now, my only hobby today is
travelling with my family for short breaks.
(Raman Jokhakar): A Daily habit that you
have?
Prayers
(Ashok
Dhere): We have complex Laws. What do you suggest about repealing laws and
reducing complexity?
Dhere): We have complex Laws. What do you suggest about repealing laws and
reducing complexity?
It
is a big problem. It’s a good one. There is not one law you could repeal in
totality. Look at your Companies Act, there are lot of provisions that don’t
make sense to me but you can’t repeal that law. You have to amend them in bits
and pieces. I don’t think there is one statute that I would say – DHUM!
– kill it! There are so many statutes that need updating, fine-tuning. You take
the latest Insolvency and Bankruptcy Code, it is doing a great job as a
statute, but it still needs refining. So, it is an ongoing process.
(Gautam
Nayak): What is your view on
Companies Act 1956 versus the current Companies Act?
But
the 1956 Act had also outgrown its useful life. It is just that our new Act is
unfortunately a knee jerk reaction to Satyam- that is the problem. Satyam
happened 10 years ago. (Raman: We call it Roy and Raju Act). Perfect.
(Gautam
Nayak): Some of the old laws we have such as Indian Contract Act from 1872.
As compared to that, some of the recent legislations have a lot more
litigations, a lot more ambiguity in drafting. What is your view on that?
I
think, the old statutes are better drafted. Our current drafting is the biggest
problem.
(Raman
Jokhakar): The way they use English.
Imagine in a country like ours where most people can’t speak English, can’t
read English, and you have these laws which even professionals can’t
understand?
What
to do. It’s good for Lawyers!
(Gautam Nayak): Technology is changing,
laws are changing, and the society is changing. In that sense, going forward,
what do you see as the key attributes a professional needs to have? As in your
times, technology was the key factor, what would be the key factors now?
A
senior professional as he climbs up the value chain, has to morph into a
Trusted Advisor. That is the biggest value you can give to the clients. You are
not a lawyer. You are a trusted advisor. Your client comes to you, to make the
company calls, real crisis calls. At that time you are not reading sections.
You are simply reading, assimilating everything. And then taking a judgement call, which is
different for each client. One guy is risky, one risk averse, one guy is a
foreigner, one Indian, one guy is a listed company, and one guy is an unlisted
company. So you have to put everything into the mix. That’s the issue.
(Ashok
Dhere): Madam, I am a fan of your book translated (shows the book ….) into
Marathi. I read that book.
Even
Marathi one also. I know Penguin said can we get the book translated into
Marathi and I said yes – as long as it is an honest translation.
(Ashok Dhere): I was fascinated by that
judgement of Aruna Shanbag. (Zia: Right to live). At that time, Supreme Court
was shy of pronouncing it because they passed it on to the Dean. Let the Dean
decide. They were shy. Now they are bold.
They
are bold. Life has changed.
(Ashok Dhere): In Golaknath and
Keshavanand Bharati, there is a constant tussle between judiciary, executive and
parliament. Will it continue forever?
Probably,
because there is misalignment spiritually. The executive feels they need more
control over judiciary, who can otherwise keep hauling them up for contempt and
striking down their laws. Judiciary feels that they are the custodians of the
Constitution which they are spiritually duty bound to protect. There is a
misalignment. But, I am for the judiciary.
(Ashok
Dhere): What about judicial activism which is also being criticised (Zia: I
understand sometimes it is overboard but…) they are giving direction to Reserve
Bank of India…
I Understand. But if you are asking me which
balance I prefer, I prefer this one even if it has these side effects, because
without that, you can’t have a country that can be kept in check. As much as I
love Reserve Bank of India, sometimes even they may go wrong. It’s ok. I don’t
think they were right in the directions they gave. I think even Reserve Bank or
the Government or any Regulator today is concerned about what the Supreme Court
thinks of them.
(Ashok
Dhere): What about corruption in the Judicial System in the light of recent
Supreme Court (four Judges) matter?
I
think there is more corruption at junior level simply because pay scales are so
pathetic and there is less corruption at the higher level. I am not a believer
that there is systemic judicial corruption. I don’t think so at all.
think there is more corruption at junior level simply because pay scales are so
pathetic and there is less corruption at the higher level. I am not a believer
that there is systemic judicial corruption. I don’t think so at all.
(Gautam Nayak): Professional Firms:
Today, do you feel there is a scope for small professional firms or are large
firms alone the future?
Boutique
firms. Specialised Boutique (firms).Otherwise big firms. Unless you have
domain and you are a boutique. Larger companies would veer towards branded
firms.
(Ashok
Dhere):Madam, so far as frauds and
scams happen or other activities that are in the newspapers, Chartered
Accountants are always at the receiving end (Zia: Poor guys) and everything is
always done with drafting with lawyers or law firms etc. (Zia: We protect
ourselves) Tell us a few tips for Chartered Accountants, how to protect themselves?
You
don’t have to sign balance sheets. (Laughter) and if you are smart, stay
away from being Directors.
(Gautam Nayak): Large firms that
we talked about. Do you think that now professions are becoming a business,
some of the large firms you see?
See,
it has always been a business. You can keep calling yourself a noble
profession, which of course it is. That does not mean that you are doing
charity. You are doing work for doing business. Just that you have to do it
ethically. That’s what makes it noble.
(Ashok
Dhere): What do you have to say
about prohibitive cost of litigation? Sometimes, litigation in an income tax
matter is valid, but the client just does not have the capacity to pay.
Answer:
That’s life. What can you do!
(Gautam Nayak): There was a talk of legal fees, capping
that etc. that the Government is considering.
Why should they? It is a free market. How do
we hire the best, pay the best and then not charge the best? That is socialism?
(Ashok
Dhere): Do you make a distinction,
M’am, between banking fraud and political corruption, say in PNB Case?
Depends.
Depends on reason. Talk about PNB, there is no fraud proved yet at a senior
level. How are you asking to compare senior level fraud before it’s even
proved? That is pre-judging.
(Ashok
Dhere): What about political
overtones as in Karti Chidambaram Case? That is also fraud matter.
It
is. But let the investigation happen.
(Raman
Jokhakar): For the Chartered
Accountant profession, what is your advice to Chartered Accountants as you look
at them and you interact with them? Is there something that you want to tell
them?
Be
stricter with your clients. (Raman: And in which way?) Get proper back up, don’t stop asking
questions, be comfortable with the balance sheet you are signing and the
qualifications, and don’t be scared about losing the account. That’s all.
stricter with your clients. (Raman: And in which way?) Get proper back up, don’t stop asking
questions, be comfortable with the balance sheet you are signing and the
qualifications, and don’t be scared about losing the account. That’s all.
The minute you can say “Go Away”,
you are capable. That’s what we do. If we are not comfortable – “We are not
going to give you that opinion.” No problem. That has been our approach right
from the day we started with twelve lawyers.
AS IT WAS, IS AND MAY BE
(MUSINGS FROM THE PAST, ABOUT THE PRESENT AND THE FUTURE AS FORESEEN)
As one’s professional career inches to what would be the age
of a senior citizen one tends to look more to the past than the future. One
suddenly finds that he/she can remember what happened in 1990 more clearly than
what happened in 2016!
of a senior citizen one tends to look more to the past than the future. One
suddenly finds that he/she can remember what happened in 1990 more clearly than
what happened in 2016!
When the Editor of the 50th anniversary
publication of the BCAJ approached me to write an article and suggested that I
recollect real life experiences, I expressed serious reservations as to whether
anybody would really be interested in the same. I do hope the Editor does not
have cause to regret his mistaken choice (of person and subject). In any case,
my vanity ultimately prevailed and I agreed to pick up my pen and let it run
wild.
In 1952, I joined the Sydenham College of Commerce and
Economics named after Lord Sydenham, a former Governor of Bombay. At that time,
it was situated in premises belonging to the J. J. School of Arts (with two
divisions of the first year class being located in the Sukhadwala Building near
Excelsior Cinema). My father was in the first batch of students (of 1913) to
enroll in the College! My brother as well as my wife graduated from Sydenham.
It was, perhaps the only College with a tennis court! In 1955, the College
shifted to its present location on B. Road near Churchgate.
In 1956, I joined the Government Law College for the then
two-year LL.B. degree course for those who had already graduated. Surprising as
it may sound to today’s college student fraternity, at that time at least 90%
of the students attended classes regularly (the Canteen residency was limited).
For the lectures by Prof. Sanat P. Mehta on the Indian Constitution, the class
was always full even though the lectures were scheduled at a most unearthly
hour early in the morning. I understand that today the percentage is reversed
and perhaps more than 90% do not attend lectures but join private coaching
classes. In our days a student who took private tuitions was looked down upon
as being backward! What I find even more surprising, and rather intolerable, is
that I am told that today professors themselves do not attend regularly. The
other leading Counsel in the field of Tax Law at that time were Mr. R. J. Kolah
and Mr. N. A. Palkhivala. Mr. R. J. Kolah was also the foremost lawyer in the
field of labour law – if this branch did not rub off on me it was, I suppose,
because I did not labour enough. Two Solicitors: Mr. N. R. Mulla and Mr.
Tricumdas Dwarkadas also had a large practice in the Tribunal. Mr. Tricumdas
(partner in the firm of M/s. Kanga & Co.) was and has been the only person
allowed to appear before a Bench of the Tribunal, otherwise than in the
regulation coat and tie! I may in passing, mention my eternal admiration of Sir
Dinshaw Mulla (the founder of the firm of M/s. Mulla and Mulla) for the number
of classical treatises he has written on varied legal subjects. I do not think
anyone, the world over, has rivaled his achievement.
With the confidence (arrogance) of youth I decided to take
the plunge in individual law practice as, according to me, it afforded
independence. The next question was whose Chamber I should join. At the request
of Mr. R. K. Dalal, the founding partner of the Chartered Accounting firm of
Messrs. Dalal & Shah, Mr. N. A. Palkhivala agreed to see me but not to
accept me as a Junior! Thereafter, through the good offices of Mr. Maneck P.
Mistry (popularly known as “Botty” Mistry, though I do not quite know why) I
joined the Chambers of Mr. R. J. Kolah.
The Law Chambers were at that time just newly located on the
first floor of the Annexe building which was connected by a passage to the High
Court Building. Chamber No.1 was of Sir Jamshedji B. Kanga in which Seniors of
great eminence like Mr. K. H. Bhabha, Mr. Murzban Mistree etc., who were
earlier his juniors, functioned. Chamber No. 2 was of Mr. R. J. Kohla and
chamber No.3 of Mr. N. A. Palkhivala. Prior thereto Chambers of Counsel were on
the Ground Floor of the High Court Building to the left as one entered the High
Court building from the gate near the University (and not the one near the Hong
Kong Bank building). Later in 1987, Counsel functioning from the Annexe
building received notices to quit as the High Court wanted the premises for
itself.
The atmosphere on the 1st floor was unique. There
was great fellowship between the 50 odd Counsel who occupied the 12 Chambers
situated there including the Chambers of Mr. Motilal Setalvad (the first
Attorney-General for India), Mr. M.P. Amin (Advocate-General for the State of
Bombay) and Mr. Karl Khandalawalla, a lawyer of eminence at the Criminal Bar, and
many more. Mr. Khandalawalla was a distinguished art critic. He was as devoted
to art as Mr. Kolah was to horse-racing and to dog-racing (which latter sport
he wanted to initiate at the Brabourne Stadium). Very often when Mr. Kolah was
in the Supreme Court on a Friday but his matter had not concluded, he would fly
back to Bombay on Friday night and after attending the races at Mahalaxmi on
Sunday evening proceed by the early morning flight on Monday back to Delhi. He
travelled extensively for professional work and invariably went to the then
Santa Cruz airport by the airport bus run by Indian Airlines. I still remember
a delightful photograph which was displayed in Chamber No. 2 of Mr. R. J. Kolah
in a top hat and tail coat with his devoted and charming wife Lorna, which
photograph was taken when they had attended the Epsom Derby race in
England.
My practice as a lawyer had a slow (more accurately, a very
slow and halting) start. In the first year of my practice at the Bar I earned a
total of Rs.30 and that too not on account of any merit of mine! A brief for
applying for an adjournment at 2.45 p.m. (which was when the High Court used to
resume work at that time after the lunch break), was marked by Messrs. Little
& Co. (the instructing solicitors) for Mr. K. K. Koticha, Advocate. A fee
of 2 Gold Mohurs (GMs) which is the denomination in which advocates practicing
on the original side of the High Court traditionally marked (and some still
mark) their fees. Interestingly a Gold Mohur, a currency prevailing in ancient
times, was reckoned at Rs.15 in Bombay, Rs.16 in Delhi and Rs.17 in Calcutta!
The bearer of the brief could not locate Mr.
Koticha in the High Court library as, (most fortunately!) he had gone
out for lunch. He noticed that (having nothing better to do) I was sitting in
the Library and offered the brief to me. This incident increased my belief in a
kind, benevolent and benign God who looked after briefless lawyers!
I may mention that Mr. Palkhivala had once offered me
employment in the legal department of Tatas at what I considered to be a
princely salary. My brother, Jal, a Chartered Accountant of great learning, was
vehemently against my accepting the offer and when I talked about it to Mr.
Kolah he was forthright, as usual, in his view. He remarked “gadhero thai
gayoch ke.”
When I commenced my practice in 1959, the Income-tax
Appellate Tribunal (Tribunal) had 2 Benches each in Bombay, Delhi and Calcutta
and one at Allahabad, Madras, Patna and Hyderabad. If I remember correctly,
there were just 2 or 3 Commissioners of Income-tax in Bombay jurisdiction. I
have lost track of the number of Principal Commissioners of Income-tax and
Commissioners of Income-tax who now hold office. The Tribunal which was formed
in 1941 was initially located in the Industrial Assurance Building near Eros
Cinema. By 1959 it had shifted to its present location. I have not been able to
discover exactly when such shift was effected. Even the Encyclopaedic Dr. K.
Shivaram, has not been able to enlighten me!
The ITAT has evolved into the leading and most satisfactorily
of all functioning Tribunals. I may refer to what I consider to be two
unfortunate administrative aberrations on its part. The Headquarters of the
Tribunal has always been at Bombay.
Three Presidents shifted the office of the President to Delhi. Thus, during
their tenure, though the Headquarters of the Tribunal was at Bombay, the office
of the Head of the Tribunal was in Delhi! A junior lawyer appropriately
remarked, “the importance of the Headquarters of the Tribunal has now been
reduced to a quarter thereof!” Mr. Rajagopala Rao a very sincere, patient and
fair member had during his tenure as President very correctly restored the
President’s office to Bombay.
The other unfortunate administrative decision is that the
Tribunal now organizes a farewell meeting for a retiring member. The hallowed
tradition followed by the Income-tax Tribunal Bar Association, at Bombay, (in
the same manner as by the High Court Bar Association) was that it was the prerogative
of the Bar to organize a Reference to a retiring member (if the Bar felt he
merited one). The occasional decision of not granting a Reference on the
retirement of a member (considered by the Bar as not being fit to be so honoured)
was not acceptable to the authorities.
There cannot be a truer saying than “Justice delayed is
justice denied.” As major reason for the abysmal mounting arrears both in the
Tribunal and the Courts is on account of the fact that the judicial authorities
have to function much below their sanctioned strength. It is proudly claimed
that the present Government is one which works. However, there does not appear
to be any evidence in support thereof, at least in the law and judicial field.
When a vacancy will occur is known well in advance – the only exception being
the unexpected event of resignation or unfortunate premature demise. Instead of
spending time on making tax life more complicated, cannot the Ministries of Law
and Finance find time to attend to this long-standing yet unresolved problem?
The malaises of mounting arrears of tax appeals and writ
petitions in the High Courts would be alleviated if more judicial members of
the Tribunal, and perhaps even Accountant Members with appropriate judicial
qualifications, were promoted to the High Courts and special benches dealing
the year round with tax matters were set up in the High Courts. It may also be
appropriate if the Supreme Court collegium, which finally recommends persons
for promotion to the High Courts, was a little more circumspect in rejecting
proposals for such promotion made by a High Court. It is for serious
consideration whether, in the event of there being a doubt about the fitness of
a member for promotion to the High Court, it is possible to devise a system
whereunder the Collegium obtains (on the condition of maintenance of complete
secrecy) the views of Advocates of pre-eminent reputation, who have practiced
before the concerned person.
Legal practice can be broadly of 2 types: a) table practice
comprising of advisory work in conference, furnishing of written opinions and
drafting pleadings and b) arguing matters before different fora. Variety is the
spice of life and, as in life generally, it is always good to have a
combination of all possibilities. However, if I had to choose only one of the
two forms of legal practice I would certainly plump for the second alternative
as appearing before a Tribunal or Court requires one to attune one’s arguments
to what is likely to appeal to the particular judge, bearing in mind his
approach to life, his bent of mind and also brings into focus one’s ability to
respond immediately to queries (relevant and irrelevant) His Lordship or Honour
may pose. A ready repartee, a light hearted remark sometimes achieves more than
learned legal submissions based on case laws. One has also to cultivate the
ability to deal on the spot with arguments urged by the opposing Counsel. The
ability to do all this is what distinguishes an Advocate from a lawyer. Law can
be learnt from text books, – advocacy requires an inherent talent and
experience.
The practice of tax laws is not confined just to the
provisions of the relevant Direct Tax Acts. One has to consider the provisions
of a whole range of what may be termed as “general laws” like the Transfer of
Property Act, personal laws which determine succession to a deceased’s
property, company and partnership law (including the Limited Liability
Partnership Act), stamp duty and registration provisions, and laws relating to
limitation and new financial instruments etc. Even the provisions of the
Evidence Act and of criminal law may have to be applied. A judge once addressed
Counsel arguing a tax appeal before him by saying. “You tax lawyers …” Counsel
replied, “I am not aware of any such animal!”
About 3 or 4 years after I joined the legal profession, Mr.
N. A. Palkhivala gradually shifted the field of his operation from Chamber No.3
to his office in Bombay House and became a Director of several Tata companies.
It was somewhat of a unique decision because Counsel generally prefer to
operate from their own independent chambers without being associated with a
particular business house. In retrospect I felt that it was all to the good
that he had not approved of me as a prospective junior. Unfortunately, in life
when one is faced with a disappointment it is only in retrospect that one
thinks of the disappointment as being all for the good.
Lord Macnaghten in London County Council v. Attorney-General
44 TC 265, 293, observed “Income Tax, if I may be pardoned for saying so, is a
tax on income. It is not meant to be a tax on anything else.” Our Finance
Ministers should take heed of these words of wisdom. Today, section 2(24) of
the Income-tax Act includes twenty-eight items as “income,” quite a few of
which cannot at all be regarded as “income.” The zeal of our Finance Ministers
has resulted in our presently having Volume 402 of the Income-tax Reports. The
publication of the Income-tax Report started in 1933. The proliferation of
litigation is shown by the fact that whereas till 1950 we had only one volume
of the Income-tax Reports per year, now (in 2017) we have 10 Volumes per year
and I do not know how many volumes 2018 will generate! Prior to the publication
of the Income-tax Reports we had “Income-tax Cases” which covered 10 Volumes
relating to the period from 1886 to 1937. The Tax Cases in England published
from 1876 presently are in the 80th volume. Of course, in so far as
the legal profession is concerned, the Indian overdose is all to the good! I
may note in passing something which is rather intriguing. In India we refer to
“Income-tax” but in the United Kingdom it is “Income Tax.”
There is today a strong lobby which doubts the wisdom of
several provisions in the annual Finance Bills (sometimes 2 per year) which
amend the Income-tax Act. The thought process which goes into the enactment of
the proposed amendments is best illustrated by the fact that recently the
Finance Bill, 2018, was apparently passed by the Lok Sabha without debate.
Some people today complain about the rates of tax and
surcharge making unwarranted inroads into one’s income earnings. They overlook
that during our flirtation with socialism some assessees were liable in 1972 to
1973 to pay more than 100% of their income as direct taxes (income-tax plus
wealth tax). The imposition of such draconian rates of taxes led to the
development of a tax planning industry. Some of the schemes were really
fantastic. An assessee is certainly not bound to pay the maximum amount of tax
possible. At the same time excessive and daring tax-planning is not advisable
as, in my view, a good untroubled night’s sleep is more important than the
possible increase in one’s wealth by embarking on such a scheme. I hasten to
add that tax planning is undoubtedly legal and permissible. The Duke of
Westminster’s case (19 TC 490) is a classic example of tax planning, perhaps
even stretching the permitted limits. Nevertheless, the Supreme Court in Union
of India v. Azadi Bachao Andolan 263 ITR 706 observed at page 758 that the
principle in the Honourable Duke’s case “was very much alive and kicking.” Even
ignoring the exceptional 2 years in the 1970s one has ruefully to accept that
in several other years in the past the individual income-earning assessee
(Mr.A.) was a junior partner in profit sharing in the firm of the Central
Government and Mr.A!
There is no reason why we should complain about the present
rates of income-tax even though one may not be able to muster the enthusiasm of
Justice Holmes of the U.S. Supreme Court who observed “Taxes are what we pay
for civilized society. I like to pay taxes, with them I buy civilization.” Mr.
C. K. Daphtary, the first Solicitor-General of India, who was known for his
ready wit and felicity of language, in a speech when he was felicitated by the
Bombay Bar, referred to the observation of Justice Holmes and wryly commented
“If by payment of taxes one buys present-day civilization then I do not want
any part of it!” The key issue was rightly summarized by Justice Sabyasachi
Mukharji in CWT v. Arvind Narottam 173 ITR 479: “Does he with taxes buy
civilization or does he facilitate the waste and ostentation of the few. Unless
waste and ostentation in Government spending are avoided or eschewed no amount
of moral sermons would change people’s attitude to tax avoidance.” Mr. N. A.
Palkivala has pithily observed “a widespread taste for tax promises to be a
thing of slow growth.”
The prodigious and unwieldy growth of tax legislation and
amendments after the present Act came into being is evidenced by the fact that,
to cite but one example, between section 115 and section 116, more than 120
sections have been inserted at one time or the other. The total inadequacy of
the English language to provide for this overdose is shown by the fact that we
have such monstrosities as section 80JJAA and section 115BBDA!
The change in the nature of the litigation then and now is
striking. In 1959 a large part of the appeals before the Tribunal centered
around cash credits, unexplained investments, capital and revenue expenditure
etc. The litigation is now more sophisticated and with an international flavour
like the circumstances in which income earned by a non-resident from an asset
situated outside India is to be deemed to accrue or arise in India (section 9),
transfer pricing and Double Taxation Avoidance Agreements. One of the most
often cited cases today is the decision of the Supreme Court in Union of
India v. Azadi Bachao Andolan 263 ITR 706 where the Supreme Court laid down
the path-breaking interpretation to be placed on the words “may be taxed”
appearing in DTAAs. I daresay in the future, a substantial part of the
litigation will centre around Chapter XA of the Income-tax Act (concerning
General Anti-Avoidance Rule) bearing in mind the very wide, if not wild,
provisions which have been enacted.
People often condemn Treaty Shopping overlooking that
Treaties are negotiated with several political, economic and other
considerations in mind and if in achieving/implementing the same tax concessions
are available so be it. If the Government negotiates a treaty which opens a
shop it cannot complain if people resort thereto!
A matter of great importance to the well-functioning of the
Tribunal is who is appointed as its President. Previously, the Central
Government was empowered to appoint the Senior Vice-President or one of the
Vice-Presidents to be the President. Now sub-section (3) of section 252 of the
Act enables the Central Government to appoint in addition a person who is a
sitting or retired judge of a High Court and who has completed not less than
seven years of service as a judge in a High Court.
Pursuant to the newly acquired power vested in it in 2013 the
Central Government appointed a retired judge of a High Court to be the
President of the Tribunal with effect from 14th March, 2015. In my
view the conferment on the Central Government of the option to appoint a
retired High Court judge as the President is misconceived. The President has to
perform various administrative tasks relating to the functioning of the
Tribunal such as constitution of the Benches, the posting of members etc. which
requires him to be a person who has worked as a member for a long period of
time before he assumes charge as President. The President is also a part of the
Committee to select persons to function as members of the Tribunal. An existing
Vice-President, and more so the Senior Vice-President, would be fully
experienced to discharge these functions. A retired High Court Judge is not
likely to be aware of the plethora of judgements, reports, magazines etc.
dealing with the tax matters. Speaking for myself I do not think the experiment
of appointing a retired High Court judge as the President of the Tribunal was
at all successful.
For almost two decades moves have now been afoot to redraft
our income-tax law. It was way back in 1997 that “A Working Draft of the
Income-tax Bill, 1997” saw the light of day. This was followed in August 2009
by the Direct Taxes Code. Later, the Direct Taxes Code Bill 2010 was published.
It is undoubtedly necessary to redraft the entire Act and not merely to move
piecemeal amendments. However, one has to bear in mind that several critical
sections have already been interpreted by the High Courts and the Supreme
Court. If in the process of redrafting them, different language is used, even
though the same may appear to be more elegant, it may start the ball of fresh
litigation rolling once again. This would be not only time but money consuming
and cause harassment to the assessee, though of course it may fill the pockets
of tax lawyers and practitioners. The net gain may be that the Government would
be able to collect more taxes from them!
A professional in the field of law is often asked which is
the moment in his legal practice or which is the case or matter which he has
argued or handled which has left him with a sense of enduring satisfaction. For
myself I would say that what is most satisfying is to note with admiration how
those who have passed through my Chambers have overcome that handicap and
achieved enviable eminence in their own legal careers.
Another question a lawyer is often asked is what is most
essential for success in the legal profession. My answer is simple: the ability
to find an all understanding spouse who will (a) put up with ill-temper (which
the lawyer can’t afford to exhibit in the Court room or in his Chamber and,
consequently, reserves it for the residence) (b) tolerate and overlook his
forgetting specific occasions and (c) be immune to his lack of punctuality in
attending to and looking after personal and social commitments.
One gathers from newspaper reports, instructions issued by
the CBDT and comments regarding the provisions in the Finance Bill, 2018, that
it is proposed to vest more and more powers in the Centralised Processing
Centre (CPC) in Bengaluru. Whilst such a move may be theoretically supportable
I feel that the Government should first put in place a satisfactory and
reliable mechanism to resolve grievances and objections raised by assessees.
Let me refer to only one example. Nowadays, if a refund is due to an assessee
it is adjusted against what is shown as arrears due from him in the records of
the all powerful, all knowing, but “in purdah” CPC. Protests lodged with
incontrovertible proof in support, against the proposed adjustments are dealt
with by a standard response: “Your objections ‘if any’ have been considered and
no interference is called for.” Representations and appeals for justice to the
higher authorities have invariably proved futile. The use of the words “if any”
shows a complete lack of application of mind (if any exists). Today an assessee
can contact his Assessing Officer and personally explain to him that the
alleged arrears are not outstanding by producing documents in support of such
assertion and by responding to any doubts entertained by the Officer. This
avenue is no longer open.
High sounding words and phrases are used to declare what the
Government proposes to do. For example, it is stated 1) there would now be
team-based assessments with dynamic jurisdiction 2) there would be
jurisdiction-free assessment i.e., a tax payer in Delhi could be assessed by a
tax officer situated elsewhere in India 3) the role of the tax officials will
be split into functions of assessments, verification, tax demands, recovery
etc.” What these phrases mean is not at all clear to me and perhaps not even to
the tax officers!
The new system is allegedly designed for minimizing the scope
for corruption. However, the cure seems to be worse than the disease at least
from the point of view of the honest tax payer who will now be denied the
opportunity of a direct and fair hearing.
If minimal interaction between the assessee and the tax
officials is the goal for allegedly avoiding corruption it would, perhaps, be
more meaningful to formulate rules limiting interaction between the citizen and
ministers and the citizen and powerful Government Officers as it is these
interactions which are probably most corruption prone.
I had better now conclude these ramblings before my pen runs
completely dry and before the reader, (if any), of this article wants to turn
over the pages to venture to the next article, assuming he has not already
entered slumberland.
It is said that what distinguishes a good lawyer from the
run-of-the-mill ones is that he can articulate his views precisely and briefly.
I have hopelessly failed so to qualify as I have over-stepped the limit
suggested by the Editor for the length of this article!
I must record that the Editor had very thoughtfully and
helpfully suggested as one of the titles for my proposed article “Happy Hours
at the Bar.” I can only say that whilst young there are undoubtedly happy hours
at the Law Bar, but as one grows older, one appreciates the happier hours one
can spend at a conventional Bar which creates a feeling of solidity,induced by
consuming liquidity!
THE EDITORIAL TRIO AND ANGEL IN HEAVEN
It is undoubtedly a historical event that BCAJ is completing
50 years of its knowledge dissemination “YADNYA” and it would be
pleasantly nostalgic to remember past Editorial Trio in heaven Sarvashree
Shamrao Argade, Bhupendra Dalal and Ajay Thakkar and our personal friend and a
permanent member of the Journal Committee Shri Jal Dastur.
50 years of its knowledge dissemination “YADNYA” and it would be
pleasantly nostalgic to remember past Editorial Trio in heaven Sarvashree
Shamrao Argade, Bhupendra Dalal and Ajay Thakkar and our personal friend and a
permanent member of the Journal Committee Shri Jal Dastur.
It was a typical and a loving combination of knowledge, wit,
fun, hobby and a common desire to be of help to the fellow professionals
through the medium of BCA journal.
Each one had a different style, nature, professional
expertise and yet an ability to share was a common factor.
Shri Shamrao Argade was the founder Editor. He used to
write editorials in Marathi English, with an abundant sprinkling of Sanskrit
shlokas, Shri Bhupendra Dalal would write in Gujarati English with enjoyable
spread of a Gujarati poetry whereas Ajay Thakkar would write in his queen’s
English with a wide ranging background of philosophy.
Shamrao was a “DADA” to his friends and juniors. Argade would
be incomplete without a suffix of “DADA”. He had lots of interest, except a
keen interest in professional practice. He would spend a lot of time with his
political colleagues in the erstwhile Bhartiya Jan Sangh, a sizable time for
the activities of our Institute as a four time central council member and
shuttling between Mumbai and Delhi. He always had plenty of time for
establishment and taking care of BCA journal which was his baby child till the
journal reached its adolescent age, and of course time for his numerous friends
like Ambalal Kaka (Thakkar), one of the crazy seven who established BCAS on 6th
July 1949. These seven persons as founders of BCAS wanted to test limits to
their knowledge which in itself is limitless and it was reason enough for them
to establish the BCAS just 5 days after the birth of our Institute.
Besides this, Argade Dada was fond of his Lonavala farmhouse,
where there were plenty of trees, flower beds and what not and he would
genuinely love to show his garden to all his visitors.
Naturally, he had no time for his clients and office. His
clients would believe that their CA is extremely busy. In spite of all this he
called himself a practising C.A !
Shri Bhupendra Dalal was a poet president and poetic
editor. He was extremely passionate about everything that he did. However,
audit was his love bird and income tax law and more than that income tax
practice was on his hate list. History must have been his pet subject and
even in audit, he was fond of
historical practices. Travel, trekking and trying to catch Himalayan heights
(in literal sense) was his favourite past time. He would be more than an
enthusiastic child to make a presentation of his slide shows and narrating his
historical travels.
He was a “Laxman” for his elder cousin Shri Arvindbai
Dalal. As a result of Arvindbai’s absence from office on account of numerous
central council meetings and lecture meetings and other related work,
Bhupendrabhai would be fighting like a warrior on office front and at the same
time he had also taken the responsibility of BCAJ editorial work with equal
enthusiasm.
Shri Ajay Thakkar was a different lovable fish. He
never wanted to become a Chartered Accountant or even a commerce graduate. He
was passionate about many unknown things, but was an obedient son as well. He
wanted to keep serpents as pet. Our country lost another Baba Amte staying in a
jungle. He would find mathematical Fibonacci numbers in abundance in nature,
plant, jungle. He wanted to do his Masters in Arts and further do his PhD in
Philosophy. He was, with lot of difficulties, persuaded to be a commerce
graduate and must have created a record of all sorts by using only one 400
pages note book throughout his four years period in the college and managed to
keep that note book without a touch of pen or pencil except for the name
written on the first page.
College lecture bunking was his second nature. Once he saw
his father walking through cross maidan to go to I.T Office and Ajay could not
go back to avoid his father. He immediately sat down near a beggar hiding
himself behind a torn umbrella used by the beggar. In spite of all this, he
became a commerce graduate and then even a Chartered Accountant. His father
once told him that one is required to study to pass the CA examination. He then
hid himself in a room for about 2 months before the examination and passed.
Once a Chartered Accountant, he paid attention to whatever
work was allotted to him by his father Ambalal Kaka. He had a special passion
for income tax law and frequent appearance before Tribunal or CIT(A) became a
routine for him. With memory tips from none other than Nani Palkhiwala, he
would anytime impress the ITAT members with facts and figures on the tip of his
tongue.
As a son of a founder member Ambalal Kaka, he instantly
became a chela of Argade dada and his journey with journal was continuous till
his death. He was a philosophical editor with queen’s English and fluent
writing skills. His prose would also sound like poetry when writing editorials,
when he became editor of the journal and later as a member of editorial board.
The Editorial Trio of these persons now enjoying heavenly
hospitality would be incomplete without mentioning another heavenly personality
Shri Jal Dastur. Although Jalbhai, as he was popularly known and
affectionately called, never became an editor of BCA journal, he was a
permanent member of the Journal Committee. He would be an excellent aid to any
Editor and I can say this with personal experience during my 5 years stint as
an editor. He would always communicate with the editor through his printed
“letters to the editor” and would be a permanent guide to the editor on company
law matters.
It was a treat to see Jalbhai in his second floor office in
Dol-Bin-Shir. It was a fairly large office, but there would be a cluster of books
and files near and in his cabin. Whenever you visit his office for journal work
or even a personal query, he would immediately take out a book, Institutes’
Guidance note and file notes to give you a studied reply. To keep eye contact
with him during the course of his own study for your query, you have to see him
by bending a little and look at him through the valley created between the
books and files. You only face him straight when you are sipping hot boiling
tea offered with love and affection in a large cup. He would otherwise be
seriously immersed in books and notes to solve your problem. Other roughly 2/3rd
portion of his office would be fairly empty and lonely.
These apparently serious looking our loving friends would now
be chitchatting in heaven together. However, even during life time, behind
their serious looking face would be a naughty child with Jalbhai narrating
funny Parsi anecdotes, Bhupendrabhai narrating his gujju tales, Ajay being
master of ceremony, making you laugh with his own straight face and Dada would
pretend to be not listening while displaying a gentle smile of acknowledgement
on his face.
In the 50th year of BCA journal’s journey, I am
sure; many of us truly miss them. I am sure their good wishes would make the
journey smoother, enjoyable and lovable.
(Shri Ashok Dhere served as the fourth Editor of
the BCA Journal from the year 2000 to 2005)
Summary Of Supreme Court’s (Sc) Judgement On Operations Of Multinational Accounting Firms (MAF) In India
Date: 23rd February, 2018
Writ Petitions:
Civil Appeal No. 2422 of 2018: Arising out
of SLP (Civil) No. 1808 of 2016 and Write Petition (Civil) No. 991 of 2013
Issue/s Involved:
“Whether the MAFs are operating in India in
violation of law in force in a clandestine manner; and no effective steps are
being taken to enforce the said law. If so, what orders are required to be
passed to enforce the said law.”
Averments:
a. MAF are operating illegally in India and
providing Accounting, Auditing, Book Keeping and Taxation Services.
b. They are operating with the help of ICAFs
illegally.
c. Operations of such entities are, inter alia,
in violation of Section 224 of the Companies Act, 1956, sections 25 and 29 of
the CA Act, the Code of Conduct laid down by the Institute of Chartered
Accountants of India (‘ICAI’ or ‘Institute’).
(Reference: Report dated 15th
September, 2003 of Study Group of the ICAI)
Study Group Report dated 15th September
2003:
The Study Group was constituted by the
Council of the ICAI in July, 1994 to examine attempts of MAFs to operate in
India without formal registration with the ICAI and without being subject to
any discipline and control. This was in the wake of liberalisation policy and
signing of GATT by India.
It was noted by the study group that the
bodies corporate formed for management consultancy services were being used as
a vehicle for procuring professional work for sister firms of Chartered
Accountants. Members of ICAI were associating with such board of directors,
managers etc. to provide escape route to MAFs. CA function must be discharged
by animate persons and not in anim bodies.
The concerns of various segments of CAs
noted by the Study Group are as under:
a) Sharing fees with non-members;
b) Networking and consolidation of Indian firms;
c) Need to review the advertisement aspect;
d) Multi-disciplinary firms with other
professionals;
e) Commercial presence of multi-national
accounting firms;
f) Impact of similarity of names between
accountancy firms and MAFs/Corporates engaged in MSC-Scope for reform and
regulation;
g) Strengthening knowledge base and skills;
h) Facilitating growth of Indian CA firms &
Indian CAs internationally;
i) Perspective of the Government, corporate
world and regulatory bodies and role of ICAI;
j) Introduction of joint audit system;
k) Recognition of qualifications under Clause (4)
of Part I of the First Schedule to the Chartered Accountants Act, 1949 for the
purpose of promoting partnership with any persons other than the CA in practice
within India or abroad;
l) Review the concept of exclusive areas keeping
in view the larger public interest involved so as to include internal audit
within it;
m) Conditionalities prescribed by certain
financial institutions/Governmental agencies insisting appointment of select few
firms as auditors/concurrent auditors/consultants for their borrowers.
Further allegations by the writ petitioners
directly filed in SC:
PricewaterhouseCoopers Private Limited
(PwCPL) and their network audit firms operating in India, apart from other violations,
have indulged in violation of Foreign Direct Investment (FDI) policy, Reserve
Bank of India Act (RBI)/Foreign Exchange Management Act (FEMA) which requires
investigation. Firms operating under the brand name of PwCPL received huge sums
from abroad in violation of law and applicable policies but the concerned
authorities have failed to take appropriate action. M/s. Pricewater House,
Bangalore was the Auditor of the erstwhile Satyam Computer Services Limited
(Satyam) for more than eight years but failed to discover the biggest
accounting scandal which came to light only on confession of its Chairman in
January, 2009. The said scandal attracted penalty of US Dollars 7.5 Million
(approx. Rs.38 crores) from the US Regulators apart from other sanctions. Since
certification by Auditors is of great importance in the matter of payment of
subsidies, export incentives, grants, share of government revenue and taxes,
sharing of costs and profits in PPP (Public Private Partnership) contracts etc.,
oversight of professionals engaged in such certification has to be as per law
of the land. Accordingly, even though investigation was sought by the
petitioner vide letter dated 1st July, 2013, no satisfactory
investigation has been done.
ICAI Expert Group Report dated 29th July
2011 (Report made in the wake of Satyam scam):
The expert group constituted by the ICAI
also examined the issues concerning operation of MAFs in India. Issues
referred to the Expert Group by the High Powered Committee group of the
ICAI are:
a) Manner in which certain Indian CA firms, hold
out to public that they are actually MAFs in India, the manner in which
assignments are allotted, determination of nexus/linkage. The representatives
of certain Indian CA firms carry two visiting cards one of Indian CA firm and
another of a multinational entity. They represent the multinational entity and
seek work for Indian CA firm.
b) Name used by auditor in his/her report – The
basic question was whether the auditors of M/s. Satyam had correctly mentioned the
name of their firm in the audit report.
c) Terms and conditions and cost payable for use
of international brand name – No international firm will allow its name to be
used by all and sundry. The question is what is the consideration whether it is
determined as a percentage of fee or profits and whether it is within the
framework of Chartered Accountants Act, 1949, Regulations framed, thereunder
Code of Conduct and Ethics.
d) Nature of extra benefits accrued to the Indian
CA firms having foreign affiliation.
e) How the MAFs placed their foot in India – Long
back in a meeting with RBI it was informed that the MAFs entered in India to
set up representative offices. No documents are available as regards the terms
and conditions set out while granting them permission to operate in India.
However, the RBI vide its letter No.Ref.DBS.ARS.No.744/08:91:008 (ICAI)/
2003-2004 dated 23rd March, 2004 inter alia, mentioned that
“RBI has not permitted any foreign audit firm to set up office or to carry out
any activity in India under the current exchange control regulations.
f) Contravention of permission originally
granted by Government – What was the original permission given for these firms
to enter into India and subsequently whether they are adhering to the terms and
conditions of that permission? If contravention was found to take up with
Government/FIPB – for approaching Government or FIPB, ICAI must have
information as to the nature of permission given. As already mentioned, no
documents are available indicating the nature of permission granted. What is
the current position of international trade in accounting and related services?
The opening up of accounting and related services, can be linked to reciprocal
opening up by developed countries.
g) Additional powers required by ICAI to curb the
malpractices – If under the existing legislation, ICAI does not have enough
powers to curb this practice, whether they would need more powers. A separate
proposal for amendment of Chartered Accountants Act, 1949 has been sent by the
Council to the Government seeking additional powers.
The Expert Group observed that MAF solicits professional work in an international brand name.
They have registered Indian CA firms with the ICAI with the same brand names
which are their integral part. There is no regulatory regime for their
accountability. Thus, the principle of reciprocity u/s. 29 of the CA Act,
Section 25 prohibiting corporates from chartered accountancy practice and Code
of Ethics prohibiting advertisement and fee sharing are flouted. The MAFs also
violate FDI policy in the field of accounting, auditing, book keeping, taxation
and legal services.
The Expert Group recommended that no person or entity and specially Chartered Accountants can
hold out to public that they are operating in India as or on behalf or in their
trade name and in any other manner so as to represent them being part of or
authorised by MAFs to operate on their behalf in India or they are actually
representing MAFs or they are MAFs office/representatives in India, except
those registered with ICAI in terms of clause (Hi) as a network, in accordance
with network guidelines as notified by ICAI from time to time.
Status Report by the ICAI
The Institute called for information from
171 Indian CA firms perceived to be having international affiliation to examine
whether they are functioning within the framework of CA profession. However,
the said firms were reluctant to submit copies of agreements with foreign
entities and their tax returns. Certain CA firms submitted the documents by
masking certain portions contained in their agreements, partnership deeds and
assessment orders/income tax returns claiming confidentiality and commercially
sensitive nature of the documents. Some of the firms did not provide the
details. Some of the findings from the data collected were as follows:
a) The multinational entity has granted
permission to the participating firms in the network to use the brand name.
This is notwithstanding the fact whether the firms have signed the License
Agreement with the entity or not. The relationship between members and firms
and how these are governed from same offices under common management and
control is not disclosed. The data disclosed on the website, however, clearly
brings out the linkage.
b) Though some of the firms participating in the
networks have not signed the Verein document of Name License Agreement, yet
while making remittances to the multinational entity, the revenue of the entire
network is taken into account.
c) Firms received financial grants from non-CA
firms. A member of the Institute is prohibited
from receiving any part of profits from a non-member of the Institute. Such an
act on the part of a member/firm seems to be in violation of Item (3) of Part I
of the First Schedule to the Chartered Accountants Act 1949.
d) The networking firms have made remittances to
a multinational entity, sharing their revenue which they have claimed to be
towards subscription fees, technology cost and administration cost etc.
in violation of Code of Ethics and regulations under CA Act.
e) Firms used the words such as “In Association
with ….”, Associates of ……..”, Correspondents of ……” etc. on the
stationery, letter-heads, visiting cards thereby violating provisions of Item
(7) of Part I of the First Schedule to the Chartered Accountants Act,1949. The networking firms in Network and all their
personnel are using the domain name identical to the name of the multinational
entity in their email IDs and the same is displayed in their visiting cards.
f) The obligations set out in respect of some of
the CA firms as per the sub-licensee agreement give a clear indication that the
CA firms are under the management and supervision of a non-CA firm for matters
such as admission of partners, merger, purchase of assets, etc.
g) Some of the firms in Network have admitted
that the global network identifies broad market opportunities, develops
strategies, strengthens network’s internal products and promotes international
brand. The member firms in India also gain access to brand and marketing
materials developed by their overseas affiliate, thereby indirectly soliciting
professional work.
h) Most of these firms have a name license
agreement to use International brand name. One of the terms of such agreement
is that apart from common professional standards etc., the Indian
affiliates shall harmonize their policies etc. with the global policies
of the network. In this manner, matters such as selection and appointment of
partners, acquisition of assets, investment in capital etc. are
regulated through the means of such agreements and at time even the
representative voting is held by an aligned private limited company rather than
the CA firms themselves. As a consequence of this, the control of the Indian CA
firms is effectively placed in the hands of non-members/companies/foreign
entities.
i) The member firms are required to refer the
work among themselves. In respect of some firms, referral fee is payable and
receivable. Agreements also provided for use of name and logo. Payment/receipt
of referral fee is prohibited as per code of conduct applicable to CAs.
In the light of the aforesaid findings,
following recommendations were made to the Council:
a) The Council should consider action against the
firms which had not given the full information.
b) Consider action against the firms who are
sharing revenue with multinational entity/consulting entity in India which may
include cost of marketing, publicity and advertising as against the ethics of
CAs or receiving grants from them.
c) Action to be taken against the audit firms
distributing its work to other firms and allowing them access to all
confidential information without the consent of the client;
d) Require the CA firms to maintain necessary data
about the remittances made and received on account of networking arrangement or
sharing of fee;
e) Consider action against firms being paid or
offered referral fee;
f) To disclose their international
affiliation/arrangement every year to the Institute;
g) Council should consider action against the
firms using name and logo of international networks and securing professional
business by means not open to CAs in India;
h) Only CAs and CA firms registered with ICAI
should be permitted to provide audit and assurance services. Wherever MAFs are
operating in India, directly or indirectly, they should not engage in any audit
and assurance services without ‘No Objection’ and permission from ICAI and RBI.
Directives issued by the court:
Important observations of the SC:
“Though the Committee analysed available
facts and found that MAFs were involved in violating ethics and law, it took
hyper technical view that non availability of complete information and the
groups as such were not amenable to its disciplinary jurisdiction in absence of
registration. A premier professionals body cannot limit its oversight functions
on technicalities and is expected to play proactive role for upholding ethics
and values of the profession by going into all connected and incidental
issues.” (Page 68)
“It can hardly be disputed that
profession of auditing is of great importance for the economy. Financial
statements audited by qualified auditors are acted upon and failures of the
auditors have resulted into scandals in the past. The auditing profession
requires proper oversight.” (Page 69)
On the basis of various reports and findings
as discussed aforesaid, the Court issued the following directives:
a) The Union of India may constitute a three
member Committee of experts to look into the question whether and to what
extent the statutory framework to enforce the letter and spirit of Sections 25
and 29 of the CA Act and the statutory Code of Conduct for the CAs requires
revisit so as to appropriately discipline and regulate MAFs.
b) To consider need for appropriate legislation
on the pattern of Sarbanes Oxley Act, 2002 and Dodd Frank Wall Street Reform
and Consumer Protection Act, 2010 in US or any other appropriate mechanism for
oversight of profession of the auditors.
c) Question whether on account of conflict of
interest of auditors with consultants, the auditors’ profession may need an
exclusive oversight body may be examined.
d) It may also consider steps for effective
enforcement of the provisions of the FDI policy and the FEMA Regulations
referred to above.
e) Such Committee may be constituted within two
months. Report of the Committee may be submitted within three months
thereafter.
f) The Enforcement Directorate (ED) may complete
the pending investigation within three months.
g) ICAI may further examine all the related
issues at appropriate level as far as possible within three months and take
such further steps as may be considered necessary.
(The above decision is a summery. Full
text of the decision may be read on the Supreme Court portal:
http://sci.gov.in/supremecourt/2013/35041/35041_2013_Judgement_23-Feb-2018.pdf
)
10 Section 142(2A) – Special audit – Direction for special audit without application of mind – Objection of assessee not considered – Order for special audit not valid
1.
(2018) 401 ITR 74 (Kar)
Karnataka
Industrial Area Development Board vs. ACIT
A.Ys.:
2013-14 & 2014-15,
Date
of Order: 02nd January, 2018
The
petitioner is a Government of Karnataka undertaking, engaged in the activities
of development of industrial areas within the State of Karnataka. The relevant
period is A. Ys. 2013-14 and 2014-15. The petitioner is already subject to
audit at the hands of the Controller and Auditor General of India (C & AG)
as well as the independent chartered accountant, and also under the provisions
of the KIADB Act itself and had already produced these two audit reports for
the said two years before the Assessing Officer. For the relevant years, the
petitioner assessee had raised its objections for the proposal for special
audit u/s. 142(2A) of the Income-tax Act, 1961. However, without application of
mind the Assessing Officer issued directions for the special audit.
The
petitioner assessee filed writ petition and challenged the said directions for
special audit. The Karnataka High Court allowed the writ petition and held as
under:
“i) The purpose of section 142(2A) of the
Income-tax Act, 1961 is to get a true and fair view of the accounts produced by
the assessee so that the special audit conducted at the instance of the Revenue
may yield more revenue in the form of income-tax and it is not expected to be a
mere paper exercise or a repetitive audit exercise. Therefore, the special
circumstances must exist to direct the “special audit” u/s. 142(2A) of the Act
and such special circumstances or the special reasons must be discussed in
detail in the order u/s. 142(2A) itself.
ii) It prima facie appeared that the assessing
authority had not only directed the special audit in the case of the assessee,
a Government undertaking already subject to audit at the hands of the C &
AG as well as the independent chartered accountant under the provisions of the
Act under which it was constituted, rather mechanically, but at the fag end of
the limitation period, perhaps just to buy more time to pass the assessment
order in the case of the assessee, which admittedly for the period in question
enjoyed exemption from income-tax under section 11.
iii) The orders neither disclosed the discussion on the
objections of the assessee to the special audit and at least in one case for
the A. Y. 2013-14, the assessing authority did not even wait for the objections
to be placed on record and before they were furnished on 29/03/2016,he had already passed the order on 28/03/2016 while the limitation for passing the
assessment order was expiring on 31/03/2016. The orders u/s. 142(2A) could not be sustained.
9 Section 264(4) of I. T. Act, 1961 – Revision – Scope of power of Commissioner – Waiver of right to appeal by assessee – Appeals filed on similar issue for other assessment years – Not ground for rejection of application for revision – Revision petition maintainable
1.
(2018) 400 ITR 497 (Del)
Paradigm
Geophysical Ltd. vs. CIT
A.Y.:
2012-13, Date of Order: 13th Nov.,
2017
The
assessee was a non-resident company and a tax resident of Australia. It
provided and developed software enabled solutions and annual maintenance
services to the solutions supplied by it. For the A. Y. 2012-13, the assessee,
inter alia applied the provisions of section 44BB of the Income-tax Act, 1961
and filed its return. Pursuant to the scrutiny assessment, the Assessing
Officer issued a draft assessment order treating the receipts as royalty or fee
from technical services. No objections were filed u/s. 144C(2) of the Act, by
the assessee and therefore, no directions were issued by the DRP. Consequently,
the Assessing Officer passed a final order dated 11.05.2015, u/s. 144C(3)(b)
r.w.s. 143(3) of the Act confirming the adjustments made in the draft
assessment order. He applied the provisions of section 44DA and computed the
total income of the assessee. The assessee did not file any appeal against the
order of the Assessing Officer.
On
01.02.2016, the assessee filed a revision petition u/s. 264 of the Act, before
the Commissioner on the ground that the Assessing Officer had wrongly not
applied section 44BB and had incorrectly invoked and applied section 44DA. The
assessee submitted that for the A. Y. 2012-13, it had not availed of the remedy
of appeal and had invoked the alternative remedy under section 264. The
Commissioner declined to interfere with the order primarily on the ground that
on similar issue which arose in the A. Ys. 2011-12 and 2013-14, the assessee
had filed appeals before the appellate authority, and therefore, the revision
petition u/s. 264 for A. Y. 2012-13 was not maintainable.
The
assessee filed writ petition and challenged the order of the Commissioner. The
Delhi High Court allowed the writ petition and held as under:
“i) The Commissioner could not refuse to
entertain a revision petition filed by the assessee u/s. 264, if it was
maintainable, on the ground that a similar issue arose for consideration in
another year and was pending adjudication in appeal before another forum.
ii) The time for filing appeal had expired. The
assessee had waived its right to file appeal and had not filed any appeal
against the order in question before the Commissioner (Appeals) or Tribunal.
Therefore, the negative stipulations in clause (a), (b) and (c) of section
264(4) were not attracted.
iii) When a statutory right was conferred on an
assessee, it imposes an obligation on the authority. New and extraneous
conditions, not mandated and stipulated, expressly or by implication, could not
be imposed to deny recourse to a remedy and right of the assessee to have his
claim examined on merits. The Commissioner could not refuse to exercise the
statutorily conferred revisional power because the Assessing Officer was his
subordinate and under his administrative control.
iv) The Commissioner while exercising power under
section 264 exercised quasi-judicial powers and he must pass a speaking and a
reasoned order. The reasoning could not be sustained for it was contrary to the
Legislative mandate of section 264.
v) The matter is remanded to the
Commissioner to decide the revision petition afresh and in accordance with
law.”
Change before you get replaced!
On the occasion of the
launch of the Golden Jubilee year of the venerable BCAJ, I take the liberty of
doing a bit of crystal ball gazing on behalf of the tax professionals of the country.
The objective of this article is only to take a peek at what the future could
possibly have in store for us. Readers are therefore advised to not get into
technicalities. It is the message that counts and not the form.
Part I
The date is 31st
December, 2018. The time is 7.59 pm
Millions of Indians are
glued to their TV sets as their untiring and zealous Prime Minister Mr.
Narendra Damodardas Modi is about to address the nation. Several viewers are
ominously recounting his speech on the night of 8th November, 2016
when he broke the news about demonetisation. Everyone is wondering what will be
announced today.
At sharp 8.00 pm, the PM’s
face appears on TV channels. There is hushed silence as everyone strains to
catch the first words of the PM.
“Mitron”, he begins.
After the customary
pleasantries, he gets down to business and within a few seconds shocks the
nation by saying that “with effect from midnight of 31st December,
2018, there will be no tax on income. The Income-tax Act, 1961 will stand abolished
almost 57 years after it was enacted.”
For a few seconds, there
is stunned silence in all the living rooms in the country. The disbelief is
writ large on the faces of the millions glued to their television sets. But as
reality sinks in, there is chaos everywhere. As expected, people rush to their
mobile phones trying to send messages on all possible types of media. Whatsapp
crashes in a few seconds as millions of messages flood the system. Facebook
comes alive with all kinds of comments and remarks. Twitter suddenly reports
that #incometaxabolished starts trending at No. 1 spot.
As expected, television
news channels go berserk and excited reporters start shouting at the top of
their voices. There is a rush to interview Mr. Subramaniam Swamy who has been
one of the most vociferous proponents of the “abolish income-tax” suggestion.
Some of the business channels also start interviewing the stunned “tax experts”
and “tax gurus” of the country. Most questions revolved around finding out what
these experts/gurus would do once the Income-tax Act is abolished. How will
they keep themselves occupied going forward?
The new year eve parties
all over the country suddenly see a drop in attendance as thousands of affected
tax practitioners try and comprehend the impact of this huge announcement made
by the Prime Minister. The bolt from the blue which most people never expected
would ever come had actually been delivered. And what a timing!
Income-tax Act, 1961
repealed w.e.f. 1st January, 2019! Before becoming a senior citizen
the Act has been given euthanasia by the government. Chartered Accountants all
over the country suddenly open up their offices and start reviewing their
financials for past few years as well as current year. Everyone begins to
estimate how much he/she is likely to lose out in terms of gross revenues once
the Income-tax practice closes down.
There are thousands of
Chartered Accountants in India who have, over the decades, built up a large tax
practice. They have been heavily dependent on the compliance related tax
practice where thousands of tax returns, lakhs of TDS statements etc are filed
year after year. As we all know, in recent years, a large portion of the
traditional income-tax practice of Chartered Accountants has been reduced to a
compliance driven practice. With the advent of automation and e-governance,
e-filing and e-payments have become the order of the day. These have shifted
the focus of people from knowledge to data entry and computerisation. Many
Chartered Accountants who refused to see the writing on the wall,are woken up
from their self imposed slumber. The prospect of their sweat and toil of
several years being on the verge of disintegrating into nothing is real and
even closer to the present than ever imagined! Very few CAs realise that the
way technology is evolving, they could anyways be redundant. Globally, there is
greater acceptance of this fact and those of us who are not upgrading our skill
sets continually, risk being replaced by machines. The ‘routine’ tax practice
is clearly at risk.
Let us take a look at the
list of various categories of people who will be affected by this dramatic
announcement by the Prime Minister:
a) Income-tax practitioners which would include
Chartered Accountants
b) Employees of the Central Government posted in
the Income-tax departments across the country
c) Middlemen who connive with the corrupt and
“fix cases” at the assessment and appellate stages
d) Publishing houses who print thousands of
books every year on taxation
e) Owners of several websites which provide tax
return filing services
f) Lawyers and counsel who provide litigation
services to tax payers and their tax consultants at the various appellate
stages
g) Television channels who spend hours discussing
the Budget and other tax matters alongwith “tax experts” and “tax gurus”
h) Many of us at the Bombay Chartered
Accountants’ Society and other professional bodies who are part of the various
committees that spend so much time on income-tax related programs / articles
etc.
The objective of this
article is merely to prod you, our reader, into sitting up and thinking. Are
you ready for a disruption that threatens to completely change your work
profile? Are you doing anything to hone your skills towards an alternative area
of practice? You have got a
Mediclaim policy to take care of a medical emergency and an insurance policy to
take care of your loved ones in case of the ultimate emergency. But have you
spent even one rupee on providing for a professional emergency – an emergency
of the type that artificial intelligence can bring upon you? Do you even
know that as blockchain technology becomes more and more prevalent and
pervasive, there may come a day when a taxpayer need not even have to file a
tax return? All the data that goes into the return today would anyways be
already available with the government? Who will then come to you for filing
tax returns? What then?
Once e-assessments become
the order of the day, imagine how much time will be saved? Imagine a
possibility that the client will tell you that he does not need you to respond
to the notices. He could sit on his laptop and respond directly to the
notices! You are not required for representing your client before a tax
officer. What then?
Today, almost every piece
of information under the sun is easily traceable on the internet with the help
of Google. For case laws, one does not need to remember citations. One does not
need to subscribe to costly magazines and/or websites. All this is virtually
floating around free of cost on the world wide web! Why would anyone call you
up to ask you about a case law? What then?
Quarterly TDS statements
are basically a compilation of data. Preparing them and filing them does not
require rocket science. All it requires is a reliable data entry operator and a
robust software. Why would a company or a partnership firm come to you for this
service? Can they not outsource this work to a BPO or to a freelance data entry
operator at a fraction of the fees that you would charge? What then?
Such simple examples are
enough to make us think hard about the harsh future ahead. The prospect of the
entire Income-tax Act, 1961 being repealed is definitely something that will
force us to think even harder.
Part II
I took the further liberty
of asking a few people known to me (and to most if not all of you) as to how
they would react to such a situation and how they would deal with this kind of
a change. Every effort has been made to speak to different categories of people
who are likely to be affected by such a change.Their interesting responses will
surely help our readers in understanding how others (who have a lot at stake in
the continuation of the Income-tax Act) would handle disruptive change that may
even do away with the Income-tax Act itself. If their thinking helps our
readers in being in a better state of preparedness for an “Apocalypse Now” type
of situation, this article would have served its purpose. Here’s what some of
the people I spoke to have to say:
Menaka Doshi, Managing Editor, Bloomberg Quint
Question:The
citizens of India are very familiar with your face as we see you regularly in
the media. Your coverage of financial world is well appreciated by thousands. A
major chunk of the discussions that you spearhead in the media are related to
Income-tax. Surely, a lot of your own time as well as that of your team members
would be spent in researching on tax matters and in talking about it.
We want to
know what it would be like for you if the Income-tax Act, 1961 is suddenly
repealed one day! A big section of the content that you thrive on for your
career and your job would suddenly vanish. How would you adapt to this change?
If you were to start preparing for such a change in advance, what would you do?
Menaka Doshi: I can’t tell if your hypothesis is a dream or a
nightmare. Personally, what a pleasant surprise it would be to “take home” my
full salary. Professionally, yes I’d miss covering all the fiscal
ammunition. The big retroactive landmines and the dense language of Section
9, the MAT missile and the LTCG bombs. But I wouldn’t worry about my job. After
all, there is still GST.
T. P. Ostwal (a practicing Chartered Accountant)
Question: As
someone who is very active on the international tax front, what would your
reaction be if, one fine day, we hear an announcement that the Income-tax Act,
1961 is abolished? Do you feel that tax professionals of India would be able to
survive by changing their home ground from India to other countries? Are we equipped
to provide truly international tax advice to foreigners engaged in
international trade even in those cases where the trade does not touch India?
T. P. Ostwal: The thought which you have brought about with this
question is very interesting and I wish that it should happen. I feel that it
would be a very bold decision by the Government to abolish the Income-tax Act.
The abolishment of the Income-tax Act has been immensely advocated by Dr.
Subramanian Swamy and I endorse his views. Unfortunately, neither the
Income-tax department nor the Government of India has the courage to do so. I
wish that they would do so for at least a short period on a trial and error
basis. During such period, they should abolish the Income-tax Act for 5 years
and clean up the whole system similar to the clean up being carried out under
the “Swachh Bharat Abhiyan”. They should allow all the pending assessments
and appeals to be completed in this duration so as to start with a clean slate.
Subsequently they should introduce a simplified Income-tax law with a moderate
rate of tax. In this law, all the receipts should be treated as taxable and all
the expenditure should be allowed as a deduction. As such with the advent of
technology and with Aadhar being linked to everything, taxation of all the
transactions will be streamlined. This will give an opportunity to the people
of India to clean up their records and be straightforward in the future. It
would be pertinent to ensure that the new Income-tax Act is not being
complicated unlike the present system.
And as for your thought
that whether the professionals in India would be able to survive this
abolishment by changing their home ground and shifting to another country, this
thought is virtually an impossible task. Neither are Indian Chartered
Accountants equipped to handle international tax advices where India is the
subject matter of part of the transaction nor can they handle a transaction where
India is not a subject matter at all. If you shift abroad on the premises
that Income-tax Act is abolished and you are going out of the country to advise
the foreigners, it is not an impossible task but we would definitely need to
gear up. There are professionals who have changed their home ground, gone
abroad and integrated themselves with the technical advancements in terms of
the laws of the world and as well advise on laws of the other countries. It is
not an unachievable task, but by and large 99% of our tax professionals are not
equipped to do that.
The Tax experts in India
can be classified in 3 categories
Domestic Tax Experts
Domestic – International
Tax Experts
International –
International Tax Experts
There are various tax
professionals in India who are well equipped to advise the clients and handle
matters within the domestic tax areas and a huge number of these professionals
are specialists. However, there are very few professionals who are specialists
on the Domestic – International tax front. Over a period of time, from 2001,
our tax professionals have gradually achieved proficiency in this field. Almost
10,000 professionals in India can handle Domestic – International tax
transactions. However, whether these 10,000 can handle International –
International tax transactions is questionable. Hardly 25-30 Chartered
Accountants may be in a position to handle international affairs entirely
outside India however, the rest of them may not be able to, in my personal
opinion.
By and large Indian tax
experts who have achieved the proficiency in advising international tax matters
can advise on the Domestic – International tax transactions as well, i.e.
application of Indian tax treaties with other countries. However, they are
neither efficient nor proficient in advising on the laws of the other
countries. This is because they are generally not expected to know the laws of
countries other than India and also practising on the laws of these other
countries may not be permissible. Consequently, they do not have expertise on
that subject.
Nevertheless,
theoretically it is quite possible to equip yourself with the knowledge of laws
of the other countries. Despite the fact that you know the laws of the other
country, the understanding of jurisprudence in that country is equally
important. Since the laws are interpreted in a particular manner by the judges
which could be different from the theoretical legal provision, this knowledge
is also extremely important. Those who keep abreast of the provisions of law
as well as the judicial interpretation in those countries can definitely embark
upon this idea of creating for themselves, professional opportunities abroad.
There are people from the large firms who have shifted abroad to their foreign
affiliates and thereby acquired that proficiency in foreign laws.
Unfortunately, if someone goes abroad for such opportunities they settle there.
Therefore, if I am asked
this question today about the Indian experts practising in India and regarding
their ability to understand and work with these foreign laws with their current
skill set, I have my reservations. I doubt whether there are any people in a
position to do that except for the small number of 25-30 professionals I
mentioned earlier. A situation of abolishment of the Income-tax Act would
create challenges for the practitioners unless they take necessary steps. They
will have to look for other work opportunities, which fortunately, are ample in
a country like India. Taking an example of the recent case of Nirav Modi, a
forensic audit is required for such cases. There are specialists who undertake
such assignments and by becoming little more equipped, the tax professionals in
India can undertake such other assignments in India itself especially with the
ongoing Swachh Bharat Abhiyan of the Government of India, particularly Mr.
Narendra Modi.
Mr. Narendra Modi is
undertaking the responsibility of cleaning up everything and consequently the
entire system is being cleaned up as a part of the Swachh Bharat Abhiyan. I
must compliment and congratulate him and the Government for undertaking the
Swachh Bharat Abhiyan in its true sense. Mr. Modi, is neither compromising nor
allowing anybody to compromise with any of the systems of the Government. For
achieving this, actions are necessary and he is undertaking such actions. Hence
the Chartered Accountants can definitely support the Government of India in its
endeavour for creating a Swachh Bharat by undertaking different and innovative
work rather than just getting bogged down to direct taxation related work. The
field of indirect taxation is humongous, wherein we can help the tax payers and
the Government of India. Further, there are multiple opportunities in the area
of company law and other system oriented work, which are substantial in the
country. We are barely around 2,50,000 Chartered Accountants. When a company
like Tata Consultancy Services has 3,00,000 employees, getting work
opportunities for 1,50,000 Chartered Accountants (assuming that they are
presently involved in direct tax work) in different fields is not at all a
difficult job.
Sonalee Godbole (a practicing Chartered Accountant)
Question:You
practice actively in income-tax matters and handle several large litigations
for your clients. You have also been regularly appearing in the ITAT on behalf
of your clients. What would be your reaction if the Income-tax Act, 1961 is
abolished one day? How would you spend your time once there is no litigation
left on tax matters and nothing is to be represented before the income-tax
authorities?If you had sufficient notice of such an event happening in future,
how would you prepare for it?
Sonalee Godbole: Government generates revenues from levy of
various taxes to meet demands of different stakeholders in the economy and also
to meet its economic development agenda like infrastructure development,
healthcare, education etc. Income tax revenues constitute a large portion of
the overall tax collections. Therefore, it is highly unlikely that the income
tax will be abolished. If it was abolished, it shall be considered as one of
the most radical tax reforms.
If we assume that income
tax is abolished, then the consequential shortfall in income tax revenue will
have to be met through other sources like levy of some other taxes.
Introduction of new taxes will give opportunity and open new area of practice.
Knowing the past history – whenever new laws are introduced in India, due to
drafting inconsistencies, it is open field for litigation. All those who have
experience of litigation practice in the field of Income tax, will have edge
over new entrants. The introduction of new law/laws will keep us busy while we
understand, interpret and litigate.
Simultaneously,
Government will introduce several compliances for the citizens, in order to
ensure that relevant data is collected by the Government. The assignment of
doing compliances on behalf of clients will provide opportunities to
professionals.
If announcement for
abolition of income tax is made by the Government, I will start studying
various other laws which are presently applicable in the country, to look for
opportunities and also look at newly introduced laws. In our CA curriculum, we
are taught to tirelessly study and continuously update our knowledge. This will
certainly help while I explore newer areas of practice. Initially, it may cause
some hiccups but everything would fall in place in long term.
The citizen will bless the
Government for abolishing the income tax. But on a lighter note, students of CA
course will be most happy since, one of the most difficult and lengthy subjects
shall be removed from the curriculum of CA students. Such a relief!
Arun Giri, promoter, Taxsutra
Question:You
have co-founded a highly successful tax portal and have been able to create an
excellent network that goes beyond the cyber world and into the physical world.
Your business model revolves around income-tax related news. Although you do
have an indirect tax related section in your portal, the predominant brand that
you have created for your portal is in the world of income-tax. In this
scenario, how would you react to the abolition of the Income-tax Act by the
government in the near future? How would you deal with a sudden void created by
such an announcement?
Arun Giri: The abolition of income tax is an idea (better
described as ‘fantasy’) that has been advocated by some thinkers in the recent
past. It hasn’t taken off and for good reasons. Be that as it may, we enter the
fantasy land to answer this question!
A black swan event like
this gives one an opportunity to imagine and paint a different canvas … with
no scope of daily tax reporting except to the extent of past litigations, there
will be very little that will excite the Indian tax professional.That being
the case, tax professionals will have to look elsewhere… naturally they will
replace their Indian tax practice with a Asian or global tax practice. Several
hundred Indian tax firms may eye the GCC market, parts of Asian continent or
even Africa where tax laws are new/evolving, hence giving them an opportunity to
learn new tax laws and become proficient tax advisors for tax laws of other
jurisdictions. Taxsutra will be happy to follow the customer and think
‘global.’ We would probably direct our focus towards global tax updates, with
focus on tax jurisdictions which would interest the Indian tax professional.
Associations like the
BCAS, with a glorious history, especially in tax, will also have to conduct
programs to re-skill the Indian tax advisors. Taxsutra shall probably be
partnering BCAS in this endeavour. If such a day were to ever pan out, it will
cause seismic changes in the tax world but what is life without being jolted
out of our comfort zones once in a while!
Kamlesh Varshney, Commissioner of Income Tax (International Taxation)-2
New Delhi
Question:
Sir – you have spent several years in the service of the income-tax department
and have, over the years, risen in rank. Today, you would be heading a team of
several hundred officers and other staff in the income-tax department. Like
you, there would be hundreds of other senior officers with thousands of staff
down the line. Basically, the work that all of you are doing is totally
dependent on what is laid down in the Income-tax Act, 1961. If we suddenly have
a situation where this Act is abolished, how would you and your team react?
Obviously, the government will either have to absorb such a large work force in
other jobs or will be left with no alternative but to seek large scale job
cuts. In either case, what do you think would be the reactions of the affected
people and how would they cope?
Kamlesh Varshney: First of all, I believe that this is a
hypothetical situation, which is unlikely to happen. However, if it happens it
would definitely be a disappointment for the tax administrators since the
wealth of experience they have gained over the years in tax matters and its
implementation would suddenly be lost. So far as job is concerned that would
not be an issue as being in government job, the work force would be absorbed
somewhere else. Having said that, I believe this situation would not arise
since direct tax has a special role to perform. Direct tax is one of the
major instruments for transfer payments (from rich to poor) meeting
socio-economic objective/principles enshrined in our constitution. Consumption
or transaction based tax, though easy to implement, fails to achieve transfer
payments. They are also more burdensome for poor people as they spend
virtually everything that they earn. Hence, for a country like India which
believes in socio-economic objectives/principles, it is virtually impossible
for any Government to abolish income tax.
Milin Mehta (a practicing Chartered Accountant)
Question:You
have been in tax practice for more than 30 years and are a partner in a firm
that was established several decades back. You have an established client base
to whom you are providing various tax services. Lately, this has become more
and more a compliance driven practice. There is already a challenge being faced
by such practitioners from the advent of automation – particularly
practitioners based in smaller towns of India. To add to this, if, one day, the
government decides to abolish the Income-tax Act, how would you react? What
steps do you think you need to take right away so that if such a drastic decision is taken in the near future by the government, you
will be able to continue to practice as a CA?
Milin Mehta: At the very outset I must state that it is a very
interesting thought. I am reminded of my own words a few years ago where I wanted
the participants of the regional conference of WIRC in Mumbai to imagine a
situation where three things happen: (1) No Tax Audits (2) No audit for Private
Limited Companies and (3) No scrutiny assessment. The purpose was to encourage
members to focus on purely “value added services” from compliance oriented. I
encouraged the members at that time to move to services where importance is
given more to the quality of service than merely stamp of being a CA.
I must admit that your
thought goes beyond what I had envisaged.
Let me analyse the
situation from a different angle. In the budget estimate of FY 2018-19, Income
Tax (personal tax, corporate tax and other taxes like STT, etc.) is estimated
at Rs. 11.39 lac crore out of gross revenue receipts (tax and non-tax and
without deducting the share of the state governments from the consolidated fund
of India) of Rs. 27.81 lac crore i.e. approximately 41% of the total gross
revenue. If you exclude the share of the Central Government (CG), this % goes
up to 57 % plus. Therefore, it is impossible to abolish the income tax, without
either substituting it with some other source of revenue or drastically
bringing down the expenditure of the CG.
I as a Chartered
Accountant very strongly feel that in either of the things, the CAs will have
enough work provided we are agile and flexible to re-train or re-orient
ourselves quickly enough to seize the opportunities. Considering the speed with
which our fraternity adapted to a framework change in the indirect taxes in a short
time shows distinctly that we as community are adept at the changes, though we
resist it a lot and many times unnecessarily.
I feel that one of the
reasons why we, as a firm, remained ahead of the pack is that we have adapted
with changes faster than other firms and have seized most of the opportunities.
As a firm, we have taken the principle (and I have been talking to younger
members and others entering the profession about this) that we must consider
that the changes are inevitable and it is only your ability to make yourself
relevant with the changes which would keep you ticking. Therefore, I feel that
I (and so also my fraternity of CAs) are ready to meet with the challenges that
would be thrown if the income tax is abolished and substituted with any other
source of revenues.
Let me look at this from a
further different angle. A large portion of the tax team of any CA office goes
in the area of compliance. Second in line will be representation and
litigation. Very little time is spent in advisory in true sense. Therefore,
majority of the time goes in completely “non-value added services”. The
services in these areas are like necessary evils and completely avoidable. The
question that I ask myself and my team is that “do we want to continue to do such
work?”. The answer is a clear “NO”. I would rather want to utilise my time more
creatively. I would want to devote my time in generating wealth and well being
and not in defending my position all the time.
The abolition of income
tax will free up time of a large number of very capable people, who I am sure
will devote their time in much more creative manner. It would be a shock at the
beginning but things would settle fast and my office and so will be most of the
agile CAs be more gainfully employed. I am not sure whether the income levels
of people will go up or not, but certainly their happiness quotient or their
quotient for contribution to the society will significantly go up.
I am not even slightly
afraid of this situation. In fact, I would welcome such situation as I do not
wish to be engaged in the work which does not produce anything.
Coming specifically to my
organisation, I feel that we are already ready for such challenges to face. The
culture is already developed to expect changes and many times initiate such
changes and challenge the situation and be ready.
Before I end, I would
want to mention that success in our profession does not depend on what you know
but it completely depends on what is your capability of learning. I would
recommend my friends to create that capability and you will be able to face the
challenges of any change, no matter how significant it is, better than your
peers.
Anil Sathe (former editor of BCAJ & a practicing Chartered
Accountant)
Question:You
have been the editor of the BCAJ for several years and have been a member of
the Journal Committee of the BCAS for more than a decade. You are also a senior
tax practitioner. The BCAJ has a very strong coverage of articles and features
relating to income-tax. If, one day, the government decides to abolish the
Income-tax Act, how would you react? What steps do you think you need to take
right away so that if such a drastic decision is taken in the near future by
the government, you will be able to continue to practice as a CA? Also, if you
were to become the editor of BCAJ again, how would the journal look like
without any article or feature relating to income-tax?
Anil Sathe: If income tax is abolished! When I read this
hypothetical announcement, my first reaction was that of shock, then relief,
gradually giving way to concern. My relationship with tax laws is longer than
that with my wife. My tryst with income tax began in 1978 when I began my
articleship. Gradually the liking for tax law grew into a passion. When I started
practice, though I was involved in every traditional area of practice including
accounts and audit, my first love was tax. I still recall the heated
discussions/ deliberations with friends in our office, in BCA study circles and
RRCs. As I started public speaking and writing, tax was the subject that I
chose. In practice I would spend hours in the corridors of Aayakar Bhavan
attending assessments, later appeals and finally in the courtrooms of the
Tribunal. Of course tax practice did result in a significant amount of
frustration when I realised that knowledge, effort and skill had very little
relation with the result which was what the client desired. When I joined the
Journal Committee of the BCAS, meetings were lively with seniors discussing
various tax issues threadbare. As the editor of the BCAJ, I enjoyed reading the
material that was published in each issue. Even today, income tax constitutes
around 40% of the editorial content of the journal. Without knowing it, tax law
has occupied such a position in professional life that it is difficult to
imagine its absence. So what would I do if income tax was abolished?
Yes those long waits, in
the department and in courtrooms would no longer be there. I would not have to
miss family commitments because an important matter was coming up. There would
be sufficient time to spend for myself. But what would I do for a livelihood?
Of course, if Income tax was abolished, the government would have to
necessarily replace it with some other revenue generating mechanism. One would
then have to study that legislation and, if possible, develop expertise in that
area. But all of us have to realise that traditional tax practice in the form
that we have seen it is already on the decline. For more than a decade, we have
seen the change and those who have not had the foresight to change the practice
structure are already suffering. Pure compliance practice has already declined
or shifted to other service providers and this trend would accelerate in the
days to come. Therefore, though abolition of income tax would be a shock for
thousands, the change in the practice landscape has been visible for a long
time. In fact, as professionals, we need to realise that the value addition to
client is in advising about his economic activity rather than in regard to the
output thereof. To a client, a person who advises him on how to increase the
size of the pie is more important than the one who tries to save the pie that
has already been baked. Professionals will have to get into the area of
consulting. Litigation in tax law would undoubtedly continue but would become
so costly that only a few would be able to afford it. So on the personal front,
while even after abolition of tax law, the remaining litigation might suffice
to take me through upto the end of my professional career, my firm would have
to reinvent itself and look to continuously develop the area of business
consulting.
As for the journal, its
contents are a reflection of the needs of readers. It’s information content is
already being challenged by the onslaught of technology with information
reaching the doorstep of the reader much before it is available in the journal.
Therefore, the journal itself will have to undergo a change, even if income tax
were to continue to exist. In its absence, new areas of practice will come to
the fore, and these will fill the void in the journal. In the next decade or
so, I expect the electronic media to completely overtake the print media. This
will have to be understood and appreciated and accepted by future editors of
the journal. The form and content of the journal will undergo a change, but if
it adapts itself to the changing scene in the profession it will retain its
place of eminence.
Part III
A new beginning!
Repeal of the Income-tax
Act, 1961 may or may not happen. Even if it does happen someday, it may be in
the very distant future. The point of this article is not about the
Income-tax Act but about the challenges thrown by disruptive technology that is
fast pervading every aspect of our lives. The objective of this article is to
spur our readers into thinking outside the box.
When we are faced with a
life changing situation, the one important question that stares at us is – “did
I do anything in the past to prepare myself to face such a situation”?
In the hypothetical
situation that I have written about in Part I of this article, we talked about
reactions of people who could be affected by such a situation. In this part of
the article I would like to talk about how we could start preparing ourselves
now so that if any part of our existing practice is disrupted suddenly, we are
not caught napping! The challenge that disruption poses must be converted into
an opportunity by us. Old baggage that has been carried on for many years can
be discarded using this opportunity.
We need to understand and
accept the fact that the practice area that sustained us over the decades will
not continue to do so in the decades ahead. We have to look at alternatives. We
need to spot opportunities around us and start working on them immediately.
There are several emerging areas of practice that are clearly making their
presence felt. We need to start taking interest in them and then start focusing
on a few of them. Some such exciting and interesting areas that one could
consider are:
u Data analytics
u Forensic audit
u Blockchain technology
u Transfer pricing in other countries
u Financial planning and wealth management
u Rehabilitation, insolvency, liquidation
services
u Corporate governance
u Valuation services
u Business / Commercial laws services
u International trade laws
u Climate change and carbon credit
u Inheritance and succession planning
All in all, the objective
of this article is to provoke the reader into action. Our profession needs
to be aware of the disruptive force of technology and change that is sweeping
the globe. We cannot afford to remain in our cocoons any longer. If we are
to survive, we need to accept the change and before that change sweeps us away,
change our course. Just as a boatman regularly adjusts his sails with every
change in the wind, so must we.
I sincerely hope that
readers of BCAJ will contribute to making the golden year of the BCAJ memorable
and momentous by reading every article relating to this theme of “disruption”
and imbibing the spirit behind the articles in their professional and personal
lives and make themselves and their teams ready for change. Unless we change
really fast, we will soon get replaced. The time to act is NOW! 
1 Section 147 – Reassessment – After the expiry of four years – No failure by assessee to truly and fully disclose all material facts – reopening is bad in law
ACIT vs. Kalyani Hayes Lemmerz Ltd.
ITA No: 802 of 2015 (Bom. HC)
A.Y.: 2003-04 Dated: 29th January, 2018
[ACIT vs. Kalyani Hayes Lemmerz Ltd.
ITA No.2476/PN/2012;
Dated: 24th Aug., 2014 ; Pune. ITAT]
The Assessee Company was
incorporated in 1996 with the Kalyani Group (Indian Partner), holding 75% and
Lemmerz Werke GMBH Germany (German Partner) holding remaining 25% share in it.
Thereafter, the share holding of the Assessee company, underwent a change with
the German Partners, increasing its share holding to 80% in the Assessee
Company by acquiring shares from M/s. Kalyani Group.
The Assessment was
completed u/s. 143 (3) of the Act after having discussed the shareholding
pattern, allowed the carried forward loss under section 79 of the Act.
Thereafter, the assessment was reopened on the point of shares holding pattern
of the company i.e in the assessment
order, applicability of provisions of section
79 of I.T. Act has not been considered by the AO.
Thereafter, the A.O passed
an order u/s. 143 read with 147 of the
Act, rejected the Petitioner’s objection, and thereafter, inter alia,
disallowed the carry forward of business losses u/s. 79 of the Act.
The CIT(A) allowed the
Assessee’s appeal, inter alia, holding that when all facts including the
change in shareholding pattern, had been disclosed during the regular
assessment proceedings, as is evident from the Assessment Order passed in the
regular assessment proceedings, then merely because the Assessing Officer
choose not to apply section 79 of the Act, it could not be said that the
Assessee had failed to disclose fully and truly all material facts, necessary
for assessment. This was a case where the first proviso to section 147 of the
Act will apply as the reopening notice is beyond a period of four years from
the end of the relevant AY.
Being aggrieved, Revenue
filed an appeal to the Tribunal. The Tribunal held that, where an assessment
order u/s. 143(3) of the Act was passed in regular assessment proceedings,
evidencing full and true disclosure of all material facts necessary for the purpose
of assessment. Then mere non consideration of section 79 of the Act by the A.O
cannot lead to the conclusion that the Assessee had failed to disclose all
material facts truly and fully, which were necessary for Assessment. The
Tribunal relied upon the Apex Court’s
decision in Calcutta Discount Company Ltd. vs. CIT 41 ITR 191 – wherein
it has been held that obligation of the Asssessee is to disclose all primary
facts truly and fully to the extent relevant for the purpose of Assessment. The
Assessee is under no obligation to inform the Assessing Officer of the
interference of fact or law to be drawn from the material facts which had been
disclosed fully and truly by the Assessee.
Being aggrieved, Revenue
filed an appeal to the High Court. The grievance of the Revenue is that it was
obligatory on the part of the Assessee to invite the attention of the A.O to
section 79 of the Act during regular assessment proceedings. Thus, not having
done so, it is submitted that the first proviso to section 147 of the Act, can
have no application.
The Hon. High Court
observed that it is an undisputed fact that the regular Assessment Order had
been passed u/s. 143(3) of the Act. The reopening notice has been issued beyond
the period of four years from the end of the relevant AY. Therefore, the first
proviso to section 147 of the Act is applicable and reopening notice can only
be sustained in cases where there is failure to disclose fully and truly all
material facts necessary for assessment. The reasons in support of the impugned
notice itself records the fact that the issue of shareholding pattern of the
company was discussed by the A.O in his Assessment order passed in the regular
assessment proceedings. The only basis of reopening is that the A.O in the
regular assessment did not apply provisions of section 79 of the Act, to
determine the taxable income. This non application of mind by the A.O while
carrying out assessment cannot lead to the conclusion that there has been any
failure on the part of the Assessee to truly and fully disclose all material
facts necessary for Assessment. The Tribunal correctly placed reliance upon the
decision of the Supreme Court in Calcutta Discount Company Ltd., (supra) to
hold that not pointing out the inference to be drawn from facts will not amount
to failure to disclose truly and fully all material facts, necessary for
assessment. In view of the above the, Appeal of dept was dismissed.
8 Sections 69B and 147 – Reassessment – Undisclosed investment – Where as per rule 11UA, value of shares was less than Rs. 5, but assessee purchased same at Rs. 10 per share and disclosed all facts in return, reassessment notice for valuing these shares at Rs. 35 as per valuation by Government valuer was not justified
[2018] 90 taxmann.com 284 (Bom)
Shahrukh Khan vs. DCIT
A.Y.: 2010-11, Date of Order: 08th Feb., 2018
Shahrukh Khan vs. DCIT
A.Y.: 2010-11, Date of Order: 08th Feb., 2018
In the A. Y. 2010-11, the assessee had purchased 1,10,00,000 shares at the rate of Rs. 10 per share. The Assessing Officer received information that Government valuer has determined fair market value of the said shares at Rs. 33.35/- per share. Therefore, on the basis of the said information, the Assessing Officer issued notice u/s. 148 of the Income-tax Act, 1961 on the reason to believe that 1,10,00,00 shares were purchased at an undervaluation of Rs. 25.69 crores. Objections filed by the assessee were rejected.
The assessee filed writ petition challenging the reassessment proceedings. The Bombay High Court admitted the writ petition and held as under:
“i) The assessment order itself mentions that the value of shares is less than Rs. 5 per share on application of Rule 11UA of the Income-tax Rules. There was a complete disclosure of all facts during regular assessment proceedings. Prima facie, the order disposing of the objections, while dealing with the objection of no reason to believe that income has escaped assessment on application of section 56(2)(vii), has completely ignored the Explanation thereto. The Explanation to section 56(2)(vii) states that the fair market value is to be determined in accordance with the Income-tax Rules. On application of Rule 11UA of the Income Tax Rules, the value per share came to less than Rs. 5 per share.
ii) In the circumstances, the impugned notice indicates a change of opinion, as this very issue namely – valuation of share was a subject matter of consideration during the regular assessment proceedings. Besides, on the application of method of valuation as mandated by the Explanation to section 56(2)(vii), prima facie, the Assessing Officer could not have had reason to believe that income chargeable to tax has escaped assessment.
iii) In the above view, prima facie, the impugned notice is without jurisdiction. Accordingly, there shall be interim relief in terms of prayer clause (d).”
7 Sections 80-IA(4), 147 and 148 – Reassessment – Where AO rejected claim of assessee of deduction u/s. 80-IA(4) and, Commissioner (Appeals) allowed said claim of deduction in its entirety, thereafter AO could not reopen this very claim of deduction for disallowance u/s. 148
[2018] 91 taxmann.com 186 (Guj)
Gujarat Enviro Protection & Infrastructure Ltd. vs. DCIT
A.Y.: 2010-11, Date of Order: 19th February, 2018
Gujarat Enviro Protection & Infrastructure Ltd. vs. DCIT
A.Y.: 2010-11, Date of Order: 19th February, 2018
For the A. Y. 2010-11, the assessee filed return of income after claiming deduction u/s. 80-IA(4). The return of the assessee was taken in scrutiny by the Assessing Officer. During such scrutiny assessment, the Assessing Officer examined the assessee’s claim of deduction u/s. 80-IA and disallowed the claim of deduction. On appeal, the Commissioner (Appeals) allowed the assessee’s claim.
Thereafter, the Assessing Officer issued reassessment notice u/s. 148 on grounds that on perusal of records, it was seen that the amount on which the assessee had claimed exemption u/s. 80-IA included the interest income assessable under the head ‘Income from other sources’. On verification of bifurcation of interest income, it was clear that this interest income was not derived from the infrastructure development activity of the undertaking. Hence, it was not to be considered for the purpose of deduction under section 80-IA. Thus, deduction so allowed on the interest income was not allowable. The objection filed by the assessee were rejected.
The assessee filed writ petition challenging the reopening. The Gujarat High Court allowed the writ petition and held as under:
“i) The assessee’s reply to the Assessing Officer would show that out of the total interest income, the assessee had attributed a sum of certain amount as business income. It is this claim of the assessee of the interest income of certain amount, as being part of its business income which is a focal point of the reasons recorded by the Assessing Officer for reopening the assessment. He contends that the interest income cannot be treated as arising out of the assessee’s business, and therefore, deduction u/s. 80-IA(4) would not be allowable. However, this is for later. For the present, one may record that the Assessing Officer passed an order of assessment in which he rejected the assessee’s claim of deduction under section 80-IA. He therefore had no occasion to separately comment on the assessee’s claim of interest income being eligible for such deduction. Be that as it may, the assessee carried entire issue in appeal before the Commissioner. The Commissioner (Appeals) by his order, allowed the assessee’s claim of deduction u/s. 80-IA in toto. Record is not clear whether the revenue has carried the order of Commissioner (Appeals) before the Tribunal or not. However, this by itself may not be a determinative factor.
ii) At that stage, after the Commissioner allowed the assessee’s appeal, the Assessing Officer issued the instant reassessment notice. Since the notice was issued beyond the period of four years from the end of relevant assessment year, the requirement of the assessee to make true and full disclosure, and the failure to make such disclosures leading to income chargeable to take escaping the assessment becomes crucial. In this context, the record would show that the crucial requirement arising out of the proviso to section 147 is not satisfied. The Assessing Officer has, in fact, in the reasons recorded itself proceeded on the basis of ‘on verification of record’. Thus, clearly the Assessing Officer proceeded on the basis of disclosures forming part of the original assessment. Even otherwise, as noted, during the original assessment, the Assessing Officer had called upon the assessee to clarify on the interest income which include the assessee’s claim of certain amount as business income and, therefore, eligible for deduction u/s. 80-IA(4). There was no failure on the part of the assessee to disclose fully and truly all relevant facts.
iii) There is yet another and equally strong reason to quash the impugned notice. Before elaborating on this, it is recorded that the assessee’s contention of possible change of opinion cannot be accepted. The Assessing Officer had rejected entire claim of deduction u/s. 80-IA(4). He, therefore, had no occasion to thereafter comment on a part of such claim relatable to the assessee’s interest income. Had the Assessing Officer accepted in principle the assessee’s claim of deduction under section 80-IA(4) and thereafter, after scrutiny not made any disallowance for interest income forming part of such larger claim, the principle of change of opinion would apply. In the present case, once the Assessing Officer rejected the claim of deduction u/s. 80-IA(4) in its entirety, there was thereafter no occasion and any need for him to dissect such claim for rejection on some additional ground.
iv) The second reason which it is referred to is of merger. The Assessing Officer having rejected the claim of deduction u/s. 80-IA(4), the issue may be recalled was carried in appeal by the assessee and the Commissioner (Appeals) allowed the claim in its entirety. It would thereafter be not open for the Assessing Officer to reopen this very claim for possible disallowance of part thereof. When the Commissioner (Appeals) was examining the assessee’s grievance against the order of Assessing Officer disallowing the claim, it was open for the revenue to point out to the Commissioner (Appeals) that even if in principle the claim is allowed, a part thereof would not stand the scrutiny of law. It was open for the Commissioner to examine such an issue, even suo motu. If one allow the claim in its entirety, the Assessing Officer thereafter cannot re-visit such a claim and seek to disallow part thereof. This would be contrary to the principle of merger statutorily provided and judicially recognised. Even after the Commissioner (Appeals) allow such a claim and the revenue was of the opinion that he has not processed it and committed an error, it was always open for the revenue to carry the matter in appeal. At any rate, reopening of the assessment would simply not be permissible. Reassessment carried an entirely different connotation. Once an assessment is reopened, the same gives wider jurisdiction to the Assessing Officer to examine the claims which had been formed part of the reasons recorded, but which were not originally concluded.
v) In the result, impugned notice is quashed. Petition is allowed and disposed of accordingly.”
6 Section 43(6) – Depreciation – WDV – While computing written down value u/s. 43(6) for claiming depreciation, depreciation allowed under State enactment cannot be reduced
[2018] 90 taxmann.com 420 (Ker)
Rehabilitation Plantations Ltd. vs. CIT
A.Y.: 2002-03, Date of Order: 29th Jan., 2018
Rehabilitation Plantations Ltd. vs. CIT
A.Y.: 2002-03, Date of Order: 29th Jan., 2018
The assessee was engaged in the business of manufacture and sale of centrigued latex and rubber. For the A. Y. 2002-03, it claimed depreciation of the entire cost of the plant and machinery to the extent of 35 per cent treating it as the actual cost allowable on which the allowable deduction for depreciation is computed. The Assessing Officer found that the depreciation on assets used in the plantations, including for manufacturing activity, was found to have been claimed by the assessee-company for more than two decades. It was found that earlier the assessments had not been taken under the Income-tax Act, 1961, since the entire income was assessable under the Kerala Agricultural Income-tax Act, 1991 (AIT Act). It was found that as per section 32(1) of the IT Act, depreciation on building, machinery, etc. is to be allowed on the written down value of the assets, owned by the assessee and used for the purposes of the business. The written down value of the assets as per section 43(6) is the actual cost when the assets were acquired before the previous year. Otherwise the written down value shall be the actual cost of the assets less all depreciation actually allowed under the IT Act. The assessee had been claiming depreciation in computing the income from plantations, and if the actual cost of the assets is adopted it would lead to the assessee getting a double benefit on the same component of cost, to the extent of 35 per cent. Hence, the written down value for the previous year was only permissible to be claimed as depreciation, was the specific ground on which such claim was rejected. The Assessing Officer allowed depreciation on written down value after reducing the depreciation claimed under AIT Act from the actual cost.
The Tribunal held that there could be no claim for the assessee over and above the written down value as per the books of account and upheld the decision of the Assessing Officer.
On appeal by the assessee, the Kerala High Court reversed the decision of the Tribunal and held as under:
“i) It is seen from the report filed by the Assessing Officer under the AIT Act that the assessee has claimed depreciation in the earlier years when filing returns under the AIT Act. The report of the Assessing Officer under the IT Act also indicates that the assets pertaining to the agricultural income has not been projected for depreciation under the IT Act for the previous years. The Assessing Officer points out that depreciation was claimed in the years 1998-99 to 2001-02 with respect to the building and plant & machinery of rubber sheeting factory, the income derived from which, being a manufacturing activity, however is not covered under the AIT Act. In such circumstances, one has to look at whether in allowing the depreciation on the basis of the written down value as available in section 43(6)(b), the entire cost of the building and plant and machinery for the purpose of generation of agricultural income has to be allowed or not.
ii) There need not be any controversy raised on the interpretation of the provision of section 43(6) at sub-clause (b). What can be reduced from the actual cost to the assessee is all depreciation actually allowed under the IT Act, 1961 or the IT Act, 1922 or any Act repealed by that Act or any executive orders issued when the Indian Income-tax Act, 1886 was in force. The AIT Act having not been specifically noticed and the depreciation allowed with respect to the income assessed to tax under any other enactments having not been excluded, there is no reason for this Court to come to a different finding as to the written down value which could be claimed as depreciation on the first year in which the assessee is assessed under the IT Act. The assessee was earlier assessed under the IT Act, but for its manufacturing activity and not its agricultural operations, the income from which was assessed under the AIT Act. The assets employed for agricultural operations were never accounted for computing the depreciation under the IT Act, since that income, prior to rule 7A, was not exigible to tax under the IT Act.
iii) The question arise since the entire income generated from the agricultural income was assessable to tax under the AIT Act, a State enactment. Only in the relevant assessment year i.e. 2002-03, the provision for a separate assessment under the AIT Act and IT Act came into force by virtue of the Income-tax Rules. Income from the manufacture of rubber which was earlier treated as agricultural income was made assessable under the IT Act to the extent of 35 per cent of the income derived from the business. Hence, the assessee would be entitled to claim only 35 per cent of the depreciation for the relevant assessment year. However, in computing such depreciation, should one adopt the entire cost of the plant and machinery or that shown as the written down value after reducing the depreciation allowed under the AIT Act, is the vexing question.
iv) As noticed, the deeming provision is very clear and there is nothing to exclude from the computation of the cost of the assets; the depreciation allowed under the AIT Act. The revenue would contend that this Court has ample powers to iron out the creases and avoid a double benefit being conferred on the assessee. There is no doubt of such powers, but, whether it could be exercised in the present case is the question. In ironing out creases one should not be accused of burning the cloth, by adding words into the statute to digress from the essential unambiguous intention.
v) The rule providing division of income to be assessed respectively under the AIT Act and the IT Act was brought in the year 2002. The Government was quite aware of the provision available in the IT Act, 1961 by which the depreciation in cases, where it was not being claimed under the enactments as specified in section 43(6)(b), can only be excluded and otherwise the written down value has to be deemed to be the cost of the assets. On apportioning the income from agriculture to be assessed under the respective enactments of the State and the Union; amendments ought to have been brought in accordingly to ensure that no double benefit accrues on an assessee.
vi) Such amendments were brought in with prospective effect as is seen from Explanation 7 to section 43(6) of the IT Act which got inserted by the Finance Act, 2009 with effect from 1-4-2010. The Explanation takes in the specific defect of double benefit being conferred on the assessee. The legislature thought it fit to give it effect from 1-4-2010. The assessment year herein is 2002-03 relating to the income of the previous year being 2001-02. The amendment does not apply to that year. The amendment brought in without any retrospective effect, further makes it clear that the legislature cured the defect, but however, did not do so for the years previous to the amendment and not for the relevant assessment year. This is not a situation in which casus omissus could be supplied.
vii) On the above reasoning, the disallowance of the depreciation and the computation made of the written down value cannot be accepted. The Assessing Officer is directed to employ the deeming provision for computing the written down value de hors the depreciation granted under the AIT Act and take 35 per cent of the cost of the total assets as written down value, allowing the depreciation for the relevant assessment year to that extent. The Assessing Officer shall deem the written down value to be the cost of the assets and compute the depreciation allowable at 35 per cent of such deemed written down value and apply it to the portion of the income derived from the agricultural business, that is assessable under the IT Act. The appeal is allowed with the above observations.”
5 Section 32(2) – Unabsorbed depreciation – Law applicable – Effect of amendment to section 32(2) by Finance Act, 2001 – Removal of restriction of eight years for carry forward and set off – Unabsorbed depreciation or part thereof not claimed till relevant year – Carry forward and set off permitted
(2018) 400 ITR 569 (Delhi)
Principal CIT vs. British Motor Car Co. (1934) Ltd.
A.Y.: 2010-11, Date of Order: 09th January, 2018
Principal CIT vs. British Motor Car Co. (1934) Ltd.
A.Y.: 2010-11, Date of Order: 09th January, 2018
The relevant period is the
A. Y. 2010-11. The assessee had the accumulated carried forward depreciation
u/s. 32(2) of the Income-tax Act, 1961 starting from the A. Y. 1998-99. In the
A. Y. 2010-11, the assessee claimed set off of the carried forward
depreciation. The Assessing Officer disallowed the claim in respect of amounts
carried forward from the years prior to A. Y. 2002-03 on the ground that the
amendment to section 32(2) of the Act, which removed of eight years limit, was
prospective and effective only from 01/04/2002.
The Commissioner (Appeals)
reversed the order and his decision was upheld by the Tribunal.
In
appeal by the Revenue, on the question whether section 32(2) as amended by the
Finance Act, 2001, w.e.f. 01/04/2002 could be given effect beyond the period of
eight years prior to its commencement, the Delhi High Court upheld the decision
of the Tribunal and held as under:
“i) The rationale for the amendment of section
32(2) the restriction against set off and carry forward limited to eight years,
beyond which the benefit could not be claimed under the provisions of the 1961
Act, was for the reasons deemed appropriate by Parliament.
ii) The limit was imposed in the year 1996
through the Finance (No. 2) Act, 1996. Had the intention of Parliament been
really to restrict the benefit, of unlimited carry forward prospectively, there
were more decisive ways of doing so, such as, an express provision or an
exception or proviso. The absence of any such legislative device meant that the
provision had to be construed in its own terms and not so as to restrict the
benefit or advantage it sought to conform. No question of law arose.”
4 Section 54EC – Exemption of Capital gain – Time of six months from date of transfer for investment – Transfer effected only on transfer of physical possession of property and not on date of execution of development agreement – Investment made by assessee falling within time specified u/s. 54EC
(2018) 401 ITR 96 (Bom)
CIT vs. Dr. Arvind S. Phake
A.Y. 2008-09, Date of Order: 20th Nov., 2017
The assessee entered into a
registered development agreement dated 23/09/2017 in respect of certain
property. The total consideration agreed was Rs. 5,32,00,000/. Physical
possession was given on 01/03/2008. For the A. Y. 2008-09, a return was filed
by the assessee declaring his income on account of long term capital gain on
sale of the immovable property. The assessee claimed exemption u/s. 54EC of the
Income-tax Act, 1961 in respect of investment of Rs. 50,00,000/- in bonds of
the NHAI made on 28/03/2008 and Rs. 50,00,000/- in bonds of RECL on 22/08/2008.
The Assessing Officer held that the investment of the bonds of NHAI was within
the period specified u/s. 54EC of the Act and the investment of Rs. 50,00,000/-
in the bonds of RECL was beyond the period provided in section 54EC in as much
as the investment made on 22/08/2008 was not within six months from the date of
transfer of assets.
The Tribunal found that on
the date of execution of the development agreement, i.e., on 13/09/2007, full
consideration was admittedly not paid, and therefore the transfer was not
effected on 13/09/2017. Therefore, taking the date of transfer as 01/03/2008 on
which date physical possession of the property was delivered, the investment made
on 22/08/2008 was well within the time specified under section 54EC of the Act.
The Tribunal, accordingly allowed the assessee’s claim.
On appeal by the Revenue,
the Bombay High Court upheld the decision of the Tribunal and held as under:
“i) The Tribunal considered
various clauses in the development agreement. Sub clause (d) of clause (3) of
the agreement provided that after full payment of consideration, the
construction would be undertaken by the developer. Admittedly, on the date of
execution of the development agreement, the entire consideration was not
received by the assessee.
ii) Physical possession of the property, the
subject matter of development agreement was parted with by the assessee on
01/03/2008. It was on that day that complete control over the property was
passed on to the developer.
iii) After having perused the various clauses in
the agreement and the factual aspects, the Tribunal rightly took 01/03/2008 as
the date of transfer and the investment made on 22/08/2008 was well within the
time specified u/s. 54EC of the Act. Therefore, no substantial question of law
arose.”
3 Section 14A – Business expenditure – Disallowance – Assessing Officer cannot attribute administrative expenses for earning tax free income in excess of total administrative expenditure
[2018] 91 taxmann.com 29 (Guj)
Principal CIT vs. Adani Agro (P.) Ltd.
Date of Order: 05th February, 2018
Principal CIT vs. Adani Agro (P.) Ltd.
Date of Order: 05th February, 2018
The assessee incurred administrative expenses amounting to Rs. 30 lakhs. The Assessing Officer was of the view that the assessee failed to fully disclose the expenditure for earning the exempt income and based on the format provided under rule 8D, made the disallowance to the tune of Rs. 60 lakhs.
The Tribunal noted that the entire administrative expenses of the assessee was Rs. 30 lakhs, out of which, the assessee had offered Rs. 10 lakhs i.e., 1/3rd of the total administrative expenditure for earning income covered u/s. 14A. The Tribunal was of the opinion that even after completing the format, the disallowance cannot exceed the total administrative expenditure incurred by the assessee.
On appeal by the Revenue, the Gujarat High Court upheld the decision of the Tribunal and held as under:
“i) Under no circumstances, can the Assessing Officer attribute administrative expenses for earning tax free income in excess of the total administrative expenditure incurred by the assessee.
ii) If it is a case where Assessing Officer disputes, question and disallow the very declaration of the assessee regarding total administrative expenditure, the issue can be somewhat different. Nevertheless, when the Assessing Officer has in the present case did not disturb the assessee’s declaration that total administrative expenses incurred by the assessee for all its activities was Rs. 30 lakhs, there was no question of disallowing administrative expenses to the tune of Rs. 60 lakhs u/s. 14A with the aid of rule 8D.”
2 Sections 40(a)(ia), 194H and 194J – Business expenditure – Disallowance – Payments subject to TDS – Compensation paid to joint venture partner under MOU – Finding that agreement not sham – Payment cannot be treated as expenditure required to deduct tax at source – Disallowance for failure to deduct tax not attracted
1.
(2018) 400 ITR 521 (Cal)
Principal
CIT vs. Entrepreneurs (Calcutta) Pvt. Ltd.
A.Y.:
2006-07, Date of Order: 13th Sept.,
2017
For the A. Y. 2006-07, the
assessee claimed as expenditure a sum of Rs. 5,17,48,439 paid to company A, as
compensation in connection with a land transaction. The assessee’s explanation
was that the amount was paid in performance of its obligation under a
memorandum of understanding with A under which A and the assessee were to share
the profit on sale of land in the ratio of 75% to A and 25% to the assessee,
that the services to be rendered by A included identifying the buyer and also
carrying out various other tasks in respect of the sale of the landed property
involved. The Assessing Officer was of the view that A was a sham company. He
treated the entire sum of compensation paid to A as the assesee’s income
chargeable to tax, on the grounds that the transaction was a sham, and that the
assessee had not deducted tax at source on the amount, invoking the provisions
of section 40(a)(ia).
The Tribunal held that the
transactions were made by a valid written contract on various terms and
conditions between the parties, which were essential for a joint venture
project. Such facts were not denied nor were any defects found in the agreement
by the Assessing Officer. It further held that the transaction was in lieu of
the agreement and the Assessing Officer was not justified in treating the
payment of compensation as an expenditure and that no tax at source was
required to have been deducted on the profit so shared between the two joint
venture partners and deleted the addition.
On appeal by the Revenue,
the Calcutta High Court upheld the decision of the Tribunal and held as under:
“i) Whether a transaction was sham or not was a
question of fact. The Commissioner (Appeals) had found the Assessing Officer’s
conclusion that it was sham transaction between assessee and A to be in direct
conflict with the Assessing Officer’s own acceptance that the services rendered
by A were of specialised, professional and technical in nature. Upon analyzing
the memorandum of understanding and other materials on record, the Commissioner
(Appeals) had accepted the contention of the assessee that the compensation paid
was not an expenditure incurred so as to attract the provisions of sections
194H and 194J requiring tax deduction at source. As a consequence, the question
of disallowance of the payments applying the provisions of section 40(a)(ia)
could not have arisen.
ii) The findings of the Commissioner (Appeals),
concurred with by the Tribunal, were based on appreciation of material on
record. Further, the Tribunal had recorded that the Assessing Officer did not
point out any defect in the “settlement/contract”. There was no perversity in
the findings of the Commissioner (Appeals) and the Tribunal. No question of law
arose.”
1 Section 143(3) – Assessment – Construction business – Estimate of cost of construction – Reference to DVO – Books of account maintained by assessee not rejected – AO cannot refer matter to DVO
(2018) 401 ITR 285 (Mad)
CIT vs. A. L. Homes
A.Y.: 2009-10, Date of Order: 20th Sept., 2017
The assessee was in
construction business. In the course of the assessment for the relevant year,
the Assessing Officer made a reference to the District Valuation Officer (DVO)
for estimation of the cost of construction. The estimated cost of construction
by the DVO was higher than that found according to the books of account of the
assessee. The valuation report was objected to by the assessee, on the ground
that it had been maintaining regular books of account and that reference could
not have been made to the DVO without rejecting the books of account. However,
the Assessing Officer added the difference in the cost of construction, as
unaccounted investment to the income of the assessee.
The Commissioner (Appeals)
deleted the addition and held that the Assessing Officer could not have made a
reference to the DVO for estimation, when the books of account of the assessee
had not been rejected. He further held that the difference between the cost
shown in the books of account and the estimation by the DVO was only 6.85%,
whereas, statutorily a reference for valuation could be made only if, in the
opinion of the Assessing Officer, the difference would have exceeded 15%. The
Tribunal found that the assessee had sold the flats and that most of the
purchasers had occupied the flats and that the cost improvements made had to be
considered as income of the purchasers. It upheld the deletion made by the
Commissioner (Appeals).
On appeal by the Revenue,
the Madras High Court upheld the decision of the Tribunal and held as under:
“i) The appellate authorities had concurrently
found that the books of account of the assessee had not been rejected by the
Assessing Officer and therefore, the matter ought not to have been referred to
the DVO for estimation of the cost of construction.
ii) The reliance placed on the report of the DVO
for making the addition was misconceived. No question of law arose.”
The Journey of the Journal
Decades ago a handful of professionals did
something extraordinary. Bound by a common vision, they conceived and evolved
the idea of a Journal for Chartered Accountants. Those committed volunteers,
embarked on an uncharted journey to bring knowledge – which was scarce in those
days – to the desks of their fellow professionals. That journey of the Bombay
Chartered Accountant Journal – is entering its 50th Volume this month. I
feel honoured to extend my delightful thanks to you – the reader – our
consistent focus, motivation and inspiration on this journey.
BCAJ demonstrates what independent
volunteers connected by a common vision can accomplish to serve a larger
professional community. So many professionals have
contributed to make the BCAJ what it is today. The innumerable writers,
contributors, poets, cartoonists, well wishers, our publishers and the editors
have given their time – a part of their lives – for a cause larger than
themselves. BCAJ will remain ever so grateful
to all of them.
The journal over the years has been a part
of many a professionals’ journey. BCAJ has strived to present depth and breadth
of themes and topics to a Chartered Accountant. What started off with giving
economic news and then tribunal judgments is now covering a broad spectrum of
topics to make complete professional reading every month. Despite the wave of
‘specialisation’, BCAJ has remained relevant due to the quality of its content
and detailed analysis by experienced practitioners. In an interlocked world,
every professional will need to read about developments that could influence
his domain. Today, no area of practice can remain an island which cannot be
approached without crossing the waters of other spheres of influence.
The early years of the BCAJ, were times of
scarcity and restrictions. Today things have swung to the other extreme – we
are surrounded by a deluge of information seeking our attention – from a lack
of access to clutter of excess.
However, a professional is still faced with the same fundamental
problem – how to find a dependable, comprehensive and balanced source of
professional reading? This problem and its solution are expressed in this
verse:
Endless
is the material to read; Time is short and difficulties many.
One
should therefore absorb the essence,
like
a swan who discerns between water and milk.
The BCAJ, then and now, strives to answer
that question. I wish and pray that BCAJ will serve its readers by curating the
essence and giving them balanced, succinct, comprehensive and dependable
technical reading every month. The reader is and always will be at the heart of
the BCAJ.
Over the years, the BCAJ has evolved its website
www.bcajonline.org which contains digitised issues of last 17 years. Many
subscribers read the digital version of BCAJ in flipbook format. We would like
more engagement, feedback and conversation with the subscribers to allow the
contributors to enhance their offering. Reader expectations matter the most,
especially now. Do write to us at journal_feedback@bcasonline.org.
The 50th Volume, starting this
month, will contain Golden Contents – pages with special articles, interviews,
musings, nostalgia, and more. This issue covers all of these to make it a
special one. The rest of the 50th Volume will continue to have such
Golden Contents. The usual monthly features and articles will of course
continue. I hope, you the discerning reader will relish this labour of love and
catch the essence.
month, will contain Golden Contents – pages with special articles, interviews,
musings, nostalgia, and more. This issue covers all of these to make it a
special one. The rest of the 50th Volume will continue to have such
Golden Contents. The usual monthly features and articles will of course
continue. I hope, you the discerning reader will relish this labour of love and
catch the essence.
Every journey
has milestones and a destination. And every milestone and destination stirs you
to take another journey. The journey of the journal is one such journey, where
every milestone inspires us to reach higher and every destination will open up
a new vista to look farther.
Learnings from Ramayana
The meaning of this shloka (verse) is that:-
There was a herculean task of conquering the mighty kingdom of Lanka, the ocean was to be crossed on foot, the opponent was the most powerful demon Ravana; and the only assistance available was that from monkeys. Despite this, Shree Ram alone killed all the demons. The moral is – the success of true heroes is attributable to their own valour and qualities; and does not depend on assistants and equipment.
In this series of a few articles, I intend to bring out the noteworthy aspects from Valmiki-Ramayana that are useful for all human beings at large and for professionals in particular. Shree Ram is believed to be an incarnation of Lord Vishnu. In that sense, he is worshipped as God. He had divine qualities, but never wielded divine powers. He never performed any Leela, Chamatkar, magic or super-human feats. He was and always acted as a human being. Valmiki is believed to be a contemporary of Shree Ram and Valmiki Ramayana which is believed to be the first and most ancient epic, is nothing but the narration of Shree Ram’s life-story. The sole objective of Shri Valmiki seems to be to project Shree Ram as an ideal, duty conscious king or ruler. Shree Ram demonstrates all emotions of a human mind but ultimately the duty consciousness prevails – duty as a king rather than in any other relation.
Many intellectuals criticize him for being too idealistic. They say it is not possible to emulate him in today’s practical life. They feel, Shri Krishna was more practical and that everyone should be like Shree Ram at home; but act as Shri Krishna outside. A few others blame him for abandoning his wife Seeta at the comment made by a dhobi. However, very few people know that after abandoning Seeta, Shree Ram lived as a Brahmachari.
I am not going to enter into any controversies as such. My aim is to tell the secret of Ramarajya –the state of most ‘ideal governance’, what made him a true leader. He is described as Maryada Purshottam. – i.e. the height or ultimate of any virtue. Be it honesty, be it bravery, be it modesty, be it leadership – whatever good qualities one can think of Shree Ram was the ‘Maryada’ or boundary. No one can surpass him in any quality. Ramayana is also popular in many countries outside India – such as Thailand, Indonesia, and Mauritius.
In the next few months, I will try to deal with this theme with practical relevance to today’s life.
2 Article 12 of India-USA DTAA; Section 9(1)(vi), 40(a)(i), 195 of the Act – payments made to the parent company on a cost to cost basis for availing lease line services from third party service provider does not qualify as royalty; it qualifies as a reimbursement, not subject to tax in India.
TS-70-ITAT-2018
T-3 Energy Services India Pvt. Ltd. v. JCIT
ITA No.826/PUN/2015
A.Y- 2010-11;
Date of Order: 2nd February, 2018
T-3 Energy Services India Pvt. Ltd. v. JCIT
ITA No.826/PUN/2015
A.Y- 2010-11;
Date of Order: 2nd February, 2018
Facts
Taxpayer, an Indian company, was an affiliate of FCo. FCo had entered
into an agreement with a third party service provider for providing
bandwidth/lease line services for the global business of the FCo’ group
including the Taxpayer. FCo raised back to back invoices on Taxpayer in respect
of Taxpayer’s share of lease line charges.
The Taxpayer contended that payment made to FCo was not in the nature of
royalty but in the nature of reimbursement and hence there was no obligation to
withhold taxes on such payments.
AO contended that the amount remitted to the third party was not a
reimbursement of expenses but was in the nature of payment made to the service
provider for lease line services through its associated enterprise (AE).
Further, it contended that such lease line charges constituted royalty under
the Act as well as the DTAA basis the amended definition of royalty under the
Act and hence would be subject to withholding u/s. 195 of the Act.
Aggrieved by the order of AO, Taxpayer appealed before CIT(A). CIT(A)
observed that in case payments were directly made to third party service
provider, it would have been taxable in the hands of the service provider and
would attract withholding obligations for the Taxpayer. Merely because the
payment is routed through FCo on back to back basis, it cannot be treated as
reimbursement of expenses. Payment made by Taxpayer is taxable in India and
will be subject to withholding.
Aggrieved, the Taxpayer appealed before the Tribunal
Held
– The
agreement with the service provider was a commercial transaction, in terms of
which FCo contracted the service provider to provide lease line services for
global business of FCo group and was not limited to the Taxpayer alone.
– The understanding
was between FCo and the service provider. Though the Taxpayer benefited from
the negotiated price under the agreement, it was not a party to the agreement.
– The
privity of the agreement was between FCo and service provider, whereby FCo obtained
the services from the service provider and passed it to its affiliates
including the Taxpayer on cost to cost basis. Thus there was no income element
involved in payments made by Taxpayer to FCo.
– Without
prejudice, the contention of AO that it is not case of reimbursement but a case
of payment to third party through its AE and hence qualifies as royalty, cannot
be accepted. This is because the term ‘royalty’ is defined under the DTAA and
it does not cover payments made towards lease line charges.
– Further,
the amended definition of royalty u/s 9(1)(vi) of the Act cannot be read into
the DTAA. Reliance in this regard was placed on Delhi HC decision in the case
of New Skies Satellite BV.
1 Article 5(4), 7 & 8 of India-Mauritius DTAA –When place of effective management is not situated in one of the contracting states but in a third country, Article 8 of DTAA (shipping income) does not apply where an agent has more than one principal, he cannot be treated as an exclusive agent for the purposes of Dependent Agent PE (DAPE)
TS-73-ITAT-2018(Mum)
ADIT (IT) vs. Baylines (Mauritius)
I.T.A. No. 1181/Mum/2002
A.Ys: 1998-99 to 2012-13,
Date of Order: 20th February, 2018
ADIT (IT) vs. Baylines (Mauritius)
I.T.A. No. 1181/Mum/2002
A.Ys: 1998-99 to 2012-13,
Date of Order: 20th February, 2018
Facts
Taxpayer, a company incorporated in Mauritius carried on the shipping
business in India. Taxpayer held a TRC indicating that it was a resident of
Mauritius for the relevant financial year. Taxpayer had an agent in India (ICo)
who concluded the contracts on behalf of the Taxpayer in India.
Taxpayer filed its return of income in India and claimed that the income
from shipping business was exempt from tax by relying on Article 8 of the India
Mauritius DTAA dealing with taxation of shipping income.
Article 8 of the India-Mauritius DTAA provides that income from shipping
business is taxable in the contracting State in which the POEM of the Taxpayer
is located. AO noted that the place of effective management (POEM) of the
Taxpayer was situated in UAE, a third country. Consequently AO held that
Article 8 of the DTAA was not applicable to the Taxpayer. Further AO held that
ICo created a dependent agent PE (DAPE) for the Taxpayer in India and
accordingly taxed the income from shipping business as per Article 7 of the
DTAA.
Aggrieved by the order of AO, Taxpayer appealed before CIT(A).
CIT(A) upheld AO’s contention that Article 8 of the DTAA was not
applicable to the Taxpayer. CIT(A) however, held that ICo did not create a DAPE
of the Taxpayer in India. Accordingly, in the absence of PE, shipping income
was held to be exempt from tax in India under the DTAA.
Aggrieved, both the Taxpayer and AO appealed before the Tribunal.
Held 1
– On
the basis of following observations, it was held that merely holding of two board
meetings in Mauritius is not sufficient to support that the POEM was in
Mauritius.
– Only two Mauritian directors
attended the first board meeting in person, while the remaining two UAE
directors of the Taxpayer attended these meeting via phone. The only business
transacted in that meeting was the appointment of the auditors.
– The business transacted in the
second board meeting was with regard to approval of accounts. It is surprising
how the annual accounts a company could be approved on telephone. This
indicates that the directors of Mauritius were on the Company’s Board only to
satisfy the conditions of the regulatory requirements of Mauritius Government.
– The
fact that ICo was appointed as an agent on a letter head showing its UAE
address and a letter addressed by Taxpayer to AO also originated from UAE
indicated that the major policy decisions were taken in UAE.
– In
case where the POEM is not in one of the contracting States, Article 8 becomes
inapplicable. Reliance in this regard was placed on the commentary by Professor
Klaus Vogel
– Thus
whether or not shipping income is taxable in India will have to be evaluated
basis Article 7 of the DTAA.
Held 2
– For
the following reasons it was held that ICo qualified as an agent of independent
status and hence did not create a DAPE for the Taxpayer in India:
• ICo carried on the activities
of the Taxpayer in the ordinary course of its business.
• Article 5(5) of DTAA between
India and Mauritius requires that when the activities of the agent are devoted
exclusively or almost exclusively on behalf of the foreign enterprise, the
agent will not be considered to be an agent of an independent status.
• The dictionary meanings of the
term ‘exclusively’ clearly suggests that the agent should earn 100% or something
near to 100% from the principal to qualify as its dependant agent. Reliance in
this regard was also placed on the decision of Mumbai ITAT in case of Shardul
Securities Ltd. vs. JCIT (115 lTD 345).
• In the facts of the case, ICo
worked on behalf of other principals as well, apart from the Taxpayer and
earned a substantial part of its income from them. Thus ICo’s activities were
not devoted exclusively or almost exclusively on behalf of the Taxpayer.
• Reliance was placed on the
decision of Mumbai ITAT in the case of DDIT(IT) vs. B4U International
Holdings Ltd. (137 lTD 346) which was upheld by Mumbai High Court in
support of the proposition that for the determination of independence for the
purpose of DAPE, one should look at the activities of the agent and whether or
not the agent works exclusively for one principal.
– The
fact that the principal has only one agent in India who undertakes all the
activities for the principal is not relevant in determination of independence
or otherwise of the agent.
– Thus,
in absence of a PE in India, the income from shipping business is not taxable
in India.
Royalty–The Digital Taxation Debate
1. Background
Characterisation
of payments for digital goods and services has been a contentious issue,
especially in Indian context. Taxation of payments in the digital economy
segment has been a subject matter of considerable litigation for quite some
time now in India and even globally. In digital economy, delivery of services
can be easily done from overseas without necessitating any part of the activity
being performed or any employees being hired in the country where customers are
located, thereby avoiding taxable presence.
The BEPS
Action 1 Report ‘Addressing the Tax Challenges of the Digital Economy’ states
that because the digital economy is increasingly becoming the economy itself,
it would be difficult, if not impossible, to ring-fence the digital economy
from the rest of the economy for tax purposes. The digital economy and its
business models present however some key features which are potentially
relevant from a tax perspective.
In India, with respect to online advertising, we have following ITAT
decisions:
a) Yahoo India (P.) Ltd. vs. DCIT
[2011] 11 taxmann.com 431 (Mumbai-Trib)
b) Pinstorm Technologies (P.) Ltd.
vs. ITO [2012] 24 taxmann.com 345 (Mumbai-Trib)
c) ITO vs. Right Florists (P.)
Ltd. [2013] 32 taxmann.com 99 (Kolkata-Trib.)
In
these decisions, the ITAT has held that payments made for online advertising
would not constitute “royalty” and in absence of any Permanent Establishment
[PE] in India of the foreign companies, the same would not be taxable in India.
In
the earlier decision of Yahoo India, the ITAT had held that services rendered
by Yahoo Holdings (Hong Kong) Ltd. for uploading and display of the banner
advertisement of the Department of Tourism of India on its portal would not
amount to ‘royalty’. In that decision, the ITAT had observed that advertisement
hosting services did not involve use or right to use by the Indian company of
industrial, commercial or scientific equipment. Further, the Indian company had
no right to access the portal of Yahoo Hong Kong. Based on these facts, the
ITAT concluded that the payment made to Yahoo Hong Kong would be in the nature of business income and not royalty income.
Similar findings have been arrived at in the case of Pinstorm and Right
Florists.
In para 21 of the decision in Right Florist (supra), it
was held as under:
“21. That takes us to the
question whether second limb of Section 5(2) (b), i.e. income ‘deemed to accrue
or arise in India’, can be invoked in this case. So far as this deeming fiction
is concerned, it is set out, as a complete code of this deeming fiction, in
Section 9 of the Income Tax Act, 1961, and Section 9(1) specifies the incomes
which shall be deemed to accrue or arise in India. In the Pinstorm
Technologies (P.) Ltd.’s case (supra) and in Yahoo India (P.)
Ltd’s case (supra), the coordinate benches have dealt with only one
segment of this provision i.e. Section 9(1) (vi), but there is certainly much
more to this deeming fiction. Clause (i) of section 9(1) of the Act provides
that all income accruing or arising whether directly or indirectly through or
from any ‘business connection’ in India, or through or from any property in
India or through or from any asset or source of income in India, etc. shall be
deemed to accrue or arise in India. However, as far as the impugned receipts
are concerned, neither it is the case of the Assessing Officer nor has it been
pointed out to us as to how these receipts have arisen on account of any
business connection in India. There is nothing on record do demonstrate or
suggest that the online advertising revenues generated in India were supported
by, serviced by or connected with any entity based in India. On these
facts, Section 9(1)(i) cannot have any application in the matter. Section
9(1)(ii), (iii), (iv) and (v) deal with the incomes in the nature of salaries,
dividend and interest etc, and therefore, these deeming fictions are not
applicable on the facts of the case before us. As far as applicability of
Section 9(1)(vi) is concerned, coordinate benches, in the cases of Pinstorm
Technologies (P.) Ltd. (supra) and Yahoo India (P.) Ltd. (supra),
have dealt with the same and, for the detailed reasons set out in these erudite
orders – extracts from which have been reproduced earlier in this order,
concluded that the provisions of Section 9(1)(vi) cannot be invoked. We are in
considered and respectful agreement with the views so expressed by our
distinguished colleagues.”
2. Recent Decision in case of Google India- ITAT
Bangalore
Recently,
ITAT Bangalore in the case of Google India Pvt. Ltd. [Google India] vs.
ADCIT [2017] 86 taxmann.com 237 (Bengaluru-Trib) dealt with the issue as to
whether payment by Google India to Google Ireland Ltd. [Google Ireland] under
‘Adwords Program’ Distribution Agreement is royalty. The ITAT held that the
said payment is taxable as royalty under the provisions of the Income-tax Act,
1961 [the Act] as well as under the India-Ireland tax treaty [DTAA] and treated
the Indian company as an assessee in default for not complying with the
withholding tax provisions.
A. Google AdWords
Google
AdWords is an online advertising service developed by Google, where advertisers
pay to display brief advertising copy, product listings, and video content
within the Google ad network to web users. The program uses the keywords to
place advertisements on pages where Google thinks they might be most relevant.
Advertisers pay when users divert their browsing to click on an advertisement.
AdWords enables an advertiser to change and monitor the performance of an
advertisement and to adjust the content of the advertisement.
The
advertisers get their advertisement uploaded into Adword program and log on the
Adword program website owned by Google. It follows the various steps to create
the Adword account for itself. The advertisers select the key words, content
and presentation related to its ads and place a bid on the online system for
the price it is willing to pay every time its user clicks on its advertisement.
Once the advertiser creates the account and uploads advertisement, the same
automatically gets stored on Adword platform owned by Google on the servers
outside India and the ads are displayed in the manner determined by the
programs running on automated platform. Google India periodically raises the
bill on advertisers for advertising spend incurred by the advertiser on clicks
through the users.
B. Brief Facts
a. Google India is a wholly owned subsidiary
of Google International LLC, USA. Google India was providing following services
to its overseas associate Google Ireland, under 2 separate agreements:
i. Information technology (IT)
and IT enabled services (ITES) [Service Agreement]
ii. Marketing and
distributorship services under a non-exclusive distributor agreement for resale
of online advertising space under the Adwords program to advertisers in India [Distribution
Agreement]. In addition to marketing and distribution services provided to
Google Ireland, under the Distribution Agreement, Google was also required to
provide pre-sale and post-sale / customer support services to the advertisers.
b. For the purpose of sales and marketing the
space, work wise flow of activities of the Google India and advertiser were as
under:
i. Enter into resale agreement with Google Ireland and resale on
advertising space under the Adword program under the Indian advertisers.
ii. Perform marketing related
activities in order to promote the sales of advertising space to Indian
Advertisers. After training to its own sale force about the features/tools available
as part of Adword program, to enable them to effectively market the same to
advertisers.
iii. Enter into a contract with
Indian advertisers in relation to sale of space under the Adword program.
iv. Provide assistance/training
to Indian advertisers if needed in order to familiarize that with the
features/tools available as part of Adword product.
v. Resale invoice to the above
advertisers.
vi. Collect payments from the
aforesaid advertisers.
vii. Remit payment to Google
Ireland for purchase of advertising space from it under the resale agreement.
c. Under the distribution agreement, Google
India made a payment aggregating to Rs. 1,457 crore for the period from F.Y.
2005-06 to F.Y. 2011-12. On the premise that it is merely a reseller of advertisement
space, Google India had categorised this payment as Google Ireland’s business
income and in the absence of a PE of Google Ireland in India, the payment was
made without withholding any tax at source. Neither Google India nor Google
Ireland had obtained any order from the tax department for Nil tax withholding.
d. As
Google India had not complied with the provisions of section 195, the tax
authorities started the proceedings u/s. 201 of the Act. Before the Assessing Officer [AO], Google India
filed the detailed reply for all the years. However, not convinced with the
reasoning of Google India, the AO, on a conjoint reading of Adword program
distribution agreement and service agreement, treated the payment as ‘royalty’
under Explanation 2 to section 9(1)(vi) of the Act as well as DTAA between
India and Ireland and determined the withholding tax liability.
e. The findings of the AO were as under:
i. The `distribution rights`
were `Intellectual Property’ [IP] rights covered by `similar property` under
the definition of royalty and the distribution fee payable was in relation to
transfer of distribution rights.
ii. Google Ireland had granted
Google India the right access to confidential information and intellectual property rights.
iii. Google India had been
allowed the use or the right to use of a variety of specified IP rights and
other IP rights covered by “similar property”.
iv. Grant of distribution right
also involved transfer of right in copyright.
v. By exercising its right as
the owner of copyright in the software, Google Ireland had authorized Google
India to sell or offer for sale, i.e., marketing and distribution of Adwords
Software to various advertisers in India.
vi. The consideration paid by
Google India was for granting license/authorization to use the copyright in the
AdWords program and not for purchase of such software.
vii. Google India had been given
right to use Google Trademarks and other Brand Features in order to market and
distribute of Adwords program.
viii. Grant of distribution right
also involved transfer of know-how.
ix. Google Ireland was obliged to
train the distributor so that Appellant could market and distribute AdWords
program.
x. Referring to Non-Disclosure
Agreement [NDA] clauses forming part of Distribution Agreement, it was held
that Google Ireland, being the copyright holder of the AdWords program, was in
a position to share confidential information whenever required with Google
India.
xi. Grant of distribution right
also involved transfer of process.
xii. Without access to the
back-end, Google India could not perform its marketing and distribution
activities. Google India had access to the processes running on the data
centres, based on the distribution rights granted to it by Google Ireland.
xiii. Google India was granted the
use or the right to use the process in the Adwords platform for the purpose of
marketing and distribution.
xiv. Grant of distribution right
also involved use of Industrial, commercial and scientific equipment.
xv. Adwords program, in one way,
was also commercial cum scientific equipment and without having access to
servers running the AdWords platform, Google India could not perform its
functions as per the Distribution Agreement.
f.
Aggrieved by the order of the AO, Google India preferred an appeal
before CIT(A). However, even the CIT(A) concurred with the view of the AO and
treated the payment to be in the nature of ‘royalty’. Aggrieved by the CIT(A)’s
order, Google India preferred an appeal before ITAT.
C. Main Issue for
consideration before ITAT
The
main issue before ITAT was whether the amounts credited in Google India’s books
to Google Ireland’s account constituted business income or royalties for use of
software, trademarks and other intellectual property rights.
D. Google’s Arguments
Before
the ITAT, Google India extensively argued that the said payment merely
represented purchase of advertisement space and it does not amount to ‘royalty’
and is in the nature of ‘business income’. Google India’s main arguments were
as under:
a) It
was merely a reseller of advertising space. It only performed market related
activities to promote the sales of advertising space. No right or intellectual
properties were transferred by Google Ireland to Google India or to the
advertiser.
b) The
brand features were predominantly commercial rights and were incidental to the
distribution activity and did not involve transfer of any separate right.
c) Google
India had no control or access to the software, Algorithm and data centre. The
server on which the Adword program runs were located outside India over which
it was not having control. Google India or the advertisers did not have any
right of any use or exploitation or the underlying IP and software. None of
these parties were concerned with the back end functioning of the Adwords
program which was solely carried out by Google Ireland. Their objective was to
benefit from the services of Google and they were not interested in the use of
search service.
d) Reliance
was also placed on the reports of High Powered Committee of the CBDT as well as
Technical Advisory Group of the OECD which had concluded that the payments in
relation to advertisement fees were not in the nature of royalty. Accordingly,
when the payments made directly by advertisers to Google Ireland could not be
regarded as royalty, the payments made by the distributor for the same ad space
also could not be characterised as royalty.
e) Clauses
containing protection of confidential information and non-disclosure were
generic and these clauses per se could not establish that there was grant of
right to use any IP.
f) Also,
what was envisaged in the exhibits of the agreement pertaining to after sales
services were that Google India responded to all routine queries of customers
and Google Ireland was to respond to the advertisers issues or technical
issues. Thus, no right to use any IP was granted to Google India.
g) The
Google brand features are predominantly commercial rights and are incidental/
consequential to the distribution activity and does not involve transfer of any
separate right. In this regard, reliance was placed by Google India on the
decisions in the case of Sheraton International Inc vs. DDIT [2009) 313 ITR
267 (Delhi HC) and Formula One World Championship Ltd. vs. CIT [2016]
176 taxmann.com 6 (Delhi HC).
h) Google
India relied upon the decisions of the coordinate bench in Right Florist
(P.) Ltd. (supra), Pinstorm Technologies (P.) Ltd. vs. ITO (supra) and Yahoo
India (P.) Ltd. vs. DCIT (supra) to prove that the issue of online
advertisement had been considered in all the decisions and it was held that the
payment made by the advertiser to the website owner was business profit and in
the absence of any business connection and PE in India and not the Royalty.
E. Tax Authorities’ Arguments
The
tax authorities argued that the payments to Google Ireland constituted
royalties on the following grounds:
a) Google India’s marketing and
distribution functions involved the sale of certain rights in the AdWords
Program, for which Google India required a license to use the AdWords Program.
The distribution rights granted to Google India under the Distribution Agreement
were therefore in effect a license to use Google Ireland’s IP i.e., inter
alia the copyright in the underlying software code of the AdWords Program.
b) The tax authorities concluded
that the license of Google Ireland’s IP to Google India under the Services
Agreement was actually for the purpose of providing the post-sale services
under the Distribution Agreement, and therefore the payments made to Google
Ireland constituted royalties.
c) The Non-Disclosure Agreement
which is Exhibit-B of the distribution agreement clearly demonstrated that by
virtue of the disclosure of the confidential information and access provided to
the confidential information to the Google India by Google Ireland, the sums
payable by Google India to Google Ireland is for information, know-how and
skill imparted to Google India.
d) Google India has been
permitted to use Google Ireland’s trademarks and brand features in order to
market and distribute the AdWords Program.
e) The grant of distribution
rights involves transfer of rights in ‘similar property’ (Explanation 2 to
section 9(1)(vi)). The grant of distribution rights also involves the transfer
of right to use Google Ireland’s industrial, commercial and scientific
equipment i.e., the servers on which on which the Ad Words Program runs.
f) The grant of distribution
rights also involves transfer of right in processes, including Google Ireland’s
databases software tools etc., without which it would not be able to perform
its marketing and distribution functions.
F. ITAT Decision
The
ITAT, to get an understanding as to how Google AdWord program works, relied on
the information obtained through the written submission of Google India, the
books available in public domain on Google AdWord and Google analytics and also
through the website of the Google and the AdWords links therein. Based on its
understanding, the ITAT observed that:
a) The entire agreement was not
merely to provide the advertisement space but was an agreement for facilitating
the display and publishing of an advertisement to the targeted customer.
b) The arrangement was not
confined to use of space but also for the use of patented tools and software of
Google Ireland.
c) Google India got an access to
various information and data pertaining to the user of the website in the form
of their name, age, gender, location, phone number, IP address, habits,
preferences, online behavior, search history etc. and it used this information
for the purpose of selecting the ad campaign and for maximising the impression
and conversion of the customers to the ads of the advertisers.
d) By using the patented
algorithm, Google India decided which advertisement was to be shown to which
consumer visiting millions of website/search engine.
e) The ITAT held that there is no
sale of space, as concluded hereinabove rather it is a continuous targeted
advertisement campaign to the targeted and focused consumer in a particular
language to a particular region with the help of digital data and other
information with respect to the person browsing the search engine or visiting the
website.
f) The ITAT did not agree that
advertisement distribution agreement and the service agreement were two
independent arrangements. According to the ITAT, both the agreements were
connected with the naval chord with each other.
g) The ITAT further held that the
payments made by the assessee under the agreement was not only for marking and
promoting the Ad Word programmes but was also for the use of Google brand
features. Needless to add that the said Google brand features were used by the
appellant as marketing tool for promoting and advertising the advertisement
space, which is main activity of Assessee and is not incidental activities.
The
use of trademark for advertising marketing and booking in the case of Hotel
Sheraton (Supra) as well as in the case of Formula 1 were
incidental activities of the assessee therein as the main activities in the
cases were providing Hotel Rooms and organizing Car Racing respectively whereas
in the present case the main activity of the assessee is to do marketing of
advertisement space for Google Adwords Programme. Therefore, these two
judgments are not applicable to the facts of the present case. Hence, for this
reason also the payment made by Google India to Google Ireland also falls
within the four corners of royalty as defined under the provisions of Act as
well as under the DTAA.
h) The ITAT has held that the
findings of the High Powered Committee would not be applicable here as this was
not case of placement of the advertisement simpliciter but there was a module
for targeted advertisement/focus marketing campaigns using the Google software
and algorithm, patented technology, secret process, use of trade mark etc.
i) The reliance placed by Google
India on the decisions of Pinstorm, Yahoo India, Right Florists have been
brushed aside since the ITAT felt that the facts relating to the working of the
AdWords program stood on a different footing.
j) The ITAT held that IP of
Google vested in the search engine technology, associated software and other
features, and hence, use of these tools by Google India, clearly fell within
the ambit of ‘Royalty’. The ITAT held that as no tax was withheld by Google
India on payments to Google Ireland, Google India was an assessee in default.
k) The ITAT was of the view that
the Ad Words Program gives an advertiser a variety of tools to enable it to
maximize attention, engagement, delivery and conversion of its advertisements.
The tools are provided using Google’s IP, software and database with Google
India acting as a gateway.
l) The ITAT was of the view that
the use of customer data for providing services under the Service Agreement was
also utilized for marketing and distribution functions under the Distribution
Agreement. It concluded that the use of customer data and confidential
information should be regarded as the use of Google Ireland’s intellectual
property by Google India.
m) The ITAT concluded that it is
through use of Google’s intellectual property that the AdWords tools for
performing various activities are made available to Google India and the
advertisers. Therefore, payments made to Google Ireland for use of its intellectual
property would therefore clearly fall within the ambit of “Royalty”.
3. Observations
a) The ITAT appears to have
undertaken an intensive fact-finding mission to unearth the technological
workings of the Google AdWords Program on the basis of which it has concluded
that the distribution rights involved a grant of license to IP and
advertisements fees were in the nature of royalties.
b) The ITAT’s ruling is clear
break with earlier positions taken on the characterization of advertisement
revenue, and payments made under distribution arrangements. Where it ruled the
payments to be in the nature of business income. In these cases, the question
is usually whether the foreign entity has a PE in India for income to be
taxable in India. In fact, the issue in such cases has been on the
determination of a PE on account of a fixed place or dependent agent rather
than whether such an arrangement will result in royalty income.
c) In fact, it was for this
very reason that the equalization levy was introduced to capture advertising
fees within the Indian tax net, in cases where the non-resident does not have a
PE in India.
d) The ITAT has taken an
aggressive approach where it has read two independent agreements in relation to
services provided by two different units of Google India together to show that
there was utilization of IP by the Indian entity and re-characterized the
nature of income. The decision does not provide for reasons of tax avoidance
for clubbing the two agreements.
e) The ITAT’s decision could
have far reaching implications from businesses across the board. Utilization of
IP such as customer data, confidential information for performing services is a
fairly common industry practice and the decision raises concerns on these type
of arrangements.
f) The above decision is very
crucial and is going to impact many cases which have the similar structure and
in such cases issue would arise as to whether such payment is in the nature of
‘royalty’.
However, one could still examine and contend that ultimately the
objective was to place the advertisement and Google India or the advertisers
were not interested in the back end process of Google Ireland and hence such
payment should constitute business income.
g) It appears that ITAT in
Google’s case has tried to distinguish the earlier decisions by holding that
Google was not only a simpliciter provider of advertisement space but it also
provided access to software, patented tools, information, etc. which helped
Google India in targeting the customers. The ITAT has also gone into
considerable depth to understand as to how these advertisements are placed on
the website of Google, how it was ensured that large number of customers visit
those advertisements, how the bidding by the advertisers take place etc. and
based on this it came to conclusion that Google India plays a pivotal role in
all these and it was not merely placing the advertisement simpliciter.
4. Equalisation Levy [EL]
a) The Finance Act, 2016 has
introduced an ‘Equalisation Levy’ (Chapter VIII) in line with the
recommendation of the OECD’s Base Erosion and Profit Shifting [BEPS] project to
tax e-commerce transactions. It provides that the equalisation levy is to be
charged on specified services (online advertising, any provision for digital
advertising space or facilities/service for the purpose of online
advertisement, etc.) at 6% of the amount of consideration for specified
services received or receivable by a non-resident payee not having a PE in
India. The Equalisation Levy Rules, 2016 have also been issued by CBDT to lay
down the compliance procedure to be followed for such levy. The Rules came into
effect from 1st June 2016.
b) Further income from such
specified services shall be exempt u/s. 10(50) of the Act. Accordingly, with
effect from 1st June, 2016, such income will not be taxed as royalty
or business income but it would be subject to equalisation levy.
An
interesting issue would arise as to whether payments made after 1st June
2016 would be liable to EL or would it still attract withholding tax treating
it as royalty based on Google India’s decision. It is notable that withholding
tax may be creditable in the country of residence of the payee but no credit is
available for EL.
5. Proposed
amendments in Section 9(1)(i) by the Finance Bill, 2018 – ‘Business Connection’
to include ‘Significant Economic Presence’
Currently,
section 9(1)(i) provides for physical presence based nexus for establishing
business connection of the non-resident in India. A new Explanation 2A to
section 9(1)(i) is proposed to inserted to provide a nexus rule for emerging
business models such as digitised businesses which do not require physical
presence of the non-resident or his agent in India.
This
amendment provides that a non-resident shall establish a business connection on
account of his significant economic presence in India irrespective of whether
the non-resident has a residence or place of business in India or renders
services in India. The following shall be regarded as significant economic
presence of the non-resident in India.
– Any transaction in respect of
any goods, services or property carried out by non-resident in India including
provision of download of data or software in India, provided the transaction
value exceeds the threshold as may be prescribed; or
– Systematic and continuous
soliciting of business activities or engaging in interaction with number of
users in India through digital means, provided such number of users exceeds the
threshold as may be prescribed.
In such cases, only so much of income as is attributable to above
transactions or activities shall be deemed to accrue or arise in India.
6. Conclusion
The
Google India’s decision will have a significant impact on how other digital
economy related payments are characterised for tax purposes in India. It would
also influence other pre 1st June 2016 cases that relate to online
advertising.
In
view of the ITAT’s observation that both the Associated Enterprises are trying
to misuse the provision of tax treaty by structuring the transaction with the
intention to avoid payment of taxes, and in view of General Anti Avoidance
Rules provision under the Income-tax Act and India’s commitment to implement
Multilateral Instrument under the BEPS initiative, the taxpayers should take
appropriate caution before entering into any arrangement/structure especially
if it is to avail any tax benefit.
It
appears that the law on this issue will continue to remain somewhat unsettled
until resolved by the higher judiciary.
The
understanding of modern day developments around digital space, the complexities
surrounding it and tax implications on such transactions need a holistic
review. It is time for India to develop a framework for digital transactions.
This would be one important aspect in India’s attempts in its endeavour of ease
of doing business.
Sale In Course Of Export U/S. 5(3) – An Update
Introduction
Under
VAT era, import and export transactions were exempted from levy of sales tax
(Vat). The export transaction is defined in section 5(1) of the CST Act.
However, section 5(1) granted exemption to direct export sale. Therefore, the
sale prior to export i.e. penultimate sale was deprived of exemption as export.
To
mitigate the said issue section 5(3) was inserted. The said sub-section is
reproduced below for ready reference.
“S.5. When is a sale or
purchase of goods said to take place in the course of import or export. –
(3)
Notwithstanding anything contained in sub-section (1), the last sale or
purchase of any goods preceding the sale or purchase occasioning the export of
those goods out of the territory of India shall also be deemed to be in the
course of such export, if such last sale or purchase took place after, and was
for the purpose of complying with, the agreement or order for or in relation to
such export.”
Thus
one sale prior to export is also exempt. However, the real issue is
interpretation of the scope of said sub-section.
Till
today, there are a number of judgements on this issue. However, still it cannot
be said that the issue is fully resolved.
Recent judgement
Recently
Hon. Kerala High Court had an occasion to decide one such issue about scope of
section 5(3) in case of Gupta Enterprises vs. Commercial Tax Officer,
Munnar and Ors. [2018] 48 GSTR 252 (Kerala).
The
petitioner was purchasing goods in auction and was objecting to charging of tax
on him by seller on ground that his purchase i.e. corresponding sale by seller
to him is covered by section 5(3) and no tax is applicable. Not able to
succeed, this petition was filed.
Facts
of case, as narrated by High Court, are as under:
“3. The appellant filed
W.P. (C). No. 6210/2005 inter alia contending that he is an exporter of
sandalwood and on receipt of prior orders and satisfying the same, he attended
the auction held by the respondents. The sale was eventually confirmed in his
favour. He was called upon to pay the entire sales tax along with the balance
amount. He replied that the transaction is exempted u/s. 5(3) of the Central
Sales Tax and sought for release of the goods against his furnishing bank
guarantee. The authorities refused to release the goods. But the respondents
insisted on payment of tax before the goods are released. Placing reliance on
the decision of the Madras High Court in W.A. Nos. 94 to 96/2000 it was
contended that the demand is against the dictum laid down in the said decision
and being aggrieved by the insistence of the Sales Tax Authorities, writ
petition was filed for the following reliefs:
(i) Issue a writ of mandamus
directing respondents 3 and 4 to release the goods purchased vide Ext. P. 3
without collecting sales tax and on the petitioner furnishing documents in
support of claim of exemption u/s. 5(3) of the CST Act and on the petitioner
paying the amount due under the auction,
(ii) Direct respondents 3 and 4
to release the goods without collection of sale tax land on the petitioner
furnishing bank guarantee for the entire tax amount pending adjudication on
sales tax exemption by the 2nd respondent and other consequential
reliefs.”
The
issue which arose was, whether the purchase of sandalwood was in course of
export u/s. 5(3). If goods purchased are exported in same form then the
exemption is invariably allowable. However, where goods purchased are processed
then question of integrated connection between export and prior purchase
arises. If no integrated connection or inextricable link is proved, the prior
transaction cannot fall u/s. 5(3). Hon. Kerala High Court referred to
historical background about interpretation of this section and then arrived at
conclusion.
The
observations of High Court are as under:
“7. The learned Single Judge after referring to the relevant provisions of
the Foreign Trade (Development and Regulation) Act, 1992, (FDTR Act), held that
while export of sandalwood can be only in such forms permitted by the DGFT,
there can be no export of sandalwood in any other form. Any export of
sandalwood except in the forms permitted by the DGFT would be an illegal export
contravening the provisions of the FTDR Act and the Customs Act. Placing
reliance on Ext. R. 3(a) addressed by the Zonal Joint DGFT to the Conservator
of Forests and Ext. R. 3(b) public notice issued by the DGFT in exercise of the
powers under “exim policy” show that sandalwood is not covered by
open General Licence, but one falling under the restricted list for which an
exporter has to make specific request for licence to DGFT, who releases quota
from time to time and that the categories of Sandalwood allowed for export are
“sandalwood chip class” in the form of heart wood chips upto 50
grams, mixed chips upto 50 grams, flakes upto 20 grams of the sandalwood
classes (Jajpokal I class, Jajpokal II class, Antibagar, Cheria Milvanthilta,
Basolabjukni, saw dust, charred billets), sandalwood chips/power sandalwood
dust obtained as waste after the manufacturing process and sandalwood in any
other form as approved by the Exim Facilitation Committee in the Directorate
General of Foreign Trade. Ext. P. 18 export licence was also issued to the
petitioner under the FTDR Act and licence to export is granted only for the
categories mentioned therein. The learned Single Judge also entered a positive
finding after referring to Ext. P. 18 export licence issued to the petitioner
under the FTDR Act that licence to export is granted only for the categories
mentioned therein, namely, sandalwood in the form of heart wood chips upto 50
grams, mixed chips not exceeding 30 grams and flakes upto 20 grams of the
sandalwood classes, Jajpokal I class, Jajpokal II class, Antibagar, Cheria
Milvachilta, Basolabukhi, saw dust, charred billets, sandalwood power, dust,
chips and flakes.
The
petitioner placed reliance on Ext. P. 17, the rules regarding selection,
cleaning, classification and disposal of sandalwood etc. issued by the
Tamil Nadu Forest Department and it was contended based on Ext. P. 17 that
various classes of sandalwood are described in Ext. P. 17 and it will be seen
therefrom that the classification is purely on the basis of weight of billets,
defects noticed in the billets and the length of the billets etc. and
these are not different types or varieties of sandalwood. The learned Single
Judge exhaustively referred to various items in Ext. P. 17 and found that the
classification of sandalwood as per Ext. P. 17 when juxtaposed with the
documents evidencing the items bid by the petitioner, as evidenced by different
documents and were put in a tabular form in paragraph 22 of the judgement. It
was concluded that export orders of foreign buyers produced by the petitioner
evidenced that they were only sandalwood chips, below 50 grams.
After
referring to the various materials as noticed above, the learned Single Judge
found that on facts the sandalwood as purchased by the petitioner from the
Forest Department is in the form of billets, roots, or even chips weighing over
50 grams, could not have been exported in consonance with exim policy and the
export licence, without converting the same into chips of the description
covered by the export licence.
There
is a prohibition, in law, for export of sandalwood in any form, other than that
permitted under the exim policy and the export licence, with an order releasing
quota for the export. So much so, the sandalwood purchased form the Forest
Department as billets, roots etc. had to be converted into flakes, power
etc. weighing below not more than 50 grams to make them exportable
goods. In commercial parlance, the goods prohibited from being exported stood
converted to exportable goods. It is also held that for the purpose of section
5(3), what is relevant for consideration is whether the goods that formed the
subject matter of the penultimate sale or purchase are the self-same goods that
are exported and in the light of the decision in Sterling Foods vs. State of
Karnataka (MANU/SC/0423/1986 :
(1986)
3 SCC 469) of the Apex Court, the words “those goods” in section 5(3)
are clearly referable to “any goods” mentioned in the preceding part
of that sub-section and it is, therefore, obvious that the goods purchased by
the exporter and the goods exported by him must be the same. On the other hand,
in the present case the goods purchased by the assessee from the Forest
Department are those which were incapable of being exported in terms of the
relevant laws. The only types of goods that can be exported as sandalwood are
those which fall under the categories permitted for export. Hence, the goods
purchased by the petitioner from the Forest Department had to undergo the
change from the commercial status of non-exportable goods to that of exportable
goods, by change in its form from billets, roots etc. to flakes of the
dimension or as dust, permitted for export, in terms of the laws relating to
export. Thus, there occurs a conversion of the goods purchased so as to facilitate
the export and as such ceased to be “such goods” which were purchased
from the Forest Department. Hence, the claim for exemption u/s. 5(3) of the CST
Act was negatived.
Though
the appellant placed reliance on the decision of the Apex Court in Consolidated
Coffee vs. Coffee Board, Bangalore (AIR 1980 SC 1403), the learned Single
Judge accepted that merely on the basis
of the condition of sale notice, one could not be compelled to pay tax provided
the exemption applies. But the decision in W.A. Nos. 94 to 96/2000 of the
Madras High Court, which in turn referred to the case of Consolidated Coffee’s
case (supra) did not support the case of the petitioner on the issue
regarding the identity of the goods to be found among that purchased and those
exported. In the Madras decision the goods purchased by the appellant therein
(petitioner herein) were contended to be different from the goods sought to
export. But the said contention was not pursued further by the Tamil Nadu
Government.
The
different varieties of sandalwood purchased by the appellant were reduced to
small pieces for the purpose of export, though noticed by the court in the said
decision, none of the decisions on which reliance was placed by the learned
Single Judge, were referred to and there was no serious argument raised by the
State of Tamil Nadu in that regard and it was in such circumstances that the
Court accepted the assessee’s case therein.”
Further
para 9 reads as under:
“9. It was then contended by the learned
counsel that the Apex Court in the decision reported in State of Karnataka
vs. Azad Coach Builders Pvt. Ltd. (MANU/SC/8024/2006
: (2006) 145 STC 176), has
doubted the correctness of the decision in Sterling Food’s case
(MANU/SC/0423/1986 : (1986) 3 SCC 469) and also the decision in Vijayalaxmi
Cashew Company’s case ((MANU/SC/1015/1996 : (1996) 1 SCC 468), and has referred
the case to a larger Bench. It is true, the Court observed, that the said
decisions need reconsideration and the matter is placed before the larger
Bench. In the above case M/s. Tata the exporter and also a manufacturer of
chassis had a pre-existing order of export of ‘Buses”. The chassis were
moved under customs bond for body building and export to the premises of the
assessee (Bus body builder).
The
assessee then delivers the completed bus which is moved under the bond directly
to the port and exported, so that chain never breaks. The question arose was
whether in such circumstances the bus body builder is entitled to claim the
benefit u/s. 5(3) of the CST Act. It is in that context the Apex Court
considered the expression “in relation to such exports” which did not
get due weightage in the earlier decision.
But
even in the said case, the assessee only contended that the test of “the
same goods” is evolved only to explain that the exporter should not have
undertaken any process to change the identity of the goods brought by him in
order to confer the benefit of exemption on the penultimate sale. Thus there
was no dispute that if the goods undergo changes in the hands of the exporter
after the purchase and before export, he will not be entitled to claim the
benefit of section 5(3) of the CST Act, which is the main issue in the present
case. Be that as it may until a final decision is rendered by the Apex Court pursuant
to the reference order in State of Karnataka vs. Azad Coach Builders Pvt.
Ltd. (MANU/SC/8024/2006 : (2006) 145 STC 176), the decision in Sterling
Food’s case and Vijayalaxmi Cashew Company’s case beholds the field as a
binding precedent under Article 141 of the Constitution of India.”
Observing
as above Hon. High Court rejected claim of section 5(3).
Conclusion
The
judgement is well reasoned to understand the scope of section 5(3) of CST Act
and more particularly, the effect of judgment of Supreme Court in case of State
of Karnataka vs. Azad Coach Builders Pvt. Ltd. (145 STC 176)(SC).
We
hope above will be a guiding judgement for deciding further cases. 
Place Of Supply – Immovable Property Based Services
Introduction
In the previous article, we had examined the Integrated Goods and
Service Tax (‘IGST’) framework in the backdrop of the provisions of the
Constitution. The IGST framework dealt with the concept of location of supplier
and place of supply (‘POS’) which aids in determining whether a supply is to be
treated as intrastate or interstate and accordingly, helps in determining the
applicable tax (CGST + SGST in case of intra-state and IGST in case of
interstate).
There are specific provisions prescribed for determination of place
of supply for both goods as well as services under Chapter V of the IGST Act.
Sections 10 & 11 thereof deal with goods while Section 12 deals with
services where both the supplier as well as recipient are located in India and
section 13 deals with services where either the supplier or recipient is
located in India.
The general rule for determination of place of supply is that the
location of the recipient is to be treated as POS except for cases where the
recipient is unregistered and his address on record is not available, in which
case location of supplier is treated as the POS.
This general rule
is subject to various exceptions where the POS is to be determined in a
different manner. One such exception pertains to cases where services relate to
immovable property and the same is covered u/s. 12 (3) in cases where both the
service provider and the service recipient are located in India. In cases where
either the service provider or the service recipient is located outside India,
Section 13(4) is applicable. In this article, we shall specifically deal with
the said exception and the issues revolving around it.
Relevant
Provisions
Section 12
of the IGST Act
(3) The
place of supply of services–
(a) directly in relation to an immovable
property, including services provided by architects, interior decorators,
surveyors, engineers and other related experts or estate agents, any service
provided by way of grant of rights to use immovable property or for carrying
out or co-ordination of construction work; or
(b) by way of lodging accommodation by a
hotel, inn, guest house, home stay, club or campsite, by whatever name called,
and including a house boat or any other vessel; or
(c) by way of accommodation in any
immovable property for organising any marriage or reception or matters related
thereto, official, social, cultural, religious or business function including
services provided in relation to such function at such property; or
(d) any
services ancillary to the services referred to in clauses (a), (b) and (c),
shall be the location at which the immovable property or boat or vessel, as the
case may be, is located or intended to be located:
Provided
that if the location of the immovable property or boat or vessel is located or
intended to be located outside India, the place of supply shall be the location
of the recipient.
Explanation.––Where the immovable
property or boat or vessel is located in more than one State or Union
territory, the supply of services shall be treated as made in each of the
respective States or Union territories, in proportion to the value for services
separately collected or determined in terms of the contract or agreement
entered into in this regard or, in the absence of such contract or agreement,
on such other basis as may be prescribed.
Services directly in relation to Immovable
Property
The practice of treating the place of supply as the location of
property in case of transactions involving immovable property is not new. Even
under the service tax regime, Rule 5 of the Place of Provision of Service
Rules, 2012 which dealt with the determination of place of provision of service
was similarly worded. However, with the concept of dual GST, this provision has
its’ own ramifications. This is because GST is a state specific law. Therefore,
deciding the type of GST applicable (CGST + SGST vs. IGST) is very important.
More importantly, in cases where the recipient of supply is not registered in
the State where the immovable property is located, the credit is lost even if
the recipient uses the services in the course of his business.
For instance, if a supplier is providing services of renting of
immovable property, in such a case, he will have to consider the Place of
Supply as the state in which the immovable property is located, whether or not
the recipient is registered in that state. Same position will apply even in
case of other transactions such as supply of maintenance and repair services
relating to immovable property. All these services apparently have a direct
relation with an immovable property and therefore, would rightly get classified
under this particular rule.
While in general, the recipient of renting service would be
registered in the state where the immovable property is located if he is into
business, the challenge may arise in case of hotels. Most companies use hotel
facilities in other states for the stay of their executives while on business
trips. Such companies may not have any branches or fixed establishments in
other states and therefore may be unregistered. This results in loss of credit
since the hotel would charge CGST & SGST relevant to that State in view of
the place of supply provision mentioned above.
Moving forward, what is meant by the phrase “directly in relation to
immovable property” needs to be analysed, as there are many other transactions
where the services involve use of immovable property as well, but there are
other factors which are also related with the supply of service and hence,
classification under this rule might not be applicable. Let us understand this
with the help of following examples:
Example 1 – ABC is a container freight
station located in Nhava Sheva. DEF, a manufacturer exporter has received an
order for export of goods from Nhava Sheva and has accordingly dispatched the
goods from his factory. When the goods reach Nhava Sheva, the exporter is
informed that the ship in which the goods are to be exported out of India will
berth at the port after 15 days and hence, DEF is required to make temporary
arrangements to store his goods. DEF enters in to a contract for the same with
ABC. The issue in this case would be whether the POS is Maharashtra, being the
location of immoveable property or Gujarat, being the location of recipient? If
ABC, taking a conservative view, classifies the service under this clause, it
would impact the credit availment for DEF as they are registered only in
Gujarat and hence, the credit of taxes for supplies consumed in Maharashtra
would not be available to them. Therefore, they are contending that the
exception clause is not applicable as the services provided by DEF are not
directly in relation to the immovable property.
Example 2 – An advertising service provider provides service in the
context of Out Of Home Advertisements. Under this model, the advertiser takes
on rent advertising space across the country by entering into agreements with
various landlords. Subsequently, the service provider enters into advertising
contract with various clients to allow the display of the advertisements from
such locations. In this context, while the services supplied by the landlords are
directly in relation to an immovable property, can the same be said for the
second leg of the transaction since the service is in relation to advertising
activity, which is distinct from leasing of an immovable property?
Before actually
analysing the above issues, we shall first discuss the following two terms,
which form the crux of this particular entry:
Scope of the phrase
“in relation to”
Directly in relation to – to be applied to what extent
The scope of the phrase “in relation to” has been dealt with by the
Supreme Court in the case of Doypack Systems Private Limited vs. Union of
India [1988 (036) ELT 0201 SC] in the context of Swadeshi Cotton Mills Co.
Limited (Acquisition and Transfer of Undertakings) Act, 1966. The issue was
whether the investments owned by the undertaking were also covered under the
provisions of the said Act and liable for acquisition? The Act provided that on
the appointed day “every textile undertaking” and “the right, title and
interest of the company in relation to every textile mill of such textile
undertakings” were transferred to and vested in the Central Government and such
textile undertakings would be deemed to include “all assets”. The contention of
the Appellants was that the investment in shares of the company were not in
relation to textile mills/undertakings and hence, they were not liable for
nationalisation.
The Supreme Court in the above case held that the expression “in
relation to” is a very broad expression which pre-supposes another subject
matter. These are words of comprehensiveness which might both have a direct
significance as well as an indirect significance depending on the context. The
Court also referred to 76 Corpus Juris Secundum at pages 620 and 621
where it is stated that the term “relate”’ is defined as meaning to bring into
association or connection with. It has been clearly mentioned that “relating
to” has been held to be equivalent to or synonymous with as to “concerning
with” and “pertaining to”. The expression “pertaining to” is an expression of
expansion and not of contraction.
From the above, it is more than evident that the term “in relation
to” has to be given a very wide interpretation. This however gives rise to the
next issue, and that is when a service is said to be in relation to immovable
property. While the GST law is silent about this respect, under the service tax
regime, the Education Guide issued by CBEC at the time of introduction of
negative list-based taxation explained that for a service to be considered in
relation to immovable property, the same should consist of lease, right to use,
occupation, enjoyment or exploitation of an immovable property or service
should have to be performed on the immovable property.
In this background, let us try to understand the above clarification
with an example. A lawyer, having his office in Delhi, provides chamber
consultancy in the form of discussion with client (based in Mumbai) on a legal
matter concerning a real estate in his Delhi Office. The client had travelled
from Mumbai for the specific meeting. Can it be said that the services in this
case are in relation to immovable property and not legal advisory?
Taking a more practical approach to the above aspect, let us take
another example of a supplier providing document management services.
Generally, this service includes receiving the documents from the customer,
scanning & storing them at supplier location. Only when the customer
requires them, they are retrieved from the respective warehouse and provided to
the customers. The customer is not aware about the location where his documents
are stored. In this context, can it be said that the services are in relation
to an immovable property merely because in supplying the services, there is an
element of immovable property involved. Both the above situations clearly
demonstrate that the service in none of the cases is in relation to immovable
property, if the interpretation of the Education Guide is accepted.
In fact, this distinction was applied even under the service tax
regime wherein Rule 4 specifically dealt with the aspect of place of provision
for performance-based services in the context of which, the Education Guide had
provided that the service of storage of goods is actually in relation to goods
and not immovable property. Relevant extracts are reproduced for reference:
5.4.1 What are the services that are provided “in respect of goods
that are made physically available, by the receiver to the service provider, in
order to provide the service”? – sub-rule (1):
Services that are related to goods, and which require such goods to
be made available to the service provider or a person acting on behalf of the
service provider so that the service can be rendered, are covered here. The
essential characteristic of a service to be covered under this rule is that the
goods temporarily come into the physical possession or control of the service
provider, and without this happening, the service cannot be rendered. Thus, the
service involves movable objects or things that can be touched, felt or possessed.
Examples of such services are repair, reconditioning, or any other work on
goods (not amounting to manufacture), storage and warehousing, courier service,
cargo handling service (loading, unloading, packing or unpacking of cargo),
technical testing/inspection/certification/ analysis of goods, dry cleaning
etc. ….
The above interpretation has been followed even in the context of EU
VAT which contains similar provision for determination of place of supply of
services. In this context, reference to the decision of the First Chamber Court
in the context of EU VAT in Minister Finansow vs. RR Donnelley Global
Turnkey Solutions Poland (RRD) is also relevant. The issue in the said case
was that RRD was engaged in providing a complex service of storage of goods
involving storage, admission, packaging, loading / unloading, etc. The issue
was whether the service could be classified under Article 47 or not, which deal
with supply of services connected with immovable property. The same is
reproduced below for ready reference:
The place of
supply of services connected with immovable property, including the services of
experts and estate agents, the provision of accommodation in the hotel sector
or in sectors with a similar function, such as holiday camps or sites developed
for use as camping sites, the granting of rights to use immovable property and
services for the preparation and coordination of construction work, such as the
services of architects and of firms providing on-site supervision, shall be the
place where the immovable property is located.
From the above, it is evident that Article 47 is worded similarly to
section 13 (4). In the context of Article 47, the Court had held as under:
Article 47
of Council Directive 2006/112/EC of 28 November 2006 on the common system of
value added tax, as amended by Council Directive 2008/8/EC of 12 February 2008,
must be interpreted as meaning that the supply of a complex storage service,
comprising admission of goods to a warehouse, placing them on the appropriate
storage shelves, storing them, packaging them, issuing them, unloading and
loading them, comes within the scope of that article only if the storage
constitutes the principal service of a single transaction and only if the
recipients of that service are given a right to use all or part of expressly
specific immovable property.
In fact, Article 47 has been amended w.e.f 1st
January 2017 to specifically provide transactions which shall be treated as
being in connection with an immovable property and transactions which shall not
be treated as being in connection with an immovable property. Some specific
inclusions and exclusions are tabulated below:
|
In Connection with Immovable Property |
Not in connection with Immovable property |
|
u Drawing up of plans for a building / u On site Supervision / Security services u Survey and assessment of risk and u Property management services (other than u Estate agent services |
u Drawing up of plans for a building / u Storage of goods in an immovable u Provision of advertising, even if uIntermediation in the provision of hotel uBusiness exhibition services uPortfolio management of investments in |
One another issue that is being faced
is from the view point of location of supplier where the services are in
relation to an immovable property. For example, ABC is a property investment
company which has acquired commercial / residential property across the country
and provides the same on lease basis to various customers. ABC has physical
presence only in Mumbai. All the lease agreements specifically provide that the
agreement has been entered into with ABC, Mumbai and the customer for leasing
the respective property which may be located anywhere across India. While
admittedly the POS in case of transactions entered in to by ABC will have to be
the location where the immovable property is situated, the issue that arise is
whether ABC is required to bill the customer from the locations where the
immovable property is located or can they continue to bill from Mumbai treating
Mumbai as the location of supplier of service?
In this regard, reference to Section 22 of the CGST Act might be
necessary which provides that registration has to be taken in each state from
where the taxable supply is being made. Therefore, it needs to be analysed as
to whether the location of supplier of service in this case will be Mumbai or
the respective locations where the property is situated? To analyse the same,
let us refer to the definition of location of supplier of service which
provides that the location of supplier of services shall mean:
(a) where a supply
is made from a place of business for which the registration has been obtained,
the location of such place of business;
(b) where a supply
is made from a place other than the place of business for which registration
has been obtained (a fixed establishment elsewhere), the location of such fixed
establishment;
(c) where a supply
is made from more than one establishment, whether the place of business or
fixed establishment, the location of the establishment most directly concerned
with the provisions of the supply; and
(d) in absence of such places, the location of the usual place of
residence of the supplier;
As can be seen from the above, location of supplier of service has
to be either a Place of Business or a Fixed Establishment, which have been
defined under the GST law as under:
|
Place of Business |
Fixed Establishment |
|
(85) “place of business” includes–– (a) a place from where the business is (b) a place where a taxable person (c) a place where a taxable person is |
(50) “fixed establishment” means a place (other than the
|
While there is no concern in treating the
Mumbai office of ABC as its Place of Business, the issue arises in the context
of other locations where ABC owns immovable property. Whether they can be
classified as POB/ FE? Evidently, ABC does not carry out any business from such
locations. The business continues to be carried out from Mumbai, only the
underlying service is delivered at such locations and hence, it can be
concluded that clause (a) of the definition of POB will not be applicable.
Similarly, clause (b) and (c) shall also not be applicable. Therefore, the only
question that needs to be determined is whether such locations can be treated
as FE or not? Even that seems improbable because for a place to be classified
as FE, the same needs to be characterised by
a sufficient degree of permanence and suitable structure in terms of human and
technical resources to supply services, or to receive and use services for its
own needs. While one can say that the locations have a sufficient
degree of permanence, the second limb, that is human & technical resources
to make the supply will not get satisfied. That being the case, such locations
cannot be even classified as FE.
Therefore, it would be safe to conclude that such locations, since
not classifiable as either POB/ FE, the question of the same being classifiable
as Location of Supplier of Service may not arise.
In this context,
one may even refer to the FAQ issued by the CBEC in this context where in one
of the questions, it was clarified that there can be interstate billing for
rental services as well.
Service by
way of lodging accommodation
This clause applies to lodging accommodation services provided by a
hotel, inn, guest house, home stay, club or campsite including a house boat.
This rule makes lodging accommodation costly as in cases where the supplier and
recipient are located in different states, it makes the transaction tax
ineffective. For example, if a hotel in Maharashtra provides accommodation
service to an employee of Gujarat based company, even if the transaction is B2B
in nature, yet the company in Gujarat will not be able to claim the credit of
taxes as the POS will be Maharashtra. In fact, the businesses are in a losing
situation as credit was eligible under the pre-GST regime.
However, one particular issue for this kind of transaction is where
transactions are routed through online portals / agents. As stated above, this
entry is applicable only in cases where the services are provided by hotel,
inn, guest house, home stay, club or campsite including a house boat.
Therefore, in cases where the transaction is routed through online
portals/agents, the rule may not apply. Let us try to understand with the help
of following example.
A Hotel in Goa has entered into a contract with two selling agents,
one located in Bangalore and another in Mumbai. The arrangement with the
Bangalore selling agent is on a Principal to Principal basis wherein the Hotel
blocks specified number of rooms for the Bangalore based agent to sell and
whether or not the Bangalore agent is able to sell the rooms, the charges are
recovered from the agent. However, the terms of the transaction with the Mumbai
based agent are different. In that case, it is provided that the Mumbai based
agent shall merely facilitate the supply on behalf of the hotel for which they
would charge service charges.
The issue arises in the case of transactions through Bangalore
agent. The reason being:
In case of billing by Hotel to Agent – whether the supply is to be
treated of lodging / accommodation service or some other service? In case the
same is treated as lodging / accommodation, the POS will be Goa, and since the
agent is located in Bangalore, credit will not be eligible resulting in a tax
inefficient structure. Further issue arises when the agent bills to the
customer. The agent is not registered in Goa. Will he treat the place of supply
as Goa or will he treat the place of supply to be that of the recipient of the
service? Will one consider the service as directly in relation to an immoveable
property and covered under sub clause (a) or will one believe that sub clause
(b) is applicable? If sub clause (b) and not subclause (a) should be the
correct classification, the issue is that the service provider is not a hotel,
inn, guest house, home stay, club or campsite including a house boat though the
actual provision of service might be by a hotel and in such a case, one can
take a view that since the supply is not by the specified class of supplier,
the exception is not applicable and accordingly, POS may have to be determined
as per the general rule. This position will have to be tested at judicial
forums.
Similarly, in the
case of second set of transactions routed through Mumbai agent, since the Hotel
will be billing directly to customer, the POS will be determined as per the
exception. The Mumbai agent billing to Hotel / Customer for arrangement fees
will be as per the applicable rule and may not get classified under this
basket.
There is one more aspect on credit front in case of B2B transactions
involving lodging accommodation. Let us take an example of a company having
operations in two states, say Maharashtra & Gujarat and hence, registered
in the two states. An employee working with Gujarat office travels to Mumbai
for a client meeting and stays in hotel. Since the company is registered in
Maharashtra, he provides the company with the GSTIN of Maharashtra and asks the
hotel to issue invoice to Mumbai office. Is there any issue in this practice?
The probable answer
to the above question may be found in section 16 of the CGST Act, which
provides that every registered person shall be entitled to take credit of input
tax charged on supply of goods / services which are used / intended to be used
in the course or furtherance of his business. The issue that can be raised here
is whether the credit can be denied on the grounds that the invoice pertained
to a different registered person (being Gujarat) and was used in the course or
furtherance of a different registered person. If this conservative view is
accepted, the credit claim might be in danger. However, to counter this view,
can it be argued that while the GST law provides for deeming branches in
different states as distinct person, the same does not apply for business? That
is, the concept of business will have to be considered at entity level and not qua
the registration and accordingly, credit should be available.
Immovable property in multiple states –
Determining POS
There can be transaction for supply of services wherein under a
single contract, services for multiple immovable properties located across
multiple states might be provided. Lets’ take an example of Clean Ganga
initiative undertaken by the Central Government and awarded to an engineering
company. The river passes through multiple states.
The Government has entered into a single contract with the company
for undertaking the task of cleaning the river. Evidently, there is no issue
with respect to whether the services are in relation to an immovable property
or not? The only issue here that arises is how the POS has to be determined as
one can say that the POS is all such states through which the river flows.
While the proviso to section 12 (3) does deal with such a scenario,
it merely provides that the supply shall be treated as made in each of the
respective States / UT in proportion to the value for service separately
collected / determined in terms of the contract or agreement and in absence of
such contract/ agreement, the POS shall be determined on such other basis as
may be prescribed.
Therefore, in cases where the agreement provides for breakup of
consideration basis the work done in each state, the POS shall be determined
accordingly. However, in case the agreement is silent, one needs to be
determined in the prescribed manner. Unfortunately, no such manner has been
prescribed as on date for determining POS for such supplies. Even if the manner
for determination of POS is prescribed, even then it has to be noted that there
is no provision under the GST law for splitting of value / supply itself. The
provisions exist only for splitting of POS.
Therefore, the
issues that arise is whether the levy will sustain in the absence of proper
provision for determination of value of supply, even if the notifications are
issued in this regard? In this context, reference can be made to the decision
of the Supreme Court in the case of CIT vs. B. C. Srinivasa Shetty wherein
it was held that the charging sections and the computation provisions together
constitute an integrated code and the transaction to which the computation
provisions cannot be applied must be regarded as never intended to be subjected
to charge of tax.
Conclusion
While there are
specific provisions for determining the place of supply in the context of
property-based services, the same has its’ own share of interpretation issues
as well as interlinkages with other aspects of the law, viz., valuation,
credits, registration, etc. and such exception rules can result in breaking the
credit chain and the intent of the GST Law to enable free flow of credit and
open up trade and commerce amongst the States.
1 Section 54 – Two separate contracts for purchase of flat viz. one for house property and the other for furniture, etc. considered, in substance, as the one only and deduction allowed in full.
Rajat B. Mehta vs. Income Tax Officer
(Ahmedabad)
ITA No. 19/Ahd/16
A.Y: 2011-12. Date of Order: 9th February, 2018
Members: Pramod Kumar (A.M.) and S. S.
Godara (J.M.)Counsel for Assessee / Revenue: Urvashi Shodhan / V. K. Singh
(Ahmedabad)
ITA No. 19/Ahd/16
A.Y: 2011-12. Date of Order: 9th February, 2018
Members: Pramod Kumar (A.M.) and S. S.
Godara (J.M.)Counsel for Assessee / Revenue: Urvashi Shodhan / V. K. Singh
FACTS
The assessee is a non-resident who sold off a house for a consideration of Rs 2.46 crore and earned long term capital gain of Rs. 1.9 crore. He invested a portion of the sale proceeds, Rs. 78 lakhs, in another residential unit and claimed a deduction u/s. 54. The AO noted that the assessee had entered into two separate contracts viz., for purchase of house property and another for purchase of furniture and fixtures therein. The payment of Rs. 60 lakhs was for the purchase of house property and Rs. 18 lakhs was for the purchase of furniture and fixtures. The AO was of the opinion that the assessee had executed two separate deeds to save stamp duty on it, (and) now the assessee is trying to evade income tax. He was further of the view that most of the furniture items are removable, and, that it cannot be said that furniture was purchased to make the house habitable. Therefore, the AO declined deduction u/s. 54 F to the extent of Rs 18 lakhs paid under a separate agreement for furniture and fixtures in the residential property purchased by the assessee.
HELD
Analysing the provisions of section 54, the Tribunal noted that the expression used in the statute is “cost of the residential house so purchased” which according to it does not necessarily mean that the cost of the residential house must remain confined to the cost of civil construction alone. A residential house may have many other things, other than civil construction and including things like furniture and fixtures, as its integral part and may also be on sale as an integral deal. Further, it noted that there are, for example, situations in which the residential units for sale come, as a package deal, with things like air-conditioners, geysers, fans, electric fittings, furniture, modular kitchens and dishwashers. If these things are integral part of the house being purchased, the cost of house has to essentially include the cost of these things as well. In such circumstances, what is to be treated as cost of the residential house is the entire cost of house, and it cannot be open to the AO to treat only the cost of only civil construction as cost of house and segregate the cost of other things as not eligible for deduction u/s. 54.
However, from the arrangement in which the transaction was entered into, the Tribunal noted that in substance and in effect the house was sold for Rs 78 lakhs. Even if the assessee was to buy the house, without the furniture, it would have been for Rs 78 lakhs – as was clearly specified in the agreement to sell. The cause or trigger for the splitting of the consideration was not relevant and it had no bearing on de facto consideration for purchase of house property. The two agreements, according to it, cannot be considered in isolation with each other on standalone basis, and have to be considered essentially as a composite contract, particularly in the light of the undisputed contents of the agreement to sale. Given these facts, the Tribunal held that the cost of the new asset has to be treated as Rs 78 lakhs. Accordingly, the Tribunal directed the AO to delete the disallowance of deduction u/s. 54 to the extent of Rs 18 lakhs.
4 Section 54 – The exemption u/s. 54 cannot be denied even in a case where the assessee has utilised the entire capital gain by way of making payment to the developer of flat but could not get possession of the flat as the new flat was not completed by the developer. Section 54(2) does not say that in case assessee could not get possession of property, he was not entitled for exemption u/s. 54.
[2018] 91 taxmann.com 11 (Chennai-Trib.)
ACIT vs. M. Raghuraman
ITA No. : 1990/Mds/2017
A.Y.: 2013-14
Date of Order: 08th February, 2018
ACIT vs. M. Raghuraman
ITA No. : 1990/Mds/2017
A.Y.: 2013-14
Date of Order: 08th February, 2018
FACTS
The assessee, in his return
of income, claimed exemption u/s. 54 of the Act. The claim for exemption was made on the basis
of payments made to the developer for sale consideration. The flat, however,
was not completed even though payment was made to the promoter. The possession
was not yet given to the assessee.
The Assessing Officer (AO)
denied deduction on the ground that construction is not completed and
therefore, the assessee is not eligible to claim exemption.
Aggrieved, the assessee
preferred an appeal to the CIT(A) who allowed the claim of the assessee.
Aggrieved, the revenue
preferred an appeal to the Tribunal.
HELD
A bare reading of section
54 clearly says that in case the assessee purchased a residential house in
India or constructed a residential house in India within a period stipulated in
section 54(1), the assessee is eligible for exemption u/s. 54. Section 54(2)
clearly says that in case the capital gain, which is not appropriated by the
assessee towards purchase of new asset or which is not utilised in purchase of
residential house or construction of residential house, then it shall be
deposited in a specific account. It is not the case of the revenue that capital
gain was not appropriated or it was not utilised. The fact is that the entire
capital gain was paid to the developer of the flat. In other words, the
assessee has utilised the entire capital gain by way of making payment to the
developer of the flat.
Section
54(2) does not say that in case the assessee could not get the possession of
the property, he is not entitled for exemption u/s. 54. The requirement of
section 54 is that the capital gain shall be utilised or appropriated as
specified in section 54(2). The assessee has complied with the conditions
stipulated in section 54(2). Therefore, the Commissioner (Appeals) has rightly
allowed the appeal of the assessee. The Tribunal held that it did not find any
reason to interfere with the order of the lower authority and accordingly, it
confirmed the same.
The appeal filed by the Revenue
was dismissed.
3 Section 47(iv) – Transaction of transfer of shares by a company to its second step down 100% subsidiary cannot be regarded as ‘transfer’ in view of the provisions of section 47(iv) of the Act. A second step down subsidiary company is also regarded as subsidiary of the assessee company under Companies Act, 1956 as the term ‘subsidiary company’ has not been defined under the Act.
[2018] 91 taxmann.com 62 (Kolkata-Trib.)
Emami Infrastructure Ltd. vs. ITO
ITA No. : 880/Kol/2014
A.Y.: 2010-11: Date of Order: 28th February, 2018
Emami Infrastructure Ltd. vs. ITO
ITA No. : 880/Kol/2014
A.Y.: 2010-11: Date of Order: 28th February, 2018
FACTS
The assessee filed its return of income declaring therein a total income of Rs. 88,79,544. In the return of income, the assessee also claimed that it has incurred a long term capital loss of Rs. 25,05,20,775 which it carried forward. The Assessing Officer (AO), assessed the total income of the assessee to be Rs. 29,99,30,657.
During the previous year under consideration, on 31.3.2010, the assessee sold 2,86,329 shares of Zandu Realty Ltd., at the rate of Rs. 2100 per share, to Emami Rainbow Niketan Pvt. Ltd., a 100% subsidiary of the assessee’s subsidiary viz. Emami Realty Ltd. The sale was in accordance with the decision taken by the Board of Directors on 23.3.2010 and also in accordance with the valuation report of SSKM Corporate Advisory Pvt. Ltd.
The Assessing Officer found that the assessee had sold shares of Zandu Realty Ltd. at a price ranging from Rs. 6200 per share on 23.12.2009 to Rs. 4390 per share on 11.2.2010. He asked the assessee to show cause why the sale price per share of Zandu Realty Ltd. should not be taken at Rs. 3989.80 being the average price traded at NSE as on 31.3.2010 against the sale price of Rs. 2100 per share taken by the assessee.
The AO held that he found the explanation of the assessee to be not acceptable. Considering the huge price variance between the quoted price in NSE and the off-market selling price shown by the assessee he held that when the shares are traded in stock exchange the best way to determine the selling price of a share is the price quoted in the stock exchange. Accordingly, he determined the long term capital gain to be Rs. 29,05,83,769, by considering the sale price to be Rs. 3989.80 per share as against Rs. 2100 per share taken by the assessee, as against the claim of loss of Rs. 25,05,20,775 shown by the assessee in the return of income.
Aggrieved, the assessee preferred an appeal to CIT(A) who confirmed the action of the AO by relying on the ratio of the decision of Gujarat High Court in the case of Kalindi Investments Pvt. Ltd. vs. CIT (256 ITR 713)(Guj.)
Aggrieved, the assessee preferred an appeal to the Tribunal.
HELD
The Tribunal noted that the assessee sold equity shares of Zandu Realty Ltd. to Emami Rainbow Niketan Pvt. Ltd based on price of shares determined by Corporate Advisory Pvt. Ltd. It also noted that the buyer Emami Rainbow Niketan is a 100% subsidiary of Emami Realty Ltd. Emami Realty Ltd. is a 100% subsidiary of Emami Infrastructure Ltd, the assessee. The Tribunal observed that the two issues which arise for its adjudication are –
(i) whether there is a transfer of shares in view of the provisions of section 47(iv) of the Act; and
(ii) if the transaction in question is not covered by section 47(iv) of the Act, then whether the computation of capital gains as made by the AO and confirmed by the CIT(A) is correct or not and whether the AO can substitute the sale consideration of the shares sold with FMV as determined by him?
The Tribunal observed that if it comes to the conclusion that this is not a transfer then the assessee’s claim that it had incurred a long term capital loss and same has to be carried forward cannot be allowed. Similarly, capital gain computed by the AO based on fair market value computed by him and substituted for the sale consideration agreed to by the seller and buyer has to be cancelled.
The Tribunal noted that the transfer is to a second step down 100% subsidiary of the assessee. The issue is whether provisions of section 47(iv)(a)(b) are applicable to a second step down subsidiary. It noted the following two divergent views on this issue –
(i) the Bombay High Court in the case of Petrosil Oil Co. Ltd. vs. CIT (236 ITR 220)(Bom.) has, in the context of provisions of section 108 of the Act, held that a 100% owned sub-subsidiary of a 100% owned subsidiary would be a subsidiary within the meaning of section 4(1)(c) of the Companies Act and also within the meaning of section 108(a) of the Act;
(ii) the Gujarat High Court has in the case of Kalindi Investments Pvt. Ltd. (256 ITR 713)(Guj) held that there is no justification for invoking clause (c) of sub-section (1) of section 4 of the 1956 Act while interpreting the provisions of clauses (iv) and (v) of section 47.
Applying the decision of the Bombay High Court (supra), the transaction in question cannot be regarded as a transfer in view of provisions of section 47(iv) of the Act, as it is a transfer of a capital asset by a company to its subsidiary company and as a second step down 100% subsidiary company is also a subsidiary of the assessee company under the Companies Act, 1956 as the term ‘subsidiary company’ has not been defined under the Income-tax Act.
Upon going through the two judgments, the Tribunal held that it prefers to follow the decision of the Bombay High Court in the case of Petrosil Oil Co. Ltd. (supra) as in its view a second step down 100% subsidiary is also covered by the provision of section 47(iv) of the Act, as this is the letter and spirit of the enactment.
Following the decision of the Bombay High Court in the case of Petrosil Oil Co. Ltd. (supra), the Tribunal held that the transaction of sale of shares of Zandu Realty by assessee to Emami Rainbow Niketan Ltd. is not regarded as transfer in view of section 47(iv) of the Act. Hence, the question of computing either the capital loss or capital gain does not arise. The Tribunal held that the assessee is not entitled to carry forward the capital loss of Rs. 25 crore as claimed.
This ground of appeal of assessee was dismissed.
2 Sections 2(29A) r.w.s. 2(42B) and 251 – Gain arising on sale of shares of a private limited company, offered in the return of income as `short term capital gain’ can be claimed, for the first time, to be `long term capital gain’ before appellate authority even without filing a revised return of income.
. 2018] 91 taxmann.com 28 (Mumbai – Trib.)
Ashok Keshavlal Tejuja vs. ACIT
ITA No. : 3429 (MUM.) of 2016
A.Y.: 2011-12: Date of Order: 15th
February, 2018
FACTS
During the previous year
relevant to assessment year 2011-12, the assessee had sold shares of a private
limited company. Gain arising on sale of these shares was shown in the return
of income, filed by the assessee, as short term capital gains. In the course of
assessment proceedings, the assessee, without having revised the return of
income, filed a letter and also a revised computation of income thereby making
a claim that the gain arising on sale of shares of private limited company need
to be considered as `long term capital gains’. This additional claim was denied
to the assessee.
Aggrieved by the assessment
made, the assessee preferred an appeal to the CIT(A) and in the course of
appellate proceedings the assessee raised the said claim before the CIT(A). The
CIT(A) did not entertain the claim made by the assessee on the ground that it
was made otherwise than by filing a revised return of income.
Aggrieved,
the assessee preferred an appeal to the Tribunal where the assessee brought to
the notice of the Tribunal the decision of the Apex Court in the case of Goetze
(India) Ltd. vs. CIT [2006] 284 ITR 323 (SC) and also the decision of the
Bombay High Court in the case of CIT vs. Pruthvi Brokers & Shareholders
[2012] 349 ITR 336 (Bom.).
HELD
The Tribunal noted that the
Supreme Court in the case of Goetze India Ltd. (supra) and also the
Bombay High Court in the case of Pruthvi Brokers & Shareholders (supra)
has clearly held that the additional claim can be filed before the appellate
authorities even if the same is not filed by way of revised return of income.
Since the assessee had filed the claim before the AO as well as before the
CIT(A) to bring to tax the capital gains as long term capital gains on sale of
share of private limited company instead of short term capital gain as declared
in the return of income, the Tribunal admitted the claim filed by the assessee.
The Tribunal remitted the
matter to the file of the AO for considering the aforesaid additional claim
raised by the assessee on merits after hearing the contention of the assessee
and evaluating the evidences filed / to be filed by the assessee on merits in
accordance with law.
This ground of appeal filed
by the assessee was allowed.
1 Section 253 – An erroneous disallowance made by the assessee in its return of income on account of non-deduction of tax at source which disallowance was not contested before CIT(A) can be challenged by the assessee, for the first time, before the Tribunal.
[2018] 90 taxmann.com 328 (Kolkata-Trib.)
Allahabad Bank vs. DCIT
ITA No. : 127/Kol/2011
A.Y.: 2007-08 and 2009-10
Date of Order: 07th February, 2018
Allahabad Bank vs. DCIT
ITA No. : 127/Kol/2011
A.Y.: 2007-08 and 2009-10
Date of Order: 07th February, 2018
If the stand of the
assessee is found to be correct and if it results in income being assessed
lower than returned income, that would be the true and correct income of the
assessee and it would be the duty of the revenue to assess the correct tax
liability of the assessee.
FACTS
The assessee, in his return
of income for AY 2007-08, disallowed a sum of Rs. 3,17,32,735 u/s. 40(a)(ia) of
the Act. Since this disallowance was
made voluntarily in the return of income, the assessee did not contest it in an
appeal filed before CIT(A) against the assessment order.
In Assessment Year 2008-09,
the deduction was claimed in the return of income and same was disallowed by
the Assessing Officer (AO). This disallowance was contested in an appeal before
CIT(A) who allowed the deduction to the extent of Rs. 96,38,366 after
examination of copies of challans and other documents.
Subsequent to the passing
of the order by CIT(A), the assessee bank observed that in respect of
disallowance amounting to Rs. 99,32,277 out of Rs. 3,17,32,735, the provisions
of TDS are not applicable at all and consequently the provisions of section
40(a)(ia) are not attracted.
For the first time in an
appeal before the Tribunal, the assessee took an additional ground that the AO
be directed to allow deduction of Rs. 99,32,277 after verification of all
necessary documents in support of the claim of the assessee.
Before the Tribunal, it was
contended that the assessee never had an occasion to address this issue before
the lower authorities and hence had no option but to file an additional ground
before the Tribunal. It was also submitted that since the issue has not been
examined by the lower authorities, in order to appreciate the contentions of
the assessee, it could be remanded to the file of the AO. The revenue had no
objection except that it would result in an assessment being framed at lesser
than returned income.
HELD
As regards the contention
of the revenue that the assessment would be framed at lesser than returned
income, the Tribunal noted the observations of the Calcutta High Court in the
case of Mayank Poddar (HUF) vs. WTO [2003] 262 ITR 633 (Cal.) and
observed that it is now well settled that there is no estoppel against the
statute. It observed that the assessee is only pleading for claim of deduction
which had been erroneously disallowed by it in the return of income and
considered as such by the AO in the assessment. Though there was no occasion
for the revenue to adjudicate this issue on merits, the revenue could not take
advantage of the mistake committed by the assessee. The scheme of taxation is
primarily governed by the principles laid down in the Constitution of India and
as per Article 265 of the Constitution of India, no tax shall be levied or
collected unless by an authority of law. When a particular item is not to be
taxed as per statute, then taxing the same would amount to violation of
constitutional principles and revenue would be unjustly enriched by the same.
Hence, in the process of verification by the AO, if the stand of the assessee
is found to be correct and if it results in income being assessed lower than
the returned income, that would be the true and correct income of the assessee
and it would be the duty of the revenue to assess the correct tax liability of
the assessee.
Having made the aforesaid
observations, the Tribunal, in the interest of justice and fair play, remanded
the issue to the file of the AO for adjudication of merits.
The additional ground of
appeal filed by the assessee was allowed.
4 Section 4 – Charge of income-tax – Interest on advance – if the income does not result at all – then the same cannot be taxed – even though an entry is made in the books of account about such a hypothetical income – which has not been materialised.
1.
CIT vs. Godrej Realty Pvt.
Ltd.
ITA
No.: 264 of 2015 (Bom High Court)
AY:
2008-09 Dated: 11th December, 2017
[Godrej
Realty Pvt. Ltd v. ITO; ITA No.: 4487/Mum/2012;
Dated: 04th June, 2014; Mum. ITAT]
The Assessee Company had
entered into a Memorandum of Understanding (MoU) with M/s. Desai & Gaikwad
to develop residential project on a plot of land, belonging to M/s. Desai &
Gaikwad at Pune. In terms of the MoU, the Assessee had given an advance to M/s.
Desai & Gaikwad and the assessee was entitled to receive from M/s. Desai
& Gaikwad interest at 10% p.a. on the aforesaid project advance. However,
the obligation to pay interest on M/s. Desai & Gaikwad to the assessee, was
from the date of execution of the development agreement. In its return for the
subject AY, the assessee did not offer to tax any interest on the aforesaid
advance with M/s. Desai & Gaikwad.
However, the A.O, brought
to tax the amount of interest on advance. This on the basis of M/s. Desai &
Gaikwad’s ledger account showed an aggregate of advance and interest, as
payable by it to the assessee. Thus, concluding that interest had accrued to
the assessee, as it follows the mercantile system of accounting. Therefore,
interest is includable in its total income.
The CIT(A) dismissed the
assessee appeal. Thus, upholding the view of the A.O that as M/s. Desai &
Gaikwad had shown interest liability to the assessee as expenditure in its
books of account, it follows that interest has accrued to the assessee.
Therefore, the interest was includable in the total income subject to tax.
The Revenue case is that,
assessee was following the mercantile system of accounting. Therefore, it was
obligatory on its part to account for its accrued interest, which had so
accrued in terms of MoU. This accrual of interest is further supported,
according to him by the fact that M/s. Desai & Gaikwad has shown in its
books the above amount as a liability to the assessee. In support of the
proposition that in a mercantile system of accounting, the income is said to
accrue, when it becomes due and the postponement of the date of payment or non
receipt of the payment, would not affect the accrual of interest, he places
reliance upon the decision of the Supreme Court in Morvi Industries Ltd.
vs. CIT (1971) 82 ITR 835.
The Tribunal records the
fact that in terms of MOU, M/s. Desai & Gaikwad was liable to pay interest
at 10% p.a. on the advance from the date of the execution of the development
agreement and the undisputed position is, it has not been executed. The debit
note sent by the assessee to M/s. Desai & Gaikwad towards the interest chargeable
on the advance was returned by M/s. Desai & Gaikwad, denying its liability
to pay any interest as demanded. Moreover, the board of directors of the
assessee had recording the no acceptance of the debit note towards the interest
payable, decided to waive the interest chargeable which is to be recovered from
M/s. Desai & Gaikwad.
Being aggrieved, the
Revenue carried the issue in appeal to the High court. The Hon. Court observed
that, in fact, there was no accrual of income in the present case. This for the
reason that there was no right to receive income of Rs.1.98 crores as interest
as admittedly development agreement has not been executed. The interest in
terms of the MoU would only commence on development agreement, being executed.
Admittedly, this is not done. Further, the return of the debit note by M/s.
Desai & Gaikwad was also an indication of the fact that M/s. Desai &
Gaikwad did not accept that interest is payable to the Assessee. Consequently,
there was no amount which had become due to the Assessee.
The entire grievance of the
Revenue before us is that the entries made by M/s. Desai & Gaikwad in its
ledger account, indicating that interest was payable, by itself, lead to the
conclusion that interest had accrued to the assessee is not correct.
Particularly, in the context of the MoU and return of debit note. Moreover, the
board of directors of assessee had passed a resolution, waiving the interest
receivable from M/s. Desai & Gaikwad. This, on account of non acceptance of
liability to interest by M/s. Desai & Gaikwad. Therefore, it was not an
unilateral giving up of accrued income but acceptance of the rejection of debit
note by M/s. Desai & Gaikwad. Moreover, the reliance upon Morvi Industries
Ltd., (supra) is inapplicable for the reasons on facts, the accrual of
income in this case would only arise after the execution of the development
agreement. Undisputedly, it has not taken place. Thus, as no income i.e.
interest has accrued or has been received, the occasion to levy tax on such
hypothetical income, cannot arise. Accordingly, Revenue appeal was dismissed.
3 Income in respect of sale of flats – accrued when possession of the flat was given – not when allotment letter was issued.
CIT vs. Millennium Estates Private Ltd.
ITA No.: 853 of 2015 (Bom. High Court)
A.Y.: 2007-08 Dated: 30th January, 2018
[Millennium Estates Private Ltd. v. DCIT; ITA No. 517/Mum/2011; Dated: 16th May, 2012; Mum. ITAT]
The assessee carries on
business as a contractor and developer. During the scrutiny proceedings the A.O
found that an amount was shown under the head current liabilities i.e. as
advances received from it buyers. The A.O did not accept the contention of the
Assessee that the aforesaid amounts from M/s. Siddhi Vinayak Securities Pvt.
Ltd. and M/s. Manomay Estates Pvt. Ltd. were received as advance at the time of
allotment on 14 & 15 March 2007 and that further consideration was received
on 1 April 2007, when the possession of the flats was given, thus chargeable to
tax in the next AY. The A.O made addition the aggregate amount received from
M/s. Siddhi Vinayak Securities Pvt. Ltd and M/s. Manomay Estates Pvt. Ltd. as
accrued income in the subject Assessment Year.
Being aggrieved, the
assessee carried the issue in appeal to the CIT (A). The CIT (A) dismissed the
Assessee appeal.
On further Appeal, the
Tribunal allowed the Assessee appeal.
Thus after being examined all the
clauses of the allotment letter as well as the clauses of the possession letter
concluded that the sale of the flats took place only in the subject Assessment
Year i.e. on 1 April 2007 i.e. when the possession of the flats was given and
the balance amount was paid. The accrual of income took place in the next year.
Till then, the amount received was only in the nature of advances. The Tribunal
also records the fact that it was not the case of the Revenue that the possession
letter dated 1 April 2007 was not genuine. Nor has the Revenue brought on
record any evidence to show that the possession was given to M/s. Siddhi
Vinayak Securities (P.) Ltd. and M/s. Manomay Estates (P.) Ltd. prior to 1
April 2007. In the above view the addition was made by the A.O and upheld by
the CIT (A) was deleted.
The Tribunal also records
the fact that in the next AY , the Assessee has offered the income on the sale
of the flats to M/s. Siddhi Vinayak Securities Pvt. Ltd. and M/s. Manomay
Estates Pvt. Ltd. to tax. The same has also been accepted by the Revenue as
taxable income for the next AY.
The grievance of the
Revenue is that the sale of the flats under consideration had in fact taken
place on 14 and 15 March 2007 when they were allotted under an allotment
letters to M/s. Siddhi Vinayak Securities Pvt. Ltd. and M/s. Manomay Estates
Pvt. Ltd.
Being aggrieved, further
Revenue filed an appeal to the High Court. The Hon. High Court observed that
the Tribunal has reproduced the relevant clauses of the allotment letter dated
15 March 2007 which is similar to the allotment letter dated 14 March 2007 and
the relevant clause. The Tribunal, held that the amount of Rs.2.14 Crores was
an advance during the subject AY. It thus held that part of the above amount
had accrued as income during the AY 2007-08. From the above clauses of the
allotment letter and clause 9 of the possession letter referred to by the
Tribunal it is very evident that the possession of the flats was given on
receipt of total consideration only on 1 April 2007. The Tribunal records as a
matter of fact that there is no dispute about the genuineness of the letter of
possession dated 1 April 2007. Moreover, no statement of the buyers or other
evidence, even circumstantial in nature, was brought on record to indicate that
the facts are different from what has been recorded in the possession letter
dated 1 April 2007. In the aforesaid facts, the view taken by the Tribunal on
the self evident terms of allotment and possession letter does not give rise to
any substantial question of law. Accordingly, Appeal of dept was dismissed.
2 Section 271D – Penalty – Accepting/ repaying loans/ advances via journal entries contravenes section 269SS & 269T – Penalty cannot be levied if the transactions are bona fide, genuine & reasonable cause u/s. 273B
CIT vs. Lodha Properties Development Pvt. Ltd.
ITA No: 172 of 2015 (Bom High Court)
A.Y.: 2009-10, Dated: 06th February, 2018
[Lodha Properties Development Pvt. Ltd. vs. ACIT; ITA No. 476/Mum/2014;
Dated: 27th June, 2014 Mum. ITAT]
ITA No: 172 of 2015 (Bom High Court)
A.Y.: 2009-10, Dated: 06th February, 2018
[Lodha Properties Development Pvt. Ltd. vs. ACIT; ITA No. 476/Mum/2014;
Dated: 27th June, 2014 Mum. ITAT]
The assessee who belongs to the Lodha group , was engaged in the business of land development and construction of real estate properties. Assessee filed the return of income declaring the total income at Rs. NIL and the same was subsequently revised to adjust carry forward losses. Assessment was completed determining the total income of Rs. 26,69,084/- under the special provisions of section 115JB of the Act. In the assessment, vide para 6, the AO, mentioned about “Accepting / repayment of loans other than account payee cheques / draft”. Eventually, AO mentioned that such accepting / repayment of loans other than account payee cheques / drafts (through journal entries) amounts to violation of the provisions of section 269SS and 269T of the Act.
The assessee submitted that the loans received are by way of “journal entries? and there is no acceptance of cash by any method other than the one prescribed in the statute. The core transactions were undertaken by way of cheque only and however, the assessee resorted to the journal entries for transfer / assignment of loan among the group companies for business consideration. In case of journal entries, as per the assessee, the liabilities are transferred / assigned by the group companies to the assessee or to take effect of actionable claims /payments/ received by group companies on behalf of the company. The journal entries were also passed in the books of accounts for reimbursement of expenses and for sharing of the expenses within the group.
The assessee further submitted during the period when journal entries were passed, the assessee company was under the bona fide belief that there is no breach of provisions of income tax Act considering recognized method of assigning credit / debit balance by passing journal entries.
In such cases, the provisions of section 269SS of the Act have no application and for this, the assesse relied on the judgement of the Honble Madras High Court in the case of CIT vs. Idhayam Publications Ltd [2007] 163 Taxman 265 (Mad.) which is relevant for the proposition that the deposit and the withdrawal of the money from the current account could not be considered as a loan or advance. It is the contention of the assessee that there is no cash transactions involved and relied on the contents of the CBDT Circular No.387, dated 6th July, 1984 and mentioned that the purpose of introducing section 269SS of the Act is to curb cash transactions only and the same is not aimed at transfer of money by transfer / assignment of loans of other group companies.
Addl. CIT mentioned that even bona fide and genuineness of the transactions, if carried out in violation of provisions of section 269SS of the Act, the same would attract the provisions of section 271D of the Act .
The ld. CIT(A) confirmed the findings recorded by the A.O.
The Tribunal held that there is no finding in the order of the AO that during the assessment proceedings the impugned transactions constitutes unaccounted money and are not bona fide or not genuine. As such, there is no information or material before the AO to suggest or demonstrate the same. In the language of the Hon’ble High Court in the case of Triumph International (I) Ltd, 345 ITR 370 (Bom), neither the genuineness of the receipt of loan/deposit nor the transaction of repayment of loan by way of adjustment through book entries carried out in the ordinary course of business has been doubted in the regular assessment. Admittedly, the transactions by way of journal entries are aimed at the extinguishment of the mutual liabilities between the assessees and the sister concerns of the group and such reasons constitute a reasonable cause.
In the present case, the causes shown by the assessee for receiving or repayment of the loan/deposit otherwise than by account-payee cheque/bank draft, was on account of the following, namely: alternate mode of raising funds; assignment of receivables; squaring up transactions; operational efficiencies/MIS purpose; consolidation of family member debts; correction of errors; and loans taken in case. In our opinion, all these reasons are, prima facie, commercial in nature and they cannot be described as non-business by any means. Further, it was observed that why should the assessee under consideration take up issuing number of account payee cheques / bank drafts which can be accounted by the journal entries.
Further, there is no dispute that the impugned journal entries in the respective books were done with the view to raise funds from the sister concerns, to assign the receivable among the sister concerns, to adjust or transfer the balances, to consolidate the debts, to correct the clerical errors etc. In the language of the Hon?ble High court, the said “journal entries? constitutes one of the recognised modes of recording the loan/deposit. The commercial nature and occurrence of these transactions by way of journal entries is in the normal course of business operation of the group concerns. In this regard, there is no adverse finding by the AO in the regular assessment. AO has not made out in the assessment that any of the impugned transactions is aimed at non commercial reasons and outside the normal business operations. Accordingly, the appeal of the assessee was allowed.
The Hon. High Court observed that the Tribunal has on application of the test laid down for establishment of reasonable cause, for breach of section 269SS of the Act by this Court in Triumph International Finance (supra) found that there is a reasonable cause in the present facts to have made journal entries reflecting deposits.
In the above circumstances, the view taken by the Tribunal in the impugned order holding that no penalty can be imposed upon by the Revenue as there was a reasonable cause in terms of section 271B of the Act for having received loans / deposits through journal entries is at the very least is a possible view in the facts of the case. Accordingly appeal of dept was dismissed.
Reduction in Sale Price Due To Discount Given By Issue of Credit Notes Subsequent To the Invoice
INTRODUCTION
Under Sales Tax Laws, tax is payable on the ‘sale price’ of goods. Sale price is normally defined in respective State Acts. For example, under MVAT Act, term “sale price” is defined in section 2(25) as under.
“2(25) “sale price” means the amount of valuable consideration paid or payable to a dealer for any sale made including any sum charged for anything done by the seller in respect of the goods at the time of or before delivery thereof, other than the cost of insurance for transit or of installation, when such cost is separately charged….”
Under Sales Tax Laws, tax is payable on the ‘sale price’ of goods. Sale price is normally defined in respective State Acts. For example, under MVAT Act, term “sale price” is defined in section 2(25) as under.
“2(25) “sale price” means the amount of valuable consideration paid or payable to a dealer for any sale made including any sum charged for anything done by the seller in respect of the goods at the time of or before delivery thereof, other than the cost of insurance for transit or of installation, when such cost is separately charged….”
There is a separate mention about discount given from the original sale price.
Discounts are generally given in the invoice itself. There may not be much difficulty in claiming reduction for such discount amount from the sale price.
However, discount can also be given after the invoices are issued. There may be discount schemes like turnover discount, early payment discount, where discount will be eligible on happening of a given event. In such cases, invoices would be at original price. The subsequent discount will be required to be given by issue of credit note.
In some of the States, there are provisions providing that discount mentioned in the invoices will be eligible
for reduction.
The issue that arises is whether such type of provisions requires strict interpretation or can be interpreted liberally so as also to include discounts given by credit note/s issued separately after the issue of invoice/s.
Recent judgment of Hon. Supreme Court in case of Southern Motors vs. State of Karnataka (Civil Appeal Nos.10955-10971 of 2016 dt.18.1.2017)
In this case, the issue before the Hon. Supreme Court was from Karnataka VAT Act, 2003. The facts leading to the litigation, as mentioned in the judgment, can be noted as under:
“3. The foundational facts, albeit not in dispute present the required preface. The appellant is a dealer in the motor vehicles and registered under the Act. Its version is that during the years in question i.e. 2007-2008 and
2008-2009, it raised tax invoices on the purchasers as per the policy of manufacturers of vehicles to maintain uniformity in the price thereof. After the sales were completed, credit notes were issued to the customers granting discounts, in order to meet the competition in the market and for allied reasons.
Consequentially, it received/retained only the net amount that is the amount shown in the invoice less the sum of discount disclosed in the credit note. Accordingly, the net amount, so received was reflected in his books of account and returns were filed …..”
The assessing authority took a view that as per the Karnataka VAT Rules, 2003, only such discount which is mentioned in the invoices is allowable. Since the discount was given post issue of invoices, it was held that it is not deductible from the sale price. Karnataka High Court upheld the claim of State Government. Before Hon. Supreme Court the main argument of the dealer was as under:
“7. The emphatic insistence on behalf of the appellant is that the combined reading of section 30 and Rule 31 demonstrates in clear terms that the assesses are entitled to claim deduction of the discount allowed to their customers by credit notes, from the total turnover to quantify their taxable turnover. The learned counsel have urged that as some discounts, especially those linked to targets to be achieved in a particular period are not comprehend able at the time of sale, these logically cannot be reflected in the tax invoices.
They have maintained that such discounts actualise through credit notes at the end of the prescribed period for which the target is fixed and are thus governed by section 30 of the Act and Rule 31 of the Rules. They have asserted that in no view of the matter, Rule 3(2)(c)can be conceded a primacy to curtail or abrogate Section 30 or Rule 31 of the Rules, lest the latter provisions are rendered otiose. Such an explication would also be extinctive of the concept of the well ingrained concept of turnover/trade discount which is indefensible.”
The department stuck to the stand that rule is to be applied strictly. The arguments of the sales tax department are noted as under:
“9. In refutation, the learned counsel for the respondents, has argued that a discount to qualify for deduction to compute the total and eventual taxable turnover, as contemplated in Rule 3(2)(c) of the Rules has to be essentially reflected in the tax invoice or the bill of sale issued in respect of the sales.
According to them, section 30 and Rule 31 deal with a situation where after a tax invoice is issued, it transpires that the tax charged has either exceeded or has fallen short of the tax payable for which a credit/debit note, as the case may be, would be issued. As these two provisions do not regulate the computation of a taxable turnover, there is no correlation thereof with Rule 3(2)(c) of the Rules which has been assigned an independent role to determine the tax liability. In absence of any specific provision in the parent statute granting tax exemption based on deduction founded on post sale trade discount, section 30 and Rule 31 are of no avail to the assesses, he urged. It is maintained that in any view of the matter, a taxing statute has to be construed strictly and any exemption is permissible only if the legislation permits the same. Reliance in buttress of the above has been placed on the decisions of this Court in A.V. Fernandez vs. The State of Kerala 1957 SCR 837, IFB Industries Ltd. vs. State of Kerala (2012) 4 SCC 618 and Jayam & Co. vs. Assistant Commissioner and Another (2016) 8 SCALE 70.”
The Supreme Court referred to a number of precedents on the issue. Ultimately, the Supreme Court came to conclusion that the sale price means what is actually received by the vendor. Therefore, the Supreme Court observed that rules cannot be interpreted to disallow reduction where actual discount is passed on and the amount is not receivable to the dealer. The pertinent observations of the Supreme Court are as under:
“37. On an overall review of the scheme of the Act and the Rules and the underlying objectives in particular of Sections 29 and 30 of the Act and Rule 3 of the Rules, we are of the considered opinion that the requirement of reference of the discount in the tax invoice or bill of sale to qualify it for deduction has to be construed in relation to the transaction resulting in the final sale/purchase price and not limited to the original sale sans the trade discount. However, the transactions allowing discount have to be proved on the basis of contemporaneous records and the final sale price after deducting the trade discount must mandatorily be reflected in the accounts as stipulated under Rule 3(2)(c) of the Rules. The sale/purchase price has to be adjudged on a combined consideration of the tax invoice or bill of sale as the case may be along with the accounts reflecting the trade discount and the actual price paid.
The first proviso has thus to be so read down, as above, to be in consonance with the true intendment of the legislature and to achieve as well the avowed objective of correct determination of the taxable turnover. The contrary interpretation accorded by the High Court being in defiance of logic and the established axioms of interpretation of statutes is thus unacceptable and is negated.”
CONCLUSION
Thus, the Hon’ble Supreme Court has decided a very important issue. The discounts are part and parcel of business activity. It will not be just to levy tax on an amount, which is neither received nor receivable as per the understanding of the parties. Therefore, the above judgment of the Hon. Supreme Court will be guiding judgment including in the forthcoming GST era.
Pre-Deposit At First Stage Appeal – Whether Adjustable At The Second Stage?
BACKGROUND:
As announced by Hon. Finance Minister, Goods and Services Tax is likely to be effective from July 01, 2017. Indirect tax litigation is yet to become a story of the past considering pendency of the matters before various Benches of CESTAT and first appellate authorities, which is further topped up by enthusiasm demonstrated by officers of the department of service tax in particular of initiating proceedings for all and sundry, decided or undecided issues. Since service tax law underwent an ‘overhaul’ on account of introduction of “negative list” based taxation from 01/07/2012, various issues closed under the earlier regime are routinely initiated for the legal testing under the “negative list” based period as well, even though those issues do not remain open on account of the new law having taken care of the shortcomings in interpretation of the earlier provisions of service tax law.
As announced by Hon. Finance Minister, Goods and Services Tax is likely to be effective from July 01, 2017. Indirect tax litigation is yet to become a story of the past considering pendency of the matters before various Benches of CESTAT and first appellate authorities, which is further topped up by enthusiasm demonstrated by officers of the department of service tax in particular of initiating proceedings for all and sundry, decided or undecided issues. Since service tax law underwent an ‘overhaul’ on account of introduction of “negative list” based taxation from 01/07/2012, various issues closed under the earlier regime are routinely initiated for the legal testing under the “negative list” based period as well, even though those issues do not remain open on account of the new law having taken care of the shortcomings in interpretation of the earlier provisions of service tax law.
ISSUE OF PRE-DEPOSIT OF DUTY OR TAX IN TWO-STAGE APPEAL
In the scenario, pre-deposit of duty or tax payable while filing appeals is quite a concern of many assessees under service tax considering huge demands initiated and routinely confirmed by adjudicating authorities at all levels and especially in vexatious cases. In a recent decision, Ahmedabad Tribunal in ASR Multimetals Pvt. Ltd. 2017 (345) ELT 294 (Tri.-Ahmd) had an occasion to examine whether pre-deposit made while filing the first appeal can be adjusted against the quantum of deposit required to be made while filing the appeal before the Tribunal.
Section 35F of the Central Excise Act, 1944 laying down provisions in this regard (as amended with effect from August 06, 2014) also applicable to service tax vide section 83 of the Finance Act, 1994 is reproduced below:
“35F. Deposit of certain percentage of duty demanded or penalty imposed before filing appeal.- The Tribunal or the Commissioner (Appeals), as the case may be shall not entertain any appeal,-
(i) under sub-section (1) of section 35, unless the appellant has deposited seven and a half per cent of the duty, in case where duty or duty and penalty are in dispute, or penalty where such penalty is in dispute, in pursuance of a decision or an order passed by an officer of Central Excise lower in rank than the Commissioner of Central Excise
(ii) against the decision or order referred to in clause (a) of sub-section (1) of section 35B, unless the appellant has deposited seven and a half per cent of the duty, in case where duty or duty and penalty are in dispute, or penalty, where such penalty is in dispute, in pursuance of the decision or order appealed against;
(iii) against the decision or order referred to in clause (b) of sub-section (1) of section 35B, unless the appellant has deposited ten per cent of the duty, in case where duty or duty and penalty are in dispute, or penalty, where such penalty is in dispute, in pursuance of the decision or order appealed against.
Provided that the amount required to be deposited under this section shall not exceed rupees ten crores.
Provided further that the provisions of this section shall not apply to the stay applications and appeals pending before any appellate authority prior to the commencement of the Finance (No.2) Act, 2014.
Explanation.- For the purposes of this section “duty demanded” shall include.-
(i) amount determined under section 11D
(ii) amount of erroneous CENVAT credit taken;
(iii) amount payable under Rule 6 of the CENVAT Credit Rules, 2001 or the CENVAT Credit Rules, 2002 or the CENVAT Credit Rules, 2004.”
[emphasis supplied]
In three cases under appeal before the Tribunal, the Appellants paid 7.5% duty at first appellate stage before Commissioner (Appeals). Against the orders passed by Commissioner (Appeals), when the appeals were filed before the Tribunal, they deposited 2.5% in terms of clause (iii) of the above section 35F / section 129A of the Customs Act, 1962*).
(*Since the provisions of the Customs Act in this regard are identical, they are not reproduced here for the sake of brevity).
They adjusted thus the amount paid at the first appellate stage and considered that the requirement of 10% payment towards pre-deposit thus stood fulfilled. The Revenue objected to this as according to them, such interpretation was incorrect and thus additional 10% was required to be paid in place of 2.5% to comply with the provisions laid down in applicable clause (iii) of the above section 35F for the appeal to be entertained by
the Tribunal.
The Tribunal found that the provisions were in no way ambiguous to interpret that the amount paid under clause (ii) at the time of filing appeal before Commissioner (Appeals) was adjustable/considered paid for the purpose of clause (iii) as well.
The Tribunal in this context relied on the ratio of decision in the case of Greatship (India) Pvt. Ltd. vs. Commissioner of Service Tax, Mumbai-I 2015 (39) STR 754 (Bom) wherein principles of interpretation of taxing statutes were discussed at significant length, at the end of which, the following conclusion was drawn at para 34 relied upon by the Tribunal in the present case.
“34. It would thus appear that it is settled position of law that in taxing statute, the Courts have to adhere to literal interpretation. At first instance, the Court is required to examine the language of the statute and make an attempt to derive its natural meaning. The Court interpreting the statute should not proceed to add the words which are not found in the statute. It is equally settled that if the person sought to be taxed comes within the letter of the law he must be taxed, however great the hardship may appear to the judicial mind to be. On the other hand, if the Crown seeking to recover the tax, cannot bring the subject within the letter of the law, the subject is free, however apparently within the spirit of law the case might otherwise appear to be. It is further settled that an equitable construction, is not admissible in a taxing statute, where the Courts can simply adhere to the words of the statute. It is equally settled that a taxing statute is required to be strictly construed. Common sense approach, equity, logic, ethics and morality have no role to play while interpreting the taxing statute. It is equally settled that nothing is to be read in, nothing is to be implied and one is required to look fairly at the language used and nothing more and nothing less. No doubt, there are certain judgments of the Apex Court which also holds that resort to purposive construction would be permissible in certain situation. However, it has been held that the same can be done in the limited type of cases where the Court finds that the language used is so obscure which would give two different meanings, one leading to the workability of the Act and another to absurdity.”
[emphasis supplied].
In view of the above, the Tribunal upheld the Revenue’s contention that the interpretation by the appellants would not be possible without inserting the words not present therein and therefore it was incorrect to interpret that the amount paid at the first stage-appeal could be adjusted. In effect, the pre-deposit amount required for two-stage appeals would be 7.5% in the first instance and 10% of the confirmed duty/tax at the time of filing the Tribunal appeal.
Having had unambiguous decision/interpretation as above, the fact that monetary limits for adjudication of Show Cause Notice have been revised vide Circular No.1049/37/2016-CX dated 29/09/2016, all cases adjudicated after this date where the amount of duty/service tax/penalty confirmed is below two crore rupees involve two-stage appeals and aggregate amount of 17.5% has to be provided towards mandatory pre-deposit. Indeed this was also clear otherwise on reading of the provisions. Further, TRU letter 10th July, 2014 in Annexure-IV also provided clarification on identical lines both in respect of section 129E of the Customs Act and section 35F of the Central Excise Act. Nevertheless, it must be noted here that vide its Circular No.984/08/2014-CX dated 16/09/2014, CBEC has clarified that payment made during investigation or audit, prior to filing the appeal can be considered to the extent of 7.5% or 10% subject to the limit of Rs.10 crore as deposit towards fulfillment of requirement u/s. 35F of Central Excise Act or section 129E of the Customs Act, 1962.
Welcome GST – Input Tax Credit Provisions under the Model GST Act (Revised Nov 2016)
1. Introduction
“Goods and Services Tax” popularly known as ‘GST’ will soon be a new face of indirect tax legislation in India. It is a concept which will subsume various indirect taxes that are currently being imposed on goods and services under various Central and State laws and will lead to imposition of a single levy namely “goods and service tax” on all goods and services purchased or consumed anywhere in India. The idea is to convert the whole of India into one single uniform market, by eliminating differential tax treatments under different laws and different States. The concept of Value Added Tax is an inherent feature of GST. Whenever a commodity changes hand, there is a value addition. GST will be imposed in respect of every value addition made to goods and services from its origination till its final consumption.Needless to say, being an indirect tax, the ultimate burden of taxes on the entire value of the commodity/service will be transferred onto the final consumer of such commodity/service. To illustrate, if ‘A’ sells goods worth Rs.100 to ‘B’, A will pay tax of say 10% i.e. Rs.10 to Government and recover the same from ‘B’ by loading the same onto value of that commodity. ‘B’ will therefore pay Rs.110 to ‘A’. When ‘B’ further sells the commodity to ‘C’ by adding his profit margin of Rs.40, then he will pay tax @10% on the said value addition of Rs.40 say Rs.4 to Government and recover the entire amount from ‘C’ i.e. 110 paid by him to ‘A’ and Rs.44 being his value addition and taxes paid by him to Government on his value addition. In short he will recover Rs.154 from ‘C’ which comprises of Rs.140 as total value and Rs.14 as taxes. The bill issued by ‘B’ to ‘C’ will also clearly show Rs.140 as the value of commodity and Rs.14 as the taxes. Therefore, in a transparent value added system, the customer knows how much amount he has paid for a commodity as its economic value and how much by way of taxes.
The example looks very simple, when Rs.10 paid by ‘A’ and Rs.4 paid by ‘B’ are taxes under the same statute and are paid to same Government. However, the economics of commodity pricing will change, if these taxes are paid under different statutes and to different governments. To illustrate, let’s assume that in the above example Rs.100 is value addition by ‘A’ for sale of goods and Rs.40 is value addition by ‘B’ in the nature of service. In other words supply made by ‘A’ to ‘B’ is in the nature of ‘sale of goods’ and supply made by ‘B’ to ‘C’ is in the nature of provision of service. In this case, A will pay Rs.10 to State Government as VAT. Although value addition made by ‘B’ is only Rs.40, since the Authority recovering the taxes from ‘B’ is a Central Government, it will recover service tax on entire Rs.140 by taxing the entire value once again under different statute (‘double taxation’). Not only that, but it will also levy tax on Rs.10 which is in fact a tax paid to State Government (‘tax on tax’). The final outcome would be that, an economic supply having aggregate value addition of Rs.140 will be loaded with VAT of Rs.10 (Rs.100 x 10%), Service Tax of Rs.14 (Rs.140 x 10%) and a tax on tax (recovered as service tax) Rs.1 (VAT of Rs.10 x 10%), thereby making total price of the commodity Rs.165. (Rs.140 as Value addition and Rs.25 as taxes) as against Rs.154 computed earlier. Another most disturbing factor in this scenario would be that, ‘B’ will raise a bill on ‘C’ showing Rs.150 as the value addition and Rs.15 as service tax. The customer will therefore be under the impression that, he has paid only Rs.15 as taxes whereas in reality he pays Rs.25 towards taxes.
GST thus endeavours to reduce cascading effect of taxes i.e. eliminating double taxation (saving of Rs.10) and tax on tax (i.e. Rs.1). It also encourages transparency by separating economic value of a commodity from taxes. The concept of “value addition based taxation” is enshrined in provisions governing Input Tax Credit(‘ITC’). This article deals with the said provisions contained in Revised Model GST law (November 2016). The provisions dealing with eligibility of CENVAT credits or tax credits under the earlier laws in GST regime (i.e. transitory provisions) are not explained in this article.
2. Definitions:
As per section 2(52), ‘inputs’ means any goods other than capital goods used or intended to be used by a supplier in the course or furtherance of business.
As per section 2(19) “capital goods” means goods, the value of which is capitalised in the books of accounts of the person claiming the credit and which are used or intended to be used in the course or furtherance of business.
As per section 2(53) “Input service” means any service used or intended to be used by a supplier in the course or furtherance of business.
As per section 2(55) “input tax” in relation to a taxable person, means the Integrated Goods and Service Tax (IGST), including that on import of goods, Central Goods and Service Tax (CGST) and State Goods and Service Tax (SGST) charged on any supply of goods or services to him and includes the tax payable under sub-section (3) of section 8 [i.e. tax payable under reverse charge], but does not include the tax paid under section 9 [i.e. tax payable under composition scheme].
As per section 2(71) “output tax” in relation to a taxable person, means the CGST/SGST chargeable under this Act on taxable supply of goods and/or services made by him or by his agent and excludes tax payable by him on reverse charge basis
As per section 2(54) “Input Service Distributor” means an office of the supplier of goods and / or services which receives tax invoices issued u/s. 28 towards receipt of input services and issues a prescribed document for the purposes of distributing the credit of CGST (SGST in State Acts) and / or IGST paid on the said services to a supplier of taxable goods and / or services having same PAN as that of the office referred to above.
3. Principal Eligibility Test:
The concept of ITC, presupposes that the preceding supply (i.e. inwards supply) as well as the subsequent supply (i.e. outward supply’) both are charged with GST. If inward supply is not charged with GST, the question of ITC does not arise. Similarly, if outward supply is not charged with GST (Nil rated or fully exempted supply, non-taxable supplies), the ITC gets accumulated and eventually becomes a part of the cost. However in certain cases, due to policy reasons, refund of ITC is permissible. Under GST, there are only two cases where refund of ITC is permissible viz. exports including zero rated supplies and cases involving inverted duty structure i.e. where the credit is accumulated on account of rate of tax on inward supplies being higher than the rate of tax on outward supplies (other than Nil/ fully exempted supplies). Except for the said two cases, if the outward supply does not attract levy of GST, then ITC of corresponding inward supply cannot be allowed and therefore necessarily forms the part of cost. This may be taken as principal eligibility test under GST.
For instance, the outward supply of goods and services which is not made by a supplier in the course of his business or commerce, is not treated as ‘supply’ for the purpose of levy of GST. There is thus no GST on such ‘non-business outward supplies’. A supplier may have been charged GST on goods and services procured and used by him for the purpose of making a ‘non-business outward supply’. However, ITC in respect of such goods/services is not allowed. What is ‘non-business outward supply’ is therefore important for the purpose of determining eligibility of ITC of corresponding goods/ services. Definition of ‘business’ is contained in section 2(17) of the GST Act. A ‘non-business’ outward supply is therefore to be interpreted accordingly.
Section 16(1) provides that, entitlement of ITC is subject to certain conditions relating to restrictions, time and manner. These conditions, restrictions and the manner, to the extent they are contained in section 16 and section 44 of the GST Act are mentioned below. In addition thereto certain additional conditions may be contained in rules which are yet to be prescribed.
4. ITC Eligibility Conditions:
As per section 16(1) of the Model GST Act, the ITC can be taken only by a registered taxable person. In other words, registration under GST is a pre-condition for availing ITC.
As per section 16(2) of the Model GST Act, the ITC shall not be allowed if the fulfillment of following conditions is in question.
– possession by claimant dealer of a tax invoice or debit note or such other prescribed taxpaying document(s) issued by a supplier registered
under this Act, against inward supply made by claimant dealer.
– The supplier issuing such documents has actually paid to the account of appropriate government, tax charged in respect of such supply, either in cash or through utilisation of ITC availed by such supplier.
– receipt of goods and/or services by claimant dealer. [The purpose of this clause is to prevent misuse of ITC provision by indulging into practices like issuing ‘accommodation bills’].
– the claimant dealer has furnished the returns u/s. 34.
Considering the provisions of ‘time of supply’ a question may arise that whether a claimant dealer would be eligible for ITC on advance payments made by him for inward supply. In this respect, it may be noted that the conditions mentioned in section 16(2) are anti-avoidance provisions. Hence as long as a supply (past or future) underlying any tax paid document (tax invoice, debit note etc.) is not doubted, ITC cannot be denied. Besides, as per Explanation 1 to Section 12 (2) the supply shall be deemed to have been made to the extent it is covered by the invoice or, as the case may be, the payment. It’s also worthwhile to note that, provisions of section 16(2) are subject to provisions of section 36 of the GST Act. As per section 36(1) credit shall be allowed to the registered taxable person on provisional basis as self-assessed in his return. It may further be noted that, Table 11 of the GSTR-1 (statement of outward supply) requires supplier to disclose the cases where tax is paid on advance basis and identifying such tax payment qua a person from whom the advance is received. However, the identification of such advance qua invoices given in Table 12 of GSTR-1 may happen in the subsequent tax period. Till the time such invoice identification takes place, it is doubtful whether ITC will be available in GSTR-2 of the receiver.
Another issue which may arise as regards receipt of goods/services will be, whether ‘actual receipt’ of goods is essential or ‘constructive delivery’ can be said to be enough as a fulfillment of aforesaid condition. For example, ‘A’ located in Maharashtra directs ‘B’ located in Gujarat to supply goods to ‘C’ located in Delhi. In such case, although there is a single movement of goods from ‘B’ to ‘C’ and goods are never actually received by ‘A’,explanation to section 16(2) provides that, ‘A’ shall be deemed to have received goods.
Similarly, in case of job work transactions, section 20 provides that, the “principal” shall be entitled to take credit of input tax on inputs and capital goods even if the inputs/capital goods are directly sent to a job worker for job-work without their being first brought to his place of business.
In case of input service distributor (ISD) also, section 16(2)(b) may not be applicable, for such ISD is not a receiver of service, but only a distributor of credit. Conditions of section 16(2) are therefore required to be fulfilled by the respective units under the same PAN at which such credit is distributed.
5. Reduction in ITC Set off
In following cases, ITC is not allowed fully, but is reduced to certain extent.
– Where the goods and/or services are used by the registered taxable person partly for the purpose of any business and partly for other purposes. [As discussed above, the amount of credit shall be restricted to so much of the input tax as is attributable to the purposes of his business only] – section 17(1). The manner of computation is yet to be prescribed.
– Where the goods and / or services are used by the registered taxable person partly for effecting taxable supplies and partly for effecting exempt supplies. In such case, the amount of credit shall be restricted to so much of the input tax as is attributable to the said taxable supplies- section 17(2). In this case, ‘zero rated’ supplies are treated as taxable supplies and supply on which recipient is liable to pay tax on reverse charge are regarded as exempt supply. For Example: ‘A’ supplies commodity X which is taxable at 5% (Turnover = Rs.50 Lakh), commodity ‘Y’ which is exempt from tax (Turnover = Rs.20 Lakh), Commodity ‘X’ and ‘Y’ are supplied to SEZ unit (Turnover = Rs.15 Lakh) and supply of commodity ‘Z’ on which the receiver is liable to pay tax under RCM (Turnover = Rs.10 Lakh). In this case, for the purpose of section 17(2) Taxable supply and Exempt supply shall be computed as under:
Taxable Supply = Rs.50 Lakh + Rs.15 Lakh = Rs.65 Lakh
Exempt Supply = Rs.20 Lakh + Rs.10 Lakh = Rs.30 Lakh.
If there is any inward supply in the hands of ‘A’ on which he is liable to pay tax under reverse charge, then such inward supply shall not be considered for the purpose of aforesaid calculation. The manner of computation u/s. 17(2) is yet to be prescribed.
– A banking company, or a financial institution including a non-banking financial company, engaged in supplying services by way of accepting deposits, extending loans or advances shall have the option to either comply with the provisions of section 17(2), or avail of, every month, an amount equal to 50% of the eligible ITC on inputs, capital goods and input services in that month.
6. Ineligible / Negative List Items
In respect of inward supply of following goods/ services specified in section 17(4), the ITC shall not be allowed.
|
Sr No |
Negative List Goods/Services |
Exceptions, |
|
1 |
motor vehicles and other conveyances |
Motor vehicles – Further supply of vehicles and conveyances. – Transportation of passengers – imparting training on driving, flying, – Transportation of goods. |
|
2 |
supply of food and |
Where such inward |
|
3 |
membership of a |
NA |
|
4 |
rent-a-cab, life |
Where it’s |
|
5 |
travel benefits |
NA |
|
6 |
works contract |
However, works
For these
‘Plant and |
|
Sr No |
Negative List |
Exceptions, if |
|
7 |
goods or services |
The goods or |
|
8 |
goods and/or |
NA |
|
9 |
goods and/or |
NA |
|
10 |
goods lost, |
NA |
As regards the aforesaid goods and services, following observations may be noted:-
– There is a need to expand the relaxation given against services mentioned in Sr. No.4 above, to all government notified services. Presently, supply of food and beverages, outdoor catering and health services (Sr. No.2) would not be eligible for ITC, even if it’s obligatory for an employer to provide these services to its employees as Government notified services under any law for the time being in force.
– Presently, ITC of membership of a club, health and fitness centre, will also be denied to film and media industry, actors, sportsman, agencies providing personal security services etc., for whom inward supply of such services is a business necessity.
– The term ‘construction’ includes capitalised expenditure, even though expenditure is incurred on renovation, additions or alterations or repairs. A business man may have to face a situation, where after the year end, at the time of audit the auditor may require him to capitalise certain expenses, which have been earlier debited to revenue accounts. In such case, he may be required to reverse the ITC availed earlier.
In addition to aforesaid cases, the ITC is also not available in following cases:
– Where the registered taxable person has claimed depreciation on the tax component of the cost of capital goods under the provisions of the Income- tax Act, 1961(43 of 1961), the ITC shall not be allowed on the said tax component.
– Where any tax is paid in terms of section 67, 89 or 90, such tax shall not be regarded as eligible ITC. Section 67 of the Act deals with payment of taxes as a result of determination by the tax authorities, in cases involving non-payment/ short payment by reason of fraud or any wilful misstatement or suppression of facts to evade tax. Section 89 deals with payment of taxes by any person who transports any goods or stores any goods while they are in transit in contravention of the provisions of this Act. Section 90 deals with payment of taxes in circumstances leading to confiscation of goods/ conveyance.
7. Timing for the purpose of Taking ITC
– As mentioned above, as per section 36, the ITC can be claimed by the assessee (‘Tax Payer’) in his tax returns on provisional basis and can be used for payment of self-assessed output tax liability. Section 37 deals with provisions relating to Matching, reversal and reclaim of ITC. The matching takes place, by comparing the details of inward supplies and tax credit furnished by assessee (as a receiver of supply) with the details furnished by his supplier in his return. The claim of ITC that match with the details of corresponding supplier’s returns are finally accepted and communicated to the assessee. Where the ITC claimed by a recipient in respect of an inward supply is in excess of the tax declared by the supplier for the same supply or the outward supply is not declared by the supplier in his valid returns, the discrepancy is communicated to both such persons. Similarly, duplicate claims of ITC are also communicated to receiver. The amount in respect of which any discrepancy is not rectified by the supplier in his valid return for the month in which discrepancy is communicated shall be added to the output tax liability of the recipient, in his return for the month succeeding the month in which the discrepancy is communicated. However, as regards duplicate claims, the excess ITC claimed shall be added to the output tax liability of the recipient in his return for the month in which the duplication is communicated.
For Example: A return for the month of July 2017 is filed on 20th August 2017. The discrepancies are communicated in August 2017. Such discrepancy will be required to be rectified in return pertaining to month of August 2017, which will be filed on 20th September 2017. If discrepancy is not rectified, then demand pertaining to excess ITC claimed will be added in the tax liability for the month of September 2017. However, if this was a case of duplicate claim, then such demand will be added in the tax liability for the month of August 2017 itself.
It is important to note that, recipient shall be entitled to reclaim the credit only if the discrepancies communicated to suppliers are subsequently rectified by him in his valid returns within the time limit specified in section 34(9) i.e. earlier of due date for furnishing of return for the month of September following the end of the financial year or the actual date of furnishing of relevant annual return.
– As per section 16(4), A taxable person shall not be entitled to take ITC in respect of any invoice or debit note for supply of goods or services after furnishing of the return u/s. 34 for the month of September following the end of financial year to which such invoice or invoice relating to such debit notepertains or furnishing of the relevant annual return, whichever is earlier. In other words, if debit note pertaining to invoice is issued by the supplier after the aforesaid period, the benefit of ITC pertaining to such debit note may not be available to the receiver.
– Where the goods against an invoice are received in lots or instalments, the entire credit becomes eligible only upon receipt of the last lot or installment.
– Where a recipient fails to pay to the supplier of services, the amount towards the value of supply of services along with tax payable thereon within a period of three months from the date of issue of invoice by the supplier, an amount equal to the ITC availed by the recipient shall be added to his output tax liability, along with interest thereon. This condition is applicable only in respect of inward supply of services and not in respect of goods.
– The credit of input tax in respect of pipelines and telecommunication tower fixed to earth by foundation or structural support including foundation and structural support thereto is allowed in staggered manner over a period of not less than 3 years. The claim in the first year not to exceed 1/3rd of the total credit and claim in second year not to exceed 2/3rd of the total credit.
8. Availability of ITC in special circumstances – Section 18.
In following cases, a registered taxable person shall be allowed to take credit subject to certain prescribed conditions and provided that the ITC is claimed within the expiry of one year from the date of issue of tax invoice relating to such supply.
– If a person applies for registration under the Act within 30 days from the date on which he becomes liable to registration, after registration, he shall be entitled to take credit of ITC in respect of inputs held in stock and inputs contained in semi-finished or finished goods held in stock on the day immediately preceding the date from which he becomes liable to pay tax under the provisions of this Act. For Example: if threshold turnover exceeds Rs.20 Lakh on 2nd October 2017. The person applies for registration on 17th October 2017 and is granted registration on 24th October 2017, then he shall be entitled to take ITC in respect of inputs held as on 1st October 2017. The provision does not cover the ITC in respect of capital goods held in stock.
– If a person applies for voluntary registration, he shall be entitled to take credit of input tax in respect of inputs held in stock and inputs contained in semi-finished or finished goods held in stock on the day immediately preceding the date of grant of registration. For Example: if a person applies for voluntary registration on 17th October 2017 and is granted registration on 24th October 2017, then he shall be entitled to take ITC in respect of inputs held as on 23rd October 2017. The provision also does not cover the ITC in respect of capital goods held in stock.
– Where any registered taxable person ceases to pay tax under composition scheme, he shall be entitled to take credit of input tax in respect of inputs held in stock, inputs contained in semi-finished or finished goods held in stock and on capital goods on the day immediately preceding the date from which he becomes liable to pay tax under normal levy. This provision covers the credit ITC in respect of capital goods held in stock reduced by such percentage as may be prescribed.
– Where an exempt supply of goods or services by a registered taxable person becomes a taxable supply, such person shall be entitled to take ITC in respect of inputs held in stock and inputs contained in semi-finished or finished goods held in stock relatable to such exempt supply and on capital goods exclusively used for such exempt supply on the day immediately preceding the date from which such supply becomes taxable. The credit of such capital goods is allowed on percentage reduction method.
9. Transfer of ITC in certain situations.
Section 18(6) provides for transfer of ITC, where there is a change in the constitution of a registered taxable person on account of sale, merger, demerger, amalgamation, lease or transfer of the business with the specific provision for transfer of liabilities. In such case, the said registered taxable person shall be allowed to transfer the ITC that remains unutilised in its books of accounts to such sold, merged, demerged, amalgamated, leased or transferred business in the manner prescribed. It is however surprising to note that, there are no similar provisions for transfer of credit, when business is succeeded as a going concern by legal heir or representative of a deceased taxable person.
10. Payment of amount of ITC in respect of goods held in stock, or payment of higher amounts in certain cases:
– Cancellation of Registration: As per section 26(7), every registered taxable person whose registration is cancelled shall pay an amount, equivalent to the ITC in respect of inputs held in stock and inputs contained in semi-finished or finished goods held in stock on the day immediately preceding the date of such cancellation or the output tax payable on such goods, whichever is higher. In case of capital goods, an amount equal to the ITC taken on the said capital goods reduced by the percentage points as may be prescribed in this behalf or the tax on the transaction value of such capital goods, whichever is higher shall be paid.
– Supply of capital goods: As per section 18(10), in case of supply of capital goods or plant and machinery, (other than refractory bricks, moulds and dies, jigs and fixtures are supplied as scrap) on which ITC has been taken, the registered taxable person shall pay an amount equal to the ITC taken on the said capital goods or plant and machinery reduced by the percentage points as may be specified in this behalf or the tax on the transaction value of such capital goods or plant and machinery, whichever is higher.
– From Normal Levy to Composition Scheme or From Taxable to Exempt Supply: As per section 18(7), where any registered taxable person, who has availed ITC, switches over as a taxable person for paying tax under composition scheme or, where the goods and / or services supplied by him become exempt absolutely u/s.11, he shall pay an amount, by way of debit in the electronic credit or cash ledger, equivalent to the credit of input tax in respect of inputs held in stock and inputs contained in semi-finished or finished goods held in stock and on capital goods, reduced by such percentage points as may be prescribed, on the day immediately preceding the date of such switch over or, as the case may be, the date of such exemption.
11. Lapse of ITC in certain situations
If after making such payment u/s. 18(7) above, any amount remains in the electronic credit ledger, then such balance amount shall lapse.
12. Input Service Distributor (ISD)
The concept of ISD is applicable only in case of inward supply of services and not in case of goods. The ISD is not an actual supplier, but he is merely a distributor of credit. For instance, A has administrative office in Maharashtra and factories at Maharashtra, Gujarat and Tamil Nadu. In such case, it may happen that all the input services are paid from administrative offices at Maharashtra and bill for such services will be raised by the supplier of services in the name of Administrative office, although the actual services are performed at Gujarat, or that the benefit of service is received at factories located at Maharashtra, Gujarat as well as Tamil Nadu. In such case, administrative office will work as ISD, and distribute all the ITC to all the beneficiary units in a prescribed manner. The manner in which ISD can distribute the credit is given in section 21 of the Act. Where the ISD and units to which the ITC is to be distributed are located in the same State, then credit of CGST shall be distributed as CGST and Credit of SGST shall be distributed as SGST. The credit of IGST shall be distributed as CGST as well as SGST, in a manner prescribed. If the ISD and units to which the ITC is to be distributed are located in the different States, then the credit of CGST shall be distributed as IGST or CGST and the credit of SGST shall be distributed as IGST or SGST. (However, it is not clear as to how the credit of CGST/SGST of one State shall be distributed to unit located at other State as CGST/SGST of that State).
As per Explanation 2 to section 21, recipient of credit means the supplier of goods and / or services having the same PAN as that of Input Service Distributor. Therefore, unless the job worker’s premises is registered as additional place of business of the Principal, the distribution of ISD to a job-worker seems difficult.
13. Payment of Tax using ITC
– As per section 44 of the Act, the ITC as self-assessed in the return of a taxable person shall be credited to his electronic credit ledger on provisional basis. The amount available in the electronic credit ledger may be used for making any payment towards output tax payable in such manner and subject to such conditions and within such time as may be prescribed. It, therefore, appears that, there may be rules for utilisation of ITC within a specific time period. Under the current tax regime, there is no limit of utilsation of Cenvat Credit under Central Excise/Service Tax laws. However, in State laws, there is time limit for carry/forward of tax credits subject to provisions for refund of unutilised credits.
– The amount of IGST-ITC shall first be utilised towards payment of IGST and the amount remaining, if any, may be utilised towards the payment of CGST and SGST, in that order. The amount of CGST-ITC shall first be utilised towards payment of CGST and the amount remaining, if any, may be utilised towards the payment of IGST. Similarly, the amount of SGST-ITC shall first be utilised towards payment of SGST and the amount remaining, if any, may be utilised towards the payment of IGST. The ITC on account of CGST shall not be utilised towards payment of SGSTand vice versa.
– The amount in electronic credit ledger shall not be used for the purposes of making payment of interest, penalty, fees, or any other amount. Similarly, such amount shall not be used for making payment of liability under reverse charge or composition tax.
– It may be noted that, in case of excess claim due to mismatch of ITC, taxable person shall be liable to pay interest on such excess claim at the prescribed rate for the prescribed period. In cases mentioned in section 37(8), interest shall be payable, from the date of availing of credit till the corresponding additions are made. If however, any excess claim of ITC added earlier is later on found to be correct due to acceptance of additional liability by the supplier of such goods/services, then such interest paid by the assessee shall be refunded to him to the extent it does not exceed the amount of interest paid by the said supplier.
14. Conclusion:
ITC and its eligibility are the key constituents of Value Addition Based Taxation Regime on which the concept of GST is designed. It is desirable that there should not be any undue restrictions on its eligibility and admissibility. The seamless flow of ITC credit will result in lower commodity price and the prices so arrived at will be better indicators of economic value of a particular commodity. The ‘matching concept’ demands highly sophisticated and very responsive Information Technology software tools and facilities. With a tax base of around 70-80 Lakh tax payers, there will be hundreds of crores of invoices which will be required to be processed every month by the GST network. Although ‘failure of matching concept’, faulty place of supply rules, composition taxes, restricted or negative list goods and services, reverse charge etc are some of the hindering factors, the Revised Model GST law has made an attempt to facilitate better credit flow as compared to the existing tax laws. But, finally, it is the implementation which will determine whether the effect of cascading of taxes on price will be minimised and reduction in prices will be achieved or not. Let us hope for the best.
5. [2017] 79 taxmann.com 199 (Bangalore – Trib.) Flughafen Zurich AG vs. DDIT A.Ys.: 2007-08 to 2009-10 and 2011-12 Date of Order: 10th March, 2017
Article 12, India-Switzerland DTAA; Section 9(1)(vii), the Act – Where foreign company seconding highly qualified skilled managerial personnel to Indian company was obligated to pay them remuneration outside India, and the purpose was to avail managerial services, the amount received from Indian company was FTS under DTAA as well as the Act.
FACTS
The Taxpayer was a company incorporated in, and tax resident of, Switzerland. It was engaged in providing operations and management services to airports. It had, inter alia, entered into Expatriate Remuneration Reimbursement Agreement (“the Agreement”) with an Indian airport operator company (“I Co”) for secondment of skill personnel.
The Taxpayer claimed that since I Co had the right to issue directions to the seconded employees, they had worked under the direct control and supervision of I Co. Thus, they satisfied employee-employer relationship test. Consequently, payment of salary to them, even though routed through the Taxpayer, could not be considered as Fees for Technical Services (‘FTS’).
The AO held that the payment received by the Taxpayer from I Co was chargeable to tax as FTS under section 9(1)(vii) as well as India-Switzerland DTAA.
Before the Tribunal, the Taxpayer contended that:
– the purpose of secondment was to assign the employees to exclusively work full time for I Co;
– therefore there was employer-employee relationship between I Co and the seconded employees;
– the parties had understood and agreed that by assignment of assignees the Taxpayer shall not be considered to have rendered any services whatsoever to I Co;
– the Taxpayer shall not be held responsible for any act or omission of the assignees during the assignment with I Co;
– the parties had also understood and agreed that in addition to remuneration paid to the assignees directly by the I Co in India, the assignees would be entitled to remuneration payable by the Taxpayer outside India;
– documents between the Taxpayer and assignee and between I Co and assignees showed that the assignees too had accepted the terms of the Agreement; and
– hence, the payment by I Co was merely reimbursement of salary paid by the Taxpayer to the assignees in foreign currency outside India.
The Taxpayer further contended that in Centrica India Offshore Pvt. Ltd. vs. DCIT [364 ITR 336 (Del)]11, seconded employees came to India on deputation for a short period whereas in its case the term of assignment varies from one year to several years and hence, its facts were distinguishable from the said decision.
The tax authority contended that the fact that despite the secondment the Taxpayer was under obligated to pay the assignees outside India showed that employee-employer relationship between assignees and the Taxpayer had not ceased and employee-employer relationship between assignees and I Co did not exist.
HELD
– Secondees were under the employment with the Taxpayer. Therefore, it was not employment or recruitment by I Co.
– Secondment was as per the requirement of I Co and in respect of the existing employees of the Taxpayer.
– All the assignees/secondees were holding high managerial position such as CEO and CCO showing that they had expertise. Therefore, the purpose was to avail the services of highly qualified experts.
– In Intel Corporation vs. DDIT [IT(TP)A No.1486/Bang/2013], the Tribunal had considered identical issue. There was no material variation in the terms and conditions of the secondment in the case of the Taxpayer and those in the cases considered by the Tribunal in the said decision and in Food World Supermarkets Ltd. vs. DDIT [174 TTJ 859].
– Further, there is no significant difference between the definition and the language in Explanation 2 to section 9(1)(vii) and that of FTS in Article 12(4) of India-Switzerland DTAA. Once a payment is for managerial service then it is irrelevant to examine the aspect of provision of service by technical or other personnel. Accordingly, there are no distinguishing facts or circumstances which warrant taking a different view.
4. [2017] 77 taxmann.com 267 (Mumbai – Trib) Qad Europe B V vs. DDIT A.Ys.: 1998-99 & 1999-2000, Date of Order: 21st December, 2016
Article 12, India-Netherlands DTAA; Section 9, the Act – Since software license issued by Dutch company to Indian customer did not permit ‘adaptation’ as defined in Copyright Act, 1957, payment made by Indian customer was not towards ‘use’ of copyright; hence, it was not ‘royalty’ under DTAA.
FACTS
The Taxpayer was a company incorporated in Netherlands. It was also a tax resident of Netherlands. The Taxpayer entered into software license agreement with an Indian company (“I Co”). The principal terms and conditions of the said agreement were as follows.
– The Taxpayer had granted non-exclusive, non-transferable, license for perpetual use on one hardware system which may include up to four servers.
– I Co did not acquire any copyright in the product.
– The software was for exclusive use of I Co for the purpose of its own business. I Co was not permitted to exploit it commercially or to assign, transfer or sublicense it.
– While I Co was permitted to modify source code, it was not permitted to modify object code10.
– Only the Taxpayer had modification rights of software.
In light of the aforementioned terms and conditions, the Taxpayer treated income arising from the said transaction as its business income. Since it did not have any PE in India, it did not offer the income to tax in India.
According to the AO, the payment received by the Taxpayer on account of sale of software to I Co was ‘Royalty’ and, therefore, it was taxable in India in the hands of the Taxpayer u/s. 9(1)(vi) of the Act.
HELD
– The Taxpayer had enabled I Co to change source code so as to make the product compatible to the local laws and regulations. The said change in the source code could not be operational till the object code was modified by the Taxpayer. Hence, the limited right of modification qua the source code granted to I Co cannot be viewed adversely.
– The computer program was governed by The Copyright Act, 1957. I Co was not permitted to do any act referred to in section 14 of the Copyright Act, 1957. Thus, the Taxpayer had not granted any copyright to I Co.
– Analysis and comparison of various provisions of the Copyright Act with the relevant clauses of the said agreement showed that the said agreement did not permit I Co to carry out any alteration or conversion of any nature, so as to fall within the definition of ‘adaptation’ as defined in Copyright Act, 1957. The right given to the customer for reproduction was only for the limited purpose so as to make it usable for all the offices of I Co in India and no right was given to I Co for commercial exploitation of the same.
– It is also noted that the terms of the agreement did not allow or authorise I Co to do any of the acts covered by the definition of ‘copyright’. Hence, the payment made by I Co could not be construed as payment made towards ‘use’ of copyright as contemplated under the provisions of the Act and DTAA when read together with the provisions of the Copyright Act, 1957.
– DTAAs of certain countries (such as, Malaysia, Romania, Kazakhstan and Morocco) specifically include software payment within the definition of ‘Royalty’. However India-Netherlands DTAA does not include software payment while defining ‘Royalty’. Hence, payment received by the Taxpayer on account of sale of software, could not be characterised
as ‘Royalty’.
– I Co had made payment for use of the software and not the ‘process’ involved in it. Since the definition in article 12(4) of India-Netherlands DTAA did not include consideration for the use or right to use ‘computer programme’ or ‘software’, the same could not be imported into it. Perusal of clauses of the Master Agreement showed that the customer had paid consideration for ‘use of computer software’ and not for ‘copyright of the computer software’. India-Netherlands DTAA treats consideration for the use of copyright of a laboratory or artistic work, etc. as ‘Royalty’. Hence, there is no question of including consideration for use of a laboratory or artistic work, etc. within the ambit of ‘Royalty’ as defined in article 12(4) of the DTAA.
– Consideration for sale of software should be covered in Explanation 4 to section 9(1)(vi) and accordingly taxable as such. However, since no corresponding amendment is made to India-Netherlands DTAA, the Taxpayer can choose more beneficial provision, i.e., DTAA.
– Since the payment received by the Taxpayer is in the nature of business profits, it is assessable under Article 7 of India-Netherlands DTAA and not under article 12.
3. [2017] 78 taxmann.com 109 (Mumbai – Trib.) Valentine Maritime (Gulf) LLC vs. ADIT A.Y.: 2007-08, Date of Order: 18th January, 2017
Section 44BB, the Act – Since section 44BB of the Act does not envisage only direct use of the plant and machinery in the prospecting for or extraction or production of mineral oils, hire charges for hiring of barge used for offshore accommodation were also subject to taxation u/s. 44BB.
FACTS
The taxpayer was a foreign company incorporated in UAE. It was engaged in oil and gas construction industry. During the relevant year, the taxpayer earned income from hiring of two tug boats to Indian companies and earned hire charges from them. The tug boats were used by the hirer in Bombay High offshore field for oil platform related work. The barge was used by the hirer for offshore accommodation/construction activities and was not directly involved in connection with prospecting of oil. In its return of income the taxpayer claimed that the hire charges of two tug boats and the barge were exempt in terms of Article 7 read with Article 5 of India-UAE DTAA.
The AO concluded that in terms of Article 1, read with Article 4, of India-UAE DTAA the Taxpayer was not a resident of UAE. Therefore, it did not qualify for benefit under India-UAE DTAA.
As an alternate contention, the Taxpayer claimed that hire charges should be subject to taxation in accordance with section 44BB of the Act. The AO rejected the alternate contention on the ground that the Taxpayer had not proved that the vessels were used for the purpose of prospecting of or extraction or production of mineral oils. Accordingly, the AO held that the earnings were in the nature of royalty in terms of section 9(1)(vi) of the Act and levied taxed accordingly.
In appeal, the CIT(A) held that the tugs were actually used by the hirer in connection with prospecting for or extraction or production of mineral oils. He further held that the barge was used for offshore accommodation/construction activities and was not directly involved in connection with prospecting of mineral oil. Accordingly, he held that the income from hiring of barge was in the nature of royalty.
HELD
– Insofar as the tug boats are concerned, they have been used in connection with prospecting for or extraction or production of mineral oils.
– In Lloyd Helicopters International Pty Ltd. vs. CIT [2001] 249 ITR 162 (AAR), AAR has held that even the income derived from providing of helicopter services to facilitate operation of extraction and production of mineral oil was taxable in accordance with section 44BB of the Act.
– Following the ruling of AAR, and the phraseology of section 44BB, even the earnings from hiring of barge were eligible for taxation u/s. 44BB.
2. [2017] 78 taxmann.com 240 (Mumbai – Trib.) APL Co. Pte Ltd. vs. ADIT A.Y.: 2008-09, Date of Order:16th February, 2017
Article 8, 24, India – Singapore DTAA – As both the conditions for invoking of Article 24 were not fulfilled, benefit of Article 8 of India-Singapore DTAA in respect of shipping income derived from India could not be denied.
FACTS
The Taxpayer was a company incorporated in, and tax resident of, Singapore. It was engaged in operation of ships in international waters, mainly for transportation of cargo and containers globally. Inter alia, the Taxpayer also carried cargo to and from India. The Taxpayer had a wholly owned subsidiary in India which was acting as its shipping agent in India. The Taxpayer claimed that in term of Article 8 of India-Singapore DTAA, its gross freight earning in India were not chargeable to tax in India.
The AO called for certain documents to verify the claim of the Taxpayer. Out of 136 ships, the Taxpayer could not provide documents in respect of 8 ships. Hence, the AO denied treaty benefits in respect of income from 8 ships. In appeal, invoking limitation of benefits (LOB) provision in Article 24 of India-Singapore DTAA, CIT (A) denied treaty benefits on entire income on the ground that there was no nexus between remittance from India of freight collected in India and the amount that was finally remitted into Singapore, and further that the income was not taxable in Singapore.
HELD
– Two conditions should be fulfilled to invoke Article 24. Firstly, income should be exempt or taxed at lower rate in source state. Secondly, only the income received in residence state should be taxable.
– Under Singapore tax law, shipping enterprises are required to furnish statement of income derived from operations of foreign ships in Singapore. The income from shipping operations is treated as ‘accruing in or derived from Singapore’ and taxed on accrual basis. This is also confirmed in the certificate issued by Singapore revenue authority.
– Use of the term “only” in Article 8 of India-Singapore DTAA shows that shipping income of a Singapore tax resident enterprise is taxable only in Singapore and not in India. Therefore, question of any kind of exemption or reduced rate of taxation in source state does not arise.
– Accordingly, the condition precedent for invoking Article 24, namely, income should be exempt or taxed at lower rate in source state was not fulfilled. Therefore, Article 24 could not be invoked.
1. [2017] 79 taxmann.com 128 (Delhi – Trib.) Cairn U. K. Holdings Ltd vs. DCIT A.Y. 2007-08, Date of Order: 9th March, 2017
Section 9(1)(i), the Act – Transfer of shares of Jersey company holding shares in Indian company by UK company to another group company was indirect transfer of asset; capital gain arising from such transfer was subject to tax in India
FACTS
The Taxpayer was a tax resident of UK. The Holding Company (Hold Co) of the Taxpayer was acquiring oil and gas assets in India through its subsidiaries. Following is the diagrammatic presentation of the original holding structure.
With a view to simplify the group structure, for better and effective local management and to access capital market, the group effectuated internal reorganisation in a series of transactions in which the Taxpayer was a party.
Briefly, the reorganisation comprised the following transactions.
– Hold Co entered into share exchange agreement with the Taxpayer and transferred its entire shareholding in nine wholly owned Indian subsidiary companies to the Taxpayer in exchange of issue of shares by the Taxpayer to Hold Co. No capital gain tax was paid on this transaction1.
– The Taxpayer setup a subsidiary in Jersey (Jersey Co). The Taxpayer entered into share exchange agreement with Jersey Co and transferred its entire shareholding in nine wholly owned Indian subsidiary companies to Jersey Co in exchange of issue of shares by Jersey Co. Jersey Co derived substantial value from assets located in India.
– Subsequently, the Taxpayer formed another subsidiary in India (I Co). The Taxpayer infused purchased certain shares if I Co for cash consideration. Thereafter, the Taxpayer transferred its entire shareholding in Jersey Co to I Co. I Co paid the consideration partly in cash and partly by issue of shares of I Co. I Co recorded the excess amount over the book value of shares of Jersey Co as goodwill.
– Subsequently, I Co issued shares by way of IPO of its shares. Post-IPO, the shareholding in I Co was: UK Co ~69% (including ~20% subscribed in cash and ~49% received in exchange of shares of Jersey Co) and public ~31%.
Following is the diagrammatic presentation of the post-reorganisation holding structure.
The AO treated transfer of shares of Jersey Co by the Taxpayer to I Co as indirect transfer of assets in India u/s. 9(1)(i) of the Act and accordingly, assessed capital gains tax in the hands of the Taxpayer.
In appeal before the Tribunal2, the Taxpayer contended as follows.
– The taxability of the transaction under the indirect transfer provisions should be denied, as the said retroactive amendment is bad in law and ultra vires.
– The Transactions undertaken by the Taxpayer were for internal reorganisation with a view to consolidate Indian business operations. Such internal reorganisation did not result in any change in controlling interest. Hence, such transaction was non-taxable.
– The Taxpayer relied on Calcutta HC decision in the case of Kusum products Limited3 to suggest that: post-internal reorganisation no real income accrued to the Taxpayer as all Indian assets were available in different form; and mere accounting entry cannot be regarded as income, unless real income was actually earned.
– For the purpose of computing capital gain, the cost of acquisition should be stepped up to the fair value of the shares of Jersey Co on the date of acquisition. Further, there was no timing difference between the acquisition and disposal of shares by the Taxpayer, and accordingly the full value of consideration and the cost of acquisition were same.
– The Taxpayer also relied on Delhi HC decision in New Skies Satellite and contended that the provisions of the Act as were in existence on the date of notification of India-UK DTAA were to be considered and retroactive amendment in relation to indirect transfer provisions was to be ignored.
HELD
On transfer of shares of Jersey Co to I Co
– Validity of retrospective amendment
On the contention of non-applicability of indirect transfer provisions, due to the same being retrospective in nature and ultra vires, the Tribunal concluded that it is not the right forum to challenge validity of provisions of the Act.
– No change in controlling interest due to internal reorganisation
The steps undertaken were not mere business reorganisation. It was a fact that the series of transactions culminated into the IPO of I Co from which the funds were used to pay part consideration to the Taxpayer for acquisition of shares of Jersey Co.
– Property being situated in India
The Indian WOS, which controls the oil and gas sector in India, will be regarded as the property in which the shareholders have the right to manage and control the business in India. Therefore, any income arising through or from‘ any property in India shall be chargeable to tax as income deemed to accrue or arise in India in terms of the indirect transfer provisions of the Act.
– No real income accruing in the hands of Taxpayer
The audited financial statements of the Taxpayer discussed about disposal of part of the company’s investment and resultant exceptional gains earned upon disposal of shares. Hence, the Taxpayer was not justified in arguing that no real income had accrued.
– While computing capital gains, cost of acquisition should be stepped up to fair value of Jersey Co.
Perusal of the provisions of the Act show that the property held by the Taxpayer (i.e., shares of Jersey Co) and its mode of acquisition did not fall under any of the clauses of the Act which required substitution of cost of acquisition in the hands of the previous owner4.
The Tribunal also denied the Taxpayer’s contention on transaction being in the nature of swap and leading to resultant step up in cost of acquisition by stating that in the present case, the price of the shares in each of the agreement is identified and the amount of acquisition recorded in the books of account represents cost of acquisition of share which cannot be substituted by
fair value.
– Whether ITL provisions at the time when India-UK DTAA was signed is to be considered
The Tribunal disregarded the argument of the taxpayer and held that:
• As per the India-UK DTAA, capital gains are taxable as per the domestic law of respective countries. Hence, the provisions in DTAA cannot make the domestic law static when both states have left it to domestic law for taxation of any particular income.
• Where exemption is provided with retroactive effect under domestic law, non-resident cannot be denied exemption by citing that such law was not in existence at the time DTAA was entered into.
• DTAA is a mechanism of avoiding multiplicity of taxation globally. If taxes are chargeable in residence state (i.e. UK), the taxpayer should not suffer tax in the source state. The facts indicated that capital gains were not taxable in the residence state. Accordingly, there was no multiplicity of tax being levied.
• Distinguished the Taxpayer’s reliance on Delhi HC ruling in the case of New Skies Satellite5 which held that amendments made under domestic law cannot be applied to relevant DTAAs.
• Where the provisions of DTAA simply provide that particular income would be chargeable to tax in accordance with the provisions of domestic laws, such article in DTAA cannot limit the boundaries of domestic tax laws.
On levy of interest
The Tribunal relied upon various judicial precedents6 and agreed with the Taxpayer’s claim that it could not have visualised its liability for payment of advance tax in the year of transaction. Consequently, interest on tax liability arising out of retrospective amendment cannot be levied7. The Taxpayer was also subject to withholding tax. However, based on the SC ruling in the case of Ian Peter Morris vs. ACIT8 and Delhi HC ruling the case of DIT vs. GE Packaged Power Incorporation9, which held that a non-resident cannot be burdened with interest for default of withholding compliance and the fact that liability arises out of a retrospective amendment which could not be foreseen, the Tribunal ruled in favour of the Taxpayer.
2. Quick Flight Limited vs. ITO (Ahmedabad) Members: R.P. Tolani (J. M.) & Manish Borad (A. M.) ITA No.: 1204/Ahd/2014 A.Y.: 2011-12. Date of Order: 4th January, 2017
Counsel for Assessee / Revenue: Urvashi Shodhan / Rakesh Jha
Section 206AA – Payments to a non-resident in terms of section 115A(1)(b) can be made after deducting tax at source @ 10% plus surcharge and cess even where the deductee has no PAN.
FACTS
The assessee was engaged in the business of chartering, hiring and leasing aircraft. During the year payment was made to a non-resident not having PAN. Tax was deducted at source @ 10% + surcharge and education cess on the payment of fees for technical services as per provisions of section 115A. However, the Assessing Officer was of the view that tax was required to be deducted @ 20% in view of the provisions of section 206AA, as the payee was not having PAN and accordingly raised demand of Rs.30,250/- towards short deduction and Rs.5750/- towards interest on short deduction. Being aggrieved, the assessee went in appeal before the CIT(A) and contended that the payment made towards fees for technical services was u/s. 115A and the assessee has rightly deducted TDS @ 11.33% and provisions of section 206AA of the Act cannot be applied to the assessee. However, according to the CIT(A), the rates prescribed in section 115A apply when the agreement pertains to a matter included in Industrial Policy. However, since no such evidence had been produced to show that agreement with the payee falls under the Industrial policy, he confirmed the order of the Assessing Officer.
HELD
The Tribunal noted that the assessee was able to show that the agreement pertains to a matter included in Industrial Policy. Further, relying on the decision of the Ahmedabad tribunal in the case of Alembic Ltd. vs. ITO (ITA No.1202/Ahd/2014), the Tribunal held that the provisions of section 206AA cannot be invoked by the Assessing Officer and he cannot insist to deduct tax @ 20% for non-availability of PAN.
1.Kumari Kumar Advani vs. Asstt. CIT (Mum) Members: G.S.Pannu (A. M.) and Ram Lal Negi (J. M.) ITA No.: 7661 /MUM/2013 A.Y.: 2012-13.
Counsel for Assessee / Revenue: Ajay R. Singh / A. K. Kardam Section 234C – Shortfall in payment of advance tax on account of impossibility to estimate income – Assessee not liable to pay interest.
FACTS
The assessee, an individual, had filed her return of declaring income of Rs. 13.91 crore. While processing such return u/s. 143(1), interest u/s. 234C of the Act was levied on account of shortfall in payment of advance tax on first and second installments, due on 15/09/2011 and 15/12/2011, in respect of gift of Rs.10.00 crores claimed to have been received on 17/12/2011. On such deferment in payment of instalments, interest of Rs.7.66 lakh was charged. On appeal, the levy was confirmed by the CIT(A).
Before the Tribunal, the assessee argued that the income in question, namely gift of Rs.10.00 crore received on 17/12/2011 was in the nature of a windfall gain and, therefore, it was not possible for the assessee to estimate its accrual or receipt at any time when the payment for first and second installments of advance tax were due. However, the revenue justified the orders of the lower authorities on the ground that the charging of interest u/s. 234C of the Act was mandatory in nature and relied on the judgment of the Delhi High Court in the case of Bill and Peggy Marketing India Pvt. Ltd. vs. ACIT (350 ITR 465).
HELD
The Tribunal noted that section 209 provides the computational mechanism of calculating advance tax to be paid. According to it, section 209 envisages calculation of advance tax based on the ‘estimate of current income’. A reading of section 209 would reveal that in order to calculate the amount of advance tax payable, an assessee is liable to estimate his income. Considered in this light, the facts of the present case clearly show that the gift of Rs. 10 crore, which has been received by the assessee on 17/12/2011 could not have been foreseen by the assessee so as to enable him to estimate such income for the purpose of payment of advance tax on an anterior date viz., 15/09/2011 or 15/12/2011. In such a situation, according to the Tribunal, the decision of the Hyderabad Bench of the Tribunal in the case of ACIT vs. Jindal Irrigation Systems Ltd. (56 ITD 164) relied upon by the assessee clearly militates against charging of interest u/s. 234C. As per the Hyderabad Bench of the Tribunal, an assessee could not be defaulted for a duty, which was impossible to be performed. To the similar effect is the decision of the Chennai Bench of the Tribunal in the case of Express Newspaper Ltd (103 TTJ 122). Therefore, the Tribunal held that the levy of interest u/s. 234C was untenable.
As regards the plea of the Revenue that charging of interest u/s. 234C is mandatory in nature, the Tribunal observed that the same cannot be allowed to lead to a situation where levy of interest can be fastened even in situations, where there is impossibility of performance by the assessee. Charging of interest would be mandatory, only if, the liability to pay advance tax arises upon fulfilment of the parameters, which in the present case is not fulfilled on account of the peculiar fact-situation. Thus, according to the Tribunal such plea of the Revenue was untenable. According to it, the judgment of the Delhi High Court in the case Peggy Marketing India Pvt. Ltd., relied on by the revenue, stands on its own facts and is not attracted to the facts of the present case.
4. [2017] 79 taxmann.com 170 (Pune – Trib.) Asara Sales & Investments (P.) Ltd. v. ITO ITA No. 1345 (Pune) of 2014 A.Y.: 2009-10 Date of Order: 8th March, 2017
Section 10(38) – Long term loss arising on sale of equity shares of a listed company, in an off market transaction, can be set off against long term capital gain arising on sale of unquoted shares since 10(38) does not apply to sale of listed shares in an off market transaction as STT is not required to be paid on such a sale.
FACTS
For the assessment year under consideration, the assessee company filed its return of income declaring therein a business loss of Rs. 13,54,362 and long term capital gain of Rs. (-) 3,85,58,664.
In the course of assessment proceedings, the Assessing Officer (AO) noticed that the assessee had, during the year under consideration, shown long term capital gain of Rs. 4,53,98,376 on sale of shares of unlisted group companies and a long term capital loss of Rs. 8,39,57,040 on sale of shares of listed company i.e. G. G. Dandekar Machine Works Ltd. (GGDL). The assessee had set off the long term capital gains of Rs. 4.53 crore against long term capital loss of Rs. 8.39 crore. Thus, the long term capital loss in the return of income was Rs. 3.85 crore which was carried forward to subsequent assessment years.
The AO was of the view that since the shares of GGDL were acquired through a stock exchange after payment of STT, the long term capital gain arising on their sale, after holding them for a period of more than one year, would be exempt u/s. 10(38) of the Act. According to the AO, the fact that the shares were sold in off market transaction without paying any STT would not take away or change the nature of shares, because the shares were listed on Stock Exchange and were otherwise eligible for levy of STT. He also held that the sale of shares of GGDL after 12 months to a 100% subsidiary in an off market transaction without payment of STT was a colorable device to enable the assessee to set off loss on sale of listed shares against profit on sale of unlisted shares. He also noted that the sale was on 18.3.2009 at a loss of Rs. 48 per share whereas the book value on the same date was Rs. 59.60 and on the same date unlisted shares of KSL have been sold @ Rs. 225 per share whereas the book value was only Rs. 134 per share which resulted in long term capital gain. Both the transactions were made on the same date and with the same entity i.e. BVHPL which is again a 100% subsidiary of the assessee. The AO held that the long term capital loss of Rs. 8.39 crore on sale of shares of listed companies would not be set off in the current year against the long term capital gains of sale of listed shares nor it would be allowed to be carried forward to be set off in future and the long term capital gains of Rs. 4.53 crore on sale of shares of unlisted group company would be chargeable to tax in the year itself as long term capital gain @ 20%.
Further, since the shares of GGDL were sold for a price which was lower than their book value whereas the sale of shares of other unlisted companies was for a price higher than their book value, the AO held that the amount of loss to the extent of Rs. 2.75 crore (to the extent it was lower than the book value of the shares sold) would be ignored while setting it off against other income, if any, in the current year or for carry forward and set off in subsequent years.
Aggrieved, the assessee preferred an appeal to CIT(A) who upheld the order of the AO and also treated the transaction to be a colorable device where the transaction was made on the same day in respect of listed shares and sale of shares of unlisted group companies. He also rejected the contention with regard to off market transaction between the group companies.
Aggrieved, the assessee preferred an appeal to the Tribunal.
HELD
Applying the rule of literal interpretation to the provisions of the Act i.e. section 10(38) of the Act and section 88 of the Finance (No. 2) Act, 2004, it is clear that STT is to be paid on such transaction which are entered into through recognised Stock Exchange. The section does not provide that each transaction of sale of listed shares is to be routed through Stock Exchange. Applying the said principle, to the facts of the case, where the shares of a group entity which was a listed company i.e. GGDL were sold in off market transaction, then no STT is to be paid and the provisions of section 10(38) of the Act are not to be applied and consequently, set off of loss arising on sale of GGDL against the income from long term capital gains arising on sale of unquoted shares cannot be denied.
The Tribunal noted that while selling the shares of listed company GGDL, the assessee opted to transact on off market trade since the said shares were of Kirloskar group concern and the group did not want the shares to be picked up by any stranger, if traded on Stock Exchange. Such business decision, according to the Tribunal, taken by the assessee cannot be doubted and called as colorable device to set off profits arising on sale of unquoted shares.
As regards the contention of the AO that the transaction was a colorable device since the shares were sold at Rs. 48 per share to another group concern whereas the book value of shares as on 31.3.2008 was Rs. 59.61 per share and these shares were acquired by the assessee in December 2006 @ Rs. 74.25 per share, the Tribunal held that the shares have not been sold to a subsidiary of the assessee but to a concern from whom the assessee has raised a loan to the extent of Rs. 18 crore and the decision was taken to sell the shares in an off market transaction to repay the loan and arrest the payment of interest on such loans. It also noted that the assessee had sold the shares at a market price prevailing on the date of the sale. It held that no fault can be found with such transactions undertaken by the assessee. Accordingly, the total loss arising on the said transaction can be adjusted and set off against any other gain arising in the subsequent year.
The appeal filed by the assessee was allowed.
3. [2017] 79 taxmann.com 67 (Mumbai – Trib.) Anita D. Kanjani vs. ACIT ITA No.: 2291 (Mum) of 2015 A.Y.: 2011-12Date of Order: 13th February, 2017
Section 2(42A) – Holding period of an office premises commences from the date of letter of allotment since that is the point of time from which it can be said that assessee started holding the asset on a de facto basis.
FACTS
In the return of income for AY 2011-12, the assessee included in the total income long term capital gain arising on transfer of her office unit. The chronology of relevant events, with respect to the office unit sold during the previous year, were as under –
1 Date of allotment of office unit to the assessee 11.04.2005
2 Date of signing of the agreement to sell 28.12.2007
3 Date of registration with the Registrar 24.04.2008
4 Date of sale 11.03.2011
The Assessing Officer (AO) computed the holding period with reference to date of registration of the agreement and held that the office unit was held for a period of less than 36 months before the date of transfer and was therefore, a short term capital asset. He rejected the contention of the assessee that the holding period should be computed from the date of letter of allotment of office.
Aggrieved, the assessee preferred an appeal to CIT(A) who confirmed the action of the AO.
Aggrieved, the assessee preferred an appeal to the Tribunal where relying on various decision it was contended that the period of holding should be computed from the date of allotment of the property as per section 2(42A). It was alternatively contended that in case holding period is to be computed from the transfer of the property, in that case, ‘date of execution’ of the sale agreement should be taken as date of transfer of the property because the document registered on a subsequent date operates from the ‘date of execution’ and not from the ‘date of registration’ in view of clear provisions of section 47 of the Registration Act, 1908. If holding period was computed from the date of execution of the agreement, then, the impugned property shall be ‘long term capital asset’ in the hands of the assessee.
HELD
The Tribunal observed that Karnataka High Court has in the case of CIT vs. A. Suresh Rao [2014] 223 Taxman 228 (Kar.) dealt with similar issue wherein the significance of the expression ‘held’ used by the legislature has been analysed and explained at length. From the said judgment it is clear that for the purpose of holding an asset, it is not necessary that the assessee should be the owner of the asset based upon a registration of conveyance conferring title on him.
It also noted that the ratio of the decisions of Punjab & Haryana High Court in the case of Madhu Kaul vs. CIT [2014] 363 ITR 54 (Punj. & Har.) and Vinod Kumar Jain vs. CIT [2014] 344 ITR 501 (Punj. & Har.) and of Delhi High Court in the case of CIT vs. K. Ramakrishnan [2014] 363 ITR 59 (Delhi) and of Madras High Court in the case of CIT vs. S. R. Jeyashankar [2015] 373 ITR 120 (Mad.).
The Tribunal, following various decisions of the High Courts, held that the holding period should be computed from the date of issue of allotment letter. Upon doing so, the property sold by the assessee would be long term capital asset and the gain on sale of the same would be taxable as long term capital gains.
This appeal filed by the assessee was allowed by the Tribunal.
2. [2017] 78 taxmann.com 242 (Delhi – Trib.) EIH Ltd. vs. ITO ITA Nos.: 2642 to 2645 (Delhi) of 2015 A.Ys.: 2004-05 to 2007-08 Date of Order: 14th February, 2017
Sections 15 r.w.s. 17, 192 – U/s. 192 there is no liability on the assessee to deduct tax at source on ‘TIPS’ recovered by the assessee from guests and paid to employees.
FACTS
The assessee company was engaged in the business of a chain of hotels (The Oberoi Group). A survey u/s. 133A was carried out at the business premises of the assessee company at Hotel – The Oberoi, New Delhi. In the course of the survey proceedings, it was noticed that the assessee company was in receipt of extra amount known as “TIPS” paid by the guests in cash or through credit cards at the time of settlement of bills in appreciation of good services provided by the service staff. On disbursal of this amount, by the assessee to the employees, no tax was deducted.
The Assessing Officer (AO) was of the view that since TIPS are paid to the employees in lieu of rendering prompt services for their employer, hence these accrued to the employees for services rendered as employees for their employer. He, accordingly, held that the assessee has failed to deduct tax and passed separate orders holding the assessee to be an assessee in default and passed orders u/s. 201(1) / 201(1A) for each of the assessment years.
Aggrieved, the assessee preferred an appeal to CIT(A) who confirmed the action of the AO.
Aggrieved, the assessee preferred an appeal to the Tribunal.
HELD
The Tribunal noted that the Apex Court in the case of ITC Ltd. vs. CIT (TDS) [2016] 384 ITR 14 (SC) has on analysis of section 15 has held that for the said section to apply, there should be a vested right in an employee to claim any salary from an employer or former employer. It held that since TIPS were received from the customers and not from the employer these would be chargeable in the hands of the employee as income from other sources and section 192 would not get attracted on the facts of the case. The Tribunal observed that the facts as considered by the Apex Court in the case of ITC Ltd.’s case (supra) would fully apply to the present case. It also noted that the cognisance of the judicial precedence has already been taken by the co-ordinate “SMC” Bench in its order dated 12.7.2016 in the case of the assessee itself.
The Tribunal held that the assessee cannot be said to be in default of the provisions of section 192 of the Act as there was no liability of the assessee to deduct TDS under the said provision on TIPS recovered from hotel guests. Therefore, it cannot be held to be an assessee in default. Since interest u/s. 201(1A) can only be levied on a person who is declared as an assessee in default the question of interest does not arise. The Tribunal quashed the orders of the AO u/s. 201(1) / 201(1A) for the respective years.
The appeals filed by the assessee were allowed.
1. [2017] 78 taxmann.com 188 (Mumbai – Trib.) Bharat Serum & Vaccines Ltd. vs. ACIT ITA Nos.: 3091 & 3375 (Mum) of 2012 A.Y.: 2008-09 Date of Order: 15th February, 2017
Section 55 – Amount received for assignment of patent is taxable as capital gains u/s. 55(2)(a) and its cost of acquisition has to be taken as Nil.
FACTS
The assessee company was engaged in the business of research development, manufacturing, wholesale trading and licensing of bio-pharmaceuticals, bio-technology products serums and process related technology. During the year under consideration, the assessee transferred a patent for Rs. 1.50 crore. The entire receipt on assignment of patent was regarded to be not taxable on the ground that the patent was a capital asset and no expenditure was incurred for acquiring the patent.
The Assessing Officer (AO) took the view that it was not possible to develop a process / patent without input from specialised/skilled personnel in a state-of-art research facility, that process of developing a patent was a part of the business of the assessee and that it had claimed all the expenses for skilled personnel and research facility in its P & L Account.
The claim made by the assessee that it had not incurred any cost for developing a patent was not accepted by the AO. He held the amount received to be a revenue receipt.
Aggrieved, the assessee preferred an appeal to CIT(A) who held that the facts of the present case were squarely covered by the provisions of section 55 of the Act and that the receipt had to be taxed as capital gains.
Aggrieved, the assessee preferred an appeal to the Tribunal.
HELD
The Tribunal, at the outset, discussed the concept of patent and the history of patents. It mentioned that it is necessary to make a distinction between cases where consideration is paid to acquire the right to use a patent or a copyright and cases where payment is made to acquire patented or copyrighted product or material. In cases where the payment is made to acquire patented or copyrighted products, the consideration paid would have to be treated as a payment for purchase of the product rather than consideration for use of the patent or copyright. It pointed out the distinction between a patent and a trademark. The Tribunal then discussed about the patented medicine ‘Profofal’ which was marketed by the assessee as Diprivan among others and was discovered in 1977. It observed that the medical patents require clinical tests and administering drugs to patients. Clinical tests have to be performed under controlled conditions. For understanding the effective mass and the side-effects of the medicine, large sample survey spread over a reasonable time span is a must.
The Tribunal held that before getting a patent of medicine like the item under consideration, the assessee has to carry out a lot of research analysis and experimentation. Naturally, it would require incurring of expenditure for both the activities. Such a tedious and cumbersome process was adopted by the assessee to have a right to manufacture / produce / process ‘Profofal’.
Considering the recitals of the agreement for assignment of patent, the Tribunal held that the patent was for the purpose to have right to manufacture/produce/process some article/thing. The patent was registered for commercial exploitation of the same in India as well as in the international market. It was transferred to the assignee for exploiting it commercially. Section 55(2)(a) talks of right to manufacture, produce or process any article or thing. Therefore, as per the amended provisions, the right to manufacture/produce/process would be taxable under the head capital gains and cost has to be taken at Rs. Nil. It upheld the order of the CIT(A).
This ground of appeal filed by the assessee was dismissed.
Interaction of CTC Members with Tax Professionals at Mumbai
REPRESENTATION
15th March, 2017
Central Technical Committee
ITO (HQ)
Aayakar Bhavan
Mumbai.
Respected Sirs
Sub: Interaction of CTC Members with Tax Professionals at Mumbai
We write to you in continuation of our discussion on the 20th February 2017 at Mumbai. We take this opportunity to present a few suggestions with a request to consider the same. These suggestions, if accepted, will go a long way in reducing contentioustax issues.
We request you to consider these suggestions favourably. We will be happy to present ourselves for any explanation and clarification that may be required by you.
Thanking you,
We remain,
Yours truly,
For Bombay Chartered Accountants’ Society,
Chetan Shah Ameet Patel
President Chairman,
Taxation Committee
1. Applicability of Section 50C to transactions covered by Section 45(3):
In a case where assesse transfers capital asset being land or building or both and the full value of consideration for such a transfer is lower than the stamp duty value of the asset so transferred, section 50C deems stamp duty value of the asset transferred to be the full value of consideration. Thus, for applicability of section 50C the consideration for transfer of land or building or both has to be compared with the stamp duty value thereof which necessarily presupposes existence of consideration. In the absence of consideration, section 50C will not be applicable.
In a situation where an assessee introduces his capital asset into a firm or an association of persons where he is a partner or a member, Supreme Court has held that there is no consideration. It is said that in such cases consideration lies in the womb of the future – Sunil Siddharthbhai v.CIT [(1985) 156 ITR 509 (SC)]. It was to overcome the ratio of this decision that section 45(3) was introduced in the Act w.e.f. 1.4.1988. Section 45(3) deems the amount credited to the account of the partner / member to be the full value of consideration. Therefore, by a fiction created by section 45(3) the amount credited to the account of the partner / member who has introduced the asset is regarded as full value of consideration.
A question arises as to whether in a case where an assessee introduces capital asset being land or building or both in a firm in which he is a partner and the amount credited to his capital account in the books of the firm is lower than the stamp duty value of the asset so introduced by him, are the provisions of section 50C applicable. It is submitted that for the following reasons, provisions of section 50C are not applicable to such a case –
i) consideration for introducing the asset into the firm in which assesse is a partner lies in womb of the future and therefore the value credited to the account of the partner / member is not consideration for transfer but it is deemed to be full value of consideration for charging capital gains;
ii) section 50C creates a fiction. Section 45(3) also creates a fiction. It is settled position in law that there cannot be a fiction on a fiction.
Suggestion:
Appropriate clarification be issued by the CBDT clarifying that the provisions of section 50C are not applicable to cases covered by section 45(3).
2. Section 115JB:
Tax on book profits was introduced because it was felt that many companies are making profits, declaring dividends but because of incentives under the provisions of the Act they are not paying any taxes. The intention of the provision is never to tax the same amount twice once under the normal provisions of the Act and once under the provisions of section 115JB. There are several instances where because of the timing difference between point when the profits are offered for taxation under the provisions of the Act and the time when they are recorded in the books of accounts, the charge of tax under the normal provisions of the Act arises in a year which is different from the year in which the transaction is recorded in the books of accounts. To illustrate, in view of the inclusive definition of ‘transfer’ as defined in section 2(47) of the Act, the charge to capital gain arises in the year in which possession is granted whereas the profit on sale is recorded in the books in the year in which conveyance is executed. There could be a gap of one or two years between the two events. This results in the assessee paying tax under the normal provisions in the year of handing over possession and in subsequent year the same profits form part of “book profits”. Another example could be of a person who is engaged in development and construction of housing projects and is following project completion method in his books of accounts but for taxation purposes, to avoid any controversy, is following percentage completion method. In such a case, also, the profits get taxed under the provisions of the Act first and then in a subsequent year, on completion of the project, the very same profits form part of “book profits”. Itis relevant to mention that the Andhra Pradesh High Court has in the case of CIT v. Nagarjuna Fertilisers & Chemicals Ltd. [52 taxmann.com 397 (AP)] held that MAT is restricted to income “incomes of relevant tax year” and incomes undisputedly pertaining to earlier tax year/s cannot be roped in for MAT; and that it is a cardinal principle of taxation that same income cannot be subjected to tax more than once in different years in absence of specific provisions and MAT provisions are no exception to this principle.
Suggestion:
Section 115JB should be suitably amended to provide for adjustment in cases where the profit included in “book profit” is to be charged to tax under the normal provisions in a different year i.e. a year other than theyear in which the profit is recorded in the books of account. The Act should incorporate what has been laid down by the Hon’ble Andhra Pradesh High Court in the case of CIT v. Nagarjuna Fertilisers & Chemicals Ltd. (supra).
3. Non-Levy of Late Filing Fee u/s. 234E prior to 01-06-2015
The legislature has introduced section 234E vide Finance Act, 2012 to provide for fees for late filing of TDS return. The Hon’ble Bombay High Court in the case of Rashmikant Kundalia and Ors v. UOI & Ors. (2015) 54 Taxmann.com 200 (Bom) has upheld the constitutional validity of the section. As a matter of fact, the Hon’ble Apex court has admitted SLP against the decision of the Hon’ble Bombay High court.
Vide amendment made by the Finance Act, 2015, the Legislature amended the section 200A w.e.f. 01-06-2015 to enable the revenue to levy late filing fee u/s. 234E vide order passed u/s. 200A. By virtue of this amendment, a question arises as to whether the late filing fees prescribed u/s. 234E were legitimately levied for the period prior to 01.06.2015 or not. Various courts and tribunals have deliberated on this and have given consistent view that the levy of late filing fees u/s. 234E prior to 01.06.2015 vide intimation u/s. 200A was not permissible under the law. Attention in this regard is drawn to various decisions as under:-
Recently the Hon’ble Kerala High Court in the case of Fateraj Singhvi v. UOI73 taxmann.com 252 (Kar) has held that section 200A is not retrospective and has only prospective application from 01-06-2015. The Hon’ble High Court observed that the mechanism provided for computation of fee and failure for payment of fee under section 200A which has been brought about with effect from 1-6-2015 cannot be said as only by way of a regulatory mode or a regulatory mechanism but it can rather be termed as conferring substantive power upon the authority. Thus, amendment made under section 200A has prospective effect, hence, no computation of fee for demand or intimation for fee under section 234E could be made for TDS deducted for respective assessment year prior to 1-6-2015.
The Hon’ble Amritsar Bench of ITAT in the case of Sibia Healthcare Pvt Ltd. v. DCIT (TDS)63 taxmann.com 333 has held that the revenue was not competent to levy fee u/s. 234E prior to 01-06-2015 by passing an order u/s.200A.
The Hon’ble Mumbai ITAT in the case of Kash Realtors Pvt Ltd v. ITO [2016-TIOL-1842-ITAT-MUM] and the Chennai ITAT in the case of G. Indhirani v. DCIT (60 taxmann.com 312) have also affirmed that prior to 01.06.15, fees u/s 234E of the Act could be levied in intimation u/s 200A of the Act in respect of defaults in furnishing TDS statements.
Now, the situation that has arisen by the act of levying such late filing fees in the intimation issued u/s. 200A for the respective years prior to 01.06.2015 needs rectification u/s. 154 as the same is a mistake apparent from record for the very fact that during that period, there was no enabling provision to levy such late filing fees. Attention in this regard is also invited to the judgment in the case of Gajanan Constructions and others v. DCIT, CPC (TDS) – Pune ITAT -(1292 & 1293/PN/2015).
Accordingly, the late fee levied needs to be deleted suo-moto by rectifying the intimation/ order passed u/s. 200A of the Act. The above position though seems to be simple and clear has various complex practical issues and what seems to be a fairly straight path is full of bumpers, speed breakers and hurdles. The first among them being the recent shift in rectification mechanism. Practically, the concerned Income Tax Officer (TDS) have informed that they do not have any power of rectification and the powers of rectification have been conferred with the CPC (TDS).
The rectification enabled by CPC (TDS) has limited options of rectification available to the deductor. The mechanism does not allow the deductor to apply for rectification in this peculiar circumstance.
Practically, neither the Income Tax Officer (TDS) is empowered nor the systems at CPC (TDS) are enabled to allow processing of rectification application of such kind.
Accordingly, this leads to uncertainty in the mind of the deductor and has no other option but to drag his case into unnecessary litigation adding to his cost and grievance.
Suggestion:
The CBDT should enable the Income Tax Officer and/or system at CPC (TDS) to resolve this issue and delete all the demands raised u/s. 234E for the years prior to 01-06-2015 at its own motion.
4. Disallowance u/s. Section 40A(3) in case of unaccounted transactions:-
Where the assessee incurs any expenditure in respect of which a payment or aggregate of payments made to a person in a day, otherwise than by an account payee cheque / bank draft exceeds Rs. 20,000/-, no deduction of such expenditure is allowed u/s. 40A(3) of the Act. (Now proposed to be in excess of Rs. 10,000/-).
The said section is quite unambiguous and simple in terms of language but what acquires significance is its implementation in a peculiar circumstance where books of accounts are not prepared and incriminating loose papers in the form of noting, etc. about unaccounted sale / purchase transactions are found in the course of search and seizure action.
For example, in a situation where certain loose sheets / documents containing a noting of unaccounted sale transactions are found and seized in the course of search, the Assessing Officer has the detail of unaccounted sales and under the provisions of Act, he is required to make a proper and just estimate of income earned by the assessee on such unaccounted sales by bringing on record material in the form of comparables in support of his estimate of profit earned by the assessee. In other words, in such a situation, the Act, under the provisions of section 2(24) r.w.s. 5, mandates the Assessing Officer to correctly assess the income earned by the assessee.
However, currently, divergent and extravagant views have been taken by few of the Assessing Officers. It has been seen in such situations that the Assessing Officers have taxed the entire unaccounted sales by disallowing the unaccounted purchases under the guise of section 40A(3). This results in taxing the entire unaccounted sales which is not “income” as defined u/s. 2(24) of the Act. An Assessing Officer is allowed to tax only the element of income and not the total turnover by applying the provision of section 40(A)(3) of the Act which actually results in absurdity and is unlawful. The Hon’ble Apex Court in CIT v. Shoorji Vallabhdas & Co. [1962] 46 ITR 144 (SC) has held that income tax is a tax only on income. The real income theory has not only been accepted but in fact propounded by the Hon’ble Apex courts as well as various High Courts time and again. The Assessing Officer to protect itself from these embarrassments tries to disallow purchases u/s. 40A(3) of the Act. It is significant to note that though the purchase is stated to be disallowed u/s. 40A(3), the resultant addition amounts to taxation of the entire sale proceeds thereby grossly disregarding the settled law laid down by the Hon’ble Apex Court. Therefore, such an action of the Assessing Officer is completely against the spirit of the law laid down by the Apex Court.
Further, the following ingredients to invoke provision of section 40A(3) of the Act needs to be met cumulatively:-
– Payment of expenditure is made in cash
– Payment exceeds Rs. 20,000/- (Now proposed Rs. 10,000/-)
– Payment is made to a person in a day
Thus, the burden of proof to prove the existence of cumulative ingredients as per section 40A(3) lies heavily on the Assessing Officer and if the same is not evident from the loose sheets, there does not arise any question of making disallowance under the said section unless the onus is appropriately discharged by the Assessing Officer.
It is true that section 40A(3) does not make any distinction between the transactions recorded in the books of accounts or not recorded in the books of accounts. However, it is also true that if no books of accounts are maintained as per the provisions of section 145 of the Act, the Assessing Officer is duty bound to make the best judgment assessment u/s. 144 of the Act which requires him to take into account all relevant material which he has gathered to determine the amount of income earned. Hence, in a given situation, a significant question arises as to whether any expense can be disallowed when the books of accounts have not been maintained and income is to be estimated on the basis of incriminating material found in the course of search. In fact, when the income is to be estimated, then there cannot be any locus standi of a specific claim of expenditure made. The question is simple and clearly answered in unanimity by various Hon’ble High Courts that no disallowance u/s 40A(3) is warranted when income is estimated – [Indwell Constructions v. CIT (1998) 232 ITR 776 (AP); CIT v. Purshottamlal Tamrakar (270 ITR 3140) (MP); CIT v. Banwarilal Banshidhar (1998) 148 CTR 533 (All.)]. Accordingly, once the Assessing Officer estimates income, he is debarred from making disallowance under the normal provisions of the Act. The Kerala High Court in the case of CIT v. PD Abrahm (2012) 252 CTR 407 has held that unaccounted expenditure can be set off against unaccounted income which again supports the real income theory.
There also prevails a decision of the Hon’ble Gujarat High Court in the case of Hynoup Food and Oil Industries reported at 290 ITR 702 which has taken acontrary view against the assessee. However, considering the various divergent views of the courts, the Hon’ble Pune ITAT in the case of Shri Narendra Mithailal Agrawal (ITA no. 811 & 808/ PN/2010) has followed the decision of the Hon’ble Supreme Court in the case of CIT v. Vegetable Products Ltd (1973) 88 ITR 192 (SC) and has rendered the verdict in favour of the assessee.
In entirety, the above position though appears amply clear as to no disallowance of expenses can be made on estimation of income, it does not seem to be digestible to the departmental officers and therefore the assessee is made to pass through the long-drawn process of litigation.
Suggestion:
It is advisable that the CBDT makes necessary amendment in Rule 6DD to include the situations of unaccounted transactions as exceptional circumstance so that no disallowance u/s. 40A(3) of the Act is made when in such situations, the Assessing Officer is required to estimate income on his best judgment after taking into account the relevant material gathered in his possession and thereby avoid gross injustice of bringing to tax the entire sale proceeds.
5. Difficulty in availing credit of Tax deducted at source for assesses following cash system of accounting
Assesse following cash system of accounting record income on receipt basis i.e as and when the amount is received by him. The payer however deducts tax as and when provision is made in the books for amount payable. TDS therefore appears in Form 26AS of the year in which the payer makes the provision. The assessee claims credit for tax in the year in which he actually receives the amount. Since the TDS credit does not appear in Form 26AS of the year in which the assesse has offered the income to tax based on cash system of accounting, credit is not granted to him, though the income from which tax is deducted is duly offered for tax in the relevant year. TDS credit is not granted to the assesse in the year in which it appears in 26AS because the income from which the said tax is deducted is not offered for tax in that year.
Due to the mismatch in the year in which TDS credit appears and 26AS and the year in which income is offered for tax, the assesse does not get credit for TDS in either of the years and often has loose the claim forever.
The issue is very relevant for professional like lawyers, chartered accountants, architects, who record income on cash basis.
In such cases, the concerned tax payers have no recourse but to make repeated requests to the CPC for rectification. Thereafter, the case gets transferred to the field officers. The assessee has to then make fresh application to the field officer and it requires herculean efforts to finally get an order of rectification passed.
Suggestion:
There has to be proper mechanism for granting credit of TDS where income has been offered for tax on cash basis of accounting.
6. Payment made to non-residents, who do not have PAN
Section 206AA requires deduction of tax at source @ 20% if the payee does not have a PAN. Notification dated June 24, 2016 was issued to state that on submission of specific documents by a non-resident provisions of section 206AA would not apply and tax can be deducted as per the rate applicable under the Act or as per the applicable DTAA. Form 27EQ available on NSDL website does not have any provision/field to enter details of such alternative documents received due to which, tax is deducted at lower rate and not at 20%. In the absence of such mechanism, demand is raised for short deduction of tax while processing the TDS statement filed.
Suggestion:
Form 27EQ needs to be amended to capture the simplification as stated in the notification.
7. Applicability of Sec.43B to both employee and employer contributions. No disallowance u/s 36(1)(va) if paid before due date of filing return of income.
Sections 36(1)(va) of the Act provides that deduction in respect of any sum received by the taxpayers as contribution from his employees towards any welfare fund of such employees is allowed only if such sum is credited by the taxpayer to the employee’s account in the relevant fund on or before the due date under the relevant Statute. The issue arises as to whether due date for payment of employees contribution to staff welfare fund viz. ESIC / PF under section 36(1)(va) is same as contemplated under section 43B.
The following court rulings have been passed in favour of taxpayer wherein it is held that Sec.43B is applicable to both employee and employer contributions – see CIT v. Kichha Sugar Co. Ltd. [2013] 216 Taxman 90 (Uttarakhand), CIT v. Hemla Embroidery Mills (P.) Ltd. [2013] 217 Taxman 207 (Punj. &Har.), Spectrum Consultants India Pvt Ltd v. CIT [2013] 215 Taxman 597 (Kar.), CIT v. AIMIL Ltd. [2010] 188 Taxman 265 (Delhi) , CIT v. State Bank of Bikaner & Jaipur [2014] 225 Taxman 6 (Raj.) , CIT v. Jaipur Vidyut Vitran Nigam Ltd. [2015] 228 Taxman 214 (Raj.) CIT v. Magus Customers Dialog (P.) Ltd. [2015] 231 Taxman 379 (Kar.), Sagun Foundry (P.) Ltd v. CIT [2017] 78 Taxmann 47 (Allahabad).
However, the Assessing Officer are making disallowance u/s 36(1)(va) read with Sec.2(24)(x) even if the contribution received from the employees is deposited before the due date for filing the Income Tax Return.
Suggestion:
The CBDT should come out with circular to clarify the settled position that “due date” for payment of employees contribution to staff welfare fund viz. ESIC / PF under section 36(1)(va) is same as contemplated under section 43B i.e due date for filing the return of income.
Deactivation of Duplicate PAN Cards
REPRESENTATION
14th March, 2017
The Chairman,
Central Board of Direct Taxes
Government of India
North Block
New Delhi – 110 001.
Dear Sir,
Sub: Deactivation of Duplicate PAN Cards
Recently, the CBDT has begun the initiative of deactivation of duplicate PAN issued to tax payers. We wholeheartedly welcome this move to clean up the system and avoid misuse by certain unscrupulous persons. At the same time, we would like to bring to your kind attention genuine problems faced by several tax payers because of this initiative.
It has been noted that often a tax payer is not even aware that he/she has been allotted two different PANs. In many such cases, the tax payer has, for the past several years, been using only one of the two PANs allotted to him. However, because of the fact that such a person has more than one PAN allotted to him/her, the income-tax department, following its new initiative, suo motu cancels one of the PANs. In this regard, no prior intimation is given to the concerned tax payer.
Some of our members have brought to our notice that in some cases, it has so happened that the PAN that was regularly being used by the tax payer for many years has been deactivated.
As a result of deactivation of the regularly used PAN which would be linked to the bank accounts and other agencies, such tax payers are interalia not able to pay advance tax, access Income Tax e-filing portals or file Income tax returns.
Such persons whose active PAN is deactivated have to follow up continuously with the income-tax department for reactivation of the PAN. This is causing a lot of unnecessary inconvenience to the tax payers. It appears that in some cases, more than a month has passed since the tax payer has made an application for reactivation of the PAN but no action has been taken.
On behalf of the tax paying community, we appeal to you to look into the past history about usage of the PAN before deactivating the PAN and also to give the concerned tax payer an intimation about two PANs being allotted to him and a prior notice before deactivating one of the PAN allotted to him. Also, after a PAN is deactivated, the concerned person must be intimated by the income-tax department about the deactivation. Also, if the PAN has been in regular use, then the tax payer must be given an opportunity of being heard in the matter before any action is taken.
Since the current financial year is drawing to an end very soon, we humbly request your good self to take immediate action in the matter so that genuine tax payers do not suffer.
Thanking you,
Yours sincerely,
For Bombay Chartered Accountants’ Society,
Chetan Shah Ameet N. Patel
President Chairman, Taxation Committee
POST-BUDGET MEMORANDUM ON DIRECT TAX LAWS 2017-18
THE FINANCE BILL – 2017
1. Clause 6 – Sec 10(38) – genuine cases should be protected
We welcome the government’s resolve to prevent the misuse of the exemptions provided in section 10. The misuse of section 10(38) by unscrupulous investors and market operators who work hand in glove to bypass the law and evade taxes has got to be stopped. The proposed amendment in section 10(38) is therefore, in principle, required.
However, as rightly pointed out in the Explanatory Memorandum, there is a need to protect the genuine investors who could have acquired shares without paying STT. In particular, the following types of acquisitions will not involve payment of STT:
1. Shares issued to employees under ESOP schemes.
2. Transfer amongst current and former employees of shares vested from a former ESOP scheme.
3. Investments made/shares acquired by regulated entities such as SEBI registered Alternate Investment Funds, Domestic Venture Capital Funds, and Foreign Venture Capital Investors; And also investments (of fresh issuances) of Mutual Funds, FPI Category I, II, III, or transactions in regulated entities, such as insurance companies,
banks, etc.
4. Issue of fresh shares to promoters, post 1st October, 2004 / issue of equity shares in a preferential issue under the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009.
5. Inter-se transfer of equity shares within the promoter group.
6. Transactions which are specifically excluded from the definition of transfer by section 47 of the Income-tax Act, which include inheritance, conversions, etc.
7. Corporate restructuring approved by a Court/NCLT – e.g. mergers, demergers etc.
8. Issue of equity shares under the Qualified Institutions Placement (‘QIP’) route under the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009.
9. Equity shares received pursuant to split or consolidation of shares of a listed company.
10. Equity shares of a listed company issued pursuant to slump sale of business to such listed company.
11. Equity shares of a listed company acquired off-market pursuant to an approval obtained from the Indian regulatory authorities.
12. Equity shares acquired pursuant to a group restructuring scheme.
13. Equity shares acquired by a subsidiary company from its parent and vice versa.
14. Equity shares issued by private limited company which is subsequently listed on stock exchange.
Further, even if STT has actually been paid at the time of acquisition of shares, practically, it would be very difficult for a shareholder to prove this. When shares are sold several years after the date of acquisition, the shareholder would have difficulty in tracing the documents evidencing the acquisition.
Suggestions:
Care must be taken to ensure that the various types of acquisitions listed above are notified for being excluded from the rigours of the amendment proposed in section 10(38).
Where the holding period of the shares exceeds 36 months, the proposed amendment should not be made applicable. In such cases, the requirement of proving that STT was paid at the time of acquisition of the shares should be removed.
2. Clause 9(ii): Section 12A(1)(ab) –
The time limit of 30 days provided in the new clause proposed to be inserted is too short. Many NGOs are run by volunteers. It is unfair to cast such an onerous responsibility on them. For example, where the amendment to the trust deed is sanctioned by a Court etc., it may take time to get copies of the court order. 30 days’ period is impractical and merely onerous.
Suggestion:
Instead of 30 days, the time limit should be 6 months.
3. Clause 9(ii): Section 12A(1)(ba) –
The condition of filing the return of income within the time specified in section 139(4A) is too harsh and unfair. There could be several genuine reasons for a charitable trust not being able to file its return in time.
Suggestion:
We therefore urge that this clause be withdrawn.
In the alternative, we suggest that there should be an enabling provision to condone the delay in case a reasonable cause is provided by the concerned trust.
4. Clause 15 – Section 40A(3)
Not only in this clause, but in various other clauses (Clauses 11, 13, 16, 21, 83), there is reference to payment by “account payee cheque, account payee bank draft or use of electronic clearing system through a bank account”.
Today’s fast changing technology provides several other modes of transferring money or making payments such as digital wallets, credit cards etc.
Since the government’s intention is to curb the use of cash and promote modes of payment which can be traced, it is imperative that any mode other than cash should be encouraged. It has been noticed that post the demonetisation drive, large number of people have started using digital wallets and credit cards for making payments. It is therefore necessary to bring these modes also within the list of acceptable modes of transacting.
Suggestion:
At all places where the words “account payee cheque or an account payee bank draft or use of electronic clearing system through a bank account” have been used, the following words may be added at the end – “or use of such electronic mode of payment as may be notified from time to time”. This will enable the government to notify new modes of electronic transfers that may be conceptualized at a future date.
5. Clause 22 – Section 45(5A)
In principle, we welcome the amendment as it will bring clarity to the contentious issue of taxation of gains arising in case of Joint Development Agreements and will reduce litigation. However, there are certain anomalies in the proposals which, if removed, will make the amendment more meaningful and will cover more tax payers.
Suggestions:
a) Presently, JDAs between societies and Developers are not covered as the new section refers only to ‘Individual or HUF.
We therefore suggest that the words “, being an individual or a Hindu undivided family,” in the Line No. 19 of Clause 22 be deleted.
b) Presently, in the Explanation to the proposed sub section (5A), the definition of “specified agreement” refers to a registered agreement in which a person owning land or building or both. This is likely to cause unintended litigation and disputes.
We therefore suggest that the word “owning” in the Line No. 35 of Clause 22 be replaced with “holding”.
c) Presently, Section 45(2) lays down the taxation of gains arising on conversion of a capital asset into stock in trade of a business carried on by the assessee. This provision has stood the test of time and has been well accepted by the tax payers as well as the tax department.
We therefore suggest that the proposed sub section (5A) be worded on similar lines as sub section (2) of section 45 so that there is consistency and clarity about the taxation of such transactions.
6. Clause 26 – Section 50CA
The proposed section will result in double taxation of the same amount in the in the hands of the payer and the receiver. Also, it is likely to create unending litigation on account of the vague and complicated definition contained in the Explanation.
Suggestion:
We therefore urge that this clause be withdrawn.
In the alternative, it is also submitted that the term ‘quoted share’ used in proposed section 50CA is defined as follows:
‘Quoted share’ means the share quoted on any recognised stock exchange with regularity from time to time, where the quotation of such share is based on current transaction made in the ordinary course of business.’
This definition is likely to create ambiguity and result in unintended litigation. The term “regularity” is highly subjective and could be with reference to the volume of transactions on the stock exchange or it could be with reference to a particular time period.
Similarly, the term “shares” is not defined. Therefore, disputes could arise as to whether preference shares are also covered by this provision.
The definition of “quoted share” may be amended as under
‘Quoted share’ means the equity share quoted on any recognised stock exchange and traded on not less than such number of days during the period of 12 months preceding the date of transfer as may be notified, where the quotation of such share is based on current transaction made in the ordinary course of business.’
It is also suggested that this section should be made applicable to shares of a company in which the public is not substantially interested.
7. Clause 29 – Section 56(2)(x)
The existing sections 56(2)(vii) and 56(2)(vii a) are being replaced by section 56(2)(x). The proposed section 56(2)(x) will have far reaching consequences. In brief, the proposal is to tax any “Person” who receives any gift in cash or kind from any other person or persons. Existing Section 56(2)(vii) only refers to gifts received by an Individual or HUF. Further, section 56(2)(viia) referred to shares received by a firm or company. By use of the word “Person” it will mean that the new section will apply to gifts received by all assessees (i.e. company, firm, LLP, Individual, HUF, AOP, BOI etc.)
The effect of this new provision will be that any amount received by following persons without consideration or for inadequate consideration will be taxable as income from other sources.
(i) Any amount settled in a private trust or any gift received by such a trust.
(ii) Any subsidy received from the Government by any company (including a public sector company) or other person.
(iii) Any bonus shares received by a shareholder from a company.
(iv) Any right shares issued to a shareholder by a company at a price below its fair market value.
(v) In the case of Buy Back of shares by a company if the shares are purchased at a price below the fair market value.
(vi) If a company, including a listed company or a firm, receives shares of a listed company without consideration or at a consideration below fair market value. (This was not taxable under section 56(2)(vii a) so far).
This suggested amendment will extinguish the entire concept of formation of private trusts in our country. At present, there is no clarity whether the status of a trust is to be determined with reference to the status of the beneficiaries or with reference to the status of the trustees. There are contradictory judicial pronouncements. In some cases the status of the trust is determined with reference to the status of beneficiaries. In other cases the trust is treated as an AOP or BOI. By use of the word “Person” in the proposed section 56(2)(x), the gift to a private trust will be treated as gift to a “person”. It is, therefore, suggested that this amendment be dropped. In the alternative, it may be provided in the Section 56(2)(x) that this section shall not apply to a trust which receives any property with a specific direction that it forms part of the corpus of the trust.
Suggestion:
We therefore suggest that the existing provisions be continued and the proposed amendment be dropped.
8. Clause 31 – Section 71(3A) – Restriction of set off of loss from House Property
This proposal to restrict the set off of loss under the head “Income from House Property” to Rs. 2,00,000 per year will affect thousands of tax payers who have availed of loans in the past based on the law as it stood then. This will also adversely impact the real estate sector which is already reeling under a lot of pressure because of lack of liquidity and reduced offtake of new properties lying unsold.
Suggestions:
We therefore urge that this clause be withdrawn.
In the alternative, the amendment should apply to loss arising on account of interest on loans taken after 31st March, 2017.
9. Clause 32 – Section 79(b) r.w.Section 80(IAC):
a) The definition of eligible start up in 80(IAC) (4) Explanation (ii) requires that the total turnover of the business should not exceed Rs. 25 crore from 1-4-16 to 31-3-21. Clarification is required regarding turnover exceeding Rs. 25 crore in any of the previous years as any increase in a later year should not disentitle the assessee for the deduction in any earlier year.
The section as it is presently worded results in ambiguity in situations when, at a later date, the turnover of the eligible start up increases and crosses Rs. 25 crore. At that stage, the company would become ineligible for the deduction under section 80IAC. However, there are doubts about the deduction already claimed in the earlier years. Because of the ambiguity, there are chances that assessments of past years may be reopened to disallow the deduction
already claimed.
Suggestion:
It cannot be the intention of the government to penalize a start up as against a company which is not a start up. As per the language of the proposed new section 79(2), a start up will never be able to carry forward any losses incurred after the period of 7 years from the date of incorporation, irrespective of whether any change of shareholding has taken place or not. Further, as a company should not be discouraged from expanding its business and increasing its turnover, the section should clearly spell out that in the event that the turnover crosses Rs. 25 crore, the start up would cease to be a start up and thus cease to be eligible for the exemption from loss of set off of losses only from subsequent years, but for the earlier years, the set off already claimed as per law would not be affected.
10. Clause 42 – Section 92CE – Secondary Adjustments
The proposed section is not in accordance with international best practice. Hardly any other country has such a practice. Further, the Companies Act, 2013 also does not have explicit provisions relating to ‘adjustments’ in the
books of accounts of the assessee. In any case, Non-discrimination Article in the DTAAs could be invoked by the non-resident entities.
On another front, reciprocal secondary adjustments by the other countries may not be beneficial for India and would hurt the Government’s initiative of enhancing ease of doing business in India.
Suggestions:
We therefore urge that this amendment be withdrawn.
In the alternative, we suggest that the Secondary Adjustment should not apply to resident companies covered under Domestic Transfer Pricing regulations and it should be restricted to only international transactions.
11. Clause 43 – Section 94B – Thin Capitalisation:
We strongly believe that this amendment is not conducive for better investment environment and is counter productive to the excellent initiatives of the government in the form of “Make in India”, “Start up India” etc.
Suggestions:
We therefore urge that this amendment be withdrawn.
In the alternative, we suggest as under:
a) The provision should not apply to loss making companies;
b) Instead of simply restricting deduction on account of interest to 30% of EBIDTA, appropriate debt equity ratio should be prescribed as per international practices;
c) The terms ‘Implicit or’ in 1st proviso to section 94B(1) should be deleted to avoid litigation.
12. Clause 50 – Sections 132(1) & 132(9B)
A. 132(1) Explanation after 4th proviso and 132(1A) new Explanation – non-disclosure of reason to believe / reason to suspect
This amendment is not in line with the government’s thrust on providing transparency in governance in the country. Non-disclosure of reasons is not a good practice and will give rise to unfettered powers in the hands of the tax officers. It will once again lead to a regime of tax terrorism which the present government has studiously tried to curb. Non-disclosure of reason to believe / reason to suspect, to any person or authority or the appellate tribunal would only compel assessees to seek relief or remedy from the High Courts which in turn would lead to an increase in backlogs in the Courts. Lastly, these two amendments are proposed on a retrospective basis with effect from 1st April, 1962 and 1st October, 1975 respectively. It has been a stated intention of the government to not bring in any retrospective amendments and therefore the proposed amendment is contrary to the said intention and once gain gives rise to uncertainty in tax laws.
Suggestion:
We therefore urge that this clause be withdrawn
B. 132 (9B) – Provisional Attachment
This provision is likely to be misused and would cause harassment to tax payers. It would also lead to protracted litigation.
Suggestion:
We therefore urge that this clause be withdrawn
13. Clause 58(i): Section 153(1):
Suggestion:
This amendment may be supplemented by simultaneously reducing the time limit for issuing notice for selection of cases for scrutiny as provided in the Proviso to section 143(2).
14. Clause 63 – Section 194(IB)
We welcome this move to curb tax evasion and misuse of certain exemption sections by unscrupulous persons. However, the section as it is presently worded will cover thousands of people who may not even be paying any income-tax because their total income is below the threshold limit. Similarly, there will be thousands of tax payers in the income slab of Rs. 2,50,000 to Rs. 5,00,000 who may be impacted by this section. Practically, it would be very difficult for such persons to comply with the TDS provisions.
Suggestion:
The section should not be made applicable to those persons whose total income does not exceed Rs. 5,00,000 in the preceding financial year.
15. Clause 75 – Section 234F
U/s 239(2)(c), a return claiming refund can be filed within one year of the end of the assessment year. As per the proposed section 234F, even such cases would be covered and would be liable to the proposed fee. This would unnecessarily cause such persons to pay a fee even though the Revenue is not adversely affected by the late filing of the return.
Suggestion:
No fee should be charged from a person who files the return of income beyond the normal time limit and in whose case, a refund is due as per the return filed.
16. Clause 83 – Section 269ST
269ST(a) begins with ‘ No person shall receive an amount ….’
The word amount will include not only sum of money but any transfer for any value’. This is unintended and should be amended to clearly apply only to cash transactions. In fact, Memorandum brings out the intention.
Suggestion:
The word “amount” in line no. 39 in Clause 83 should be replaced with “sum of money”.
17. Clause 86 – Section 271J:
It is widely felt that this provision could be subjected to widespread misuse and would result in harassment of honest and genuine professionals. Also, in any case, there is no provision for preferring an appeal to the ITAT in respect of orders passed by the CIT.
Suggestions:
We therefore urge that this section be withdrawn.
In the alternative, we suggest that the right of appeal to the ITAT be given to the affected person by way of a suitable amendment in section 253. Also, in order to provide a prospective impact of the section, an amendment should be made in the section to the effect that the section would apply to the certificates / reports issued on or after 1st April, 2017.
18. Schedule 1 – Part III: The lower rate of tax has been made applicable in case of smaller domestic companies whose turnover for F.Y. 2015-16 did not exceed Rs. 50 crore. This is a welcome amendment.
However, inadvertently, companies which are incorporated after 31st March, 2016 will not be entitled to the benefit of this concessional tax rate. Since the requirement of the turnover being less than Rs. 50 crore for F.Y. 2015-16 does not prohibit such an eligible company from continuing to pay tax in a later year even if its turnover crosses Rs. 50 crore, it is obvious that ultimately, the government intends to cover all companies at a later date for the reduced corporate tax rate of 25%. This was also the stated intention as per the speech made by the Honorable Finance Minister in July 2014 immediately after the present government was voted to power. That being the case, the companies incorporated after 31st March, 2016 should not be excluded from the scope of this amendment.
Suggestion:
The reduced rate of 25% should be made applicable to all companies incorporated on or after 1st April, 2016.
REPRESENTATION – THE FINANCE BILL – 2017
REPRESENTATION
8th March, 2017
Mr. Arun Jaitley
Hon. Minister of Finance
Government of India
North Block
New Delhi – 110 001.
Respected Sir,
THE FINANCE BILL – 2017
We compliment you for the focused and non populist Budget that was presented on 1st February. The idea of combining the Rail Budget and the Finance Budget is also a welcome one.
We also wholeheartedly support the various initiatives taken by the government in expanding the formal economy and reducing the use of cash in the daily transactions that the people of India enter into.
The Housing-for-all is truly a one of its kind social project in the world. Nobody has attempted a project of this scale in such a short time. And the budget proposals for Affordable Housing are in the right direction towards this project. We appreciate the deep thought but simple provisions to incentivize the private sector to put their might behind this project. We feel the proposals, be it the Industry status, tax holidays or interest subvention, are adequate and will attract a lot of serious players in the Affordable Housing sector.
Many of the provisions like three moving up the indexation base year, reducing the holding period for long term capital gains, deferring the incidence of tax in JDA etc will additionally achieve the task of bringing more land supply for development.
We take this opportunity to make certain suggestions for rationalization of law, rectification of certain anomalies in the proposed amendments as also clarifying certain ambiguities so that the amendments meet the intended objectives of the government.
We would be happy to personally explain the suggestions if we are presented with an opportunity to do so.
For Bombay Chartered Accountants’ Society,
Chetan Shah Ameet N. Patel
President Chairman, Taxation Committee
CC:
– Shri Santosh Kumar Gangwar, Minister of State for Finance
– Shri Arjun Ram Meghwal, Minister of State for Finance
– The Finance Secretary
– Dr. Hasmukh Adhia, The Revenue Secretary, Ministry of Finance
– The Chairman, Central Board of Direct Taxes
– Joint Secretary, TPL-I
– Director, TPL-I
– Director, TPL-II
BCAS In 2016-17. Part – 1
You have been in touch with the Society during the entire year, learning and sharing knowledge through its various media. We would like to give you a glimpse of what has gone by in a capsule format. In the coming 3 months’ issues, including this issue we will be updating you with the happenings during the year April 2016 to March 2017.
This month let us summarise the enriching learning experience at BCAS through Lecture Meetings, Workshops and Seminars.
In the May Issue, we will cover various activities pertaining to Students and the Representations made by the Society.
Lastly in June we will cover knowledge sharing through our publications and various other activities held at the Society.
This year the Society has conducted 26 Lecture Meetings, 31 Seminars and Workshops including the Residential Refresher Courses and 19 Joint Programs with various organisations.
Lecture Meetings: During the year, besides the various routine meetings on filing of income tax returns, implications of changes in the accounting standards or aspects of international taxation, the Society conducted lecture meetings like “Business Reorganisation and Restructuring” by CA. Pinakin Desai, “Cyber Crime, Cyber Security and Cyber Laws” by CA. Sachin Patil, (IPS), DCP, Mumbai Police and “Crude Diplomacy & Global Economy” by Mr. Kushal Thaker. These lecture meetings though significant for the profession covered a broad avenue of various areas where Chartered Accountants do not generally venture independently. These lectures received an overwhelming response.
With GST round the corner, how can BCAS not touch upon the GST aspects ? The Society had one lecture meeting by CA. Bhavna Doshi on GST and another session post the Budget by Advocate Vikram Nankani touching upon the various issues pertaining to GST in the coming months. Both these lecture meetings had Q&A from participants and an overall interactive participation.
A new concept of “Expert Chat @ BCAS” commenced this year in August 2016. The concept of Chat with an expert is appreciated drawing more and more attendance and viewership. The first one was “Winning Global Marketplace” where Mr. Lee Frederiksen, Ph.D. was in a fireside chat with Mr. Nishith Desai. This was followed by various others including “Is BEPS answer to Tax Planning?” Where CA. Rashmin Sanghvi was in fireside chat with CA. Sushil Lakhani. The Society also covered the Demonetisation which was the talk of the nation in November via an Experts Chat @ BCAS -“Issues and Impact of Demonetisation” where experts like Ms. Sucheta Dalal a journalist, and Mr. Dharmakirti Joshi an Economist from CRISIL were in a fireside chat with CA. Ameet Patel. All chat sessions received an overwhelming response. Another aspect of Expert Chat was covered by Mr. Jalaj Dani of Asian Paints on “Effective Professionalization of Family Managed Business – Opportunities & Challenges”. The chat was moderated by CA. Shariq Contractor. BCAS recently tied up with the Institute of Internal Auditors (IIA) -Mumbai Chapter for conducting various joint events. This commenced with a session by Mr. Richard Chamber IIA President and CEO who was in a chat with Ms. Nandita Parekh at the Experts Chat @ BCAS Session on “Internal Audit 2017: Global Trends and Outlook”.
BCAS has been hosting its videos of lecture meetings on its YouTube Channel. Since August, it has also been live streaming its Lecture Meetings held at BCAS Hall at Jolly Bhavan office. This has benefitted many professionals across the country. Our YouTube Subscriber base has increased from 500 subscribers last year to more than 2,500 today.
Here are a few statistics:
In terms of watch time, the viewership has increased by 176% over the last year.
While so many new things are happening around lecture meetings, the age-old tradition of the Society is not missed with its Budget Lecture meetings. Senior Advocate Shri S E Dastur continued to enthral the audience with his lucid style of presenting the speech on the “Direct Tax Provisions of the Finance Bill 2017”. The hall was packed with 3,000 people at the venue and over 15,000 watching live from various parts of the country.
Seminar & Workshops (including Residential Refresher Courses): If you have been a regular reader of the BCAJ you must definitely have glimpsed through the Golden Jubilee Residential Refresher course (RRC) held at Jaipur in the February Issue. This was the 50th year of the RRC’s being organised by the Society and the celebration was a grand one witha blend of knowledge and enjoyment. The Golden Jubilee RRC had an overwhelming response of 275 participants from all across the country. The 20th International Tax Conference was held at an international location, Sri Lanka in August where the Sri Lankan Finance Minister Ravi Karunanayake was invited as chief guest. The conference had again very elaborative technical coverage with speakers like CA. Pinakin Desai, CA. Padamchand Khincha & CA. T. P. Ostwal. Besides this local speakers namely Shri Suresh R. I. Perera and Shri Shiluka Goonewardane talked about the Taxation in Sri Lanka and the Investments in Sri Lanka respectively.
The 7th Residential Study Course on IndAS was held at Silvassa in February 2017 where the various issues relating to IndAS- 109, aspects on ICDS vs. IndAS, Case Studies on Revenue Recognition under IndAS – impact on different sectors, Case Studies on Consolidation and Business Combinations, Case Studies on Real Estate/Infrastructure Companies and Accounting Standards for Non-IndAS were covered.
Besides these the 2nd Batch of Mentoring Miracle kick started in January with a large number of mentees enrolling for the same. Technology being the forefront in todays’ economy BCAS conducted a two day seminar on “Advanced Excel” in November and a “Workshop on Audit In IT Empowered World – Techniques For Effectiveness & Efficiency” in March. Both received tremendous response and had in store great learnings on the various techniques used in a system based environment.
The Seminar on “Estate Planning, Wills and Family Settlement Critical Aspects” held in December was a full house. The program also sold more than 100 Pendrives of the recorded event. A two day workshop on “Mergers & Acquisitions” held in January had excellent speakers like Dr. Lalit Kanodia – Chairman Datamatics, Mr. Suresh Kotak – Chairman Kotak Group, Dr. Anup Shah, Adv. Sharad Abhyankar – Sr. Partner – Khaitan & Co., Adv. – Akil Hirani- Majmudar & Partners, CA. T.P. Ostwal, Mr. Sudhir Valia – Exec. Director Sun Pharma Ltd, CA. Hiten Kotak, CA. Himanshu Kishnadwala, CA. Sridhar Swamy & CA. Mitil Chokshi. This workshop attracted participation from various parts of the country.
In August, the Society conducted the “Workshop on NBFC” covering significant topics in that area like Prudential Norms & Compliances – Important Aspects, Statutory Audit Aspects under Companies Act, 2013, Internal Audit Perspective for NBFCs and Internal Financial Controls for NBFCs.
The latest is the GST season, where the Society has already organised three houseful seminars with more than 300 participants at each session. The recent one was in the month of February. This two-day program brought together eminent speakers in the field of Indirect tax at one table to educate our members on GST.
While we talk about the various seminars and workshops let us also glance through the various courses at BCAS which also attracted excellent participation. “Four Days Orientation Course on Foreign Exchange Management Act (FEMA)” held in the month of March received more than 100 participations.
This was the 17th year of the Society where it has been conducting the “DTAA Course” successfully. This year also the Course was completed over 14 session on weekends covering aspects of various treaties, BEPS and Equalisation levy.
Non-Technical topics like the Leadership camp covering “Chanakya Business Sutra” by Mr. Mahendra Garodiya, “Heal without medicine” a program on healing without any medicines, public speaking program and “workshop on the CPR training” for members including free health check-up all received a welcome response from various participants in the profession.
The Youth being the pulse of the nation and the future of the profession cannot be set aside. Thus the Society also holds the Youth RRC every year with this year being the consecutive 4th year. BCAS held this RRC jointly with ICAI. Participants from both organisations attended and enjoyed the learning at Alibaug.
The Society has joined hands with various other organisations.
|
Event |
Speaker |
Jointly with |
|
Seminar on Internal Financial Controls
|
CA. Himanshu Kishnadwala CA. Abhay Mehta |
Chartered Accountants |
|
Challenges of Transforming |
Mr. Amitabh Kant |
Forum of Free Enterprise |
|
Two Days Seminar jointly |
CA. Sonalee Godbole CA. Mayur Nayak CA. Vishal Gada CA. Mandar Telang CA. Bhadresh Doshi Advocate Sunil Lala |
Association of Chartered |
|
Full Day Workshop on Writing |
CA. Raman Jokhakar, CA. Anil |
Aurangabad Branch of WIRC |
|
Full Day Seminar on |
Mr. Nimesh Shah, Mr. Abizer Diwanji, Mr. Bhavesh A. Shah, Mr. Amit Tripathi, Mr. N. S. Venkatesh, |
Chambers of Tax Consultants |
|
Full Day Seminar on Goods |
CA. Sunil Gabhawalla CA. Udyan Choksi CA. Mandar Telang CA. Govind Goyal |
DTPA Study Circle, Kolkata |
|
Two Days Workshop on |
CA. Ashutosh Pednekar CA. Abhay Mehta CA. Himanshu Kishnadwala Eminent faculty from |
Kanpur Chartered |
|
Workshop on GST, MVAT and |
Various Speakers |
AIFTP, CTC, MCTC, STPAM |
|
Lecture Meeting-The Union Budget Meeting 2017-18 arranged by |
Mr. H. P Ranina |
Forum of Free Enterprise |
|
Event |
Speaker |
Jointly with |
|
Under the auspices of Amita Memorial Trust, A talk in memory of |
Ms. Mittal Patel |
The Chamber of Tax Consultants |
|
Lecture Meeting on RBI and its Autonomy |
Mrs. Usha Thorat – Former Deputy Governor, Reserve Bank of India CA Rajendra Chitale Mr. A. K. Purwar-Former Chairman, State Bank of India |
Forum for Free Enterprise and the A D Shroff Memorial Trust |
While
we continue with lots more this season, a few more aspects will be covered in
the coming next 2 issues of the BCAS Journal. The Annual Report of the Society
will also detail all these activities along with participation numbers and
various other statistics.
Practice – A “True And Fair” Choice for A Fresh Chartered Accountant in Current Times?
1. Introduction
A Chartered Accountant reaches a major crossroad of his life when he is qualifies and has to decide between practice and service. Unfortunately, in recent times, from a majority of the persons qualifying opt for service in industry or the Big 4 as their first choice and very rarely choose practice as a career. The Institute of Chartered Accountants (ICAI) statistics reflect the number for associate members who are in full time practice at 46,308 out of total 171,357 CA’s i.e. 27%.
2. Probable reasons for choosing employment over practice
This trend is also evident from my personal experience:
(a) Out of 25 odd aspiring CA’s in my CA group of 1999, it is sad to note that I am the only one who has opted for independent practice. There are of course some who are with the profession as Big 4 employees, but a majority is with the corporate sector.
(b) Only a couple of trainees have opted for practice out of approx. 50 odd trainees trained by our firm in the last 14 years.
(c) On the personal front as well my Chartered Accountant sibling has opted to make a career in the Big 4 and has never shown interest in practice.
On the other hand, the global trends as reflected in June 2015 by the International Federation of Accountants (IFAC) pegs the number of accountants in public practice at 45.1%. This brings me to the moot point on why are the statistics of qualified CA’s opting for practice in India so low as compared to global norms? The reasons for not opting for practice, as a career choice may be attributable to the challenges faced by a CA practitioner: –
(a) Lower earnings in the initial struggle period of practice as against an assured fixed pay package from day one of employment
(b) No readymade post-retirement benefits in individual practice for the practitioners as against those in employment where the employer provides for post -retirement employee benefit plans.
(c) Need to operate from home until one can afford to buy/lease an office as against in employment where you can work with the best infrastructure and state- of -the-art facilities.
(d) No structured career path vs. a structured career path with a fast track plan in place.
(e) Little travel opportunity vs. attractive global business trips at the employer’s cost.
(f) Networking for developing good contacts, identifying mentors etc. is currently on limited and on a trial and error basis since it is random, unstructured and luck also plays a dominant role since it is not always possible to be at the right place at the right time. (I am not referring to networking as envisaged by the ICAI which does not seem to have taken off).
(g) Difficulty in retaining good staff who trains with the firm but leave for greener pastures elsewhere.
(h) In recent years, it is becoming increasingly difficult for the smaller firms to get the reasonably priced trainees, which has resulted in their costing being thrown off gear due to the need to opt for more expensive semi qualified staff.
(i) The clients in India are also extremely price sensitive and generally resist increase in payments by CA practitioners. This results in many of the smaller CA firms continuing to accept lower fees from their clients out of insecurity and fear of losing clients.
(j) The general public perception is that a good CA is one who is good in “managing” client’s issues with the various government authorities. They feel that generally all CA’s earn substantial portion of their income from such malpractices. This though only a perception unnecessarily taints the entire profession, which can otherwise play an important role in the country’s economic growth
by partnering and supporting business by leveraging their expertise/ knowledge in the right and ethical manner.
(k) There is also the challenge of losing work due to technological development. For instance, many corporate players have created websites providing online assistance for filing Income tax returns, Company formation etc., at a fraction of a cost charged by CA firms. There is a strong possibility that CA practitioners will lose their staple practice if they do not carve a niche for themselves.
(l) It is widely known that almost 70% of the practitioners are sole proprietors and there is a general aversion to partnering with others possibly due to lack of formal forums / guidance to network, distrust for peers and non-willingness to trade off size with independence. The proliferation of smaller sole proprietary set ups may be the reason why there is a mad scramble to get work at any cost, resulting in undercutting of prices. If the proprietary firms join hands to form bigger set ups, then the fee structure would definitely be more competitive and fair for CA’s.
(m) Since I have joined practice, there has been a major overhaul of laws, starting with replacement of FERA with FEMA, introduction of Service tax, introduction of new corporate laws, the recently introduced RERA and Benami Prohibition Act, the proposed introduction of GST etc. It has become increasingly necessary for the practitioners to quickly unlearn the old and learn the new in order to stay updated and relevant.
(n) Due to the superior technology adopted by various government departments and more integration between databases of different government departments, the defaults made by tax filers are detected more briskly and penalty orders issued immediately. It has become most important for CA’s to regularly educate and guide their clients to be compliant in all respects so that they are safeguarded from such penalties.
(o) Recently, there have been news of the database of some CA firms being hacked resulting in them losing access to their own database. This has made it extremely important for the firm/partners to take professional help in ensuring the firm network and databases are secured and regularly backed up.
Therefore, practice is not for the weak-hearted especially in larger cities where the competition is cut throat and one has to be constantly alert to opportunity and reinvent the wheel to survive.
3. Meeting the challenge and the way forward- my personal experience
In my initial years of practice, there was no conscious thought given to actively developing the practice. With a ready-made practice, which I became partner in, I had thought that I just need to stick around and learn the tricks of the trade. I spent the maximum time and energy in execution mode i.e. in interacting with clients, execution of jobs on hand and updating my knowledge and skill sets. Our firm never had any growth plan or strategy and we generally trudged along doing our daily jobs, like a rudderless ship. I remember not knowing how much would be our firm’s turnover and profitability at the end of the year. The big Surprise would be revealed only after all accounts were updated at the time of tax return deadline in September. Our outstanding fees were also averaging at 8 months since most clients would pay before the next audit/ tax filing due to lack of regular follow up on our part. We would randomly provide annual increments to staff including performance incentives, even before our financial position was known to us. This coupled with the lack of special efforts to add to our top line, slowly resulted in the shrinkage of our bottom line. We soon realised such an approach was not sustainable since although we were successful in keeping our staff happy, it was at the expense of the firm’s long-term prospects.
Ever since, we have started focusing our energies on steadily developing the practice and have changed tracks to introduce the following professional initiatives, which has definitely helped set the firm into “growth mode”. These are the steps we have taken :
(a) It is very important to do an honest SWOT analysis of your firm, and align your firm’s growth plan to its strengths. It is also important for the firm partners to take into consideration their areas of interest so as to have a well-defined firm strategy. We have thus identified newer areas of practice, identified industries or service lines to focus upon etc., and have devised a growth strategy for the firm covering 3 years, wherein the aim is for the newer areas of practice to contribute more than the traditional areas of practice, to the topline.
(b) We have also introduced an annual process of budgeting firm performance in March every year, taking into consideration the previous year’s performance. We regularly monitor firm performance against targets set at a monthly frequency such that the firm’s performance is known to us before we head into the 4th quarter.
(c) We also conduct Monthly Outstanding reviews, to ensure the receivables do not become sticky thereby adversely impact our cash flows. We have also introduced a system of sending follow up emails for the slow moving debts and a stop service policy in case the dues go beyond 6 months, so that the clients do not take us for granted.
(d) We have introduced the policy to periodically review rates charged to clients per service line and to formally communicate any increase vide formal communication so that the client understands that it would be the norm rather than an exception. We have also fixed minimum thresholds for our fees, below which we would not accept/continue the work. This has helped in weeding out clients who do not appreciate your services and unnecessarily object to fee increase.
(e ) We have also introduced the practice of issuing an engagement letter for the new jobs. This has ensured that the terms and conditions on which we undertake the assignment are well spelt out at the start and accepted in writing by the client. There is also a policy to collect the mandate fee of 50% of the fee for walk- in clients, who have not been referred by our contacts.
(f ) For the purpose of continuously engaging with the clients, we have started the practice of meeting key clients identified by the firm at the start of the year, at regular intervals. We also send regular mailers to all clients containing interesting articles, recent key changes in law etc.
(g) Managing the IT systems to ensure data is kept secure and is regularly backed up, software bought are updated regularly, business continuity planning etc. is especially important in the current world, where the technology drives most business. We have outsourced the IT systems to a professional to manage the IT risks.
(h) In recent times we have carefully developed a web presence and we ensure that it is regularly reviewed and updated with latest details with respect to firm Partners, offerings etc.
(i) For a small enterprise, where the partners are involved in execution, it is very challenging to spend time on networking. However, it is extremely important to slot time for networking into your calendar since unless you continuously expose yourself further to newer people/corporates, the opportunities would not be so forthcoming. For this reason, we have devised internal targets to ensure each partner meets two new people per week.
(j) We have also introduced the practice of determining key result areas (KRA’s) for the key staff at the start of the year, so that the incentives paid are aligned to firm performance and the individual’s achievement of KRA’s.
(k) We have also focused on creating standardised processes and procedures and regularly training the staff in this regard, which would help the firm in scaling up through creation of efficiencies.
(l) Since the results of the trainees in our firm in recent years have not been good, we have started regular in house trainings for the trainees and also encourage them to attend relevant programs conducted by
the ICAI.
(m) We also have devised a system of weekly trackers for the staff, wherein we allocate works to staff and also regularly monitor the status of the works.
(n) It is possible that to many readers the steps that we have taken seem elementary, but my experience is that despite this knowledge of what is necessary, many of my contemporaries do not put it into action.
4. Expectations from Institutions and peers
Although in recent years, ICAI & BCAS have been very active in the development and marketing of the profession, and have taken noteworthy initiatives, there is yet scope
to do more to alleviate the challenges faced by the current practitioners and help practice become the top career choice:
(a) Although there are myriad seminars for developing knowledge on various laws, there are very limited seminars/courses focusing on developing public speaking, presentation skills and other soft skills that are important for a practitioner. The professional institutes should consider a tie-up with premier Management Institutes for creating specialised communication courses for CA’s, which may help them develop their communication/ presentation skills.
(b) Currently, there are multiple study circles where the focus is generally on knowledge sharing, but there could be groups regularly meeting with a specific focus on practice management to share specific practice experiences, network and encourage tie-ups/ partnerships. The practice experience shared could cover topics relevant to practitioners like draft of a partnership agreement /MOU, recent tools available for CA office management, etc.
(c) Like the ICAI has created separate portals for WOMEN CA, professional development etc. ICAI could create a portal for the Corporates to post their specific requirements for audit/ special assignments etc. The SME practitioners could log in and regularly check for such requirements and send their best quotation. The regulatory framework of the ICAI should, be such that this becomes a possibility.
(d) There is a lot of literature available in the market including self-help books focusing on individual practitioners. Regular columns may be introduced in the publications to recommend and review these books, which may help the practitioners who are avid readers.
e) Senior members in practice in the bigger Indian firms may be encouraged to share their experiences in practice and provide insights into practice development. For instance, M/s ABC wishes to have an office in Goa, but does not know how to go about the same and build a presence. The only way the firm would learn is by speaking to other firms who have successfully done it. I am aware that BCAS has such a program but these type of events need to increase. If there were regular columns/articles in the professional magazines wherein the partners of the larger firms would share their experiences on how they have expanded their reach, others could benefit from it.
(f) Another effort lacking is for formal mentoring programs to be introduced for younger members, so they can gain considerably from the experience of the seniors in the profession. Here again BCAS has such a program but it needs to be publicised much more.
(g) Although there is a portal for registration of articled trainees which firms can use for recruitment of trainees, the same needs to be improved since the information available therein as regards articled trainees is not updated promptly, which unnecessary results in waste of time.
Conclusion
The thought process behind penning this article is for the following stakeholders in the profession: –
(a) For the new practitioners to learn from my experience, to get out of the execution mode, view the big picture and to consciously take steps to grow their firm to its full potential.
(b) For the professional bodies of our erudite profession to further support and empower practitioners so that the newly qualified CA’s seriously consider practice as a “true and fair” choice rather than join the service bandwagon, which is the trend in recent years.
Overseas Direct Investments – Write-Off of Investment
BACKGROUND
The Foreign Exchange Management Act, 1999 (“FEMA”) and Rules and Regulations issued thereunder came into force from 1st June, 2000. Since then, over last 16 years, they have undergone several changes.
The Foreign Exchange Management Act, 1999 (“FEMA”) and Rules and Regulations issued thereunder came into force from 1st June, 2000. Since then, over last 16 years, they have undergone several changes.
Beginning December 2015, RBI is issuing Revised Notifications in substitution of the original Notifications issued on May 3, 2000. Previously, annually on July 1, RBI was issuing Master Circulars with shelf life of one year. In another change, from January 1, 2016, most of the Master Circulars have been discontinued and substituted with Master Directions (except in case of – Foreign Investment in India and Risk Management and Inter-Bank Dealings). Unlike the Master Circulars, the Master Directions will be updated on an ongoing basis, as and when any new Circular / Notification is issued. However, in case of any conflict between the relevant Notification and the Master Direction, the relevant Notification will prevail.
CONCEPT AND SCOPE
The issues relating to write-off of investments in overseas subsidiary / joint venture entity and some other issues connected therewith are being discussed in this article.
OVERSEAS DIRECT INVESTMENT
Vide Notification No. FEMA 120/RB-2004 dated July 7, 2004, RBI notified the revised Foreign Exchange Management (Transfer or Issue of any Foreign Security) Regulations, 2004. This Notification repealed and substituted Notification No FEMA 19/2000-RB dated 3rd May 2000 which had notified Foreign Exchange Management (Transfer or Issue of any Foreign Security) Regulations, 2000.
The purpose of this Notification is to regulate acquisition and transfer of a foreign security by a person resident in India i.e. investment (or financial commitment) by Indian entities in overseas joint ventures and / or wholly owned subsidiaries. This Notification also regulates investment by a person resident in India in shares and securities issued outside India. Updated provisions in this regard are contained in FED Master Direction No. 15/2015-16.
This article discusses the following aspects in the context of overseas investment made by an Indian party in the shares of an overseas entity.
1. Restructuring of the balance sheet of the overseas entity involving write off of capital and receivables.
2. Sale of shares in a WOS / JV involving write off of the investment (or financial commitment).
1. Restructuring of the balance sheet of the overseas entity involving write off of capital and receivables
Almost all businesses suffer teething troubles and have a gestation period during which it will generally incur losses. However, over time, the business comes on track and also recoups the initial losses. Indeed, in some cases it may happen that despite the best efforts of the Indian party, the business continues to suffer losses and may require restructuring. Such instances are increasingly noticed in the post-2008 period which is marked by global economic turmoil.
If appropriate corrective action is not taken at the appropriate time, it may not only affect the viability and continuity of the business but the overseas entity may become sick and be in an irrecoverable situation although the business may have good potential. In such cases, the possible solution could be to restructure the balance sheet of the overseas entity by setting-off the past losses against the paid-up capital and reserves. However, this would also require the shareholders to write down their investment in the overseas entity.
In this background, in 2011 RBI amended Notification No. FEMA 120/RB-2004 and inserted Regulation 16A which permits the Indian Party (investors / promoters) to undertake restructuring of the overseas entity. Regulation 16A permits write-off of investment as well as receivables subject to compliance with certain conditions.
Such write off is permitted in case of both Wholly Owned Subsidiary (WOS) of the Indian Party or a Joint Venture (JV) of the Indian Party along with overseas investor(s). However, in case of a JV, the write-off is permitted only if the Indian Party holds at least 51% stake in the JV.
What can be written-off
The Indian Party can write-off the following investments / dues from the foreign entity: –
1. Equity share capital.
2. Preference share capital.
3. Loans given.
4. Royalty
5. Technical knowhow fees.
6. Management fees.
Available Routes for restructuring and write-off
This restructuring and write-off can be done either under the Automatic Route or under the Approval Route. The maximum amount that can be written-off under the Automatic Route as well as the Approval Route is 25% of the equity investment made by the Indian Party in the overseas WOS / JV.
AUTOMATIC ROUTE
A company listed on a recognised stock exchange in India can avail of the Automatic Route. The Indian Party is required to report the write-off / restructuring to RBI, through the designated AD Category-I Bank within 30 days of the write-off/restructuring.
APPROVAL ROUTE
An unlisted Indian Party can write-off / restructure its investment / receivables in overseas WOS / JV only after obtaining prior approval of RBI. It will need to apply to RBI, through the designated AD Category-I Bank.
Documents to be submitted
Both under the Automatic Route as well as the Approval Route, the Indian Party is required to submit the following documents together with its application.
a) A certified copy of the balance sheet showing the loss in the overseas WOS/JV set up by the Indian Party.
b) Projections for the next five years indicating benefit accruing to the Indian company consequent to such write off / restructuring.
2. Sale of shares in a WOS/JV involving write off of the investment (or financial commitment)
Depending upon the business exigencies, an Indian Party may consider selling its shares in the overseas WOS / JV. Regulation 16(1) grants general permission to an Indian Party to disinvest the shares subject to certain conditions if the sale does not result in any loss.
However, it is not necessary that the sale will always result in profit. Hence, RBI has granted general permission for disinvestment of shares by an Indian Party where such disinvestment results in a loss. It may be noted that the computation of ‘loss’ in case of Notification No. FEMA 120/RB-2004 is distinct from that the computation of ‘loss’ in terms of the Income-tax Act, 1961. For FEMA purpose, the ‘loss’ is to be understood as realisation of disinvestment proceeds of shares which are less than the investment made. Thus, there would be a ‘loss’ when the disinvestment proceeds on the sale of shares are lower than the amount paid at the time of purchase of shares.
Again, disinvestment by an Indian Party in its overseas WOS / JV, resulting in a loss or write-off on investment, can be either under the Automatic Route or the Approval Route.
AUTOMATIC ROUTE
The Indian Party can avail the Automatic Route if it complies with any of the following four criteria.
1. The overseas JV / WOS is listed on a stock exchange outside India.
2. The Indian Party is listed on a stock exchange in India and it has net worth of not less than Rs. 100 crores.
3. The Indian Party is listed on a stock exchange in India, it has net worth of less than Rs. 100 crores but investment in the overseas JV / WOS does not exceed US $ 10 million.
4. The Indian Party is unlisted and the investment in the overseas entity does not exceed US $ 10 million.
Once the Indian Party qualifies under any of the aforementioned criteria, it will need to comply with the following conditions.
a. If the shares of the overseas JV / WOS are listed, the sale should be effected through the stock exchange.
b. If the shares of the overseas JV / WOS are not listed and they are disinvested by a private arrangement, the share price should not be less than the value certified by a Chartered Accountant / Certified Public Accountant as the fair value of the shares based on the latest audited financial statements of the JV / WOS.
c. The Indian Party should not have any outstanding dues by way of dividend, technical know-how fees, royalty, consultancy, commission or other entitlements and / or export proceeds from the JV or WOS.
d. The overseas concern should have been in operation for at least one full year and the Annual Performance Report together with the audited accounts for that year must have been submitted to RBI.
e. The Indian Party is not under investigation by CBI / DoE/ SEBI / IRDA or any other regulatory authority in India.
f. The Indian Party should submit details of such disinvestment through its Bank in Part III of Form ODI within 30 days from the date of disinvestment.
g. Sale proceeds should be repatriated to India within 90 days from the date of sale of the shares / securities.
APPROVAL ROUTE
If an Indian Party does not satisfy the criteria / conditions mentioned above, it should obtain prior approval from RBI for undertaking divestment in its overseas WOS / JV.
SPECIFIC WINDOW IN CASE OF A LISTED COMPANY HAVING EXPORTS
In addition, Regulation 171 provides another window for write-off in case of a listed company. Thus, if the proceeds realised by an Indian Party listed on any stock exchange in India from sale of shares or security referred to in Regulation 16 (1)2 are less than the amount invested in the shares or security transferred, the Indian Party may write off the differential amount if such differential amount does not exceed the percentage approved by the RBI, from time to time, of the Indian Party’s actual export realization of the previous year.
If, however, the differential amount is more than the percentage approved by RBI from time to time, of the Indian Party’s actual export realisation of the previous year, prior permission of RBI would be required for write-off.
SIGNING OFF
As pointed out above, transfer by way of sale of shares of a JV / WOS outside India as well as restructuring of the balance sheet of JV/WOS involving write-off of capital and receivables, requires fulfillment of various conditions and also involves various compliances. It would be prudent to examine the facts carefully and in appropriate cases, wherever applicable, apply to the RBI for permission which may be granted subject to such conditions as the RBI may consider appropriate.
1 It may be noted that while Notification No. FEMA 120/RB-2004 includes Regulation 17, Master Direction No. 15/2015-16 on investment in JV/WOS does not make any mention thereof.
2 While Regulation 17 mentions Regulation 16(1), it also mentions “for a price less than the amount invested in the shares or security transferred”. A case where sale proceeds are less than investment is within the ambit of Regulation 16(1A) and not within the ambit of Regulation 16(1). Hence, Regulation 16(1) should be read as Regulation 16(1A).
SEBI Again Initiates Action against Statutory Auditors for Fraud, Negligence, Etc.
SEBI has initiated action yet another time against auditors of a listed company that was alleged to have carried out massive frauds, made false/fake/duplicate books of accounts, etc. In an earlier case, SEBI had actually debarred an auditor/Chartered Accountant from issuing any certificates under various Securities Laws. This case was discussed earlier in this column in the April, 2016 issue of this Journal. Further, as will also be discussed later herein, the Bombay High Court had held that SEBI did have power to take action against auditors and that such powers were not the exclusive prerogative of the Institute of Chartered Accountants of India. This results in not only SEBI being able to debar auditors but also initiate other actions such as penalties, prosecution, etc. Action under other laws such as the Companies Act, 2013, can also not be ruled out.
This particular case (Order of SEBI dated 16th February 2017 in the matter of Arvind Remedies Limited) has an interesting and perhaps worrisome feature. SEBI has taken a view that the concerned auditors had been negligent in their duties as auditors and failed to maintain requisite professional standards in their work. Based on this, the auditors have been accused of fraud, manipulation, deceit, etc. These allegations are not only more serious but can result in far stricter punishment.
FACTS OF THE CASE
A forensic audit was carried out of the listed company, Arvind Remedies Limited, by a consortium of bankers. Several findings were made by these forensic auditors and also by SEBI’s own subsequent investigation. Some of alleged frauds/manipulation, etc. were as follows:-
1. Maintenance of multiple sets of books of accounts.
2. Recording of bogus sales.
3. Allegedly making fake sales/entries with several companies.
4. Destruction of large amount of inventories which SEBI suspects to be originally non-existent.
5. Reduction of a large amount of tangible assets in a suspicious manner.
And so on.
The turnover of the company had reduced very substantially. The share price on stock exchange too had reduced to a small fraction of the price in preceding period. It was alleged that during the relevant period the Promoters sold a very substantial number of shares and reduced their shareholding from 46.84% to 3.58%. The Promoter Director also had drawn a large amount as commission on sales which SEBI has alleged to be fake.
Around this time, the erstwhile auditors (“the Auditors”) of the Company resigned and a new firm was appointed. The findings by the new firm were similar to findings of SEBI/the forensic auditor.
ACTION BY SEBI AGAINST THE COMPANY AND PROMOTER DIRECTOR
SEBI alleged that the Company and its promoter director were guilty of violation of several provisions of the SEBI Act/SEBI (PFUTP) Regulations relating to manipulations, frauds, etc. It also alleged that the promoter director had drawn a large amount of commission on the basis of bogus sales. Accordingly, it issued the following interim directions:-
1. Debarred the Company and the promoter director from accessing the securities markets, buying/selling shares, etc.
2. Directed the promoter director to impound the commission that he had drawn on basis of allegedly bogus sales.
SEBI also directed the promoter director not to alienate any of his assets till the amount of commission was duly impounded in the manner specified by SEBI.
ACTION AGAINST THE AUDITORS
SEBI had sought a statement from the Auditors on various issues to which replies were given by them. Pursuant to such replies and investigation, SEBI made several observations against the role of the Auditors. SEBI stated: “For negligence in certification of accounts of listed company, failure to maintain professional standards in Audit, the Statutory Auditor and its proprietor were prima facie alleged to have violated – i. Section 12A(a), (b) and (c) of the SEBI Act and Regulation 3(b), (c) and (d) and Regulation 4(1) and 4(2)(a), (e), (f), (k) and (r) of the PFUTP Regulations.” (emphasis supplied).
Again, SEBI pointed out several alleged lapses of the Auditors such as not reporting on certain discrepancies in the accounts. Based on this, SEBI observed, “The irregularities perpetrated by ARL, its Director and Statutory Auditor, discussed hereinabove are prima facie in violation of Sections 12A(a), (b) and (c) of the SEBI Act; Regulations 3(b), (c) and (d) read with Regulations 4(1) and 4(2)(a), (e), (f), (k) and (r) of the PFUTP Regulations. “
Thus, SEBI has alleged that the Auditors have prima facie violated the provisions relating to fraud, manipulation, deceit, etc. as contained in the SEBI Act and the PFUTP Regulations.
These provisions provide for certain fairly serious violations. Section 12A(a) concerns with use of “any manipulative or deceptive device or contrivance” in connection with certain issue/purchase/sale of securities. Section 12A(b) deals with employment of “any device, scheme or artifice to defraud” in connection with issue or dealing of securities. Regulation 4(2)(r) of the PFUTP Regulations deal with “planting false or misleading news which may induce sale or purchase of securities.”
Thus, and to repeat, these are serious violations alleged.
The interim order also operates as a show cause notice to the Auditors asking them to show cause as to why they should to be debarred from giving various certificates for having allegedly committed violations of the provisions relating to fraud, manipulation, deceit, etc.
Whether negligence/lower professional standards in audit can be treated as fraud, deceit, etc.
In the earlier order in the case of Shashi Bhushan discussed in an earlier article in this column, the auditor concerned was specifically alleged to have committed the violations relating to fraud, etc. In other words, the allegation was that he was party to such things.
In the present case, the order, though not wholly clear/consistent, seems to be on a different footing. The Auditors are not specifically alleged to be party to such fraud, etc. The allegation against them is that they have been negligent in their audit and/or they have applied lower professional standards in their audit. However, whether such negligent work can amount to fraud, manipulation, etc.? The latter are allegations that can result in severe consequences of debarment, penalty, prosecution and perhaps more.
The Order/Show Cause notice further states that “The Statutory Auditor therefore, enabled ARL and its Director to perpetrate manipulation/fraud on genuine investors in the securities market.” Thus, it appears that the allegation is that the alleged actions/defaults of the Company/director were a consequence of such alleged negligence, etc.
It will be interesting to read the final order of SEBI on the matter and how it bridges what I see as a gap between alleging negligence/low professional standards in audit and an active fraud/manipulation/deceit. Negligence/low professional standards in audit is surely a default that ought to be acted upon but allegation of fraud, manipulation, etc. are different and serious defaults. Negligence, it is submitted, does not amount to committing fraud which requires mens rea and a conscious and active participation to commit such an act.
WHETHER SEBI HAS POWERS TO ACT AGAINST AUDITORS
To consider whether SEBI has powers to act against auditors of a listed company, the decision of the Bombay High Court in Price Waterhouse & Co. vs. SEBI (2010) 103 SCL 96) is relevant. The Court had observed therein:-
“25. ….The powers available to the SEBI under the Act are to be exercised in the interest of investors and interest of securities market. In order to safeguard the interest of investors or interest of securities market, SEBI is entitled to take all ancillary steps and measures to see that the interest of the investors is protected. Looking to the provisions of the SEBI Act and the Regulations framed thereunder, in our view, it cannot be said that in a given case if there is material against any Chartered Accountant to the effect that he was instrumental in preparing false and fabricated accounts, the SEBI has absolutely no power to take any remedial or preventive measures in such a case. It cannot be said that the SEBI cannot give appropriate directions in safeguarding the interest of the investors of a listed Company. Whether such directions and orders are required to be issued or not is a matter of inquiry. In our view, the jurisdiction of SEBI would also depend upon the evidence which is available during such inquiry. It is true, as argued by the learned counsel for the petitioners, that the SEBI cannot regulate the profession of Chartered Accountants. This proposition cannot be disputed in any manner. It is required to be noted that by taking remedial and preventive measures in the interest of investors and for regulating the securities market, if any steps are taken by the SEBI, it can never be said that it is regulating the profession of the Chartered Accountants.
….
With a view to safeguard the interests of such investors, in our view, it is the duty of the SEBI to see that maximum care is required to be taken to protect the interest of such investors so that they may not be subjected to any fraud or cheating in the matter of their investments in the securities market. In our view, the SEBI has got inherent powers to take all ancillary steps to safeguard the interest of investors and securities market.”
The Court thus has held that where a Chartered Accountant is “instrumental in preparing false and fabricated accounts”, SEBI does have jurisdiction to act in interests of investors/markets. The Court further observed:-
“If it is unearthed during inquiry before SEBI that a particular Chartered Accountant in connivance and in collusion with the Officers/Directors of the Company has concocted false accounts, in our view, there is no reason as to why to protect the interests of investors and regulate the securities market, such a person cannot be prevented from dealing with the auditing of such a public listed Company.”
It is clear thus that SEBI does have power/jurisdiction to take action against a Chartered Accountant who connives/colludes with the management of the company to concoct false accounts.
However, the questions that this particular case presents are two. Whether negligence/applying lower professional standards in auditing by itself amount to fraud. Secondly, whether such negligence, etc. itself are actionable
by SEBI.
IMPLICATIONS ON OTHER PROFESSIONALS AND GENERALLY THROUGH OTHER LAWS
Action by SEBI against the Chartered Accountant does not rule out action by the Institute of Chartered Accountants of India for defaults of professional negligence, misconduct, etc. Further, action is also conceivable under other laws such as the Companies Act, 2013, etc.
Adverse action is also possible in appropriate cases against other professionals such as Company Secretaries, lawyers, etc.
It will be of interest whether and to what extent the defence of double jeopardy (under Article 20(2) of the Constitution of India) of double punishment for the same offence would be available.
CONCLUSION
The liability of auditors of entities to which Securities Laws apply have only increased over the years. Apart from increasingly complex laws and wider requirements/scope of audit and other work, there are multiple regulators who end up regulating the same work. The auditors would have thus to be prepared to defend their work against action by different regulators/forums and also be subject to multiple forms of adverse action for the same work.
Joint Holder or Nominee is the Question
INTRODUCTION
Succession planning is catching up with modern India. Earlier, people in India would think of wills, trusts and other modes of estate planning only when they were of a ripe old age. However, today even younger people are considering what is the best mode of planning for one’s assets so that there is a smooth transmission to the family. And rightly so, since life is uncertain and hence, planning for one’s affairs would only mean that an already mourning family has one less problem to face!
Succession planning is catching up with modern India. Earlier, people in India would think of wills, trusts and other modes of estate planning only when they were of a ripe old age. However, today even younger people are considering what is the best mode of planning for one’s assets so that there is a smooth transmission to the family. And rightly so, since life is uncertain and hence, planning for one’s affairs would only mean that an already mourning family has one less problem to face!
When it comes to estate planning, the most basic form of planning is a joint ownership of assets and a nomination. However, there is a fair deal of confusion as to the difference between these two and which is superior of the two. Let us examine the meaning of these two very important tools and when to use which.
JOINT HOLDING
A joint holder as the name suggests is joint in ownership along with the 1st holder or the main holder. Joint ownership could be in respect of bank accounts, demat accounts, share certificates, flat ownership certificates, etc. A joint holding is the opposite of a single / sole ownership. Depending upon the mode of joint holding, in certain assets, the joint holder can operate the assets along with or after the lifetime of the primary holder. To illustrate in the case of bank accounts, the following modes are possible:
(a) Either or Survivor – under this mode, either of the joint holders can operate the account. Moreover after the death of the primary member, the joint holder would automatically become the sole holder of the account.
(b) Former or Survivor – under this mode, the joint holders can operate the account only after the death of the primary member. Once the primary member dies, the joint holder would automatically become the sole holder of the account. However, during the lifetime of the primary member, the joint holder cannot operate the account.
Table F of Schedule I to the Companies Act, 2013 lays down the model Articles of Association of a limited company. Clause 23 of this Table F provides that on death of a joint holder of shares, the survivor member would alone be recognised by the company as having any title to his interest in the shares.
NOMINATION
Nomination is something which is extremely popular nowadays and is increasingly being used in co-operative housing societies, depository/demat accounts, mutual funds, Government bonds/securities, shares, bank accounts, etc. Nomination is something which is advisable in all cases even when the asset is held in joint names. Simply put, a nomination means that the owner of the asset has designated another person in his place after his death.
The legal position in this respect is crystal clear. Once a person dies, his interest stands transferred to the person nominated by him. Thus, a nomination is a facility to provide the society, company, depository, etc., with a face which whom it can deal with on the death of a person. On the death of the person and up to the execution of the estate, a legal vacuum is created. Nomination aims to plug this legal vacuum. A nomination is only a legal relationship created between the society, company, depository, bank, etc. and the nominee.
The nomination seeks to avoid any confusion in cases where the will has not been executed or where there are disputes between the heirs. It is only an interregnum between the death and the full administration of the estate of the deceased.
A nomination continues only up to and until such time as the will is implemented. No sooner the will is implemented, it takes precedence over the nomination. Nomination does not confer any permanent right upon the nominee nor does it create any beneficial right in his favour. Nomination transfers no beneficial interest to the nominee. A nominee is for all purposes a trustee of the property. He cannot claim precedence over the legatees mentioned in the will and take the bequests which the legatees are entitled to under the will.
The Supreme Court in the case of Sarbati Devi vs. Usha Devi, 55 Comp. Cases 214 (SC), in the context of a nomination under a life insurance policy held that a mere nomination made does not have the effect of conferring on the nominee any beneficial interest in the amount payable under the life insurance policy on the death of the assured. Once again in the case of Vishin Khanchandani vs. Vidya Khanchandani, 246 ITR 306 (SC), the Supreme Court examined the National Savings Certificate Act and various other provisions and held that, the nominee is only an administrative holder. Any amount paid to a nominee is part of the estate of the deceased which devolves upon all persons as per the succession law and the nominee must return the payment to those in whose favour the law creates a beneficial interest. Again, in Shipra Sengupta v Mridul Sengupta, (2009) 10 SCC 680, the Supreme Court upheld the superiority of a legal heir as opposed to a nominee in the context of a nomination made under a Public Provident Fund.
The Supreme Court reinforced its view on a nominee being a mere agent to receive proceeds under a life insurance policy in Challamma vs. Tilaga (2009) 9 SCC 299. In Ramesh Chander Talwar vs. Devender Kumar Talwar, (2010) 10 SCC 671, the Supreme Court upheld the right of the legal heirs to receive the amount lying in the deceased’s bank deposit to the exclusion of the nominee. A similar view has been taken by the Bombay High Court in Nozer Gustad Commissariat vs. Central Bank of India, 1993(2) Bom.C.R.8 and Antonio Jaoa Fernandes vs. Asst. Provident Fund Commissioner, 2010(3) All MR 599 in respect of balance standing in the employee provident fund of the deceased.
The position of a nominee in a flat in a co-operative housing society was analysed by the Supreme Court in Indrani Wahi vs. Registrar of Co-operative Societies, CA NO. 4646of 2006(SC). The Supreme Court held that there can be no doubt that the holding of a valid nomination does not ipso facto result in the transfer of title in the flat in favour of the nominee. However, consequent upon a valid nominationhaving been made, the nominee would be entitled to possession of the flat. Further, the issue of title had to be left open to be adjudicated upon between the contesting parties. It further held that there can be no doubt, that where a member of a cooperative society nominates a person, the cooperative society is mandated to transfer all the share or interest of such member in the name of the nominee.The Supreme Court concluded, that it was open to the other members of thefamily of the deceased, to pursue their case of succession or inheritance in respect of the flat, in consonance with the law.
The position was a bit murky when it came to a nomination in respect of shares in a company or a depositary account. The Companies Act, 2013 in the form of section 72 read with Rule 19 of the Companies (Share Capital and Debentures) Rules, 2014 (in respect of nomination for physical shares) and Bye Law 9.11 made under the Depositories Act, 1996 (which deals with nomination for securities held in a dematerialised format) provide that any nomination made in respect of shares or debentures of a company, if made in the prescribed manner, shall, on the death of the shareholder/debenture holder, prevail over any law or any testamentary disposition, i.e., a will. A Single Judge of the Bombay High Court explained this proposition in the case of Harsha Nitin Kokate vs. The Saraswat Co-op. Bank Ltd, 112 (5) Bom. L.R. 2014 that upon the death of a shareholder, the shares would “vest” in the nominee. A nominee became entitled to all the rights attached to the shares to the exclusion of all others regardless of anything stated in any other disposition, testamentary or otherwise. The Court concluded that the Legislature’s intent under the Companies Act and the Depositories Act, 1996 was very clear, i.e., to vest the property in the shares in the nominee alone in supersession of the testamentary/intestate succession. Another Single Judge of the Bombay High Court, had an occasion to consider the above provisions of the Companies Act and the earlier decision of the Bombay High Court in Jayanand Jayant Salgaonkar vs. Jayashree Jayant Salgaonkar and others, Notice of Motion No. 822/2014 in Suit No. 503/2014. It held that the earlier decision of Harsha Nitin Kokate vs. The Saraswat Co-op. Bank Ltd was rendered per incuriam, i.e., without reference to several binding Supreme Court and Bombay High Court decisions.
A nomination, if held supreme, wholly defenestrates the Indian Succession Act. According to the judgment in Harsha Nitin Kokate, a nomination becomes a “Super-Will” one that has none of the defining traits of a proper Will. Thus, a nomination, even under the Companies Act only provides the company or the depository a quittance. A nominee only continues to hold the securities in trust and as a fiduciary for the legal heirs under Succession Law.
A division bench of the Bombay High Court in Shaktia Yezdani vs. Jayanand Jayant Salgaonkar, Appeal No. 313/2015 Order dated 01.12.2016 considered both the earlier Single Judge decisions. It also analysed all the Supreme Court and High Court decisions on the superiority of a will over a nomination. It held that the provisions of the Companies Act are not materially different from the provisions of other Acts which provide for nomination. A nomination does not become a testamentary disposition under the Indian Succession Act. As has been consistently held, a nominee does not get an absolute title to the property. Nomination never overrides testamentary or intestate succession. The legislative intent by virtue of the Companies Act is not to make nomination a third mode of succession after testamentary or intestate succession. It concluded that the provisions of the Companies Act have nothing to do with the law of succession. Hence, the view of the Single Judge in Harsha Nitin Kokate’s case (supra) was incorrect and that of the Single Judge in Jayanand Jayant Salgaonkar was correct. Thus, the Division Bench has, for the time being, placed nomination even under the Companies Act / Depositories Act, at par with nomination for other assets, i.e., subservient to a will/ intestate succession.
WHICH IS SUPERIOR – JOINT HOLDING OR NOMINATION?
The big question which most people are asking is that what should be done – a joint ownership or a nomination of both? A joint holder is definitely on a higher pedestal as compared to a nominee since he is already entered as an owner. All that the bank/depositary participant /society needs to do is to strike out the name of the deceased primary member and take the joint holder on record as the primary member. So the descending order of hierarchy when it comes to succession planning would be Will – Joint Holding – Nomination. Of course, one can even place a trust right at the top of the pyramid. Thus, in cases where one is certain that after him the asset should go to a particular person then a joint holding is definitely advisable, e.g., in the case of a husband and a wife. In addition, a nomination may be created as an alternative beneficiary, e.g., in favour of the child of the couple. If there are joint holders, the nomination must be signed by all the joint holders and the nominee’s right would arise only when all the joint holders die.
One overarching fact to be borne in mind is that neither a joint holder nor a nomination creates a legal ownership over the asset in question. That is determined solely on the basis of the will (in cases of testamentary succession) or by the intestate law (e.g., the Hindu Succession Act, 1956 in case of Hindus dying intestate or Indian Succession Act for Parsis dying intestate).
It is advisable that the fact of joint holding/nomination is also reproduced in the will of the person. Moreover, the beneficiaries under the will should be co-terminus with the joint holders/nominees wherever possible to avoid any variance and disputes. Further, always have a habit of reviewing all joint holdings and nominations. There have been several instances of people making nominations or adding joint holders long back and then forgetting about it. In many cases, these past actions come back to haunt the family of the deceased by causing succession hurdles.
CONCLUSION
Considering the confusion and myths surrounding succession planning, joint ownership, nomination, is it not time to entirely redo the Indian Succession Act, 1925? Is it right to interpret succession issues in the light of a 92-year old Act? There should be a comprehensive law dealing with all forms and modes of estate planning across various asset classes. That would go a long way in reducing the pending litigation before our judiciary since a large number of cases pertain to succession disputes!
Prohibition of Benami Property Transactions Act, 1988 (As Amended) – An Overview [Part – I]
In the last couple of years, there has been an immense hue and cry about curbing benami transactions and black money. The number of benami transactions in the real estate and other sectors have increased astronomically. In the absence of an effective regulation, the black or ill-gotten money is easily parked in the opaque real estate industry. Since the year 2014, this issue also assumed significant importance in view of the election manifesto of Bharatiya Janata Party and subsequent focus and determination of the present government, reflected in the substantial amendments to the applicable law and prompt actions initiated for its effective implementation.
The Benami Transactions (Prohibition) Act, 1988 has been completely revamped in the year 2016 by the Benami Transactions (Prohibition) Amendment Act, 2016 and the government is vigorously invoking the amended law in achieving its objective of combating the menace of black money and corruption. The purpose of this article is to provide a brief history of the law on benami transactions, and give an overview of the law dealing with such transactions and the journey of the vital changes in law.
1. Background & Brief History
A. Background
a) The earliest noteworthy mention of benami transactions was in the 18th century when the British had colonised the territory of India. In the case of Gopeekrist Gosain vs. Gungapersuad (1854) 6 MLA 53, it was held that such benami transactions were a part of India’s custom and therefore must be recognised unless otherwise provided by law.
Thereafter, sections 81 and 82 of the Indian Trusts Act, 1882 extended legislative recognition to benami transactions due to which the Indian Courts were bound to enforce them. The rationale provided for justifying these transactions was section 5 of the Transfer of Property Act, 1882 according to which there is no prohibition on transfer of property in the name of one person for the benefit of the other.
b) In the last few decades, many such transactions were entered between parties to deploy ill-gotten wealth and to defraud and frustrate various law enforcement authorities under various laws. In order to remedy this situation the Parliament introduced section 281A in the Income-tax Act, 1961 [the ITA] to prohibit the institution of suits with regards to benami properties. The widespread menace of illegal benami transactions was not effectively curtailed and therefore sections 81 and 82 of the Indian Trust Act, 1882 and section 281A of the ITA were repealed by the Benami Transactions (Prohibition) Act, 1988 w.e.f. 19-5-1988. Thereafter following the recommendations of the 57th Law Commission Report the Benami Transaction (Prohibition of the Right to Recover Property) Ordinance, 1988 was promulgated by the President on 19th May, 1988.
c) The said Ordinance was subjected to criticism in the media and public on the grounds that it was not an effective mechanism to curb benami transactions. Accordingly, 130th Law Commission Report submitted certain recommendations as enumerated below:-
– All kinds of property must be covered by benami transactions.
– The new law must declare that entering into benami transactions is an offence except when a father or husband transfers property in the name of his daughter or wife.
– Omission of section 94 of the Transfer of Property Act, 1882.
– Acquisition of such properties under the same procedure as provided in Chapter XXA dealing with acquisition of immovable properties in certain cases of transfer to counteract evasion of tax, of the ITA.
d) Thus, after incorporating the relevant recommendations of the Law Commission the Benami Transactions (Prohibition) Bill was passed by both the Houses of Parliament and on 5th September 1988, it became the Benami Transactions (Prohibition) Act, 1988.
B. Benami Transactions (Prohibition) Act, 1988 now renamed as Prohibition of Benami Property Transactions Act, 1988
The Benami Transactions (Prohibition) Act, 1988 now renamed by the Benami Transactions (Prohibition) Amendment Act, 2016 as Prohibition of Benami Property Transactions Act, 1988 [the Benami Act] was enacted in order to prohibit all benami transactions and confiscating of property which has been held as benami. The pre-amended Act consisted of only 9 sections out of which Sections 3, 4 and 5 were significant.
– Section 3 prohibited entering into a benami transaction. The exceptions to the same were as follows:
“the purchase of property by any person in the name of his wife or unmarried daughter and it shall be presumed, unless the contrary is proved, that the said property had been purchased for the benefit of the wife of the unmarried daughter.”
– Section 4 provided that no suit or claim shall be maintained to enforce rights with respect to benami properties. The exceptions to the same were:
“(a) where the person in whose name the property is held is a coparcener in a Hindu undivided family and the property is held for the benefit of the coparceners in the family; or (b) where the person in whose name the property is held is a trustee or other person standing in a fiduciary capacity, and the property is held for the benefit of another person for whom he is a trustee or towards whom he stands in such capacity.”
– Section 5 provided that the benami properties shall be acquired by authority without any compensation or payment in return.
C. Delay in implementation of the Act
The menace of benami transactions has flourished not due to lack of appropriate legal framework but mainly due to non-implementation/lack of proper implementation of the enacted laws and lack of adequate administrative infrastructure. In other words, although 28 years ago the Benami Act was passed by the Parliament, it was not implemented despite the request by the Central Vigilance Commission [CVC] to the government to empower the CVC under the Benami Act and also prescribe rules for effective implementation. In this context, the Government justified that the Act was not made operational due to apparent lacunae and pitfalls in the law. Hence, recently the present government brought in a new bill to completely revamp the Benami law in tune with the current circumstances and requirements and to deal with growing challenges.
D. Benami Transactions (Prohibition) Amendment Act, 2016
The original Benami Transactions (Prohibition) Act, 1988 i.e. the ‘Principal Act’ was woefully inadequate to address the rampant menace of benami transactions in a country with widespread poverty and illiteracy.
In the recent past, there have been various instances in which people used their unaccounted money to purchase property in name of a fictitious or non-existent person. Therefore, the need for a strong mechanism to combat such activities has become inevitable. The object and purpose of the Benami Transactions (Prohibition) Amendment Act, 2016 is not only to efficaciously prohibit benami transactions but also to prevent evasion of law by illegal practices. The most significant aspect of the Amendment Act is that all the benami properties shall be confiscated after following due procedure of law.
However, the law extended immunity under the Income Declaration Scheme, 2016 to those who made a declaration in respect of their benami properties.
E. Development of the law on prohibition of benami transactions
– On 13th May, 2015, the Benami Transactions (Prohibition) Amendment Bill, 2015 was introduced in Lok Sabha in order to amend and incorporate certain very important provisions of the Benami Act i.e. amendment to the definition of benami transactions, establishment of Adjudicating Authority and Appellate Tribunal, penalties on benami transactions.
– The Amendment Bill, 2015 was then referred for examination to the Standing Committee on Finance. On 28th April, 2016, the Standing Committee’s report was submitted.
– On 22nd July, 2016, the government proposed amendments to the Amendment Bill, 2015. On 27th July, 2016 the Amendment Bill was passed by the Lok Sabha and on 2nd August, 2016 the Rajya Sabha approved the same.
– The Amendment Bill received the President’s assent on 10th August, 2016 and the Benami Transactions (Prohibition) Amendment Act, 2016 [the Amendment Act, 2016] was brought into force.
F. Reason for enlargement of the Act from 9 sections to 72 sections instead of enacting a new Benami Act
A question arises as to why the government has chosen to make such a large number of amendments i.e. from 9 sections to 72 sections, instead of enacting a new law altogether.
This was explained by the Finance Minister during the parliamentary debate, as follows:
“Anybody will know that a law can be made retrospective, but under Article 20 of the Constitution of India, penal laws cannot be made retrospective. The simple answer to the question why we did not bring a new law is that a new law would have meant giving immunity to everybody from the penal provisions during the period 1988 to 2016 and giving a 28 year immunity would not have been in larger public interest, particularly if large amounts of unaccounted and black money have been used to transact those transactions. That was the principal object.”
2. Meaning of Benami Transaction
What is Benami?
The term “Benami” has its origin in the Persian language which implies “without a name”. The term “benami” implies made, held, done, or transacted in the name of (another person). It is used in Hindu law to designate a transaction, contract, or property that is made or held under a name that is fictitious or is that of a third party who holds as ostensible owner for the principal or beneficial owner.
The benami transaction is any transaction in which property is transferred to one person for a consideration paid by another person. In this kind of transaction the person who pays for the property does not buy it under his/her own name. The person on whose name the property has been purchased is called the benamidar and the property so purchased is called the benami property. The person who finances the deal is the real owner. The property is held for the benefit, direct or indirect, of the person paying the amount.
In simple terminology, benami transactions are transactions where property is purchased in the name of one person but the consideration for the said purchase is paid by other person; therefore, the former will be the nominal owner and the latter will the real owner of the property. The Privy Council in the case Pether Perumal vs. Muniandy (1908) ILR 35 Cal. 551 held that the person who lends his name for the purchase of property and has ostensible title, i.e., the benamidar is nothing but an alias for the real owner who has beneficial ownership of the property.
The Amendment Act, 2016 has substituted the definition of ‘benami transaction’ and the substituted definition, considerably expanding the scope of the term, reads as follows.
“(9) “benami transaction” means, –
(A) a transaction or an arrangement –
(a) where a property is transferred to, or is held by, a person, and the consideration for such property has been provided, or paid by, another person; and
(b) the property is held for the immediate or future benefit, direct or indirect, of the person who has provided the consideration, except when the property is held by –
(i) a Karta, or a member of a Hindu undivided family, as the case may be, and the property is held for his benefit or benefit of other members in the family and the consideration for such property has been provided or paid out of the known sources of the Hindu undivided family;
(ii) a person standing in a fiduciary capacity for the benefit of another person towards whom he stands in such capacity and includes a trustee, executor, partner, director of a company, a depository or a participant as an agent of a depository under the Depositories Act, 1996 (22 of 1996) and any other person as may be notified by the Central Government for this purpose;
(iii) any person being an individual in the name of his spouse or in the name of any child of such individual and the consideration for such property has been provided or paid out of the known sources of the individual;
(iv) any person in the name of his brother or sister or lineal ascendant or descendant, where the names of brother or sister or lineal ascendant or descendent and the individual appear as joint-owners in any document, and the consideration for such property has been provided or paid out of the known sources of the individual; or
(B) a transaction or an arrangement in respect of a property carried out or made in a fictitious name; or
(C) a transaction or an arrangement in respect of a property where the owner of the property is not aware of, or, denies knowledge of, such ownership;
(D) a transaction or an arrangement in respect of a property where the person providing the consideration is not traceable or is fictitious.
Explanation – For the removal of doubts, it is hereby declared that benami transaction shall not include any transaction involving the allowing of possession of any property to be taken or retained in part performance of a contract referred to in section 53A of the Transfer of Property Act, 1882 (4 of 1882), if, under any law for the time being in force, –
(i) consideration for such property has been provided by the person to whom possession of property has been allowed but the person who has granted possession thereof continues to hold ownership of such property;
(ii) stamp duty on such transaction or arrangement has been paid; and
(iii) the contract has been registered;”
Prior to its substitution, the definition of ‘benami transaction’ read as follows:
“2(a)”benami transaction” means any transaction in which property is transferred to one person for a consideration paid or provided by another person.”
In the context of pre-amended provisions of the Act, the Supreme Court in the case of G. Mahalingappa vs. G. M. Savitha [2005] 147 Taxman 583 (SC) held that the following findings of fact were arrived at by the appellate court and the trial court, and would conclusively prove that the transaction in question was benami in nature:
(1) the appellant had paid the purchase money.
(2) the original title deed was with the appellant.
(3) the appellant had mortgaged the suit property for raising loan to improve the same.
(4) he paid taxes for the suit property.
(5) he had let out the suit property to defendant Nos. 2 and 5 and collecting rents from them.
(6) the motive for purchasing the suit property in the name of plaintiff was that the plaintiff was born on an auspicious nakshatra and the appellant believed that if the property was purchased in the name of plaintiff/respondent, the appellant would prosper.
(7) the circumstances surrounding the transaction, relationship of the parties and subsequent conduct of the appellant tend to show that the transaction was benami in nature.
Similarly, in the context of cases under the ITA, various courts and tribunals have laid down various tests for deciding the issue regarding benami nature of transactions. However, it is important to keep in mind the enlarged scope of the definition of the ‘benami transaction’ substituted by the Amendment Act, 2016.
Meaning of some other important terms
The Amendment Act, 2016 has substituted or inserted various other important definitions in the Act, some of which are given below for ready reference.
“(8) “benami property” means any property which is the subject matter of a benami transaction and also includes the proceeds from such property;”
“(10) “benamidar” means a person or a fictitious person, as the case may be, in whose name the benami property is transferred or held and includes a person who lends his name;”
“(12) “beneficial owner” means a person, whether his identity is known or not, for whose benefit the benami property is held by a benamidar;”
“(16) “fair market value”, in relation to a property, means –
(i) the price that the property would ordinarily fetch on sale in the open market on the date of the transaction; and
(ii) where the price referred to in sub-clause (i) is not ascertainable, such price as may be determined in accordance with such manner as may be prescribed;”
“(24) “person” shall include (i) an individual; (ii) a Hindu undivided family; (iii) a company; (iv) a firm; (v) an association of persons or a body of individuals, whether incorporated or not; (vi) every artificial juridical person, not falling under sub-clauses (i) to (v);”
“(26) “property” means assets of any kind, whether movable or immovable, tangible or intangible, corporeal or incorporeal and includes any right or interest or legal documents or instruments evidencing title to or interest in the property and where the property is capable of conversion into some other form, then the property in the converted form and also includes the proceeds from the property;”
“(29) “transfer” includes sale, purchase or any other form of transfer of right, title, possession or lien;”
3. Prohibition and consequences of Benami Transactions
A. Benami Transactions – A punishable Offence
a) Section 3(1) provides that no person shall enter into any benami transactions.
b) Section 3(3) provides that whosoever enters into any transaction on or after the date of commencement of Amendment Act, 2016 i.e. 1-11-2016, shall be punishable in accordance with the new Chapter VII i.e. new section 53 of the Act.
c) Section 53(1) provides that where any person enters into a benami transaction in order to defeat the provisions of any law or to avoid payment of statutory dues or to avoid payment to creditors, the beneficial owner, benamidar and any other person who abets or induces any person to enter into the benami transaction, shall be guilty of the offence of benami transaction.
d) Section 53(2) provides that whoever is found guilty of the offence of benami transaction referred to in sub-section (1) mentioned above, shall be punishable with rigorous imprisonment for a term which shall not be less than one year, but which may extend to seven years and shall also be liable to fine which may extend to twenty-five per cent of the fair market value [FMV] of the property.
e) The FMV of the property shall be determined in accordance with section 2(16) read with Rule 3 of the Prohibition of Benami Property Transaction Rules, 2016 [the Rules]. Presently, Rule 3 prescribes the methodology of valuation of unquoted equity shares i.e. higher of its cost of acquisition, FMV as per Discounted Cash Flow method and value determined in prescribed manner as per prescribed formula.
B. Prohibition of the right to recover property held benami
a) Section 4(1) provides that no suit, claim or action to enforce any right in respect of any property held benami against the person in whose name the property is held or against any other person shall lie by or on behalf of a person claiming to be the real owner of such property.
b) Section 4(2) provides that no defence based on any right in respect of any property held benami, whether against the person in whose name the property is held or against any other person, shall be allowed in any suit, claim or action by or on behalf of a person claiming to be the real owner of such property.
C. Property held benami liable to confiscation.
Section 5 provides that any property, which is subject matter of benami transaction, shall be liable to be confiscated by the Central Government.
D. Prohibition on re-transfer of property by benamidar.
Section 6 provides that no person, being a benamidar shall re-transfer the benami property held by him to the beneficial owner or any other person acting on his behalf. Any such re-transfer shall be deemed to be null and void. However, this prohibition shall not apply to a re-transfer made in accordance with the provisions of section 190 of the Finance Act, 2016 i.e. under the Income Declaration Scheme, 2016.
4. Authorities
Chapter III and sections 7 to 23 of the Act deal with various authorities under the Act and their powers.
Section 18 of the Act provides that the following shall be the authorities for the purposes of the Act, namely:
a) The Initiating Officer;
b) The Approving Authority;
c) The Administrator; and
d) The Adjudicating Authority.
An Adjudicating Authority shall consist of a Chairperson and at least two other members.
The Central government has vide notification no. 3288(E), dated 25-10-2016, notified that the Adjudicating Authority appointed u/s. 6(1) of the Prevention of Money-laundering Act, 2002 [PMLA] and the Appellate Tribunal established u/s. 25 of PMLA shall discharge the functions of Adjudicating Authority and Appellate Tribunal under the Benami Act until the appointment of Adjudicating Authority and establishment of Appellate Tribunal under this Act.
Section 19 deals with the powers of discovery and inspection, enforcing attendance, compelling production of books of accounts and other documents, issuing commissions, receiving evidence on affidavits etc.
Section 21 provides for the power to call for information while power to impound documents is given in section 22. In addition, section 23 provides for the power of authority to conduct inquiry etc.
5. Attachment, Adjudication and Confiscation
Chapter IV and sections 24 to 29 of the Act deal with the attachment, adjudication and confiscation of the benami property.
A. Notice and attachment of property involved in benami transaction
Section 24 and Rule 5 provide for issue of notice by the Initiating officer to any person believed to a benamidar and to beneficial owner, provisional attachment of the property for a period not exceeding 90 days, passing of appropriate order for continuing provisional attachment or revocation of the provisional attachment order (after making such inquires and calling for such reports or evidence as he deems fit and taking into account all relevant materials) and in case of order for continuation of provisional attachment or order for provisional attachment, draw up a statement of the case and refer it to the Adjudicating Authority within 15 days of the attachment.
B. Manner of service of notice
Section 25 provides for manner of service of the notice on the person named therein either by post or as if it were a summons issued by a Court under the Code of Civil Procedure, 1908 and to be addressed to specified addressees in various cases.
C. Adjudication of benami property
Section 26 contains provisions relating to the process to be followed by the Adjudicating Authority in respect of adjudication of benami property. On receipt of a reference from an Initiating Officer, the adjudicating authority shall issue notice within 30 days to (a) the person specified as a benamidar therein; (b) any person referred to as the beneficial owner therein or identified as such; (c) any interested party, including a banking company; (d) any person who has made a claim in respect of the property and provide not less than 30 days to furnish the information sought.
The Adjudicating Authority shall, after (a) considering the reply, if any, to the notice issued under s/s. (1); (b) making or causing to be made such inquiries and calling for such reports or evidence as it deems fit; and (c) taking into account all relevant materials, provide an opportunity of being heard to the person specified as a benamidar therein, the Initiating Officer, and any other person who claims to be the owner of the property, and, thereafter, pass an order (before the expiry of one year from the end of the month in which the reference under sub-section (5) of section 24 was received) (i) holding the property not to be a benami property and revoking the attachment order; or (ii) holding the property to be a benami property and confirming the attachment order, in all other cases.
D. Confiscation and vesting of benami property
Section 27 provides that where an order is passed in respect of any property under sub-section (3) of section 26 holding such property to be a benami property, the Adjudicating Authority shall, after giving an opportunity of being heard to the person concerned, make an order confiscating the property held to be a benami property. In case an appeal has been filed against the order of the Adjudicating Authority, the confiscation of property shall be made subject to the order passed by the Appellate Tribunal u/s. 46.
The procedure for confiscation of the property is prescribed in Rule 6, which provides that the adjudicating officer shall send a copy of the order of confiscation to the Authorised Officer. The rule contains separate procedure for confiscation in respect of immovable property and moveable property.
It is further provided that nothing in sub-section (1) shall apply to a property held or acquired by a person from the benamidar for adequate consideration, prior to the issue of notice under sub-section (1) of section 24 without his having knowledge of the benami transaction.
Where an order of confiscation has been made, all the rights and title in such property shall vest absolutely in the Central Government free of all encumbrances and no compensation shall be payable in respect of such confiscation. Any right of any third person created in such property with a view to defeat the purposes of this Act shall be null and void.
E. Management of properties confiscated
Section 28 provides that the Administrator shall have the power to receive and manage the property, in relation to which an order of confiscation has been made. Rules 7, 8 and 9 contain relevant rules in respect of receipt of the confiscated property, management of confiscated property and disposal of the same.
The Central government has vide notification no. 3290 (E), dated 25-10-2016, directed that the Income-tax Authorities specified u/s. 116 of the Income-tax Act, 1961, as mentioned in the notification, to exercise the powers and to perform the functions of the ‘Authority’ i.e. Approving Authority, Initiating Officer and Administrator, under the Act.
F. Possession of the property.
Section 29 provides that where an order of confiscation in respect of a property has been made, the Administrator shall proceed to take the possession of the property. The Administrator shall (a) by notice in writing, order within seven days of the date of the service of notice to any person, who may be in possession of the benami property, to surrender or deliver possession thereof to the Administrator or any other person duly authorised in writing by him in this behalf; (b) in the event of non-compliance of the order referred to in clause (a), or if in his opinion, taking over of immediate possession is warranted, for the purpose of forcibly taking over possession, requisition the service of any police officer to assist him and it shall be the duty of the officer to comply with the requisition.
6. Appeals
Chapter V and sections 30 to 49 of the Act and Rule 10 together with Form 3, contain relevant provisions relating to appeal to Appellate Tribunal against the order of the Adjudicating Authority and Appeal to high Court against the order of the Appellate Tribunal.
7. Offences and Prosecution
In addition to confiscation of the benami property and penalty for benami transactions mentioned earlier in the context of section 3, section 54 provides that any person who is required to furnish information under the Benami Act knowingly gives false information to any authority or furnishes any false document in any proceeding under the Benami Act, shall be punishable with rigorous imprisonment for a term which shall not be less than 6 months but which may extend to 5 years and shall also be liable to fine which may extend to 10% of the FMV of the benami property.
No prosecution can be instituted against any person in respect of any offence u/s. 3, 53 or 54 without the prior sanction of the CBDT.
8. Other Important provisions
a) Certain transfers to be null and void
Section 57 provides that notwithstanding anything contained in the Transfer of the Property Act, 1882 or any other law for the time being in force, where, after the issue of a notice u/s. 24, any property referred to in the said notice is transferred by any mode whatsoever, the transfer shall, for the purposes of the proceedings under this Act, be ignored and if the property is subsequently confiscated by the Central Government u/s. 27, then, the transfer of the property shall be deemed to be null and void.
b) Proceedings etc. against legal representatives
Section 66 provides where a person dies during the course of any proceeding under the Benami Act, any proceeding taken against the deceased before his death shall be deemed to have been taken against the legal representative and may be continued against the legal representative from the stage at which it stood on the date of the death of the deceased.
Any proceeding which could have been taken against the deceased if he had survived may be taken against the legal representative and all the provisions of this Act, except section 3(2) relating to entering into benami transaction prior to 1-11-2016 and the provisions of Chapter VII relating to offences and prosecution, shall apply accordingly.
Where any property of a person has been held benami u/s. 26(3), then, it shall be lawful for the legal representative of the person to prefer an appeal to the Appellate Tribunal, in place of the person and the provisions of section 46 relating to appeals to Appellate Tribunal shall, so far as may be, apply, or continue to apply, to the appeal.
c) Provisions of the Act to override other laws
Section 60 clarifies that the provisions of the Benami Act shall be in addition to, and not, save as hereinafter expressly provided, in derogation of any other law for the time being in force.
Section 67 provides that the provisions of the Benami Act shall have effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force.
In this connection, the Finance Minister, during the parliamentary debate, clarified as follows:
“Is this law in conflict with the Income-tax Act in any way? The answer is ‘no’. The Income-tax deals with various provisions of taxation, the powers to levy the tax and prescribes procedures etc. This particular law deals with any benami property which is acquired by a person in somebody else’s name to be vested in the Central Government. So the two Acts are supplementary to each other as far as this Act is concerned.”
The above gives an overview of the amended Benami law. In the next part of the Article, we shall deal with certain important questions which are likely to arise in the mind of a reader.
3. Book profit – Accounts prepared and certified in accordance with the provisions of the Companies Act – has to be accepted – cannot be altered – Section 115JB Explanation .
CIT – 6 vs. Century Textiles and Industries Ltd.[Income tax Appeal no. 1072 of 2014, dt : 16/01/2017 (Bombay High Court)].
[Asst CIT vs. Century Textiles and Industries Ltd,. [ITA No. 3261/MUM/2009; Bench : C ; dated 13/09/2013 ; AY 2005-06, Mum. ITAT ]
During the course of assessment proceedings, the AO noticed that the assessee had debited to its Profit and Loss Account an amount of Rs.12.41 crore being the arrears of depreciation for the earlier A.Y 2000-01 and 2001-02. The AO called upon the assessee to explain why the depreciation relating to earlier AY should not be added back to the Book Profits. The assessee pointed out that its accounts had been prepared in accordance with the provisions of the Companies Act which were duly audited. Therefore, in view of the decision of the Apex Court in CIT vs. Apollo Tyres Ltd [255 ITR 273] wherein it has been stated that the book profit as prepared and certified in accordance with the provisions of the Companies Act, has to be accepted and cannot be altered to determine book profit for purpose of section 115JB of the Act except as provided in the Explanation thereto. Notwithstanding the above, the AO did not accept the same and added arrears of depreciation for the A.Y 2000-01 and 2001- 02 to the audited book profits to determine the book profits for the purpose section 115JB of the Act.
Being aggrieved, the assessee filed an appeal to the CIT(A). The appeal was allowed by the CIT(A) following the decision of Apollo Tyres Ltd (supra) .Thus deleted the addition made by the AO.
Being aggrieved the Revenue carried the issue in appeal to the Tribunal. The Tribunal referred to the judgment of Hon’ble High Court of Bombay in case of Kinetic Motor Company Ltd. (262 ITR 330) in which the High Court referred to the judgment of Hon’ble Supreme Court in case of Apollo Tyres Ltd. (Supra) and held that the accounts prepared and certified in accordance with part 2 and part 3 of schedule VI of the companies Act could not be tinkered with and AO had no jurisdiction to go beyond the net profit shown in the such accounts. The Tribunal, therefore, deleted the addition made.
On further appeal, the High Court held that the issue stands concluded by the decision of the Apex Court in Apollo Tyres Ltd. (supra) and the decision of this Court in Kinetic Motor Co. Ltd. (supra). The above decisions have held that it is not permissible to the AO to tinker with the profit declared in the audited account maintained in terms of Schedule VI of the Companies Act. As the order of the Tribunal has merely followed decision of the Apex Court in Apollo Tyres Ltd. (supra) question as formulated does not give rise to any substantial question of law.
The other grievance of the Revenue was that the clause (iia) was inserted only in Finance Act, 2006 w.e.f. 1st April, 2007 and is not applicable for the year under consideration. However, the court observed that the grievance of the revenue does not carry the issue in the present facts any further as the Tribunal has not allowed the claim of the respondent-assessee by relying upon clause (iia) of explanation to section 115JB of the Act. Further that this issue was not urged before the authorities under the Act. Therefore, in view of the decision in CIT vs. Tata Chemicals Ltd. [256 ITR 395], it cannot be urged before this Court for the first time.
2. Sale of shares – capital gain vs Business Income- consistency – own funds – considering the volume and frequency of purchase / sale of shares – held not a trader: Section 45
CIT – 4 , vs. Shri Upendra K. Doshi. [ Income tax Appeal no. 848 of 2011; AY 2008-09 dated : 15/11/2016 (Bombay High Court)].
[Shri Upendra K. Doshi vs. DCIT [ITA no:7854/M/2014 dated 14/08/2013 ; A Y: 2005-06 to 2008-09. Mum. ITAT ]
The assessee purchased and sold certain shares, profit from which was claimed as Short term/Long term capital gain depending upon the period of holding. The AO did not dispute the long term capital gain. However, he treated the assessee as a trader instead of investor and accordingly re-characterised the amount shown as ‘Short term capital gain’ as ‘Business income’.
The ld. CIT(A) noticed that the assessee consistently held the shares as ‘Investment’ and this treatment of profit from sale of shares as ‘capital gain’ stood accepted by the AO in earlier year as well. He, therefore, directed to treat the amount as Short term capital gain as against the ‘Business income’ held by the AO.
Being aggrieved, the Revenue filed an appeal before the Tribunal. The Tribunal observed that the treatment of Long term capital gain has been accepted by the AO. The only dispute is about the treatment of profit from sale of shares etc., other than long term capital assets, which the AO treated it as ‘Business income’. The assessee gave similar treatment to the shares by keeping it as ‘Investment’ on the lines as was done in the earlier years. For the immediately preceding assessment year i.e. 2004-05, the assessee showed Long term capital gain and Short term capital gain from the transfer of shares.
The AO accepted profit from transfer of shares as short term/long term capital gain respectively in the assessment made u/s. 143(3) of the Act for such earlier year. Similar is the position for the A.Y. 2003-04 in which the assessee again showed profit from the transfer of shares as Long term capital gain and Short term capital gain which was assessed by the AO as such in assessment made u/s. 143(3) of the Act. This shows that the assessee held and declared the shares as ‘Investment’ and this stand came to be accepted by the Revenue. Thus the ld. CIT(A) order was upheld .
Being aggrieved by the order of the Tribunal, the Revenue filed an appeal before the High Court. The Hon’ble High Court took the note of the fact that appeals for AY 2005-06 and AY 2006-07 are admitted by the High Court considering the frequent and voluminous transactions carried out with borrowed funds in shares held as “Short Term Capital Gain”. The Hon’ble court observed that in the subject assessment year, the assessee has carried out the business activity out of its own funds and the authorities have also rendered a finding of fact that the transactions are not large nor so frequent so as to hold that the assessee was a trader in shares.
The finding of fact arrived at both by the CIT(A) as well as the Tribunal for the subject assessment year that the assessee was an investor in shares out of its own funds and considering the volume and frequency of purchase / sale of shares is not a trader has not been shown to be perverse by the Revenue. In the above view, the appeal was dismissed.
1.Reopening of assessment – No tangible material before the AO for assuming the jurisdiction u/s. 147- Reopening notice was bad in law: Section 148
CIT vs. Smt. L. Parameswari; [2017] 79 taxmann.com 119 (Mad):
The assessee-company was engaged in trading of dyes and chemicals. A search was carried out in business premises of assessee wherein documents seized showed that assessee had paid commission to sister concern for rendering services of sales agent. According to the Assessing Officer, the relationship between the parties militated against the claim being bona fide, particularly in the absence of proof of rendition of service by the sales agent. He thus rejected assessee’s claim for payment of commission. The Commissioner(Appeals) noted that sister concern had been appointed as sales agent for the sake of maintaining uniformity in sale prices and to avoid unnecessary and uneconomical competition between the sister concerns. A decision thus came to be taken by the entities that a bifurcation of duties was called for and one concern was identified to act as the selling agent for the entire group of companies. The transaction thus found favour with the Commissioner as being bona fide and genuine. The Tribunal also approved the findings of the Commissioner (Appeals) and allowed the claim.
On appeal by the Revenue, one of the questions raised was:
“Whether on the facts and in the circumstances of the case that the Income Tax Appellate Tribunal was right in holding that the price difference borne by the assessee company in respect of the transaction with M/s. United Bleachers Limited, a sister concern, could not be disallowed alternatively, u/s. 40A(2), ignoring the reasons given in support of the addition by the Assessing Officer.?”
The Madras High Court upheld the decision of the Tribunal and held as under:
“i) There is no prohibition that related parties cannot engage in business transactions. Such an interpretation would render the provisions of section 40A(2) of the Act redundant. Section 40A(2) empowers the Assessing Officer to effect a disallowance of payments that are, ‘in his opinion’ excessive or unreasonable giving regard to fair market value of the goods, services or facilities for which the payment is made or the legitimate needs of the business or profession of the assessee or the benefit derived by him or accruing to him. Such ‘opinion’ has to be based on tangible material and not assumptions and suspicions.
ii) The provisions of section 40A(2) are not automatic and can be called into play only if the Assessing Officer establishes that the expenditure incurred is, in fact, in excess of fair market value. This had not been done in the present case. The quantum of commission paid is thus at arms length. The decision to streamline business activities and establish a division of labour or hierarchy of operations is within the domain of the entities and cannot be trespassed upon by the Assessing Officer except where the officer establishes that such design or method is a ruse to circumvent legitimate payment of tax.
iii) The Supreme Court in the case of Vodafone International Holdings BV. vs. Union of India [2012] 341 ITR 1/204 Taxman 408/17 taxmann.com 202 points out the difference between ‘looking through’ a transaction and ‘looking at’ a transaction settling the position that a conclusion of colourable/sham can be arrived at by viewing the transaction in a commercially realistic and wholistic perspective, not adopting a truncated and dissecting approach. In the present case, there is a consistent finding of fact that the transaction was bona fide and acceptable. Nothing is placed on record to indicate that the findings are perverse. Thus there is no need to interfere with the concurrent findings of the authorities. In the result, revenue’s appeal is dismissed.”
6. Settlement Commission – Application for settlement of case – Maintainability – Application offering undisclosed foreign income and assets – A. Ys. 2005-06 to 2014-15- Section 245C – Effect of Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 – Act coming into force w.e.f. 01/07/2015 – Return filed on 21/05/2015 and notice u/s. 148 issued on 29/05/2015 – Application for settlement maintainable
Arun Mammen vs. UOI; 391ITR 23 (Mad):
Assessee had filed returns of income on 21/05/2015 disclosing foreign income and assets. On 29/05/2015, the Assessing Officer issued notices u/s. 148 of the Act. The assessee made applications before the Settlement Commission for settlement of the cases. The Settlement Commission rejected the applications holding that the Commission does not have jurisdiction to entertain these applications offering undisclosed foreign income and assets.
The Madras High Court allowed the writ petition filed by the assessee and held as under:
“i) Explanatory notes dated July 2, 2015 issued in Circular No. 12 of 2015 have clarified that the Black Money(Undisclosed Foreign Income and Assets) and Imposition of tax Act, 2015 comes into effect from 01/07/2015.
ii) The assessee having filed their return of income on 21/05/2015 and notice having been issued u/s. 148 by the Assessing Officer on 29/05/2015 which was before coming into effect of the provisions of the 2015 Act, the applications submitted by the assessee before the Settlement Commission were maintainable.”
5. Refund – Interest on refund – Section 244A – A. Ys. 2007-08 and 2008-09 – Period for which interest payable – Exclusion of period of delay caused by assessee – Belated claim during assessment or revised return not a delay caused by assessee – Claim of assessee accepted in appeal by Commissioner (Appeals) – Time taken for appeal proceedings cannot be excluded
Ajanta Manufacturing Ltd. vs. Dy. CIT; 391 ITR 33(Guj):
For the A. Ys. 2007-08 and 2008-09, the assessee had claimed refund with interest in respect of relief given by Commissioner (Appeals). Refund was granted but the Commissioner held that the assessee would not be entitled to interest up to the period of giving effect to the order of the Commissioner(Appeals).
The Gujarat High Court allowed the writ petition filed by the assessee and held as under:
“i) In cases covered under sub-section (1) of section 244A of the Income-tax Act, 1961, the assessee would be entitled to interest on refund at specified rate. Under sub-section (2) of section 244A, however, such interest would not be payable to the assessee if the proceedings which resulted in refund are delayed by reasons attributable to the assessee, whether wholly or in part. In such a case the period of delay so attributable to the assessee would be excluded from the period for which interest is payable.
ii) The act of revising the return or revising a claim during the course of assessment proceedings could not be said to be a reason for delaying the proceedings which could be attributable to the assessee. The fact that the assessee had filed an appeal which ultimately came to be allowed by the Commissioner, could not be a reason for delaying the proceedings which could be attributed to the assessee.
iii) The Department did not contend that the assessee had needlessly or frivolously delayed the assessment proceedings at the original or appellate stage. In the absence of any such foundation, the mere fact that the assessee made a claim during the course of the assessment proceedings which was allowed at the appellate stage would not ipso facto imply that the assessee was responsible for causing the delay in the proceedings resulting in refund. Under the circumstances, the order passed by the Commissioner was not valid.”
4.Recovery of tax – Stay of demand during pendency of appeal before CIT(A) – Circular/Instruction No. 1914 dated 02/02/1993 and Circular dated 29/02/2016 modifying Instruction No. 1914 – Circular No. 1914 deals with collection and recovery of income tax, however it does not standardise the quantum of lumpsum payment required to be made by asssessee as a pre-condition of stay of disputed demand before CIT(A). Circular dated 29-2-2016 being a partial modification of Circular No. 1914 merely prescribes the percentage of the disputed demand that needs to be deposited by assessee. Thus, although process for granting stay was streamlined, and standardised by Circular dated 29-2-2016 but it could not mean that Instruction No. 2-B(iii) contained in Circular No. 1914 dealing with situation of unreasonably high pitched or dealing with situation of genuine hardship caused to assessee was erased by Circular dated 29-2-2016, therefore, both these factors should have been considered by both, Assessi
Flipkart India (P.) Ltd. vs. ACIT; [2017] 79 taxmann.com 159 (Karn):
For the A. Ys. 2014-15 and 2015-16, the assessee had filed appeals before the CIT(A) against the assessment orders. The assessee also filed applications for stay of the disputed demand during the pendency of appeals. Relying on the CBDT Circular dated 29/02/2016, the assessee was directed to pay 15% of the disputed demand for grant of stay of the balance.
The assessee filed writ petitions challenging the said orders. The Karnataka High Court allowed the writ petition and held as under:
“i) Undoubtedly, the present case raises the issue of balancing the interest of the Revenue, and the interest of an assessee. Needless to say, the Revenue does have the right to realise the assessed income tax amount from the assessee. However, while trying to realise the said amount, the Revenue cannot be permitted, and has not been permitted by the Circulars mentioned above, to act like a Shylock. It is precisely to balance the conflicting interests that certain guidelines have been prescribed by Circular No.1914, and Circular dated 29.2.2016. The Circular dated 29.2.2016 clearly states that the circular is “in partial modification of Instruction No.1914”. Therefore, the Circular dated 29.2.2016 does not supersede the Circular No.1914 in toto, but merely “partially modifies” the instructions contained in Circular No.1914.
ii) According to Instruction No.4(A) of Circular dated 29.2.2016, it is a general rule, that 15% of the disputed demand should be asked to be deposited. But, according to Instruction No.4(B)(a) of the Circular dated 29.2.2016, the demand can be increased to more than 15%; according to Instruction No.4(B)(b) of the Circular dated 29.2.2016, the percentage can be lower than 15%, provided the permission of the Prl. CIT is sought by the Assessing Officer. However, in case the Assessing Officer does not seek the permission from the Prl.CIT, and in case the assessee is aggrieved by the demand of 15% to be deposited, the assessee is free to independently approach the Prl. CIT. The assessee would be free to request the Prl. CIT to make the percentage of disputed demand amount to be less than 15%.
iii) It is true that Instruction No.4 (B)(b) of the Circular dated 29.2.2016, gives two instances where less than 15% can be asked to be deposited. However, it is equally true that the factors, which were directed to be kept in mind both by the Assessing Officer, and by the higher superior authority, contained in Instruction No.2-B(iii) of Circular No.1914, still continue to exist. For, as noted above, the said part of Circular No.1914 has been left untouched by the Circular dated 29.2.2016. Therefore, while dealing with an application filed by an assessee, both the Assessing Officer, and the Prl. CIT, are required to see if the assessee’s case would fall under Instruction No.2-B(iii) of Circular No.1914, or not? Both the Assessing Officer, and the Prl. CIT, are required to examine whether the assessment is “unreasonably highpitched”, or whether the demand for depositing 15% of the disputed demand amount “would lead to a genuine hardship being caused to the assessee” or not?
iv) A bare perusal of the two orders, both dated 23.11.2016, clearly reveal that the Assessing Officer has relied upon Instruction No.4(B)(b) of the Circular dated 29.2.2016, and has concluded that since the petitioner’s case does not fall within the two illustrations given therein, therefore, it is not entitled to seek the relief that less than 15% should be demanded to be deposited by it. Moreover, the Assessing Officer has jumped to the conclusion that the petitioner’s finances do not indicate any hardship in this case. However, the Assessing Officer has not given a single reason for drawing the said conclusion. Since the petitioner has been constantly claiming that it has suffered loss from the very inception of its business, from 2011 to 2016, the least that the Assessing Officer was required to do was to elaborately discuss as to whether “genuine hardship” would be caused to the petitioner in case the petitioner were directed to pay 15% of the disputed demand amount or not? Yet the Assessing Officer has failed to do so. Therefore, this part of the order, naturally, suffers from being a non-speaking order. Hence, the said orders are legally unsustainable.
v) A bare perusal of the order dated 25.1.2017 also reveals that the Prl. CIT has failed to appreciate the co-relation between Circular No.1914, and Circular dated 29.2.2016. The Prl. CIT has failed to notice the fact that the latter Circular has only “partially modified” the former Circular, and has not totally superceded it. The Prl. CIT has also ignored the fact that Instruction No.2-B(iii) contained in Circular No.1914 continues to exist independently of and in spite of the Circular dated 29.2.2016. Therefore, it has failed to consider the issue whether the assessment orders suffers from being “unreasonably highpitched”, or whether “any genuine hardship would be caused to the assessee” in case the assessee were required to deposit 15% of the disputed demand amount or not? Thus, the Prl. CIT has failed to apply the two important factors mentioned in Circular No.1914.
vi) For the reasons stated above, this Writ Petition is, hereby, allowed. The twin orders dated 23.11.2016, and the order dated 25.1.2017, are set aside. The case is remanded back to the Prl. CIT to again decide the Review Petitions filed by the petitioner. The Prl. CIT is further directed to decide the Review Petition within a period of two weeks from the date of receipt of the certified copy of this order.”
3.Offences and prosecution – Compounding of offences – Sections 276B and 279(2) – Failure by assessee to deposit amount deducted as tax at source – Rejection of application for compounding on basis of guidelines by CBDT – Assessee’s failure to deposit amount collected beyond its control – Chief Commissioner should consider objective facts on merits before exercising jurisdiction – order rejecting application for compounding not sustainable
Sports Infratech P. Ltd. vs. Dy CIT; 391 ITR 98 (Del):
The assessee failed to deposit the amounts deducted as tax from the sums payable under various contracts. A complaint u/s. 276B of the Act, 1961 was filed against the assessee. The assessee sought for compounding of the offence u/s. 279(2) of the Act. The Chief Commissioner rejected the application on the ground that the compounding was not permissible in view of the guidelines issued by the CBDT imposed especially in view of para 8(v) thereof which stated that the offences having a bearing in a case under investigation by any other Central or State agency such as the CBI, were not to be compounded.
The Delhi High Court allowed the writ petition filed by the assessee and held as under:
“i) The rejection of the assessee’s application was entirely routed on the Chief Commissioner’s understanding of the conditions of ineligibility in para 8(v). The view was based upon an erroneous understanding of law. While exercising jurisdiction, the Chief Commissioner should consider the objective facts before it.
ii) The assessee’s failure to deposit the amounts collected was beyond its control and was on account of seizure of books of account and documents. But for such seizure, the assessee would quite reasonably be expected to deposit the amount within the time prescribed or at least within the reasonable time. Instead of considering these factors on their merits and examining whether indeed they were true or not, the Chief Commissioner felt compelled by the text of para 8(v). The material on record in the form of a letter by the Superintendent of CBI also showed that a closure report was in fact filed before the competent court.
iii) Therefore, the refusal to consider and accept the assessee’s application u/s. 279(2) of the Act could not be sustained. The impugned order is hereby set aside. The Chief Commissioner is hereby directed to consider the relevant facts and pass necessary orders in accordance with law within six weeks after granting a fair opportunity to the petitioner.”
2.Charitable purpose – Sections 10(23C)(vi), 12AA and 80G – Trust registered u/s. 12A and income exempt u/s. 10(23C) – Surplus income utilised for charitable purposes – Trust entitled to approval for purpose of section 80G
CIT vs. Gulabdevi Memorial Hospital; 391 ITR 73 (P&H):
The assessee, a charitable trust was registered u/s. 12A of the Income-tax Act (hereinafter for the sake of brevity referred to as the “Act”), 1961 since 1977 and was also granted approval for section 80G and the same were renewed from time to time till the A. Y. 2009-10. On 23/03/2009, the assessee filed application for approval u/s. 80G for the period 2010-11 to 2014-15. The Commissioner rejected the application. The Commissioner found that the assessee was generating substantial surplus and was spending only a small percentage for charitable purposes. The Commissioner was of the view that the assessee had disentitled itself for the grant of renewal of exemption u/s. 80G of the Act as according to him, the assessee had deviated from its charitable objects. The Tribunal held that the assessee was entitled to approval for the purposes of section 80G.
On appeal by the Revenue, the Punjab and Haryana High Court upheld the decision of the Tribunal and held as under:
“i) It was admitted that the assessee was registered u/s. 12AA and that it has been held entitled to exemption u/s. 10(23C)(vi). The assessee was granted exemption u/s. 80G of the Act from the year 1997 till the passing of the order. Further, the finding of the Tribunal, that the assessee had never misutilised its funds, had not been assailed.
ii) The generated surplus having been ploughed back for expansion purposes also remained undisputed by the Revenue. The charges for its services were also considered by the Tribunal and were found to be extremely reasonable. The assessee was entitled to approval for purposes of section 80G.”
1. Business expenditure – Disallowance u/s. 40A(2) – A. Y. 1997-98 – Disallowance is not automatic and can be called into play only if AO establishes that expenditure incurred is, in fact, in excess of fair market value
CIT vs. Smt. L. Parameswari; [2017] 79 taxmann.com 119 (Mad):
The assessee-company was engaged in trading of dyes and chemicals. A search was carried out in business premises of assessee wherein documents seized showed that assessee had paid commission to sister concern for rendering services of sales agent. According to the Assessing Officer, the relationship between the parties militated against the claim being bona fide, particularly in the absence of proof of rendition of service by the sales agent. He thus rejected assessee’s claim for payment of commission. The Commissioner(Appeals) noted that sister concern had been appointed as sales agent for the sake of maintaining uniformity in sale prices and to avoid unnecessary and uneconomical competition between the sister concerns. A decision thus came to be taken by the entities that a bifurcation of duties was called for and one concern was identified to act as the selling agent for the entire group of companies. The transaction thus found favour with the Commissioner as being bona fide and genuine. The Tribunal also approved the findings of the Commissioner (Appeals) and allowed the claim.
On appeal by the Revenue, one of the questions raised was:
“Whether on the facts and in the circumstances of the case that the Income Tax Appellate Tribunal was right in holding that the price difference borne by the assessee company in respect of the transaction with M/s. United Bleachers Limited, a sister concern, could not be disallowed alternatively, u/s. 40A(2), ignoring the reasons given in support of the addition by the Assessing Officer.?”
The Madras High Court upheld the decision of the Tribunal and held as under:
“i) There is no prohibition that related parties cannot engage in business transactions. Such an interpretation would render the provisions of section 40A(2) of the Act redundant. Section 40A(2) empowers the Assessing Officer to effect a disallowance of payments that are, ‘in his opinion’ excessive or unreasonable giving regard to fair market value of the goods, services or facilities for which the payment is made or the legitimate needs of the business or profession of the assessee or the benefit derived by him or accruing to him. Such ‘opinion’ has to be based on tangible material and not assumptions and suspicions.
ii) The provisions of section 40A(2) are not automatic and can be called into play only if the Assessing Officer establishes that the expenditure incurred is, in fact, in excess of fair market value. This had not been done in the present case. The quantum of commission paid is thus at arms length. The decision to streamline business activities and establish a division of labour or hierarchy of operations is within the domain of the entities and cannot be trespassed upon by the Assessing Officer except where the officer establishes that such design or method is a ruse to circumvent legitimate payment of tax.
iii) The Supreme Court in the case of Vodafone International Holdings BV. vs. Union of India [2012] 341 ITR 1/204 Taxman 408/17 taxmann.com 202 points out the difference between ‘looking through’ a transaction and ‘looking at’ a transaction settling the position that a conclusion of colourable/sham can be arrived at by viewing the transaction in a commercially realistic and wholistic perspective, not adopting a truncated and dissecting approach. In the present case, there is a consistent finding of fact that the transaction was bona fide and acceptable. Nothing is placed on record to indicate that the findings are perverse. Thus there is no need to interfere with the concurrent findings of the authorities. In the result, revenue’s appeal is dismissed.”
Loan or Advance to Huf by Closely Held Company – Whether Deemed Dividend U/S. 2 (22)(E) – Part I
Introduction
1.1 Section 2(22) of the Income-tax Act,1961 (the Act) provides inclusive definition of the term “dividend”. Sub-clauses (a) to (e) create a deeming fiction to treat certain distributions/ payments by certain companies to their shareholders as dividend subject to certain conditions and exclusions provided in section 2(22) ( popularly known as ‘deemed dividend’). Such distribution/ payments can be treated as ‘deemed dividend’ only to the extent to which the company possesses ‘accumulated profits’. The expression “accumulated profits” is also defined in inclusive manner in Explanations 1 & 2 to section 2 (22).
1.2 Prior to the amendment by Finance Act, 1987, section 2(22)(e) broadly provided that dividend includes any payment by a company, not being a company in which public are substantially interested (‘closely held company’) of any sum (whether as representing a part of the assets of the company or otherwise ) by way of advance or loan to a shareholder, being a person who has a substantial interest in the company(Old Provisions). Section 2(32) defines the expression ‘person who has a substantial interest in the company’ as a person who is the beneficial owner of shares, not being shares entitled to a fix rate of dividend, whether with or without a right to participate in profits (shares with fixed rate of dividend), carrying not less than 20% of the voting power in the company. ”Under the Income-tax Act, 1922 (1922 Act), section 2(6A)(e) also contained similar provisions with some differences [such as absence of requirement of substantial interest etc.] which are not relevant for the purpose of this write-up.
1.2.1 The Finance Act, 1987 (w.e.f. 1/4/1988) amended the provisions of section 2(22)(e) and expanded the scope thereof. Under the amended provisions, dividend includes any payment by a company of any sum (whether as representing a part of the assets of the company or otherwise) made after 31/5/1987 by way of advance or loan to a shareholder, being a person who is the beneficial owner of the shares ( not being shares with fix rate of dividend) holding not less than 10% of the voting power, or to any concern in which such shareholder is a member or partner and in which he has substantial interest. For the sake of brevity, in this write-up `advance’ or loan both are referred to as loan. Simultaneously, Explanation 3 has also been inserted to define the term “concern” and substantial interest in a concern other than a company. Accordingly, the term ‘concern’ means a Hindu undivided family (HUF), or a firm or an association of person [AOP] or a body of individual [BOI] or a company and a person shall be deemed to have substantial interest in a ‘concern’, other than a company, if he is, at any time during the previous year, beneficially entitled to not less than 20% of the income of such ‘concern’. It may be noted that in relation to a company, the person having substantial interest will be decided with reference to earlier referred section 2(32). As such, with these amendments, effectively not only loan given to specified shareholder but also to a ‘concern’ in which such shareholder has substantial interest is also covered within the extended scope of section 2(22)(e) (New Provisions). In this write-up, we are only concerned with loans given to HUF and therefore, reference to other categories of ‘concern’ such as Firm, AOP, Company etc. are ignored for convenience. As such, the reference to the expression ‘concern’ in this write-up should be construed as referring to HUF or, at best, in the context, to other non-corporate entities such as Firm, AOP etc.
1.2.2 Section 2(22)(e) also covers any payments by a ‘closely held company’ on behalf, or for the individual benefit, of any such shareholder with which we are not concerned in this write-up and therefore, the reference to the same is excluded. The requirement of possessing ‘accumulated profits’ continues in all the above provisions. It may also be noted that there are some issues with regard to the scope of the expression ‘accumulated profits’ inclusively defined in the Explanations 1 and 2 of section 2(22) with which also we are not concerned in this write-up.
1.2.3 For the purpose of considering the applicability of section 2(22)(e), the courts/various benches of Tribunal have also considered the object of these provisions and have understood that, the purpose is to bring within the tax net accumulated profits distributed by closely held companies to their shareholders, in the form of loans to avoid payment of tax on dividend. The purpose being that the persons who manage such closely held companies should not arrange their affairs in a manner that they assist the shareholders in avoiding payment of tax on dividend by having their companies pay or distribute money in the form of loan [Ref:-Alagusundaram Chettiar – (2001) 252 ITR 893 – SC, Mukundray Shah – [2007] 290 ITR 433 (SC), Subrata Roy – (2015) 375 ITR 207 (Del) –SLP dismissed (2016) 236 Taxman 396 (SC) -, Bagmane Construction (P). Ltd – (2015) 331 Taxman 260 (Kar), Amrik Sing – (2015) 231 Taxman 731 ( P & H) – SLP dismissed – (2016) 234 Taxman 769 (SC)-, Chandrashekar Maruti – (2016) 159 ITD 822 (Mum), etc.]
1.3 Under the 1922 Act, in the context of the provisions contained in section 2(6A)(e), the Apex Court in the case of C.P. Sarathy Mudaliar (83 ITR 170) had held that the section creates a deeming fiction to treat loans or advances as “dividend” under certain circumstances. Therefore, it must necessarily receive a strict construction. When section speaks of “shareholder”, it refers to the registered shareholder [i.e. the person whose name is recorded as shareholder in the register maintained by the company] and not to the beneficial owner of the shares. Therefore, a loan granted to a beneficial owner of the shares who is not a registered share holder cannot be regarded as loan advanced to a ‘share holder’ of the company within the mischief of section 2(6A)(e). As such, the HUF cannot be considered as a shareholder within the meaning of section2 (22) (e), when shares are registered in the name of its Karta and therefore, loan given to the HUF could not be considered as deemed dividend.
1.3.1 In the above case, the Court also observed as follows:
“……It is well settled that an HUF cannot be a shareholder of a company. The shareholder of a company is the individual who is registered as the shareholder in the books of the company. The HUF, the assessee in this case, was not registered as a shareholder in the books of the company nor could it have been so registered. Hence there is no gain-saying the fact that the HUF was not the shareholder of the company.”
The above judgment was also followed by the Apex Court in the case of Rameshwarlal Sanwarmal (122 ITR 1) under the 1922 Act. As such, under the 1922 Act, the position was settled that for an amount of loan given to a shareholder by the closely held company to be treated as deemed dividend, the shareholder has to be a registered shareholder and not merely a beneficial owner of the shares.
1.3.2 For the sake of clarity, it may be noted that section 6A(e) of the 1922 Act, as well as the Old Provisions did not apply to loan given to any specified ‘concern’. Such cases are covered only under the New Provisions referred to in para 1.2.1.
1.3.3 Principle laid down by the Apex Court referred in para 1.3, has been applied, even in the context of the Act. As such, the expression ‘shareholder’ appearing in section 2(22) (e) has been understood by the courts as referring to a registered shareholder [i.e. the person whose name is recorded as shareholder in the register maintained by the company] and this proposition, directly or indirectly, found acceptance in large number of rulings. [Ref:- Bhaumik Colour (P). Ltd – (2009) 18 DTR 451 (Mum- SB), Universal Medicare (P) Ltd – (2010) 324 ITR 263 (Bom), Impact Containers Pvt. Ltd. – (2014) 367 ITR 346 (Bom), Jignesh P. Shah – (2015) 372 ITR 392, Skyline Great Hills – (2016) 238 Taxman 675 (Bom), Biotech Opthalmic (P) Ltd.- (2016) 156 ITD 131 (Ahd), etc.]
1.4 Under the New Provisions, loan given to two categories of persons are covered Viz. i) certain shareholder (first limb of the provisions) and ii) the ‘concern’ in which such shareholder has substantial interest (second limb of the provisions).
1.4.1 In the context of loan given to shareholder, under the first limb of the New Provisions, the reference is to a shareholder, being a person who is the beneficial owner of shares and as such, two conditions are required to be fulfilled i.e. the person to whom the loan is given should be a registered shareholder as well as he should also be beneficial owner of the shares. In addition, he should hold shares carrying at least 10 % voting power. As such, as explained by the special bench of the Tribunal in Bhaumik Colour’s case (supra), if a person is a registered shareholder but not the beneficial shareholder then the provisions of the section 2 (22)(e) contained in the first limb will not apply. Similarly, if a person is a beneficial shareholder but not a registered shareholder then also this part of the provisions of the section 2(22)(e) will not apply.
1.4.2 In respect of loan given to a ‘concern’ (second category of person), under the second limb of the New Provisions, such shareholder (referred to in the first limb) should be a member or partner thereof and he should have a substantial interest in the ‘concern’ as defined in Explanation 3 (b) to section 2(22). Accordingly, to invoke this second limb of the provisions in respect of a loan given to a ‘concern’, as explained by the special bench of the Tribunal in Bhaumik Colour’s case (supra), the concerned shareholder must be both registered as well as beneficial shareholder holding shares carrying at least 10 % voting power in the lending company and such shareholder should be beneficially entitled to not less than 20% of income of such ‘concern’ at any time during the previous year.
1.4.2.1 Even in cases where the condition for invoking the second limb of the New Provisions are satisfied (i.e. the person is a registered shareholder as well as beneficial owner of the shares), the issue is under debate that, in such cases, where the loan is given to a ‘concern’ in which such shareholder has substantial interest whether the amount of such loan is taxable as deemed dividend in the hands of such shareholder or the ‘concern’ to whom the loan is given. In this context, the CBDT (vide Circular No. 495 dated 22/9/1987) has expressed a view that in such cases, the deemed dividend is taxable in the hands of the ‘concern’. However, the judicial precedents largely, directly or indirectly, shows that in such cases, the deemed dividend should be taxed in the hands of the shareholder [Ref: in addition to most of the cases referred to in para 1.3.3, Ankitech (P) Ltd. – (2012) 340 ITR 14 (Del), N. S.N. Jewellers (P) Ltd.- (2016) 231 Taxman 488 (Bom), Alfa Sai Mineral (P) Ltd. – (2016) 75 taxmann.com 33(Bom),Rajeev Chandrashekar -(2016) 239 taxman 216 (Kar), etc. (in last three cases SLP is granted by the Apex Court- Ref:- 237 Taxman 246, 243 Taxman 140 and 243 Taxman 139 respectively)].
1.4.3 For the purpose of invoking the New Provisions, the positions in law referred to in paras 1.4.1 and 1.4.2 have largely held the field in subsequent rulings.
1.5 In the context of loan given to an HUF by a closely held company in which karta of the HUF is the registered shareholder having requisite shareholding, the issue was under debate as to whether the new Provisions relating to deemed dividend will apply and if these provisions are applicable, the amount of such deemed dividend should be taxed in whose hands i.e. the registered shareholder or the HUF, which received the amount of loan.
1.6 Recently, the issue referred to in para 1.5 came up for consideration before the Apex Court in the case of Gopal & Sons (HUF) and the issue, based on the facts of that case, is decided by the Court. Considering the importance of this and its possible far reaching impacts, it is thought fit to consider this in this column.
CIT vs. Gopal and Sons HUF – ITA No. 73 of 2014 (Calcutta High Court)
2.1 The relevant facts in the above case were: the case relates to Asst. Year. 2006-07. The assessee [i.e. Gopal and Sons (HUF)] seems to have made some investment in shares during the previous year and the source thereof was out of funds received from G. S. Fertilizers Pvt. Ltd. (GSF) in which, according to the Assessing Officer (AO), the assessee HUF had requisite shareholding. The AO also noticed that the opening balance in the advance account of the assessee HUF with GSF in the Financial Year 2005-06 was Rs. 60,25,000/- and the closing balance was Rs. 2,61,33,000/-. As such, the AO found that the assessee HUF had received advances from GSF during the year. From the Audit Report, Annual Return, etc. filed by the GSF with the Registrar of Companies (ROC) for the relevant period, the AO found that the Gopal and Sons (HUF) (i.e. assessee) was a registered shareholder (as per the annual return of GSF), holding 3,92,500 shares of GSF which comes to 37.12 % shares of the said company. Accordingly, the holding of the assessee HUF was more than 10 % of the voting power in the GSF. Therefore, the AO concluded that Gopal and Sons (HUF) (i.e. assessee) was both, the registered share holder holding shares of the company and also beneficial owner of the shares carrying more than 10 % of voting power in the company. From the company’s audited accounts, the AO found that there was a balance of Rs. 1,20,10,988/- as “Reserve & Surplus” as on 31/3/2006. It seems that the AO treated this as “accumulated profits” of GSF and this fact does not seem to have been disputed by the assessee HUF. Accordingly, applying the new Provisions of section 2(22)(e) of the Act, the AO treated the advances received from the GSF as deemed dividend in the assessment of assessee HUF to the extent of Rs. 1,20,10,988/- (i.e. limited to the amount of ‘accumulated profits’).
2.1.1 The Commissioner of Income-Tax- Appeals [CIT-(A)] confirmed the action of the AO, by observing in para 8.5 and 8.6 as under:
“8.5. However, I do not find any force in the submission of the appellant. As per record, there is no dispute that the appellant HUF is beneficial owner of the shares. On examination of Annual Returns filed by the company with ROC for the relevant year, it was observed by the AO that though, the shares might have been issued by the company in the name of Shri Gopal Kumar Sanei, Karta of HUF, but the company has recorded name of the appellant HUF as shareholder of the company. In the annual return filed with ROC, Gopal & (HUF) has been recorded as shareholder having 37.12% share holding. The annual return filed by the company is replica of shareholder register maintained by the Company. According to the Companies Act, a shareholder is a person whose name is recorded in the register of share holders maintained by the company. The company, M/s. G.S. Fertilizers Pvt. Ltd. has recorded the name of Gopal & Sons (HUF) as a shareholder. Thus, the appellant is not only the beneficial holder of the shares but also the registered shareholder. Further, as per the provisions of section 2(22)(e) as amended w.e.f. 1.4.1998*, the only requirement to attract provisions of section 2(22)(e) is that the shareholder be beneficial shareholder. The decision of Hon’ble Apex Court relied upon by the appellant pertains to 1922 I.T. Act and the decision of the Apex Court was with reference to provisions of section 2(6A)(e) of the I.T. Act, 1922. In fact, in the same case as in the case reported in 122 ITR 1, the Hon’ble Supreme Court in the case reported in 82 ITR 628 (SC) has held as under:
“Shares held by Karta, when shares were acquired from the funds of the HUF, could be considered to be shares held by the HUF and then loan made to the family could fall within the definition of “dividend” in section 2(22)(e).”
The Hon’ble Supreme Court in the case of Kishanchand Lunidasing Bajaj vs. CIT reported in 60 ITR 500 (SC) has held:
“Shares were acquired with the funds of a HUF and were held in the name of Karta. HUF could be assessed to tax on the dividend from those shares.”
The Hon’ble Kerala High Court in the case of Gordhandas Khimji (HUF) vs. CIT reported in 186 ITR 365 (Ker.) has held:
“Advances to HUF shareholder by the company to the extent of its accumulated profits will be assessable as deemed dividend in the hands of HUF and not in the hands of Karta.”
Recently, ITAT, Mumbai Special Bench in the case of ACIT vs. Bhaumik Colour (P) Ltd. reported in 118 ITD 1 has held that for the purpose of taxing the deemed dividend, the shareholder must be both beneficial and registered shareholder. Though, as mentioned above, as per the amended provisions of section 2(22)(e) of the Act, the share holder should be beneficial owner of the shares holding not less than ten per cent of the voting power, even if the ratio of the decision of the Special Bench (Supra) is considered in the case of appellant, the appellant is both beneficial as well as registered share holder of the company as mentioned above.
(8.6) In view of above facts, discussion and legal position, I am of the opinìon that the AO was justified in making the addition of Rs. 1,20,10,988/- by provisions of section 2(22)(e) of the Act. The case of the appellant is covered under the provision of section 2(22)(e) from all the angles Therefore, the addition of Rs.1,20,10,988/- is hereby confirmed. The ground no. 2 is dismissed.”
* This should be 1.4.1988
2.1.2 The above referred issue came-up for consideration before the Kolkata bench of the Tribunal (ITA No. 2156/K/2009) at the instance of the assessee (alongwith other issues with which we are not concerned in this write-up) for the Asst. Year. 2006-07. On behalf of the assessee, it was contended that the issue is covered in favour of the assessee by the decision of the tribunal in the case Binal Sevantilal Koradia (HUF) [ITA No. 2900/MUM/2011) rendered on 10/10/2012 for the Asst. Year. 2007-08 and in that case, the Tribunal has followed the decision of the special bench of the Tribunal in Bhaumik Color’s case as well as the judgment of the Rajasthan High Court in case of Hotel Hill Top (supra). In that case, the Tribunal has also noted that the same view has been taken by the Bombay High Court in the case of Universal Medicare (P) Ltd. (supra).
2.1.2.1 After referring to the findings of the CIT (A) referred to in para 2.1.1 above and the decision relied on by the counsel of the assessee, the Tribunal decided the issue in favour of assessee (vide order dtd. 27/1/2013) by observing as under:
“In the aforesaid judgment of Mumbai Tribunal in the case of Binal Sevantilal Karodia (HUF), supra, the Tribunal was followed the decision in the case of ACIT vs. Bhaumik Colour Pvt. Ltd. 313 ITR 146(AT). The Ld. Sr. DR has not controverted that this issue is covered. We find that this issue is covered by the order of Mumbai Tribunal in the case of Binal Sevantilal Karodia (HUF), supra. Hence, taking it as covered matter, we allow this issue of assessee’s appeal.”
2.2 At the instance of the Revenue, the above issue relating to taxability of deemed dividend in the hands of the assessee HUF(along with other issues with which we are not concerned in this write-up) came-up before the Calcutta High Court for which following two questions were raised:
“i) Whether on the facts and in the circumstances of the case the learned Tribunal erred in law in deleting the addition of Rs.1,2010,988/- as deemed dividend under section 2(22)(e) of the Income-tax Act by relying on a decision of Mumbai Tribunal in the case of Bimal Sevantilal Karodia HUF where the assessee was neither a shareholder nor a beneficial shareholder without considering that in the present case the assessee HUF is a beneficial as well as registered share holder having 37.12% share holding of the company and for this the order passed by the learned Tribunal is perverse and deserved to be set aside ?
ii) Whether on the facts and in the circumstances of the case the learned Tribunal erred in law in placing reliance on a decision of Mumbai Tribunal in the case of Bimal Sevantilal Karodia HUF without considering that the facts of the said case is squarely different from that of the present assessee ?”
2.3 The Court decided the issue (vide order dtd. 13/2/2015) in favour of the Revenue by observing as under:
“In so far as question Nos.1 and 2 are concerned, Mr. Bharadwaj, learned Advocate appearing for the assessee did not dispute that the Karta is a member of the HUF which has taken the loan from the Company and, therefore, the case is squarely within the provisions of section 2(22)(e) of the Income Tax Act, which reads as follows:
“any payment by a company, not being a company in which the public are substantially interested, of any sum (whether as representing a part of the assets of the company or otherwise) made after the 31st day of May, 1987, by way of advance or loan to a shareholder, being a person who is the beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits) holding not less than ten per cent of the voting power, or to any concern in which such shareholder is a member or a partner and in which he has a substantial interest (hereinafter in this clause referred to as the said concern) or any payment by any such company on behalf, or for the individual benefit, of any such shareholder, to the extent to which the company in either case possesses accumulated profits;”
Therefore, question No.1 is answered in the affirmative.
Question No.2 need not be answered. The appeal is thus disposed of.”
2.4 From the above factual position leading to the decision of the High Court, it may be relevant to note that neither the Tribunal nor the High Court has analysed in detail the relevant positions of law for invoking and applying the new Provisions relating to deemed dividend and its application to the facts of the case of the assessee HUF. The Tribunal has merely followed the decision of its co-ordinate bench referred to in para 2.1.2 and the High Court merely stated that the Karta is a member of HUF which has taken a loan from the company and therefore, the case is covered within the new Provisions.
Section 35DDA and Payments under Voluntary Retirement Scheme
ISSUE FOR CONSIDERATION
Section 35DDA provides for a deduction, of one-fifth of the amount of an expenditure, on payment of any sum to an employee, in connection with his voluntary retirement in accordance with the scheme for such retirement. The balance expenditure is allowed to be deducted, in equal instalments, for each of the four succeeding previous years. The section also contains a disabling provision, that provides that no deduction shall be allowed for an expenditure on voluntary retirement referred to in section 35DDA. It however does not prescribe any condition that requires to be incorporated in the scheme, nor does it require the scheme to be approved by any authority.
Section10(10C) confers an exemption from income tax for a receipt , in the hands of an employee, on his retirement, up to Rs. 5 lakh under a voluntary retirement scheme that is framed as per the guidelines prescribed in Rule 2BA.
An interesting issue has arisen about the application of section 35DDA to a payment of an expenditure under a scheme of voluntary retirement which is not framed as per the guidelines prescribed under Rule 2BA. In such circumstances, whether the deduction for expenditure would be restricted to one-fifth or not is an issue over which conflicting views are available. The issue that arises, in the alternative, is about the deduction in full of the amount of expenditure u/s. 37 of the Act.
While the Delhi bench of the Income tax Appellate Tribunal has held that for a valid application of section 35DDA, it was necessary that the scheme was framed as per the guidelines prescribed under Rule 2 BA, the Mumbai bench held that the provisions of section 35DDA applied once the payment was made under a scheme, even where the scheme did not meet the requirements of rule 2BA. When asked to address the issue of full deductibility, the Delhi bench held that the deduction was possible provided the expenditure was of revenue nature. The Mumbai bench however held that the expenditure was to be amortised for deduction in five equal annual instalments.
WARNER LAMBERT’S CASE
The issue arose in the case of DCIT vs. Warner Lambert (India) (P) Ltd., 33 taxmann.com 686(Mum.) for A.Y. 2003-04. The assessee company in that case was engaged, inter alia, in the business of trading, importing, marketing, manufacturing and sale of ayurvedic medicines, breath fresheners, chewing gums and drugs. It had claimed 100% deduction for payment made to an employee of an amount of Rs. 17 lakh who had opted to retire on account of restructuring of the business of the company . It explained that the said expenditure was not in accordance with the scheme of voluntary retirement to which provisions of section 35DDA applied and, accordingly, the said amount had been claimed in full. The AO observed that the said expenditure was incurred clearly under the voluntary retirement scheme and was to be allowed, as per section 35DDA, at one-fifth of the claim spread over a period of five years. The assessee pointed out that the claim was allowable u/s. 37(1) of the Act. The AO however, applied the provisions of section 35DDA by holding that the said provisions included payment of an expenditure under schemes of any nature for granting voluntary retirement to employees prior to its actual retirement date. According to the A.O, it was not material that the schem was framed under the prescribed guidelines of rule 2BA.
In appeal, the CIT(A) observed that the AO had not brought any material on record to show that the assessee had paid any compensation under the existing scheme. He further held that since the assessee had himself contended that payment was not under any scheme of voluntary retirement, the applicability of provisions u/s. 35DDA merely on presumption was not justified.
In appeal to the Tribunal by the Income tax Department, it was submitted by the Revenue that a specific bar had been imposed for not allowing deduction under any other provisions of the Act vide section 35DDA sub-section (6), for an expenditure covered by sub-section (1) of section 35DDA and as such the assessee could not have resorted to section 37(1) of the Act for claiming the deduction. It was pointed out that w.r.e.f 1st April, 2004 on substitution of the words ‘in connection with’ for ‘at the time of”, the amount that has been paid ‘in connection with’ voluntary retirement scheme was covered by the provisions of section 35DDA and only one-fifth of the amount paid could be allowed as a deduction. It was further submitted that no approval of any competent authority was required for the voluntary retirement scheme adopted by the assessee.
In reply, the assessee submitted that no formal scheme had been adopted by the company and only an option was given to those employees who were not absorbed, on reorganisation, to opt for VRS which was to be considered in the overall context. It was further explained that the scheme contemplated u/s. 35DDA was the same as in section 10(10C) and, therefore, for invoking section 35DDA, it was necessary that the scheme adopted by the company confirmed with the requirements set out in R. 2BA and as no such scheme was framed, the provisions of section 35 DDA were not applicable.
The honourable Tribunal was not inclined to accept the plea of the Income tax Department to the effect that the provisions of section 35DDA were applicable because the payment had been made in pursuance to a scheme of voluntary retirement and that it was not necessary that the said scheme should have also complied with the guidelines prescribed under Rule 2 BA r.w.s. 10 (10C) of the Act. It stated that on a bare perusal of the section, it was revealed that the provisions of the section were attracted only when the payment had been made to an employee in connection with his voluntary retirement, in accordance with any scheme of voluntary retirement. It observed that the legislature inserted the section in order to allow only one-fifth of the total expenditure since the payment reduced the burden on the assessee relatable to subsequent years.
In order to resolve the dispute, the honourable Tribunal held that the principles of harmonious construction of statute were to be applied which required that a statute be received as a whole and one provision of the Act should be in conformity of the other provisions in the same Act so as to ensure uniformity in interpretation of the whole statute. It further observed that the provisions relating to voluntary retirement scheme were contained in section 10(10C) and all the conditions laid down therein had to be fulfilled before an exemption could be availed by an employee under the said section; that the income and expenditure go together in the scheme of the Act; that it was difficult to appreciate that a claim for an expenditure could be held to be covered by section 35DDA whereas while allowing exemption of the same expenditure in the hands of the payee, only those claims were entertained which confirmed to the guidelines laid down under r. 2BA; that the language in sections 35DDA and 10(10C), clearly referred to a scheme or schemes of voluntary retirement; though it was true that section 35DDA did not specifically refer to section 10(10C) but principles of harmonious construction required that the conditions as laid down under Rule 2BA had to be met before a deduction u/s. 35DDA could be allowed.
The Tribunal noted that the scheme adopted by the assessee did not confirm to the guidelines laid down under Rule 2BA and therefore, it could not be held that the provisions of section 35DDA were applicable in the company’s case. The claim made by the company for deduction u/s. 37 was accordingly upheld by the tribunal.
SONY INDIA’S CASE
The issue arose again in the case of Sony India (P) Ltd., 21 taxmann.com 224 (Delhi) for assessment year 2005-06.
In that case the assessee company, on closure of one of its units, had floated a VRS scheme for employees of said closed unit and one-fifth of the payments made there under was claimed u/s. 35DDA. The A.O however, observed that for claiming deduction under s.35DDA provisions of rule 2BA were to be satisfied; as the assessee’s VRS scheme was not framed in accordance with Rule 2B, VRS expenditure claimed by assessee were liable to be disallowed. The assessee had claimed one-fifth of the amount of expenditure incurred on payment under the voluntary retirement scheme of the company to its employees and claimed that such an expenditure was to be allowed as per section 35DDA of the Act. The expenditure so claimed was disallowed by the A.O in assessment. Amongst the different reasons, one of the reasons of the AO, for disallowance of the claim of one-fifth of the expenditure on payments to employees under the voluntary retirement scheme, was that the scheme was not framed as per the guidelines prescribed under Rule 2BA.
The assessee, in the alternative, pleaded that the expenditure was otherwise deductible u/s. 37(1) but the A.O rejected the said plea by holding that the expenditure was incurred for achieving a benefit of enduring nature and as such it was capital in nature; the expenditure on VRS was to reduce the staff strength with a view to achieve viability and profitability of business, benefit of which was to endure over a number of years. the said expenditure could not be allowed u/s. 37(1) but was allowable only u/s. 35DDA.
On appeal by the assessee, the Commissioner (Appeals) came to the conclusion that the said expenditure was not in respect of retrenchment of employees of closed unit but the said expenditure was incurred in terms of the VRS. However, the VRS was not in accordance with rule 2BA. Therefore, the Commissioner (Appeals) held that the expenditure had been incurred to sustain the business for a longer period of time resulting in a benefit of enduring nature and thus, was capital in nature. Accordingly, the appeal of the assessee was dismissed on that ground.
On further appeal, amongst the other grounds, the assessee placed the following grounds before the Tribunal; Whether the Commissioner (Appeals) was unjustified in reading the conditions of Rule 2BA in section 35DDA? Whether VRS expenditure was otherwise allowable as deduction u/s. 37(1)?
The Tribunal noted that in the Bill, leading to enactment of section 35DDA, a provision was made regarding the application of Rule 2BA which portion was deleted when the Bill was passed and, thus, the conditionalities of the rule had not been incorporated intentionally in the section; the deletion of conditionalities originally incorporated in the Bill showed that legislative intendment was not to incorporate all the conditions of section 10(10C) in section 35DDA; the legislature left the scheme of voluntary retirement open-ended and did not place any restriction on the scheme; the plain language of the provision supported the case of the assessee; that it was not simply the case of taking guidance from a definition section but required modification of the provisions of section 35DDA by incorporating a part of section 10(10C) in it which incorporation did not find support from any rule of construction. The Tribunal held that there was no compelling reason to read section 35DDA as suggested by the revenue and therefore, the scheme of the assessee was held to be a VRS, to which the provisions of section 35DDA was applicable.
Dealing with the claim for the deduction u/s. 37(1) of the Act, the Tribunal noted the observations made by the Kerala High Court in the case of CIT vs. O E N India Ltd., 8 taxman.com 246 and in particular the following observations while allowing the deduction in full following the various court decisions. “It is mentioned that the test applied to determine whether the expenditure incurred by the assessee is revenue or capital in nature depends upon the finding as to whether the assessee has created any fixed asset or not. If an asset has been created, the expenditure will certainly be capital in nature. Where the expenditure does not lead to creation of a fixed asset, the expenditure is generally revenue in nature. However, creation of an asset is not a mandatory requirement. The expenditure incurred for achieving a benefit of enduring nature is also capital in nature. When this test is applied, it is felt that the purpose of introduction of VRS is to reduce the staff strength with a view to achieve viability and profitability of the business in general and the retrenchment will give long-term benefit to the assessee. The VRS floated with a view to encourage massive retirement is primarily to streamline the business by restructuring the work force with a view to increase profitability and to make the business viable. Therefore, the benefit will endure over a number of years to come. Accordingly, the payment under the VRS for retirement of a number of employees is nothing but a capital expenditure which could be claimed as a deduction in a phased manner over several years. It is for the assessee to provide rational basis to ascertain the number of years over which the benefit endures and accordingly write off the amount of expenditure by amortizing it over those number of years. Section 35DDA is a virtual declaration of the fact that the expenditure should not be allowed in one year and it has to be amortized over a few years. Therefore, even prior to introduction of section 35DDA, the assessee was entitled to claim deduction of expenditure in a phased manner over a number of years which have to be rationally fixed by the assessee.” The Tribunal noted that the having stated so, the court abundantly made it clear that the aforesaid had been stated only with a view to express the opinion of the court and it was not intended to disturb the settled position through various high courts’ decisions, which had not been contested before the Supreme Court. The court held that the entire amount paid under the VRS had to be held to be revenue in nature to bring in line its decision with the decisions of various high courts.
The Tribunal however held that the assessee was entitled to deduction of one-fifth of the expenditure u/s. 35DDA as claimed for the reason that it had failed to establish that the expenditure was not capital in nature. According to the Tribunal, the facts suggested that the payment was made on closure of an unit and such payment was to be held to be on capital account unless it was established by the assessee that the business of the unit closed was closely interlaced and interlinked with the business continued by the assessee.
OBSERVATIONS
Section 35DDA (1) of the Act reads as under; “Where an assessee incurs any expenditure in any previous year by way of payment of any sum to an employee at the time of( in connection with) his voluntary retirement, in accordance with any scheme or schemes of voluntary retirement, 1/5th of the amount so paid shall be deducted in computing the profits and gains of the business for that previous year, and the balance shall be deducted in equal instalments for each of the four immediately succeeding previous years.”
The relevant part of section 10(10C) reads as under :” any amount received or receivable by an employee of- (i)………. (ii) any other company; or ….. on his voluntary retirement or termination of his service, in accordance with any scheme or schemes of voluntary retirement or ……, to the extent such amount does not exceed five lakh rupees. Provided that the schemes of the said companies or ……….., governing the payment of such amount are framed in accordance with such guidelines including inter alia criteria of economic viability as may be prescribed (rule 2BA) .”
On an apparent reading of section 35DDA, what one gathers is that for a valid application of section 35DDA, the payment of expenditure to an employee should have been made in connection with his voluntary retirement under a scheme of such retirement. On fulfilment of these conditions, one-fifth of the expenditure would fall for allowance in the year of payment and the balance will be allowed in four equal annual instalments.
The section by itself does not prescribe that the scheme should have been framed as per guidelines prescribed rule 2BA. As long as the payment (not revenue in nature) is made under a scheme for voluntary retirement, the case for deduction should be governed by the provisions of section 35DDA and if so no deduction shall be allowed under any other provisions of the Income Tax Act. For the purposes of claiming an exemption u/s. 10(10C), in the hands of an employee, it is however essential that the receipt is under a scheme i.e. framed as per the guidelines prescribed under Rule 2BA.
It is the above noted distinction between the two provisions of the Act, one dealing with the payment and the other dealing with the receipt that prompted the tribunal in the Warner Lambert’s case to recommend a harmonious reading of section 35DDA & 10(10C) so as to include only such payments within the ambit of section 35DDA which are made under a scheme that meets the guidelines of Rule 2BA , and that the deduction is not to be restricted to one-fifth of the amount of expenditure but may qualify for a full deduction provided of course it is otherwise allowable. With utmost respect there is nothing in section 35DDA that stipulates reading in the manner that requires that the scheme referred to in section 35DDA should be so framed so as to meet the conditions of rule 2BA. Likewise there is nothing in section 10(10 C) that provides that the receipt by an employee should be from an employer whose case is covered by section 35 DDA . In our respectful opinion, the provision of these sections are independent of each other and operate in different fields even through both of them deal with the common subject of voluntary retirement. Accordingly the Tribunal in Sony India’s case was right in holding that scheme referred to in section 35DDA need not have been framed as per the guidelines prescribed under Rule 2BA.
The Finance Bill, leading to enactment of section 35DDA, contained a provision that required that the scheme referred to in section 35DDA is framed as per Rule 2BA however, the said requirement was omitted when the Bill was enacted and with this the condition for application of the rule was not retained intentionally in the section. The deletion of the condition originally incorporated in the Bill showed that legislative intent was not to incorporate all the conditions of section 10(10C) in section 35DDA. The legislature has consciously left the scheme of voluntary retirement, referred to in section 35DDA, open-ended and has not place any restriction on the scheme. The plain language of the provision supports the case of literal interpretation and that it is not simply the case of taking guidance from another provision of the Act for its understanding but requires a modification of the provisions of section 35DDA by incorporating a part of section 10(10C) in it which incorporation amount to doing violence to the language of section 35DDA and does not find support in any rule of construction. There is no compelling reason to read section 35DDA as being suggested by a few.
The disabling provisions of section 35DDA(6) can not help the case of mandatory application of section 35DDA in all cases of payment on voluntary retirement so as to restrict the deduction to one-fifth of the expenditure even where the expenditure is otherwise allowable in full. In our opinion, the provision of s/s. (6) has a limited application to only such cases which are otherwise covered by the provisions of s/s.(1). In other words, the expenditure of revenue nature should be deductible in full u/s. 37 of the Act and only those which do not so qualify for full deduction will be governed by section 35DDA. It is this larger issue, about the eligibility of an expenditure on payment of compensation towards voluntary retirement for deduction in full, u/s. 37, on being established that it is an expenditure wholly and exclusively incurred for the purposes of business, has remained to be directly addressed. It is possible that a payment of the nature being discussed would qualify for a full deduction once it is established to be of a revenue nature. The scope of section 35DDA should be restricted only to such expenditure that are otherwise not allowable under the provisions of section 37 of the Income-tax Act.
The test applied to determine whether the expenditure incurred by the assessee is revenue or capital in nature. Applying the test depends upon the finding as to whether the expenditure incurred has the effect of achieving a benefit of enduring nature and if yes, it is capital in nature.
When that test was applied, it was felt that the purpose of introduction of VRS was to reduce the staff strength with a view to achieve viability and profitability of the business in general and the retrenchment would give long-term benefit to the assessee. It is for the assessee to provide a rational basis to ascertain whether the benefit is of enduring nature and even if not so, it is otherwise allowable in the year in which it is incurred. Section 35DDA is not a virtual declaration of the fact that the expenditure should not be allowed in one year and it has to be amortised over a few years.
Accounting for MAT
The Finance Bill 2017 sets out the requirement of determining how Ind AS will impact Minimum Alternate Tax (MAT) on first time adoption (FTA) and on an ongoing basis. This article discusses a few issues with respect to MAT implications on FTA.
FINANCE BILL 2017 PROVISIONS ON MAT IMPACT ON FTA OF Ind-AS
The broad provisions are set out below:
1. Ind AS adjustments in reserves/ retained earnings (RE) are included in 115 JB book profit equally over 5 years beginning from the year of Ind AS adoption, except:
– Other Comprehensive Income (OCI) items recyclable to P&L are included in book profits, when those are recycled to P&L
– Adjustments to capital reserve, securities premium and equity component of compound financial instruments are excluded from book profit
– Use of fair value as deemed cost exemption for PPE/ Intangible Asset will be MAT neutral
• To be ignored for computing book profit
• Depreciation is computed ignoring the amount of fair value adjustment
• Gains/ losses on transfer/realisation/disposal/ retirement are computed ignoring fair value adjustment (as per Memorandum to the Finance Bill)
– Gains/losses on investments in equity instruments classified as fair value through other comprehensive income (FVTOCI) will be included in
book profit on realisation/disposal/transfer of
investment
– Use of fair value as deemed cost exemption for investments in subsidiaries, associates and joint ventures will be MAT neutral. Gains/ losses to be included in book profit on realisation/disposal/ transfer of investment
– Use of option to make Indian GAAP Foreign Currency Translation Reserve (FCTR) Zero will be MAT neutral
• To be included in book profit at the time of disposal of foreign operation.
2. FTA adjustments made at transition date (TD) are trued up for any changes upto the end of the comparative year. For example, for a phase 1 Company the TD will be 1 April 2015. The FTA adjustments on 1st April 2015 will be trued up for any changes upto the end of the comparative year end, i.e., 31st March 2016. This is illustrated below.
3. Consider a company that has only one adjustment at TD. The investments in mutual fund were measured at cost less impairment (assume INR 100) on an ongoing basis under Indian GAAP. On TD the company will have to measure the investments in mutual funds at fair value (assume INR 180). At 1st April, 2015, the company has included the fair value uplift INR 80 in RE. At 31st March, 2016, the fair value of the mutual fund was INR 240. For purposes of section 115 JB book profits, the company will include INR 28 each year for the next 5 years (INR 140 in aggregate), starting from the financial year 2016-17.
MAT IMPACT ON FTA OF Ind-AS
On the TD to Ind AS, the company makes adjustments to align Indian GAAP accounting policies with Ind AS. The impact of these items may end up in different adjustments being made. An asset or liability is recorded or derecognised or measured differently and the corresponding impact is directly adjusted in either:
(a) RE or reserves
(b) Another asset or liability
(c) OCI
(d) Capital reserve
(e) Equity
(I) Corresponding Adjustment made to RE or Reserves
Some examples of adjustment in this category and the corresponding impact on MAT are as follows:
|
Adjustments |
Impact on MAT |
|
Property, Plant |
This is MAT |
|
Investment in |
This is MAT |
|
The amount of |
While the |
|
Receivables are |
For purposes of |
|
Fair value gains |
For purposes of |
|
With respect to |
For purposes of |
|
Under Indian |
For purposes of |
(II) Corresponding Adjustment made to another
Asset or Liability
Some examples of adjustment in this category and the corresponding
impact on MAT are as follows:
|
Adjustments |
Impact on MAT |
|
(a) A (b) Indian |
(a) No (b) The
|
|
(a) Two (b) Indian |
(a) For (b) With
|
|
A day before the |
No Impact on MAT |
|
Two years before the TD the lessee entity enters into a 30 year long |
For purposes of |
(III) Corresponding Adjustment made to OCI
|
Adjustments |
Impact on MAT |
|
The entity |
This is MAT |
|
Adjustments |
Impact on MAT |
|
The Company has a |
This is MAT |
|
Adjustments |
Impact on MAT |
|
The entity |
This is MAT |
|
Adjustments |
Impact on MAT |
|
The Company has a |
This is MAT |
(IV) Corresponding Adjustment made to Capital
Reserves
|
Adjustments |
Impact on MAT |
|
Prior to the TD |
Any adjustment to |
|
Prior to the TD |
For purposes of |
(V) Corresponding Adjustment made to Equity
|
Adjustments |
Impact on MAT |
|
A day prior to |
Equity component |
|
Two |
The |
|
Adjustments |
Impact on MAT |
|
The equity |
The debit |
QUESTION
As explained above, the Finance Bill 2017 requires FTA adjustments in specific cases to be included in determining book profits under section 115 JB over a period of 5 years. For such adjustments that are not MAT neutral and have a MAT impact over a period of 5 years, would a provision for MAT liability or a credit for MAT asset be required on TD under Ind AS 12 Income Taxes?
RESPONSE
As a first step a company determines it’s income tax liability based on normal income tax provisions. However, this is subject to the provisions of section 115 JB of the Income tax Act, which requires a company to pay atleast a minimum tax on the basis of the book profits as determined under Indian GAAP or Ind AS as applicable. If a company pays higher tax during any financial year due to applicability of MAT, the excess tax paid is carried forward for offset against tax payable in future years when the company will be paying normal income tax.
As per the current Income-tax Act, the MAT credit can be carried forward for set-off for ten succeeding assessment years from the year in which MAT credit becomes allowable. The Finance Bill 2017 proposes that credit in respect of MAT paid u/s. 115JB can be carried forward upto fifteen succeeding assessment years. MAT is an additional tax payable to authorities based on the comparison of book profit and taxable profit for the year, albeit the company may be required to make certain adjustments (additions or deductions) to accounting profit for arriving at the 115 JB book profit.
For accounting purposes, the author believes that a MAT provision or a MAT asset should not be created on TD adjustments for the following reasons:
– The trigger for MAT is a higher book profit compared to a lower income computed under normal income tax computation provisions. The relationship between future book profits and income computed under normal income tax provisions will determine the MAT in future periods. Therefore MAT is like a current tax liability/asset that is accounted in each year. The possibility of the future book profits being higher or lower due to TD adjustments, is not a relevant factor for creating a MAT liability or MAT asset for TD adjustments. In other words, MAT is a current tax based on book profits in each year, and the liability for MAT arises only once the financial year commences. MAT is not triggered by FTA adjustments, though those are taken into consideration for determining MAT book profits for the relevant year.
– Absent tax holidays and few tax exempt income/ expenses, differences between the normal tax and the MAT are primarily due to deductible and taxable temporary differences. Those temporary differences result in deferred taxes being recognized on the basis that they will eventually reverse subject to application of prudence for recognition of DTA. Thus, the MAT is effectively a mechanism to bridge/ reduce gap between the carrying amount and tax base of assets and liabilities. On its own the MAT does not create any new differences. Since Ind AS 12 requires an entity to recognise DTA/ DTL for temporary differences between the carrying amount and tax base of assets and liabilities, it may be argued that MAT itself should not result in recognition of any new/ additional DTA/ DTL. Else, it may be tantamount to double counting. This is explained with the help of a small example.
EXAMPLE
The Company enjoys an accelerated depreciation under the Income-tax provisions, but charges lower depreciation for accounting purposes. This has resulted in the Company being subjected to MAT. The Company has created a DTL for the accelerated depreciation at normal income tax rates. The Company also records a MAT liability in the financial year.
On TD the Company records the fixed assets at Indian GAAP carrying value and also creates a provision for decommissioning liability of INR 100 with a corresponding adjustment to RE. For 115 JB book profits the RE adjustment will be spread over 5 years.
As a result of recording the decommissioning liability in Ind AS, the DTL amount will also correspondingly reduce on TD. It would be inappropriate to record a MAT asset on TD, for the RE credit of INR 100, since that would tantamount to double counting.
MAT is effectively a mechanism to bridge/ reduce gap between the carrying amount and tax base of assets and liabilities. On its own the MAT does not create any new differences. Since Ind AS 12 requires an entity to recognise DTA/ DTL for temporary differences between the carrying amount and tax base of assets and liabilities, it may be argued that MAT itself should not result in recognition of any new/ additional DTA/ DTL
Considering the above arguments, MAT payment is only an event of the relevant period, viz., the period during which MAT obligation arises under the Income-tax Act. Hence, it should be recognised in the relevant period and no upfront DTA/ DTL should be created towards amount to be adjusted in book profit of future years. The ICAI may issue appropriate guidance on the matter.
Right to Live Yes – Right to Die?
The month of March 2017, is possibly a landmark month in Indian history. The election results of five states were declared and the ruling party recorded a stunning success. Barring the lone state of Punjab it has come to power in four states. While these results have given the party a boost, the responsibility to deliver on its promises has also increased. The Goods and Services Tax (GST), promising to be a game changer has cleared virtually all hurdles and will come into force from 1st July 2017, some months before the September 2017 deadline. Finally, possibly for the first time since independence the Finance Bill for the ensuing financial year has been passed in the preceding financial year itself.
Amidst all the excitement, two events have not received as much public attention from the public as they deserve. These are passing of the Mental Health Care Act, 2016 which in terms of a specific provision decriminalises an attempt to commit suicide. The second is the Supreme Court declining to permit a mother to terminate the pregnancy although the foetus had a severe abnormality. The woman had completed 27 weeks of pregnancy. The current Medical Termination of Pregnancy Act does not permit termination of pregnancy beyond 20 weeks. Seemingly unconnected events, but both relate to right to live which should include a right to die!
For long, activists have been pleading that, when a person attempts to take his own life, it is an extreme step. Such a person could either be mentally ill or under such severe stress that he/she does not feel it worthwhile to live. After having suffered the trauma of having taken such a step, to prosecute the person under the Indian Penal Code (IPC) was really inhuman to both the person concerned as well as his/her close relatives. Section 115 of the Mental Health Care Act presumes a state of severe mental stress in case of a person who makes an attempt to commit suicide, and prohibits any action under section 309 of the IPC. It is true that there would be unscrupulous elements who may try to take unwarranted advantage of such a provision. However, not to legislate due to the possible misuse by a few was incorrect and the government has taken a positive step. One hopes that apart from this welcome provision, the other sections of the Act are also put to good use so that mentally ill persons get medical attention that they deserve and are treated with dignity by the society.
As far as the second event is concerned, there needs to be a debate in public fora. Given the medical infrastructure that our country has, it is extremely difficult to detect a severe abnormality of a foetus, in the early stages of pregnancy. That being the case, if such an abnormality is detected late, there should be some remedy available to the unfortunate parents. I am deeply conscious of a large number of ethical, moral issues involved and there is really no definite answer to a number of questions that may arise. One can only imagine the predicament of the doctor if such a child with a severe abnormality is born alive. There should be a healthy public debate in regard to these situations and the condition of such a child, and the emotional trauma of the parents must receive due consideration.
Finally, there is the issue of euthanasia. Every day we witness, a number of persons who are terminally ill and the chances of their medical condition improving are virtually nil. In such a situation whether they should have the right to decline medical treatment is a very contentious issue. In this case as well there will be a number of ethical and moral issues involved. I am reminded of the case of the nurse – Aruna – who was sexually assaulted and thereafter lay comatose for nearly four decades. While one salutes the dedication of those nurses and doctors who took care of her for this entire period, one wonders what decision the patient would have taken if she had been in the mental state to take one. Today, the concept of a living will is gaining ground where a person while in possession of his mental faculties puts down in writing his decision should a medical condition of his being terminally ill arise.
There is no point in putting the onus on the judiciary in the situations contemplated above. Courts have to deal with the law as legislated. It is true that in situations like the medical condition of an unborn child, or a terminally ill patient one must tread with extreme care. When one is dealing with life, and yes death of a person the decision is irreversible. Therefore, there must be a continuous public debate on these aspects and one must move forward for reaching a consensus on an acceptable legislation. That much we owe to those who suffer in silence!
From Darkness to Light
It was our annual vacation – this time to the French Riviera and around, beginning from Seville in Spain to Capri Islands in Italy.
We had had a great time and Capri was to be the best part of our trip. Travelling from Naples by ship to reach Capri was an experience in itself. Once settled in the advantageously perched hotel at Marina Piccola, plans were made to visit the Blue Grotto next day morning.
Blue Grotto is a cave opening, about a meter in height leading you to darkness for a fraction of a second, which instantly turns to azure blue light on the water surface caused by sunlight entering the caves through the small opening. As you appear to float on water, the crystal blue waters give silver reflections from the tiny bubbles on the surface of the objects underwater.
The next day, we left the hotel at around 10 am for the jetty from where we were to be ferried to Blue Grotto which was about 45 minutes away. A number of ferries were making trips carrying groups of eager and excited tourists.
As all of us got our turn to step on to the ferry, the excitement mounted as each one of us was looking to have a memorable experience. After having braved the Sun for an hour or so, we were near the location.
Once there, we disembarked into smaller boats which could accommodate about four of us at a time. There were boats already lined up, each waiting for their two minutes of exhilarating experience. The Sun made the wait look like eternity. Time always seems to stop when you are anxious or expectant. Stop, it did.
After some anxious waiting, it was announced that our turn would be next. We had by then realised that the trip was like a drop – here you go and there you come – all in a matter of a hundred seconds. The boatman instructed us to bend such that we do not hit the rocky ceiling. And, we got ready with our Camera – ready to capture memories.
The next two minutes was marked by exclamations – “wow…”, “beauty…”, “fabulous…” and the like.
And there we were back in the sunlight. The trip over, everybody had signs of happiness and amazement writ large on their faces. Each was trying to outclass the others in the description of the beauty they had just witnessed.
I wondered what was wrong. I had seen darkness all around. Were they being sarcastic? In fact, I was too embarrassed to share my experience with my friends. I did not want to be a spoil-sport.
My mind was so flooded with these contradictions that I did not even remember my trip back to Anna Capri. I kept wondering. Heavily disillusioned and disheartened with the experience, I climbed the stairs at the hotel and walked to my room.
Throwing the camera bag on to the bed, I wearily walked to the small room. As I looked up the mirror to study myself, I was shocked to say the least.
My sunglasses rested on my nose over my elegant pair of normal spectacles. And, it struck me like a lightening. I had ventured into Blue Grotto with my sun glasses on. It did not take rocket science for it to dawn on me that Blue Grotto did not appear blue to me as I was wearing dark sun glasses.
As if still to prove myself right, I hurried to the camera and retracted the clicks of those moments in the cave. Lo and behold!! They showed the Blue Grotto in all its blue splendour.
It was much after we returned to India that in one of our meetings, I gathered courage to explain my reality of that experience. In any case, I had reinforced the age old lesson for myself – “You have to eliminate all your filters of viewing -may they be of sunglasses or prejudices, biases, predispositions or the like”. Else, as the German philosopher, Arthur Schopenhauer, beautifully observed – “Every person takes the limits of their own field of vision for the limits of the world”.
[2016] 67 taxmann.com 47 (Delhi – Trib.) Kawasaki Heavy Industries Ltd. vs. ACIT A.Y.:2011-12, Date of Order: 11th February, 2016
Section 9(1) of the Act and Article 5 of India- Japan DTAA – In absence of authority to undertake core business activity or to conclude contracts, specific authority granted under power of attorney to an employee of LO will not result in constitution of PE of nonresident.
Facts
The Taxpayer, a Japanese Company, was headquartered in Japan. The Taxpayer established a Liaison Office (“LO”) in India. The Taxpayer had executed a Power of Attorney (“POA”) in favor of one of the employees of the LO.
The Taxpayer contended that purchase orders were directly raised by Indian customers on the HO of the Taxpayer, the HO directly sent quotation/invoices to Indian customers and all these documents were signed and executed by the HO directly without any involvement of LO. Further, the POA in favour of the employee was LO specific and did not grant any authority to the employee to undertake any core activities on behalf of the Taxpayer or to sign and execute the contracts. The Taxpayer also submitted documents supporting its contentions.
While the authority granted under POA was LO specific, without rebutting the documents submitted by the Taxpayer or bringing on record any other material, the AO held that the Taxpayer had granted unfettered powers to the employee and hence, the LO constituted PE in India of the Taxpayer. The AO also observed that the LO was operating beyond the scope of permission granted by RBI.
Held
POA showed that the authority granted to the employee was LO specific. Hence, the conclusion drawn by the AO that the authority granted is unfettered was incorrect. The POA did not demonstrate that the employee was authorised to undertake either the core business activity or to sign and execute the contracts. Therefore, AO’s observation that it was beyond the scope of RBI permission was perverse.
While the Taxpayer had supported its contention with documentary evidence, the AO had not rebutted the evidence nor did he bring on record any material in support of the conclusion that the Taxpayer had PE in India.
It has been brought on record that purchase orders were directly raised by Indian customers on the Taxpayer. The Taxpayer directly sent quotation/invoices to Indian customers and all these documents were signed and executed by the Taxpayer directly without any involvement of LO. No material has been brought on record to show that LO carried on core activities in India.
Accordingly, the LO of the Taxpayer did not constitute PE in India of the Taxpayer.
[2016] 67 taxmann.com 105 (Delhi – Trib.) Vertex Customer Management Ltd. A.Y.: 2004-05, Date of Order: 4th March, 2016
Section 9(1)(i) of the Act; Article 5, 13 of India-UK DTAA –Indian company to whom Taxpayer outsources some of its business in a continuous, real and intimate manner results in business connection under the Act; (ii) on facts, the Taxpayer did not have ‘fixed place PE’ or ‘service PE’ or ‘dependent agent PE’ under DTAA Where PE is remunerated on arm’s length basis, no further profit can be attributed; Amount paid as consideration for equipment use, qualifies as royalty, even if it is paid at cost
Facts
The Taxpayer was a company resident in the UK (“UKCo”). It was engaged in providing sales related outsourcing services to its clients. The Taxpayer had a group company, which was resident of India (“ICo”). The Taxpayer had outsourced certain services to ICo. The Taxpayer incurred certain expenses in respect of treasury, taxation, and finance to facilitate ICo in delivering its services to the customer. ICo reimbursed such expenses to the Taxpayer. Taxpayer had claimed that since payments received from ICo were towards reimbursement of expenses and hence not taxable in India.
Further, the Taxpayer had granted ICo right to use certain equipments outside India. In its return of income, the Taxpayer claimed that consideration received from ICo for equipment use was in the nature of royalty in terms of Article 13(3)(b) of India-UK DTAA . It also claimed that since the reimbursement was on cost basis, it was not taxable.
However, the AO concluded that Taxpayer had Permanent Establishment (PE) in India in terms of India-UK DTAA and it also had ‘business connection’ in terms of the Act. Accordingly, he taxed profit attributable to the PE. He also attributed the reimbursement of expenses and royalty in hands of the Indian PE of the Taxpayer.
The questions before the Tribunal were as follows.
(i) Whether the Taxpayer had a business connection in India?
(ii) Whether the Taxpayer had a fixed place PE in India?
(iii) Whether the Taxpayer had a service PE in India?
(iv) Whether the Taxpayer had a dependent agent PE in India?
(v) If a transaction is at an arm’s length price, whether any further profit can be attributed to PE?
(vi) Whether in absence of any income element, mere expense reimbursement could be considered royalty chargeable to tax in terms of India-UK DTAA ?
Held
(i) ‘Business Connection’ in India
On the basis of various decisions on the issue, it is apparent that there should be a continuous, real and intimate connection between the activity carried on by the non-resident (NR) outside India and the activities carried on in India. Further, such activity should contribute to the profits of the NR in his business. The relationship between the NR and the resident should be something more than mere trading on principal-toprincipal basis.
In the present case the Taxpayer secures orders from its customers on behalf of the ICo and outsources the job to ICo. There is a continuous relationship between the Taxpayer and ICo in India. The contract entered by the Taxpayer outside India are carried out in India. The responsibility of the Taxpayer vis-à-vis its customer is concluded in India. The responsibility of the Taxpayer cannot be segregated and will complete only after ICo provides services to the customers. Hence, the Taxpayer had a continuous, real and intimate connection resulting in business connection in India in terms of section 9(1)(i) of the Act.
(ii) Fixed place PE in India
To constitute a fixed place PE, all the following conditions should be satisfied.
(a) There is a place of business.
(b) Such place is at the disposal of the Taxpayer.
(c) Such place is fixed.
(d) Business of the Taxpayer is wholly or partly carried on through such place.
In case of the Taxpayer, it was not established whether the premises of ICo or client was made available to the Taxpayer. Thus, ICo’s premises cannot be said to be at the disposal of Taxpayer since it has no right to occupy the premises but is merely given access for the purpose of work. Also the services provided in India were in the nature of Business process outsourcing (BPO) services and back office operations. Thus, relying on India UK DTAA and the decision in DIT vs. Morgan Stanley & Co. Inc. [2007] 292 ITR 416 (SC), the Tribunal held that the Taxpayer did not have a fixed place PE in India.
(iii) Service PE in India
In the absence any material brought on record to show that of the Taxpayer having deputed its employees to India, question of ‘Service PE’ cannot arise.
(iv) Dependent agent PE in India
An agent is not considered an independent agent if: (a) he performs activities wholly or almost wholly for the non-resident and its group companies; and (b) the transactions between the agent and the non-resident are not on arm’s length basis. In absence of any material on record to show that ICO was a dependent agent of Taxpayer, the Taxpayer cannot be said to have ‘dependent agent PE’ in India.
(v) Attribution of further profit
No further profit can be attributed to the PE in respect of transaction if transfer pricing analysis has fully captured functions performed, assets deployed and risks assumed. Thus even if it is accepted that the taxpayer has PE in India, since the PE is remunerated at arm’s length price, no further profit can be attributed to the PE.
(vi) Reimbursement characterized as royalty.
The reimbursement on cost basis as consideration received for equipment use qualifies as royalty under India-UK DTAA . The amount claimed by the Taxpayer as reimbursement on cost basis is similar to the consideration received for equipment use. Accordingly, the amount should also be treated as royalty.
Forms substituted
MVAT UPDATE
NO . VAT / Adm – 2 0 1 6 / 1 B / / Adm – 8 Extra . ord.17,18,19 dated 24.2.2016
The Commissioner of sales tax, Maharashtra State in respect of the periods starting on or after 01.04.2016 has substituted Form No. 423 – for Tax Collection at Source, Form No. 424 for Tax Deduction at Source by an employer, MVAT returns in Forms 231 to 235 requiring invoice wise details to be submitted.
Customs, Excise and Service Tax Dispute Resolution Scheme, 2016
Indirect Tax Dispute Resolution Scheme, 2016
Chapter XI of Finance Bill, 2016 has introduced the Indirect Tax Dispute Resolution Scheme, 2016 in order to reduce litigation and an environment of distrust in addition to increasing the compliance cost of the tax payers and administrative cost for the Government. The Scheme shall come into force with effect from 01.06.2016. This scheme is applicable to the declarations made up to 31.12.2016.
All the appeals pending before the Commissioner (Appeals) as on 01.03.2016 under the Central Excise Act, 1944 or the Customs Act, 1962 or the Finance Act, 1994 are eligible for settlement under the Dispute Resolution Scheme. However, if the impugned order is in respect of certain specified cases, the same cannot be settled under the Dispute Resolution Scheme, 2016.
Further, the cases of eligible assessees can be concluded by paying disputed tax along with interest and penalty equal to 25% of the penalty imposed under the impugned order. The eligible assessees are required to make declaration for settlement after enactment of the Finance Act 2016 between 01.06.2016 and 31.12.2016.
Changes in Service Tax Rules
Notificaiton No. 19/2016-ST dated 01. 03. 2016
Vide this Notification, following changes are made in Service Tax Rules, unless otherwise stated, which will be effective from 01.04.2016 :
1. Rule 2(1)(d)(i)(D)(II) is being modified so that legal services provided by a senior advocate shall be on forward charge.
2. Rule 2(1)(d)(EEA) making service recipient, that is, mutual fund or asset management company as the person liable for paying Service tax is being deleted. Meaning thereby, services provided by mutual fund agents/distributors to a mutual fund or asset management company are being put under forward charge.
3. Rule 2(1)(d)(i)(E), which provides for liability of service receiver to pay Service tax under Reverse Charge in relation to support services provided or agreed to be provided by Government or Local authority with certain exceptions.
4. Rule 6(1): Following benefits presently available to individual or proprietary firm or partnership firm, are being extended to One Person Company (OPC) whose aggregate value of taxable services provided from one or more premises is up to Rs. 50 lakh in the previous financial year:
a) Quarterly payment of Service tax and
b) Payment of Service tax on receipt basis
5. Rule 6(7A): The Service tax liability on single premium annuity (insurance) policies is being rationalised and the effective alternate Service tax rate (composition rate) is being prescribed at 1.4% of the total premium charged, in cases where the amount allocated for investment or savings on behalf of policy holder is not intimated to the policy holder at the time of providing of service.
6. Service tax assessees above a certain threshold limit shall also submit an annual return for the financial year, in such form and manner as may be specified by the CBEC, by the 30th day of November of the succeeding financial year;
The Central Government may, subject to such conditions or limitations, specify by notification, an assessee or class of assesses who may not be required to submit the annual return
7. Sub-Rule 2 has been inserted to provide that an assessee, who has filed the annual return by the due date, may submit a revised return within a period of 1 month from the date of submission of the said annual return.
8. Sub-Rule 2 has been inserted to provide that where the annual return is filed by the assessee after the due date, the assessee shall pay to the credit of the Central Government, an amount calculated at the rate of Rs. 100 per day for the period of delay in filing of such return, subject to a maximum of Rs. 20,000/-.