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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
and CARO
Reporting under Companies Act, 2013

 

CA. Himanshu Kishnadwala
&

CA. Abhay Mehta

Chartered Accountants
Association,
Ahmedabad

Challenges of Transforming
India

Mr. Amitabh Kant

Forum of Free Enterprise

Two Days Seminar jointly
with Ahmedabad Chartered Accountants Association (ACAA)

CA. Sonalee Godbole

CA. Mayur Nayak

CA. Vishal Gada

CA. Mandar Telang

CA. Bhadresh Doshi

Advocate Sunil Lala

Association of Chartered
Accountants’ of Ahmedabad

Full Day Workshop on Writing
and
Drafting Skills

CA. Raman Jokhakar, CA. Anil
Sathe

Aurangabad Branch of WIRC

Full Day Seminar on
Alternative Fund Raising Options for Corporates

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
& Services Tax

CA. Sunil Gabhawalla

CA. Udyan Choksi

CA. Mandar Telang

CA. Govind Goyal

DTPA Study Circle, Kolkata

Two Days Workshop on
Accounting Standards (AS) and Standards on Auditing (SAs)

CA. Ashutosh Pednekar

CA. Abhay Mehta

CA. Himanshu Kishnadwala

Eminent faculty from
KCAS 

Kanpur Chartered
Accountants’ Society

Workshop on GST, MVAT and
Service Tax

Various Speakers

AIFTP, CTC, MCTC, STPAM
& WIRC of ICAI

Lecture Meeting-The Union Budget Meeting 2017-18 arranged by
Nani A. Palkhivala Memorial Trust

Mr. H. P Ranina

Forum of Free Enterprise

Event

Speaker

Jointly with

Under the auspices of Amita Memorial Trust, A talk in memory of
Amita Momaya-The Road less Travelled

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.

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!

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
and Equipment (PPE) or Intangible Assets is fair valued on TD, as the new
deemed cost under Ind AS.  The
corresponding impact is recorded in RE on the TD

This is MAT
neutral.

Investment in
subsidiaries, associates and joint ventures is fair valued on TD, as the new
deemed cost under Ind AS.  The
corresponding impact is recorded in RE on the TD

This is MAT
neutral.

The amount of
deferred tax asset or liability (DTA/DTL) is changed due to TD adjustments of
various assets and liabilities. The corresponding debit or credit impact is
recorded in RE on the TD

While the
Memorandum to Finance Bill states that it should be MAT neutral, the text of
the Finance Bill 2017 does not contain any such clause.
Hence, based on the text of the Finance Bill 2017, one may argue that for
purposes of determining book profits the debit or credit adjustment in RE
after true-up impact will be recognized over 5 years.

Receivables are
provided for based on Expected Credit Loss (ECL). The corresponding debit
impact is recorded in RE on the TD

For purposes of
determining book profits the debit adjustment in RE after true-up impact will
be recognized over 5 years.

Fair value gains
on derivative assets were not recognized under Indian GAAP.  On TD a derivative asset is created with a
corresponding impact on RE

For purposes of
determining book profits the credit adjustment in RE after true-up impact
will be recognized over 5 years.

With respect to
Service Concession Arrangements, the Intangible assets were recorded at cost
under Indian GAAP.  Under Ind AS these
are recorded at fair value (cost plus margin).  On TD, the amount of Intangible Assets will
be increased with a corresponding impact on RE.

For purposes of
determining book profits the credit adjustment in RE after true-up impact
will be recognized over 5 years.

Under Indian
GAAP, Investments in mutual fund is measured at cost.  Under Ind AS at each reporting date it is
fair valued with gains/losses recognized in the P&L account. On TD, the
amount of Investments will be increased or decreased for fair value gains/losses
with a corresponding impact on RE.

For purposes of
determining book profits the credit or debit adjustment in RE after true-up
impact will be recognized over 5 years.

(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
day before the TD the parent issues to a bank a financial guarantee (FG) on
behalf of its subsidiary.  The parent
will not cross charge the subsidiary for the FG.  On TD the parent will record a FG liability
(INR 100) and a corresponding investment in the subsidiary.

(b)   Indian
GAAP book value of investment is INR 250. 
The Company uses fair value of INR 400 as deemed cost on TD.  The investment is sold after four years at
INR 700.

(a)   No
Impact on MAT since an asset and a liability is recorded with no
corresponding impact on RE or reserves. However, true-up impact will have to
be adjusted.

(b)   The
fair value uplift of INR 50 (400-(250+100)) is MAT neutral.  When the investment is sold, the profit of
INR 300 (700-400) + the fair value uplift INR 50, will be included in book
profits for MAT purposes.

 

(a)   Two
years before the TD the parent issues to a bank a FG on behalf of its
subsidiary for a 5 year period.  The
parent will not cross charge the subsidiary for the FG.  Under Ind AS, on the date of issue of the
FG the parent will record a FG liability and a corresponding investment in
the subsidiary.  Assuming the
subsidiary is financially capable and the bank does not have to invoke the
FG, the FG would be amortized over a 5 year period with a corresponding
credit to the profit and loss.  On TD,
the FG would be amortized for a two year period with a corresponding credit
to RE.

(b)   Indian
GAAP investment value is INR 100. 
Assume the FG liability on initial recognition is INR 20, and that the
entity uses previous GAAP carrying value (INR 100) on TD for investment.

(a)   For
purposes of determining book profits u/s 115 JB the credit adjustment in RE
on account of FG amortization after true-up impact will be recognized over 5
years.

(b)   With
respect to investment, for purposes of determining book profit u/s 115 JB, RE
will be debited by INR 20 which after true up impact will be recognized over
5 years

 

A day before the
TD the entity enters into a long term service arrangement, which has an
embedded lease.  The entity is a lessee
and lease is finance lease.  On TD the
entity will record an asset and a corresponding lease liability of equal
amount.

No Impact on MAT
since an asset and a liability is recorded with no corresponding impact on RE
or reserves. However, true-up impact during the comparative period will be
recognized over 5 years.

Two years before the TD the lessee entity enters into a 30 year long
term service arrangement, which has an embedded lease. The entity is a lessee
and lease is finance lease.   Under Ind
AS the entity will record an asset and a corresponding lease liability of
equal amount on the date of entering into a lease arrangement. On TD the
amount of asset and lease liability recognized would not be equal because the
asset depreciation and the loan amortization will happen at different
amounts.  Therefore on TD, there would
be a debit or credit adjustment to RE.

For purposes of
determining book profits u/s 115 JB the debit or credit adjustment in RE
after true-up impact will be recognized over 5 years.

(III) Corresponding Adjustment made to OCI

Adjustments

Impact on MAT

The entity
applies hedge accounting under Indian GAAP, which is fully aligned with the
Ind AS principles.  On that basis it
has recorded a cash flow hedge reserve in OCI.  Under Ind AS it will continue with the
hedge accounting, therefore, the cash flow hedge reserve recorded under
Indian GAAP will be continued as it is.

This is MAT
neutral, i.e, the consequences under Indian GAAP and Ind AS will be the
same.  The cash flow hedge reserve will
be included in book profits u/s. 115 JB as and when the hedge reserve is
recycled to the P&L account.

Adjustments

Impact on MAT

The Company has a
foreign branch.  It recognizes a FCTR
on translation of foreign branch.  The
Company chooses the FTA option of restating the FCTR to zero under Ind AS.  Subsequently the FCTR is accumulated afresh

This is MAT
neutral, i.e, the consequences under Indian GAAP and Ind AS will be the
same.  The Indian GAAP FCTR and the
fresh accumulated Ind AS FCTR is recognized when the branch is finally
disposed off.

Adjustments

Impact on MAT

The entity
applies hedge accounting under Indian GAAP, which is fully aligned with the
Ind AS principles.  On that basis it
has recorded a cash flow hedge reserve in OCI.  Under Ind AS it will continue with the
hedge accounting, therefore, the cash flow hedge reserve recorded under
Indian GAAP will be continued as it is.

This is MAT
neutral, i.e, the consequences under Indian GAAP and Ind AS will be the
same.  The cash flow hedge reserve will
be included in book profits u/s. 115 JB as and when the hedge reserve is
recycled to the P&L account.

Adjustments

Impact on MAT

The Company has a
foreign branch.  It recognizes a FCTR
on translation of foreign branch.  The
Company chooses the FTA option of restating the FCTR to zero under Ind AS.  Subsequently the FCTR is accumulated afresh

This is MAT
neutral, i.e, the consequences under Indian GAAP and Ind AS will be the
same.  The Indian GAAP FCTR and the
fresh accumulated Ind AS FCTR is recognized when the branch is finally
disposed off.

(IV) Corresponding Adjustment made to Capital
Reserves

Adjustments

Impact on MAT

Prior to the TD
the Company has applied acquisition accounting for a common control
transaction.  The consideration paid
was lower than the fair value of assets and liabilities taken over.  The difference was recorded as capital
reserves. The Company chooses to restate the accounting of the common control
transaction on the TD in accordance with Ind AS 103.  Under Ind AS the assets and liabilities in
a common control transaction are recorded at book value, and the excess of
book values over the consideration is recorded as capital reserves.  Whilst in both Indian GAAP and Ind AS, a
capital reserve is recorded, the amount of capital reserve recognized is
different.

Any adjustment to
capital reserves is MAT neutral.

Prior to the TD
the Company has applied acquisition accounting for a common control
transaction and recognized goodwill in accordance with Indian GAAP.  The Company chooses to restate the
accounting of the common control transaction on the TD in accordance with Ind
AS 103.  Under Ind AS common control
transaction does not lead to recognition of goodwill.  The said amount is adjusted against RE.

For purposes of
determining book profits u/s. 115 JB the debit adjustment in RE will be
recognized over 5 years.

(V)   Corresponding Adjustment made to Equity

Adjustments

Impact on MAT

A day prior to
the TD the Company has issued a compound financial instrument that is
classified as liability under Indian GAAP. 
On TD under Ind AS, the Company does split accounting and records the
instrument partly as a liability and partly an equity.  The equity represents the option under the
instrument to convert to shares at a future date and at a fixed predetermined
ratio.

Equity component
of compound financial instruments is MAT neutral.

Two
years prior to the TD the Company has issued a compound financial instrument
that is classified as liability under Indian GAAP.  On TD under Ind AS, the Company does split
accounting and records the instrument as a liability and an equity amount. 

The
equity component is MAT neutral. 
However, subsequent to the issue of the compound financial instrument,
the liability would have under gone a change under Ind AS due to the
amortization effect. RE would be debited to the extent of the amortization
for the two year period prior to TD. 

Adjustments

Impact on MAT

The equity
represents the option under the instrument to convert to shares at the end of
5 years at a fixed predetermined ratio.

The debit
adjustment to the RE after true-up impact, would be allocated over 5 years
for the purposes of determining book profits u/s 115 JB.

       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

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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

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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

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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

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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

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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/-.

Changes in Reverse Charge Mechanism

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Notification No. 18/2016 dated 01. 03. 2016

This Notification has proposed changes in Reverse Charge Mechanism by amending Notification No. 30/2012-ST dated 20.06.2012 which will be effective from 01.04.2016 :

1. In Paragraph I, in clause (A), sub-clause (ib) is omitted to provide that services provided by mutual fund agents/ distributors to a mutual fund or asset management company are being put under forward charge;

2. In Paragraph I, in clause (A), sub-clause (ic) is substituted by “provided or agreed to be provided by a selling or marketing agent of lottery tickets in relation to a lottery in any manner to a lottery distributor or selling agent of the State Government under the provisions of the Lottery (Regulations) Act,1998 (17 of 1998)”, to bring in line with changes made in section 65B(44) of the Finance Act;

3. In Paragraph I, in clause (A), sub-clause (iv), item (B) has been substituted to provide that legal services provided by a senior advocate shall be on forward charge.

4. The words “support services” have been omitted from Serial No.6 making any service provided by Government taxable .

Definition of Support Services stand deleted

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Notification No. 15/2016-ST & 17/2016 dated 01. 03. 2016

The Finance Act, 1994 was amended vide the Finance Act, 2015 so as to make any service (and not only support services) provided by Government or local authorities to business entities taxable from a date to be notified later. 1st April, 2016 has already been notified as the date from which any service provided by Government or local authorities to business entities shall be taxable. Consequently, 1st April, 2016 is also being notified as the date from which the definition of support services shall stand deleted from the Finance Act, 1994.

Rationalisation of Interest Rates :

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Notification No. 13/2016 –ST & 14/2016

Interest rates on delayed payment of duty/tax across all indirect taxes is proposed to be made uniform at 15%, except in case of service tax collected but not deposited with the Central Government, in which case the rate of interest will be 24% from the date on which the service tax payment became due.

Further, for the amount collected in excess of the tax assessed or determined, rate of interest would be 15% as against 18%.

In case of assessees, whose value of taxable services in the preceding year/years covered by the notice is less than Rs. 60 lakh, the rate of interest on delayed payment of service tax will be 12%.

Government Exempted Services provided by Bio Incubators :

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Notification No. 12/2016 dated 01. 03. 2016

Vide this Notification, services provided by Bio Technology Incubators which are approved by Biotechnology Industry Research Assistance Council (BIRAC) to the incubates are being exempted from Service Tax with effect from 1st April, 2016.

Exemption to Software recorded on Media bearing RSP

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Notification No. 11/2016 dated 01. 03. 2016

By this Notification Service Tax has been exempted w.e.f. 1st March, 2016 on Information Technology Software if such software is:

(1) recorded on a media which is notified under Chapter 85 of the CETA ;
(2) on which RSP is required to be declared;
(3) the value of the package of such media domestically procured or imported, has been determined under Section 4A of the CE Act;
(4) Excise Duty / CVD has been paid by the manufacturer / importer on RSP basis;
(5) the service provider has to make a declaration on the invoice that no amount in excess of the declared RSP has been recovered from the customer;
(6) E xemption from excise to the extent of value liable for service tax in case of customized software which does not require RSP (Notification no. 11/2016 – CE refers).

Amendment in Point of Taxation Rules, 2011

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Notification No. 10/2016-ST dated 01. 03. 2016

Section
67A is proposed to be amended to obtain specific rule making powers in
respect of Point of Taxation Rules, 2011. Point of Taxation Rules, 2011
are being amended accordingly. The amendment in the Rules would come
into force with effect from the date of enactment of the Finance Bill,
2016.

SERVICE TAX UPDATE – Changes in Abatement Notification No. 26/2012

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Notification No. 08/2016 dated 01. 03. 2016
CBEC vide this notification has made the following changes in Abatement Notification No. 26/2012, which will be effective from 1st April 2016 :

Notification No.2 :
Transport of Goods by Rail (other than service specified below): Taxable Value 30%: Subject to condition that Cenvat Credit of Input & Capital Goods used for providing the said service is not availed. Earlier, credit of Input service was also not allowed along with Inputs & Capital Goods. However, now Cenvat credit of Input Service is allowed.

Notification No.2A :
Transport of goods in containers by rail by any person other than Indian Railways : Taxable Value 40% : Subject to condition that Cenvat Credit of Input & Capital Goods used for providing the said service is not availed. This is a newly inserted entry.

Notification No.3:
Transport of passengers, with or without accompanied belongings, by rail : Taxable Value 30% : Subject to condition that Cenvat Credit of Input & Capital Goods used for providing the said service is not availed. Earlier credit of Input service was also not allowed along with Inputs & Capital Goods. However, now Cenvat credit of Input Service is allowed.

Notification No.7:
Services of goods transport agency in relation to transportation of goods OTHER THAN USED HOUSEHOLD GOODS : Taxable Value 30% : Subject to condition that Cenvat Credit of Input, Input Service & Capital Goods used for providing the said service is not availed. Earlier, this was applicable for “Services of goods transport agency in relation to transportation of goods”. So, all goods including household goods were covered. Now, same is omitted from this Entry & separate entry No. 7A is provided for the same.

Notification No.7A:
Services of goods transport agency in relation to transportation of USED HOUSEHOLD GOODS : Taxable value 40% : Subject to condition that Cenvat Credit of Input, Input Service & Capital Goods used for providing the said service is not availed. This is a newly inserted entry.

Notification No.8:
Services provided by a foreman of chit fund in relation to chit: Taxable value 70% : Subject to condition that Cenvat Credit of Input, Input Service & Capital Goods used for providing the said service is not availed. This is a newly inserted entry.

Notification No.9:
Transport of passengers, with or without accompanied belongings, by- a) a contract carriage other than motorcab. b) a radio taxi c) a Stage carrier : Taxable value 40%: Subject to condition that Cenvat Credit of Input, Input Service & Capital Goods used for providing the said service is not availed.

Notification No.10:
Transport of goods in a vessel : Taxable value 30% : Subject to condition that Cenvat Credit of Input & Capital Goods used for providing the said service is not availed. Earlier, credit of Input service was also not allowed along with Inputs & Capital Goods. However now, Cenvat credit of Input Service is allowed.

Notification No.12:
Construction of a complex, building, civil structure or a part thereof, intended for a sale to a buyer, wholly or partly except where entire consideration is received after issuance of completion certificate by the competent authority : Taxable value 30% : Subject to condition that (i) CENVAT credit on inputs used for providing the taxable service has not been availed. This entry was earlier also in existence, however it includes categories such as carpet area less than 2000 sq.ft. or more than that etc. (ii) The value of land is included in the amount charged from the service receiver. Now these categories are removed and such taxable service is charged at 30% of total value.

Notification No.11 :
Substituted (Defin. of ‘Package Tour’ given at para-2 is omitted)

Service by Tour Operator in respect of : (i) tour, only for arranging or booking accommodation : Taxable value 10 : This abatement of 90% cannot be claimed in such cases where the invoice, bill or challan issued by the tour operator, in relation to a tour, only includes the service charges for arranging or booking accommodation for any person and does not include the cost of such accommodation.; (ii) other than (i) above : Taxable value 30 : CENVAT credit on inputs, capital goods and input services other than input services of a tour operator, used for providing the taxable service is not availed.

Changes in Mega Exemption Notification No. 25/2012 dated 01. 03. 2016

[A] New Entries inserted to exempt services :

(1) Entry 9B w.e.f. 01.03.2016: Services provided by the Indian Institutes of Management (IIM), as per the guidelines of the Central Government, to their students, by way of the following educational programmes, except Executive Development Programme, –

a. two year full time residential Post Graduate Programmes in Management for the Post Graduate Diploma in Management, to which admissions are made on the basis of Common Admission Test (CAT ), conducted by the IIM;

b. fellow programme in Management;

c. five year integrated programme in Management.

(2) Entry 9C: Services of assessing bodies empanelled centrally by Directorate General of Training, Ministry of Skill Development and Entrepreneurship by way of assessments under Skill Development Initiative (SDI) Scheme.

(3) Entry 9D: Services provided by training providers (Project implementation agencies) under Deen Dayal Upadhyaya Grameen Kaushalya Yojana under the Ministry of Rural Development by way of offering skill or vocational training courses certified by National Council For Vocational Training.

(4) Entry 12A and 14A w.e.f. 01.03.2016: Restoration of certain exemptions withdrawn last year for projects, contracts in respect of which, contracts were entered into before withdrawal of the exemption. [Refer changes discussed supra under newly proposed Section 102 and Section 103 of the Finance Act, for details].

(5) Entry 14 (ca): Services by way of construction, erection, commissioning, installation of original works pertaining to low cost houses up to a carpet area of 60 sq. m. per house in a housing project approved by the competent authority under the “Affordable housing in partnership” component of PMAY or any housing scheme of a State Government.

(6) Entry No. 23(bb): Service of transportation of passengers, with or without accompanied belongings, by a stage carriage, was in the Negative list of services vide Section 66D(o)(i) of the Finance Act. With the proposed deletion of said entry under the Negative List, a new entry is being inserted under the Mega Exemption Notification so as to exempt services by a stage carriage other than air conditioned stage carriage.

(7) Entry No. 26(q): Services of general insurance business provided under ‘Niramaya’ Health Insurance scheme launched by National Trust for the Welfare of Persons with Autism, Cerebral Palsy, Mental Retardation and Multiple Disability Act, 1999 (44 of 1999).

(8) Entry No. 26C: Services of life insurance business provided by way of annuity under the National Pension System regulated by Pension Fund Regulatory and Development Authority of India (PFRDA) under the Pension Fund Regulatory And Development Authority Act, 2013 (23 of 2013).

(9) Entry No. 49: Services provided by Employees’ Provident Fund Organisation (EPFO) to persons governed under the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 (19 of 1952).

(10) Entry No. 50: Services provided by Insurance Regulatory and Development Authority of India (IRDA) to insurers under the Insurance Regulatory and Development Authority of India Act, 1999 (41 of 1999).

(11) Entry No. 51: Services provided by Securities and Exchange Board of India (SEBI) set up under the Securities and Exchange Board of India Act, 1992 (15 of 1992) by way of protecting the interests of investors in securities and to promote the development of, and to regulate, the securities market.

(12) Entry No. 52: Services provided by National Centre for Cold Chain Development under Ministry of Agriculture, Cooperation and Farmer’s Welfare by way of cold chain knowledge dissemination.

(13) Entry No. 53 w.e.f 01.06.2016: Services by way of transportation of goods by an aircraft from a place outside India upto the customs station of clearance in India.

[B] Withdrawal of Exemption :

(1) Entry No. 6(b) & (c) has been amended to withdraw exemption in respect of the following: Services provided by a senior advocate to an advocate or partnership firm of advocates and to a person other than a person ordinarily carrying out any activity relating to industry, commerce or any other business or profession; and a person represented on an arbitral tribunal to an arbitral tribunal.

Hence, Service tax in the above instances would be levied under forward charge. However, legal services provided by a firm of advocates or an advocate other than senior advocate is being continued i.e. under Reverse Charge.

(2) Entry 14(a): Exemption to construction, erection, commissioning or installation of original works pertaining to monorail or metro is being withdrawn. However, the said services, where contracts were entered into before 01.03.2016, on which appropriate stamp duty, was paid, shall remain exempt.

(3) Entry No. 23(c): Exemption to services for transport of passengers, with or without accompanied belongings, by ropeway, cable car or aerial tramway is being withdrawn by deletion of this entry.

[C] Expansion of Scope :

(1) Entry No. 13: Scope expanded to also cover the following: Services provided by way of construction , erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, or alteration of:

(ba) a civil structure or any other original works pertaining to the ‘In-situ rehabilitation of existing slum dwellers using land as a resource through private participation’ under the Housing for All (Urban) Mission/Pradhan Mantri Awas Yojana, only for existing slum dwellers;

(bb) a civil structure or any other original works pertaining to the ‘Beneficiary led individual house construction / enhancement under the Housing for All(Urban) Mission/ Pradhan Mantri Awas Yojana’.

(2) Entry 16 : The threshold exemption limit of consideration charged for services provided by a performing artist in folk or classical art form of (i) music, or (ii) dance, or (iii) theatre, has been extended from Rs. 1 lakh to Rs. 1.5 lakh per performance (except brand ambassador).

[D] New definitions inserted :

(1) “approved vocational education course” means, –

(i) a course run by an industrial training institute or an industrial training centre affiliated to the National Council for Vocational Training or State Council for Vocational Training offering courses in designated trades notified under the Apprentices Act, 1961 (52 of 1961); or

(ii) a Modular Employable Skill Course, approved by the National Council of Vocational Training, run by a person registered with the Directorate General of Training, Ministry of Skill Development and Entrepreneurship.

(2) “senior advocate” has the meaning assigned to it in Section 16 of the Advocates Act, 1961 (25 of 1961).

(3) “(oa) “educational institution” means an institution providing services by way of:

(i) pre-school education and education up to higher secondary school or equivalent;

(ii) education as a part of a curriculum for obtaining a qualification recognised by any law for the time being in force;

(ii) education as a part of an approved vocational education course;”

These definitions will be effective from the date of enactment of the Finance Bill, 2016.

M/s. G. K. Micro Metal Pvt. Ltd. vs. State of M. P. Ltd Others, [2013] 64 VST 147 (MP)

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VAT – Entries in Schedule – Aluminium Granules (Powder) – Are Same as Aluminium, Entry 36 of Part III of Schedule II of The Madhya Pradesh Value Added Tax Act, 2002.

FACTS
The assessee dealer, a company, sold aluminium powder and had paid sales tax @ 4% treating it aluminium covered by Entry 36 of Part II of the Schedule II of the Act. The department levied tax @12.5% under residual entry. The company filed writ petition before the Madhya Pradesh High Court (Gwalior Bench) against aforesaid assessment order.

HELD
Under Entry 36 of Part II of Schedule II of the Act, rate of tax on sale of aluminium is 4%. The company is selling aluminium granules (Powder). It is used as aluminium. There is no different use. Since the nature of the product is the same and use is the same, the petitioner company is not liable to pay tax 12.5% under residual entry. The residual entry would not be applicable when a specific rate of tax entry has been prescribed on a particular commodity. Accordingly, the High Court allowed the writ Petition filed by the company and directed the assessing authority to reassess the tax liability of the company after calculating payment of rate of tax payable by the company at four per cent on sale of aluminium granules (powder).

M/s. MRF Ltd. vs. State of Tamil Nadu, [2013] 64 VST 103 (Mad)

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Inter-State Sales – Delivery of Goods – Against Allotment Letter – Subsequent Dispatch of Goods Outside the State – Local Sale – Purchase Tax Payable – At Last Point, Section 3(a) of The Central Sales Tax Act, 1956 and Item 74 of Schedule I of The Tamil Nadu General Sales Tax Act 1959.

FACTS
The appellant company purchased rubber from State Trading Corporation against allotment letter. Delivery thereof was given within the State of Tamil Nadu by STC and the appellant dealer subsequently dispatched it to its branches outside the State of Tamil Nadu. Since goods were sent by the appellant dealer outside the State, the STC charged CST on such sales to applicant. The enforcement department visited place of business of the appellant dealer and found that delivery is given within the State as such did not accepted claim of inter-State purchase of appellant dealer and levied purchase tax at last point, despite tax paid by selling dealer under the CST Act treating it as inter-State sale. The Tribunal confirmed the order of lower authorities. The appellant filed revision petition before the Madras High Court against the order of Tribunal.

HELD
The terms and conditions of allocation of natural rubber shows that they are general in character, that whenever there is a movement of rubber in the course of inter-State trade, as an incidence of sale, certainly, as per the clause, central sales tax provisions would stand attracted. Therefore, the inclusion of a clause referring the to furnishing of C forms as regards inter-State sale in the general conditions, per se, would not in any manner, speak on the character of the transaction. There is nothing on the record to show that the parties intended on the facts of the case that allotment was intended to result in the movement of goods to various branches of the assessee. The application of the delivered rubber to any particular unit outside the State is a matter of choice and the discretion of the assessee and the seller, at no point of time, was involved in this. On a reading of facts of the case, the High Court held that the assessee after having purchased the goods had issued dispatch instruction for movement of goods to other State. Thus there was no link between the purchase and dispatch. It is difficult to say that the movement is nothing but an inter- State sale. Accordingly, the claim of applicant for inter-State purchase was rejected by the High Court and confirmed the levy of purchase tax as last point purchase. However, since selling dealer had charged CST @4% and remitted to the Government and rate of purchase tax is 5%, the State was directed to give necessary adjustment in respect of four per cent tax paid by selling dealer STC as the payment made in respect of the assessment made on the assessee as last purchaser and that the balance tax payable by the assessee would be only to the extent at one percent. Accordingly, the High Court dismissed the applications with above direction for adjustment of CST paid by selling dealer towards payment of purchase tax by the appellant.

M/s. Paul Varghese vs. CCT, [2013] 64 VST 6 (Ker)

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Sales Tax – Penalty – Levied Under Special Provision – Then Penalty Under General Provision Cannot be Levied for Same Offence, sections 17(4), (5A) and 45A of the Kerala General Sales Tax Act, 1963.

FACTS
The Petitioner had opted for simplified procedure of assessment u/s. 17 (4) of the Act and the assessment was completed accordingly, subsequently, upon investigation, the dealer was reassessed and subjected to penalty u/s. 17(5A) of the Act. Further, the dealer was also subjected to penalty u/s. 45A of the Act.

The dealer filed a writ petition before the Kerala High Court against the levy of penalty under the general provision of the act contained in section 45A of the Act particularly when penalty order for same offence u/s. 15(5A) was levied and accepted.

HELD
Admittedly, the liability u/s. 17(5A) of the act for levy of penalty upon reassessment of an order of simplified assessment passed u/s. 17(4) of the Act had become final. The dealer is not liable to be punished for the same offence by referring to the general provision of section 45A as to the failure to maintain proper accountants and non response to the notice, which stands on a much lower pedestal. Even though sections 17(5A) and 45A are distinct and different, governing separate situations, the offence involved is measured in greater scales, imposing punishment in a mandatory manner, that too by “three times” of the tax effect in respect of the years 1998- 1999 and 1991-2000, while leaving the rest in respect of 2000-2001 as the turnover did not touch the limit to suffer any tax liability in respect of 2000-2001 for imposing the “mandatory penalty” u/s. 17(5A), there is no question of considering the same for imposing the “discretionary penalty” u/s. 45A as well. When a “special provision’ is there the “general provision” has to be excluded, so as to give way to the former. In the instant case, section 17(5A) is the special provision and section 45A is the general provision, which in term has to yield to the former. Accordingly, the High Court allowed writ petition filed by the dealer and levy of penalty u/s. 45A of the Act was set aside.

[2016-TIOL-08-ARA-ST] M/s Godaddy India Web Services Pvt. Ltd.

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Promotion and marketing, branding etc. without securing orders or facilitating provision of service are naturally bundled services of support and accordingly are covered under Rule 3 of the Place of Provision of Service Rules, 2012.

Facts
The Applicant proposes to enter into a “service agreement” with a foreign company providing web services to customers across the world. Services to be provided include marketing and promotion services, direct marketing, branding, offline marketing by conducting road shows, arranging seminars, supervising third party customer care center services, payment processing etc. for a consideration of cost plus mark-up of 13% in US dollars. The Applicant is not authorised to enter into any contract on behalf of the foreign company or secure orders or facilitate the provision of services. The question before the authority is whether the aforesaid services are support services naturally bundled in terms of section 66F of the Act and if so, whether the place of provision is outside India and whether the service qualifies as export in terms of Rule 6A of the Service Tax Rules, 1994.

Held
The Authority noted that the services proposed to be provided are with a sole intention of promotion of the brand of the foreign company by augmenting its business and therefore would support their business interests in India. Further it was held that the definition of ‘intermediary’ under Rule 2(f) of the Place of Provision of Service Rules, 2012 excludes a person who provides the “main service” on his own account. Supporting the business of the foreign company is the main service and processing payments and supervision of third party call centers are ancillary and incidental to the main service of support which is offered as a package for a lumpsum payment. Thus in view of these indicators the proposed services are support services naturally bundled in the normal course of business and fall under Rule 3 of the POPS as per which the place of provision is the location of the service receiver. There is no contract between the applicant and the customers of the foreign company in India and no consideration is received from the Indian customers. The benefit of the service accrues to the foreign company outside India and thus the support service is provided outside India i.e. the location of the service receiver. Further since the payment is received in convertible foreign exchange and all other clauses of Rule 6A of the service tax rules are satisfied the service qualifies to be an export.

2016 (41) STR 454 (Tri.-Mum.) Commr. Of C Ex. Nashik vs. Sahastronics Controls Pvt. Ltd.

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If any service is provided for fulfilment of a condition of the contract, the services are provided to self and hence, not taxable.

Facts
The Respondent was awarded with a contract on build, own, operate and transfer (BOOT) mode by Nasik Municipal Corporation for micro processor based energy saving devices and its maintenance. As per the contract, post commencement of operations, the operations and maintenance of these devices was to be done by the Respondent and if a device/s did not function optimally, then to that extent, they would not get remuneration. The remuneration was fixed as a percentage of operating profit to be arrived after reducing the cost from the savings in electricity consumption. Show Cause Notice was issued proposing to demand service tax on operating profit. The adjudicating and first appellate authority took a view that service was rendered to self as Respondent was required to maintain the equipments in order to earn revenue and the ownership of the equipment was with them and accordingly, dropped the demand. The department challenged the order before the Tribunal.

Held
The Tribunal observed that the lower authorities have given their findings on the basis of the facts and documents on record. As per grounds of appeal, no allegations are made which contradicts with the findings of the lower authority and hence the Appeal was dismissed.

2016 (41) STR 441 (Tri-Mum.) Maharashtra Chamber of Housing Industry vs. C.C.E, C. & ST, Mumbai

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New plea/ground regarding limitation cannot be taken at the stage of second appeal.

Facts
In the present case, the Appellant was challenging the leviability of service tax on amounts received from nonmembers. During the hearing a new ground of demand getting barred by limitation was raised.

Held
Since the Appellant had neither raised the limitation ground at adjudication stage nor in the first appeal, it was held that no new ground can be raised at the second appeal stage.

[2016] 66 taxmann.com 244 (Chennai-CESTAT) – Sify Technologies Ltd. vs. Commissioner of Service Tax, LTU, Chennai.

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When CENVAT credit is systematically allocated between departments providing taxable services and those providing exempt services, Rule 6(2) of CENVAT Credit Rules, 2004 becomes applicable and Rule 6(3) cannot be invoked.

Facts
Appellant had 3 types of departments namely Department A (providing taxable services), Department B (providing exempt services) & Department C (administrative department). The Appellant apportioned input service tax credit earned by Department C, between Departments A & B in the ratio of their respective turnover. It was submitted that when the records clearly demarcated the extent of credit allocable the credit cannot be disallowed without bringing any cogent evidence to demonstrate that those services were not relevant. Whereas department contended that once the assessee comes under Rule 6(2) of CENVAT Credit Rules, the application of Rule 6(2) and 6(3) simultaneously is not possible. As assessee failed to comply with the conditions prescribed by Rule 6(3) read with Rule 6(3A) of CENVAT Credit Rules, the entire CENVAT credit was disallowed.

Held
The Tribunal observed that the Appellant had already reversed credit allocated to Department B which provided exempt services. It held that Rule 6(3) of CENVAT Credit Rules contains overriding provisions which are independent of provisions of Rule 6(1) and (2). Since proper records were maintained which enabled substantial allocation of CENVAT credit in respect of taxable as well as exempt services, its case would get covered under Rule 6(2). Therefore, there cannot be a presumption by the Revenue that such method falls under Rule 6(3) of CENVAT Credit Rules. Accordingly, the matter was remanded to adjudicating authority to a limited extent to examine allocation of the credit received by Department A through Department C.

[2016] 66 taxmann.com 77 (Chennai CESTAT) – Smt. A Vijaya vs. Commissioner of Central Excise, Salem.

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In multi-level marketing; profit earned by first level distributor from sale of manufacturer’s product on his own account and volume based incentive / commission received by him on his purchases would not be liable for service tax under Business Auxiliary Services. However, commission earned on purchases made by next level distributor sponsored by him would attract service tax.

Facts
Appellants being individuals and household agents (i.e. first level distributors) bought products from ‘Amway’ for sales to retail customers at MRP. They also identified second level distributors and sold Amway products to them for further retail sale. First level distributors had three types of income namely (i) profit from products purchased from Amway at Distributor’s Acquisition Price and sold at amount not exceeding product’s MRP (ii) volume based commission based on purchases made by them from Amway and (iii) commission earned from Amway on the basis of purchases made by second level distributor sponsored by them in the chain of direct marketing. Department levied service tax on gross commission earned by distributors under category of “Business Auxiliary Services” on the ground that they not only made retail sale by direct marketing, but they also engaged in sales promotion on behalf of Amway by appointing 2nd line and 3rd line distributors.

Held
While deciding the case, the Hon’ble Tribunal applied the ratio laid down in similar case by Principal Bench of New Delhi CESTAT in Final order Nos. 51818 51855/2015 dated 09/06/2015 in case of Mr. Charanjeet Singh & others (Batch of 38 appeals). It observed that Amway products are not sold on the shelf but only through distributors and that Amway products cease to belong to Amway once they are purchased by a distributor and ownership of goods gets transferred to the distributor. It held that “Business Auxiliary Services” would cover promotion, marketing or sale of those goods which belong to client and not those goods which belong to distributor themselves. Hence, sale of these goods by distributors/ sub-distributors would not constitute service to Amway. Further it concurred with the decision of the Principal Bench on the aforesaid case in which Tribunal held that any incentive or commission received by the distributor from Amway for buying certain quantum of goods during a month cannot be treated as consideration received for promotion or marketing or sale of goods, more so, as this commission is not linked to goods sold by the first level distributor but his purchases, it is in the nature of volume discounts. However, commission received by Appellants on the basis of volume based purchases of Amway products made by their sales group i.e. group of second level of distributor appointed by Amway as identified qua the Appellants is held to be liable for service tax, on the ground that by sponsoring such second level distributors, the Appellants in fact promote sales of Amway products and commission paid for the same is also linked to sales made by Amway company directly to such second-level distributors.

D. H. Patkar & Co. vs. ITO ITAT “D” Bench, Mumbai Before B.R.Baskaran (AM) and Ramlal Negi, (JM) I.T.A. No.: 4524/Mum/2013 A.Y.:2009-10. Date of Order: 18th March, 2016. Counsel for Assessee / Revenue: Jignesh R. Shah / B. S. Bist

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Explanation u/s. 37(1) – Payment of speed money to dock workers are not bribes or prohibited under the law hence cannot be disallowed.

Facts
The assessee, a partnership firm, was engaged in clearing and forwarding agency business. During the year it paid the sum of Rs. 34.6 lakh as speed money to the dock workers on behalf of its clients. The AO took the view that these payments are in the nature of bribes and hence the same cannot be allowed as deduction as per the Explanation given u/s. 37(1) of the Act. The CIT(A) also confirmed the order of the AO.

Before the Tribunal, the assessee submitted that these expenses have been incurred on behalf of its clients and in support produced the copies of bills raised upon its clients. It was further submitted that the assessee was constrained to incur these expenses upon the instructions of its clients in order to get their job of loading and unloading done quickly. The payment was also justified on the ground that it was a prevailing practice to incentivise the dock workers by paying some extra charges to get the job done quickly. He submitted that these kinds of payments are not prohibited by law and hence the tax authorities are not justified in invoking the Explanation to section 37(1) of the Act to disallow the claim of the assessee.

Held
According to the Tribunal, the impugned disallowance merits deletion for the following reasons:

these payments have been made by the assessee on behalf of its clients and hence the same does not constitute its own expenditure;

even though the assessee has routed the expenditure and reimbursement received from its clients through the Profit and loss account, yet it is settled principle that the books of accounts of the assessee cannot be the sole determinative factor to decide about the nature of expenditure;

the AO has invoked the provisions of Explanation to section 37(1), but he has not cited the relevant law, which prohibits such kind of payments;

the assessee’s claim that it was paid to the workers has not been disproved.

Therefore, the Tribunal set aside the order of the AO and directed him to delete the disallowance.

PSU Banks’ Bad Loans – Lax legal system – Swift action in the Vijay Mallya case is important

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A day after a consortium of 13 banks approached the Supreme Court to prevent controversial industrialist Vijay Mallya from leaving the country, the court was told on Wednesday that the former chairman of United Spirits Limited had been in London since March 2. While he may not be able to escape the legal process for long, as the Supreme Court has issued notices to him, the entire saga is an example of how crony capitalism has grown deep roots in the country and how banks have dragged their feet when big names are involved. Several of his lenders have a lot to answer for, if they have to counter the growing perception about their cosy relationship with an errant promoter. Why, for example, did they take four years to move the apex court? How could they lend crores of rupees to Kingfisher when pledged assets were only one-tenth of the value of the loan? Or, as the apex court asked, why were loans given to Mr. Mallya when he was a defaulter and was facing legal proceedings? It’s also not clear how banks attached such a high value to the Kingfisher Airlines brand and used it as collateral for giving huge loans. The government’s promises apart, public sector banks still await an institutional mechanism and an operational environment that can insulate their lending from political and other influences.

The country’s legal framework has also added to the problem; for example, after United Bank of India declared Mr. Mallya a wilful defaulter, a court struck it down on technical grounds. There are countless other examples of promoters delaying the loan recovery process on some legal grounds or the other, thereby allowing wilful defaulters to become “freeloaders” – to borrow a term used by Reserve Bank of India Governor Raghuram Rajan. As the Kingfisher example shows, an inordinately long time in taking action against defaulters only helps in erosion of the value of the underlying assets, leaving nothing much to banks. In that context, the bankruptcy code now in Parliament is of critical importance. Like in the West, a modern law with a focus on speedy closure will help firms on the brink to be either restructured or sold off with limited pain for all involved. In some cases, if this is done swiftly, assets can be put to good use and the firm can be revived. Fast-track courts too are needed in India to take these cases to closure fast.

India does have some laws – including one on securitisation and reconstruction of financial assets and enforcement of security interest or the SARFAE SI Act – and other mechanisms, like Strategic Debt Restructuring, to address the problem of corporate insolvency. But many of these laws or guidelines have not worked because of inefficient enforcement. For example, banks rely on debt recovery tribunals that were created under a 1993 law to help financial institutions reclaim loans. But the tribunals have been swamped with so many cases that it may take at least another four years to clear them. Mr. Mallya is right when he said on Sunday in a grandiose statement that while he has been declared a wilful defaulter, many large borrowers who owe much more have got away. But swift action on the Mallya case is important, as it will set a strong example for the rest of the large defaulters who have taken the banking system for a ride.

(Source: Editorial in the Business Standard dated 10-03- 2016.)

Quota Blackmail – Roots of Jat agitation lie in lack of jobs which needs fixing, but giving in sets a bad precedent

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Nine days into Haryana’s Jat reservation stir 19 lives have already been lost, almost 200 have been injured and economic damage is estimated at a staggering Rs 20,000 crore. The government of chief minister Manohar Lal Khattar, who was heckled in the epicentre of the agitation in Rohtak, has unfortunately agreed to bring a bill for quotas to Jats in the state assembly’s next session.

The government’s willingness to capitulate before agitators who used violent means sets a bad precedent. Not only did the rioters bring the state to a standstill, they also damaged Delhi’s water supply network, which will take another two weeks to bring back on par.Giving in to such street tactics by those who are essentially pursuing a political demand can only harm the polity . Attempts to finalise the Jat quota will create further trouble.

The Supreme Court has set a 50% cap on quotas, exceeding this is illegal.

But to stay within the quota will have to be carved out of someone’s else share. It will then be the turn of that community to agitate. The results will also be keenly watched by dominant castes elsewhere such as Patels in Gujarat, Kapus in Andhra Pradesh and Marathas in Maharashtra all of whom want reservation. We could soon see eruptions elsewhere, if not in Haryana.

In the short term, governments need to hold their ground. They cannot sidestep this issue by conceding more quotas. And in the long term all political parties need to question some axioms of populist politics today . Firstly, caste quotas should not monopolise our notions of social justice. We need subtle rather than sledgehammer forms of affirmative action, for example, a points-based system that gives most weightage to economic deprivation.

Secondly, creation of jobs is falling radically short of India’s demographic demand. Economic policy must be indexed to job growth rather than GDP growth, reforms that grow jobs must be pushed through. These include radical labour reforms which incentivise the creation of more jobs, facilitation of land acquisition by industry , as well as educational reforms which radically improve the quality of public sector institutions while uninhibitedly inviting the private sector to play a greater role. If we fail to undertake these and similar job-creating reforms the Jat stir will not be the last reservation agitation we will see, damaging though it might have been.

(Source: Editorial in The Times of India dated 24-02-2016.)

How we must Redraft Education Policy

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The legal and regulatory environment of our education system is in a sorry state. A statement from IIT Bombay faculty has spoken of the pitfalls of government overregulation of higher education. But the problem exists across the spectrum: pre-primary, K-12, colleges, universities et al.

I am sure no one would disagree that we need more innovation in our education system. But where do we really stand in recognising that our education system is weighed down by decades of inefficiency and red tape? Students, parents, schools and colleges are victims of this daily malaise. Governments have been unable to support government schools, but they are more eager to meddle with the private school system. This calls for a radical change in mindset.

Private unaided education should not be looked at through the same prism as government run or even private aided education. Alas, that is exactly what is happening. Take the example of the recent spate of Fee Regulation Acts across states such as Maharashtra, Tamil Nadu and Rajasthan. Private unaided schools now need the approval of the respective state governments and in the case of Maharashtra, the parents, through an executive committee, before they can increase their fees!

No one forces anyone to attend these schools and they are in any case prohibited from profiteering and charging any sort of capitation fee. They need to comply with RTE as well. So why then interfere in their fee setting process? If parents have a grievance they can always approach the state’s education department.

This is nothing but blatant interference in what is essentially a fundamental right under our Constitution that allows schools to practise their occupation without unreasonable restrictions. This is what an 11 judge bench of the Supreme Court held in the TMA Pai case. Fee regulation also leads to corruption, favouritism and an overall adversarial atmosphere.

Kids are the biggest losers. Schools have to justify each penny they wish to charge and that will invariably lead to financial pressure on the schools, which in turn will have a domino effect on the quality of education and availability and cost of finance.

It’s also ironical that 100% FDI is permitted under the automatic route in education in India, but that investment has to be in a not for profit entity subject to all these restrictive regulations! Yes, there was a time and place for a more socialist approach to education. India was newly independent and needed a number of safety nets. But fast forward to 2016, and a lot has changed.

We need less government in the private sector, more entrepreneurship, higher quality of education and freedom for private schools to make their own decisions. The government instead of interfering with private schools should focus on improving the government school network. This too will require participation from the private sector. Governments are strapped for cash and need this support. PPP in various forms can prove to be highly successful. We have seen successes in Africa and Latin America in the low income private school sector and we need to replicate that in India. This requires governments to free their minds and not look at private education with suspicion.

There are six things that state governments and regulators can do. First, focus on improving government schools with the help of reputed private players in the low income private school sector.

Governments can let the private sector adopt schools and run them as low cost schools. This has been successful in Latin America and Africa. Research has shown that even those with lower incomes would prefer to pay a little for quality education rather than sending their kids to free government schools where nothing is taught or learnt.

Second, repeal fee regulation and other regressive rules that interfere with the management and functioning of private unaided schools. Instead, retain the power to grant approvals for setting up schools, ensure quality control through a self-regulation mechanism and prevent capitation fees being charged.

Third, boards of affiliation need to be more pragmatic in their oversight. Procedures and other rules and regulations should recognise the role played by technology and be amended to reflect our times. Fourth, allow private unaided schools to choose a legal structure of their choice rather than restricting them to “not for profit” structures. This will enable schools to raise more funds and improve the quality of education without having to create “innovative” structures to do so. Haryana permits schools to be set up by companies. Companies have far more regulatory obligations and reporting requirements compared to trusts and societies! This therefore should not be a concern to governments.

Fifth, distance education programmes should be liberalised and not shackled by territorial jurisdiction limits. The new distance education guidelines should be drafted in a manner that allows cross border access and must do away with the concept of state boundaries.

Sixth, the government has been very proactive in liberalising FDI, preparing a startup policy and an IP policy. They should draft the new national education policy with the same zeal and ensure it’s a forward looking policy, which takes into account the role of technology and also modern and progressive systems of learning.

The sooner the government realises that over regulation kills innovation, the better for education, students and the government’s own development goals.

(Source: Article by Vivek Kathpalia in The Times of India dated 23-02-2016.)

Budgets – the long view

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The flood of commentary that follows the presentation of a Union Budget focuses quite naturally on the immediate numbers. However, it is the long view that often proves more educative. Taking the perspective of the last decade, budgetary numbers present some clear trends.

To start with, central tax revenue and GDP will have remained in lock step: GDP (at current prices) is expected to have grown 3.4 times over the decade to 2016-17; so is budgeted tax revenue for next year. However, the states’ share of this revenue will have multiplied 4.7 times, leaving net central tax revenue to grow barely three-fold — and therefore slower than GDP. That the fiscal deficit has been controlled, regardless, is because of the spectrum bonanza that the government has engineered.

The contribution of different taxes to the total tax kitty has seen changes. Income-tax revenue is budgeted to have grown significantly faster than GDP, multiplying 4.3 times over the decade. Since GDP has grown only 3.4 times, people are now paying a greater share of their income as tax. Companies have not been as generous — corporation tax revenue is budgeted to have grown at nearly the same speed as GDP. Don’t blame the companies, though. The stress in the corporate sector has caused the share of profits in GDP to drop to a low point. If companies start doing better and reporting profit growth, corporation tax revenue will see a boost, not just in absolute terms, but also in relation to GDP.

Among indirect taxes, the star performer is service tax, whose revenue next year is budgeted to be a massive six times greater than a decade earlier. This is not just because service tax rates have been raised, but also because the coverage of the tax has been expanded. However, the other indirect taxes have disappointed. Customs duties, for instance, are budgeted to grow next year to just 2.8 times the level a decade earlier. This could indicate that duty rates have been dropped, making the economy more open than before, or that there has been a change in the import mix, towards items that attract lower duty. Alternatively, more imports are duty-free because they feed exports. Whatever the reason, the collection rate for Customs duty has dropped to barely 8 per cent of total imports in the last full year, compared to about 9 per cent of imports a decade earlier.

Finally, there is the other underperformer, excise duty. Revenue from this is budgeted to grow next year to just 2.7 times the level a decade earlier — making it the slowest-growing tax item, and growing slower than GDP, although the share of manufacturing in GDP has not fallen. The primary reason for the slippage is probably the fact that excise duties were lowered in the wake of the financial crisis of 2008, and are yet to be taken back up to the level that prevailed earlier. Perhaps finance ministers have stayed their hand because imposing higher excise duties might affect already depressed demand for a range of goods.

What conclusions should one draw from these numbers? First, the faster growth of revenue from direct taxes (on income and corporate profits) is to be welcomed as it makes the tax system more progressive. That customs duties are growing slower than both GDP as well as imports is also to be welcomed, if it can be confirmed that this is because duty rates have dropped and made the economy more open. However, the fact that taxes on manufacturing are growing slower than GDP should cause concern. Overall, the government’s total expenditure in relation to GDP is the same as it was a decade earlier. This tells us that, for all the excitement over annual budgets, finance ministers have little leeway for introducing change until the share of taxes in GDP grows. That will happen when the economy recovers momentum — corporate profits will grow and yield more taxes, and excise duty rates can be taken back to where they were before the 2008 crisis.

(Source: Weekend Ruminations by T. N. Ninan in Business Standard dated 12-03-2016.)

The real threat to India is not Kanhaiya, it’s lack of jobs

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Indian political life is rich in ironies. A leftist student leader, Kanhaiya Kumar, is arrested for sedition and anti-national conduct. The arrest turns him into a hero and a symbol of the freedom to dissent. The home minister defends the arrest by wrongly citing the United States as an exemplary democracy that doesn’t tolerate anti-national dissent.

Continuing strident protests crowd out a fine annual Budget of the government. In a magnificent speech, the ‘symbol of freedom’ reveals his true colours, espousing a statist ideology that does not allow economic freedom and has a record of killing millions for dissenting.

Prime Minister Modi’s great achievement was to broaden the appeal of the BJP in 2014 to a vast number of aspiring Indians who were swept by his rhetoric of jobs, growth and vikas. He thus created a genuine Indian conservative party made up of an ‘economic right’ and a ‘cultural right’, resembling the Republicans in America and the Conservatives in England.

Many on the economic right had little sympathy for Hindutva but they took a calculated risk, hoping that Modi would keep the cultural right under control, as Ronald Reagan did in the US and Margaret Thatcher in the UK.

Two weeks ago the government presented a prudent, jobcreating Budget that rightly offered a ‘new deal’ to rural India. Particularly inspiring was the announcement of a mission to finally liberate millions of women in the villages from smoke-filled chullahs in their kitchens by giving them access to cooking gas, and removing at one go the most pernicious form of pollution that blights the lives of Indian women. It also sent a powerful message to Bharat — rural India too could aspire to the lifestyle of urban India!

Grabbing eyeballs: The sedition row crowded out the Union Budget and its new deal for rural India.

The second nugget in the Budget was to give statutory authority to Aadhaar, which paves the way to deliver cash transfers into the bank accounts of the poor via mobile banking (including the women who will shift to cooking gas from cow dung). It is extraordinary that 98 crore Indians already have Aadhaar numbers, almost the same number as mobile phones, and 20 crore families now have bank accounts.

There will always be concerns related to privacy in a national identity program but I believe the Aadhaar bill addresses these fears. Plenty of countries have also solved this problem. The dramatic gains in the public delivery of subsidies and benefits to the poor via Aadhaar far outweigh the potential risks to privacy.

The Aadhaar bill is as transformative as any legislation introduced in India’s parliament. There were other gems in Jaitley’s Budget but all these were quickly forgotten, crowded out by the massive coverage of Kanhaiya, the new darling of the Indian media. Meanwhile, the future of the aspiring millions is in serious jeopardy.

The economy needs to accelerate by two full percentage points to deliver the required jobs. The Budget does offer the potential to do so but it will need single-minded attention to execution. The Prime Minister cannot afford more distractions like the sedition controversy, and he must control the cultural right if he wants to deliver his election promise.

The BJP government made the mistake of making a martyr of Kanhaiya. He is not a threat to India. The real threat lies in the failure to create jobs. If Modi wants to deliver vikas and restore credibility with the economic right of his party, he must control the cultural right and focus single-mindedly on executing his Budget.

(Source: Extracts from an article by Shri Gurcharan Das, & former CEO of Procter & Gamble India, in The Times of India dated 13-03-2016.)

The Indian classics belong to the world, and no one has exclusive rights – Rohan Murty

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Ancient India represents more than 3,000 years of extraordinary literature, science, history, and culture. Yet, the world is fast losing and not sufficiently replenishing scholars who can access, digest, and share these treasures with the modern world.

In recent times, the Bhandarkar Institute, Sanskrit College (Chennai), Deccan College, and Bharatiya Vidya Bhavan have been among the plethora of institutions that hosted generations of great classical scholars, and my family has had the honour of supporting them philanthropically. Yet, economic pressures and a change in societal priorities, among other issues, have resulted in very few people in my generation studying the classics as their first choice. This trend is worrying and begs the question: who will continue to study, intelligently debate, and widely share the extraordinary knowledge that we have gathered over several millennia?

To turn this tide we must work together to ensure that the knowledge of ancient India lives on for generations to come. This requires several efforts that will collectively work towards a future where the study of ancient Indian history, mathematics, classics, literature, etc will proliferate across the world and be as vaunted as the study of ancient Greece or Rome. One where the citizens of the world will marvel at what the ancients here did.

It is for this reason that I support the Murty Classical Library of India (MCLI), a non-profit whose aim is to assemble the best scholar-translators worldwide to edit, translate, and annotate the greatest works in classical Indian literary and intellectual history. Our hope is not only to bring to readers everywhere pleasure and instruction, but also pride to the people of India at the luminous achievements of our poets and thinkers. At the same time, we are actively working to encourage young people to familiarise themselves with classical texts, to learn the original scripts, to seek help from our annotations, and actually begin to read not only the English translations but also the original Indic works on their own.

MCLI is perhaps the most ambitious translation project, spanning over two millennia and 14 classical Indian languages. Our expert translators range from Vanamala Viswanatha (Kannada) in Bengaluru to Christopher Shackle (medieval Punjabi) in London to David Shulman (Telugu and Tamil) in Jerusalem to Velcheru Narayana Rao (Telugu) in Atlanta. These are just a few of the many world-class scholars translating for MCLI, each of whom reflects our mission to find the best scholars for each text and language, wherever they might reside. Translation is an art form and our editors and scholars work together to ensure that the translations remain faithful to the source. Sheldon Pollock, our general editor, is an extraordinary scholar who, along with the rest of our staff, works tirelessly to create the most exacting scholarship possible. Sheldon himself was fortunate to train under India’s brilliant academics, such as M. V. Patwardhan and Srinivas Sastry (Pune); P. N. Pattabhirama Sastry (Varanasi); Balasubrahmanya Sastry (Mantralayam); and Venkatachala Sastry and Vidwan Nagaraja Rao (Mysore). His dedication and passion for producing high-quality and faithful translations that will outlive us all is evident to anyone who actually reads an MCLI book.

Recently, there have been suggestions that political alignment should inform participation in MCLI. On the contrary, politics has absolutely no place in the work we do at MCLI and thus is not a factor in determining who collaborates with us. This is an enterprise of pure scholarship and genuine love, period. That said, participation in MCLI does not preclude people from holding or expressing their political views on matters outside the purview of MCLI. That is a fundamental right that we will not abridge.

I am proud to have such a diverse mix of scholars contributing to MCLI, as ancient Indian classics ought to have universal appeal. They are as much a part of world heritage as Greek, Latin, or Chinese classics. Hence I do not agree with the view that classical Indian scholarship is the sole purview of Indians, no more than I believe that the study of Shakespeare ought to be exclusively left to the English. In fact, some of the best-known scholars on English literature are Indians! On this note, I am inspired by what the Mahatma said: “I do not want my house to be walled in on all sides and my windows to be stuffed. I want the cultures of all the lands to be blown about my house as freely as possible. But I refuse to be blown off my feet by any.” Sadly, as a society today we have let our institutions, manuscripts, and scholarship in these areas fall into a state of disrepair. And this I am going to help rebuild.

Notwithstanding its early momentum, however, MCLI alone cannot be the panacea for the challenges ahead. At best, MCLI will produce some 2,500 volumes over the next 500 years, yet there are possibly millions awaiting translation. Given all that’s to be done, I hope we can spend less time pitting Indian against Indian and instead think earnestly about how to best preserve our cultural heritage for generations to come.

There is far too much to be done in far too little time. MCLI is just one of many initiatives I hope to support in my lifetime to ensure that the institutions, manuscripts, and scholarship in the areas of the classic endure. I look forward to working constructively with anybody — be they ethnically Indian or otherwise — as long as they are honest scholars of the highest calibre interested in advancing the same visions articulated here.

(Source: Article by Shri Rohan Murty, sponsor of Murty Classical Library of India , in The Times of India dated 06.03.2016)

Bad loans – Reform banking beyond naming & shaming – India’s political economy has to change, too

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The Supreme Court (SC) has asked India’s central bank, the Reserve Bank of India (RBI), to hand over a list of all companies that owe more than Rs 500 crore to (mainly) state-owned banks, but whose promoters continue to live, well, in some comfort. The second criterion is dicey, since what constitutes high living tends to be subjective, but it should be an easy matter for the RBI to hand over a list of the major defaulters. Since taking over in 2013, RBI governor Raghuram Rajan has been fighting a lonely battle to get banks to clean up their books, seize assets of habitual defaulters and impose some discipline in the country’s moth-eaten lending system. The SC order strengthens his hand in the fight to break the cronyism between bankers and promoters. This is welcome.

The court can reveal the names handed over by the RBI. Naming and shaming might achieve results that gentle nudges have failed to deliver. However, such a list of names would contain the names of both those who wilfully borrowed too much to achieve too little and defaulted in desultory impunity and those who fell to unanticipated political risk that compounded normal business risk in the period of policy paralysis after a former telecom secretary was sent to jail in 2011. The point, really, is to reform banking as practised in the public sector, redeem banking decisions from political/bureaucratic interference. That, in turn, calls for overhauling political funding to make it transparent and free of the proceeds of corruption, besides overhaul of ownership and control. The malaise in banking has its roots in our political economy.

Rajan’s job would have been simpler had he been armed with a modern bankruptcy law similar to the US’. Yet, parliamentary logjam has thwarted India’s new bankruptcy code, which could permit swift resolution of bad loans. The government must prioritise this as the number one item on its legislative agenda and get it passed in the Budget session. Of course, for this, it would need to engage the Opposition, instead of calling it antinational and other names. (Source: Editorial in The Economic Times dated 19-02-2016.)

Narendra Modi, Mark II

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Has Narendra Modi re-set his political sights? He talks now of the poor,
not the neo-middle class that featured in his campaign manifesto and in
Arun Jaitley’s first Budget. When railway finances are in poor shape,
he decides to not raise railway fares – though fares cover barely
twothirds of cost. He has done a dramatic about-turn on the rural
employment guarantee programme, which he no longer damns as a monument
to Congress failures. The promise of minimum government has gone out the
window. And he sounded defensive, even beleaguered, when he spoke the
other day of conspiracies to “finish” him – conspiracies by civil
society activists, if you please, while he (i.e. Mr. Modi) was busy
working for the people.

To many observers, that sounded like
Indira Gandhi who campaigned in 1971 by saying: “They say ‘Indira
hatao’, I say ‘Garibi hatao’.” Though her economic policies did little
to remove poverty, she is remembered by the poor as someone who stood
for and by them. It is beginning to look like Mr Modi thinks that is not
a bad place to be. Typically, the arrival of “Modi Mark II” is to be
marked by a kisan maha sammelan in Delhi, with 100,000 farmers to
attend. So the nervous question in business circles is: will Mr Modi,
less than two years into office and wounded by Rahul Gandhi’s
“suit-boot” jibe, use the Budget to announce his new political
positioning?

If he does, there will be parallels with P. V.
Narasimha Rao, who turned his back on economic reforms in 1993, two
years after launching them, because of electoral reverses in two
southern states. Soon Rao was to announce freebies on Independence Day,
while Manmohan Singh as finance minister grumbled in an interview that
you could not spend your way to prosperity. The record of other prime
ministers too shows how much can change when a prime minister is faced
with the two-year challenge. Elected to the Lok Sabha in 1967, Indira
Gandhi faced a political challenge in 1969 and wrested the initiative
only by splitting the Congress and launching on a reckless string of
nationalisations and ruinous tax measures. Reelected in 1971, she was
faced with JP’s anti-corruption movement by 1973, and eventually imposed
Emergency rule. Elected a third time in 1980, she had to confront
Bhindranwale’s “Dharam Yudh Morcha” in 1982, leading to the Punjab
insurgency that eventually cost her her life.

When it came to
Rajiv Gandhi, the Bofors scandal hit him shortly after he completed two
years, in 1987; he would never recover the political initiative. As for
Mr. Vajpayee, re-elected in 1999, the challenge came midway into his
term, from the Rashtriya Swayamsevak Sangh boss K. S. Sudarshan. Their
power play was on the swadeshi issue; Mr. Vajpayee stood his ground. And
Manmohan Singh, two years into his second term, was hit in the solar
plexus by the government’s auditor; his government remained paralysed
till its term ran out.

Mr. Modi faces no real political challenge
or crisis, least of all because of civil society activists. But he
recognises that some of those whom he enthused in 2014 are now a
disappointed lot, even as successive droughts have caused severe
distress in the countryside. While it is entirely right that he should
address that urgently, the danger with “Modi Mark II” is that he will
focus on giveaways rather than the tougher task of boosting productivity
(and therefore farm incomes). In a search for a more secure political
constituency, Mr. Modi might even be tempted to revert to the failed
policies of Indira’s time: trade protectionism, redistributive taxes
that encourage evasion, and policies that favour government-funded
investments rather than private sector recovery. One hopes not.

(Source: Weekend Ruminations by Shri T. N. Ninan in Business Standard dated 27-02-2016.)

A. P. (DIR Series) Circular No. 53 dated March 03, 2016

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Grant of EDF Waiver for Export of Goods Free of Cost

Presently, Status Holder exporters can export, free of coat, freely exportable items for export promotion annually up to Rs 10 lakh or 2% of average annual export realization during preceding three licensing years, whichever is higher.

This circular now provides that Status Holder exporters can export, free of coat, freely exportable items for export promotion annually up to Rs 10 lakh or 2% of average annual export realization during preceding three licensing years, whichever is lower.

Notification No.FEMA.362/2016-RB dated February 15, 2016

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Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) (Second Amendment) Regulations, 2016

This Notification has amended Notification No. FEMA. 20/2000-RB dated 3rd May 2000 as under: –

A. In Regulation 2 – new clause (viiAA) has been inserted as under: –

“(vii AA) “Manufacture”, with its grammatical variations, means a change in a non-living physical object or article or thing- (a) resulting in transformation of the object or article or thing into a new and distinct object or article or thing having a different name, character and use; or (b) bringing into existence of a new and distinct object or article or thing with a different chemical composition or integral structure.”

B. In Regulation 14 the following amendments have been made
a. In sub-regulation 1, existing clause (i) and clause (ia) have been amended.
b. In sub-regulation 3, existing sub-clause (D) in clause (iv) has been amended.
c. Sub-regulation 5 – Guidelines for establishment of Indian companies/ transfer of ownership or control of Indian companies, from resident Indian citizens to non-resident entities, in sectors under government approval route – has been amended.

d. In sub-regulation 6, the existing clause (ii) has been amended.

C. In Schedule 1 the following amendments have been made: –

a. In paragraph 2, paragraph beginning with “Provided further that the shares or convertible debentures…..” and ending with “…………permitted to the extent specified in Regulation 14.” has be deleted.

b. In paragraph 2, new clause (v), has been inserted as under: –

“(v) by way of swap of shares, provided the company in which the investment is made is engaged in an automatic route sector, subject to the condition that irrespective of the amount, valuation of the shares involved in the swap arrangement will have to be made by a Merchant Banker registered with SEBI or an Investment Banker outside India registered with the appropriate regulatory authority in the host country.
c. Note: A company engaged in a sector where foreign investment requires Government approval may issue shares to a non-resident through swap of shares only with approval of the Government”
d. In paragraph 3, the existing sub-paragraph (c) has been deleted.
e. In ‘Annex B’, the existing table – Foreign Investments caps and entry route in various sectors – has been substituted.

D. In Schedule 9 the following amendments have been made: –
a. Existing paragraph 4 – Entry Route – has been amended.
b. Existing paragraph 8 – Downstream Investment – has been deleted.

E. E xisting Schedule 11 – Investment by a person resident outside India in an Investment Vehicle – has been substituted.

Notification No.FEMA.361/2016-RB dated February 15, 2016

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Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) (Amendment) Regulations, 2016

This Notification has amended Notification No. FEMA. 20/2000-RB dated 3rd May 2000 as under: –

A. Substituted clause (viia) in Regulation 2 as follows: – “(viia) Non-Resident Indian (NRI) means an individual resident outside India who is citizen of India or is an ‘Overseas Citizen of India’ cardholder within the meaning of section 7 (A) of the Citizenship Act, 1955.”

B. Substituted Regulation 5(3) as follows: – “(i) A Non- Resident Indian (NRI) may acquire securities or units on a Stock Exchange in India on repatriation basis under the Portfolio Investment Scheme, subject to the terms and conditions specified in Schedule 3. (ii) A Non- Resident Indian (NRI) may acquire securities or units on a non-repatriation basis, subject to the terms and conditions specified in Schedule 4.”

C. Substituted Schedule 3.

D. Substituted Schedule 4.

SEBI debars Auditor for one year – a precedent for other professionals too?

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SEBI has, probably for the first time, barred a Chartered Accountant and auditor of a listed company from issuing certificates for a wide range of entities and purposes. The bar, though not a total one, is fairly wide both in respect of the services he can render and the entities to which he can render such services.

The order of SEBI (“the Order”) is in the case of Shri Shashi Bhushan, Proprietor of M/s. Bhushan Aggarwal & Co., in the matter of Ritesh Properties and Industries Limited (Order No. WTM/RKA/EFD/23/2016 dated 17th February 2016).

Summary of THE Order
The matter concerned a listed company (“the Company”) that was alleged to have carried out several accounting irregularities such as inflated revenues/profits, incorrect classification of assets, etc. The report of the Auditors did not point out these irregularities. In a subsequent year, the Company actually reversed by way of restatement the whole of such inflated revenues of the two years under consideration. The price of the shares of the Company had moved from Rs. 3.52 to Rs. 123.50 during the period that the order covered. An earlier order of the SEBI on the Company gives more details of other alleged violations by the Company.

The Company, as per the order, was engaged in real estate/ land related activities. The Company had recognized substantial revenues that were shown to have resulted in significant profits. SEBI appointed an independent Chartered Accountant to conduct special examination of the accounts of the Company. SEBI recorded a finding that there were serious accounting irregularities that had resulted in overstatement of revenues/profits. SEBI considered this not only to be a fraud by the Company but also alleged that the auditors abetted the company in doing so. Consequently, SEBI passed prohibitory directions to such Chartered Accountant.

Violations of Accounting Standard/Guidance Notes
SEBI considered the relevant requirements of Accounting Standard 9 on Revenue Recognition and the Guidance Note on Recognition of Revenue by Real Estate Developers issued by the Institute of Chartered Accountants of India. It examined the detailed facts of the case and contrasted the requirements of such Accounting Standard/ Guidance Note with the actual accounting practices followed by the Company. According to SEBI, “correct accounting procedures and practices had not been followed in preparation of financial statements of the Company”.

Allegations/findings of SEBI against the Auditors
SEBI stated that, “It was observed from the analysis of the report that the auditor had fraudulently certified the annual report, which it did not believe to be true and had fraudulently caused the annual reports of the relevant period to be published with untrue information, in spite of the presence of unusual features in the accounts of the Company”. SEBI made certain further observations such as:-

“… the Auditor had fraudulently omitted to disclose…”

“It was alleged that as a statutory auditor of the Company, the Auditor failed to notice that the Company had not followed the accounting standards for recognising revenue.”

– “The Auditor had certified the overstated revenue and profits recognised by the Company in violation of the applicable Accounting Standards for recognising revenue from real estate business.”

– “In spite of the presence of unusual features in the accounts which prima facie gave reason to believe that the revenue recognised by the Company was not in order, the Auditor had willfully/ fraudulently failed to take note of the same while certifying the accounts of the Company. The aforementioned commissions and omission by the Auditor prima facie indicated the intention to benefit the Company in disseminating the false financial position and to defraud the investors by not giving the true and fair picture of the Company’s financial position.”

– “…it was observed that knowing very well that what was being certified was not true and fair report of the Company, the Auditor had certified its Annual Reports, suppressing Related Party Transactions and showing inflated and false financial position of the Company only to defraud the general investors.”

SEBI alleged that the Auditors had contravened several provisions of the SEBI Act and PFUTP Regulations relating to fraudulent and other practices. After reviewing the submissions of the Auditors, SEBI concluded that:-

“…it has been established that correct accounting procedures and practices had not been followed in preparation of financial statements of the Company and the Noticee had falsely certified misleading Annual Accounts of the Company, containing distorted information, which he did not believe to be true but certified knowing that the same when published would be relied upon by the investors to be true and fair and such certification was intended for the benefit of the Company and its promoters/ directors in their alleged manipulation of price in the scrip of the Company. I, therefore, find that by the aforesaid acts and omissions the Noticee aided and abetted the Company in disseminating the false financial position and to defraud the investors by not giving the true and fair picture of the Company’s financial position and, thus, its acts and omissions amount to aiding and abetting in the fraudulent, unfair and manipulative acts in connection with dealing in the shares of Ritesh Properties and are covered within the definition of “fraud” and “fraudulent” under regulation 2(1)(c) of the PFUTP Regulations…” (emphasis supplied)

Direction of debarment against the Auditors
In view of this, SEBI passed prohibitory directions debarring the Auditors. The wording of the debarment are interesting (emphasis supplied):-

“… hereby prohibit Shri Shashi Bhushan, Proprietor of M/s. Bhushan Aggarwal & Co. from, directly or indirectly, issuing any certificate required under securities laws namely Securities Board of India Act, 1992 (sic), the Securities Contract (Regulations) Act, 1956, the Depositories Act, 1996, Rules, Regulations, Guidelines made thereunder, the Listing Agreement and the applicable provision of the Companies Act, 2013, the Rules, Regulations, Guidelines made thereunder which are administered by SEBI, with respect to listed companies and the intermediaries registered with SEBI for a period of one year.”

Some aspects need attention:-
– the prohibition is on issue of certificates and not reports.
– The certificate may be under any of the specified securities laws, viz., SEBI Act, SCRA and Depositories Act and the rules, regulations and guidelines issued thereunder. The laws specified, particularly the rules, regulations and guidelines are numerous.
– The certificate may be even under the the applicable provision of the Companies Act, 2013, the Rules, Regulations, Guidelines made thereunder which are administered by the Securities and Exchange Board of India.
– The certificate must be required under the said specified laws.
– The certificates may relate to listed companies as well as intermediaries registered with SEBI. The term intermediaries covers a wide range of entities active in the securities market.

Applicability to other professionals
It is not uncommon for SEBI to find such entities engaging in accounting irregularities. Clearly, while SEBI would take actions against such persons for such matters, the role of the Auditors would also now increasingly come into focus. This order may become thus one of the first of many such orders in the future.

While passing the order, SEBI stated, “This is also a fit case where SEBI needs to send a stern message to professionals who associate themselves with securities market so as to prevent them from indulging in such acts of omissions and commissions as found in this case.” (emphasis supplied). While these words do show SEBI’s desire to act strictly, the use of the word “professionals” needs attention. Other professionals such as Company Secretaries, lawyers, etc. too associate themselves with and advise entities in the securities markets. It can thus be expected that, in appropriate and similar cases, such orders may also be passed against other professionals such as Company Secretaries, lawyers, etc.

Locus standi of SEBI to pass such orders
It will be interesting to watch the progress of such orders and how appellate authorities/courts act in that regard. In Price Waterhouse vs. SEBI ((2010) 103 SCL 96), the Bombay High Court had observed that, “isst 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 SEBI cannot give appropriate directions in safeguarding the interest of the investors of a listed Company….. 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.” (emphasis supplied). Thus, the Court endorsed the power of SEBI to take action against auditors who engage in such acts.

Whether SEBI has exclusive, parallel or overlapping jurisdiction over auditors?

In the present case, SEBI held the Chartered Accountant to have acted in a manner aiding and abetting in the fraudulent, unfair and manipulative acts, etc. as prohibited under the SEBI PFUTP Regulations. However, this obviously does not rule out actions by other authorities including ICAI depending on facts of each case. The auditor may also face action for non-reporting of fraud u/s. 143(12) of the Companies Act, 2013. Thus, Auditors (and other professionals) may see multiple actions under different provisions and from different authorities/ persons. And it is possible that the parties who can take action may only increase. For example, if and when the provisions relating to class actions u/s. 245 of the Companies Act, 2013, are brought into effect, there may be claims for damages/compensation too. Similarly, when brought into effect, NAFRA may also have a role. Concerns may also arise whether such actions can be exclusive or overlapping/multiple for essentially the same default.

The Bombay High Court in Price Waterhouse’s case cited earlier did make some distinction between the role of ICAI and SEBI. For example, it stated that, “It is true, as argued by the learned counsel for the petitioners, that SEBI cannot regulate the profession of Chartered Accountant. This proposition cannot be disputed in any manner”. However, it also held if SEBI takes “remedial and preventive measures in the interest of investors and for regulating the securities market, if any steps are taken by SEBI, it can never be said that it is regulating the profession of the Chartered Accountant”. Importantly, it also observed, “In a given case, if ultimately it is found that there was only some omission without any mens rea or connivance with anyone in any manner, naturally on the basis of such evidence, SEBI cannot give any further directions.”

These words do give broad guidance of what role SEBI has and where it can and cannot act. They affirm SEBI’s powers but at the same time limit them. Having said that, several concerns and issues still remain as to where the lines of demarcation, if any exist, are to be drawn, whether the role will be overlapping, whether the defense of double jeopardy for multiple punishments would be available, etc. Discussion of this would be beyond the scope of this article and competence of this author.

Conclusion
SEBI has powers to take action against a wide range of persons who are associated with the securities markets. Such persons are not merely those who are registered with SEBI as intermediaries or are listed companies whose securities are listed on stock exchange. Auditors and other professionals, independent directors, key managerial personnel, etc. are also persons who have been over the years been acted against by SEBI. The law is clearly developing and there are grey areas and concerns that hopefully will see more light on as time passes.

SICA vs. SARFAESI – And the Winner Is…..

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Introduction
The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (“SARFAESI”) is an Act meant to protect the interests of secured creditors by giving them a mechanism by which they can enforce their secured interests without resorting to any Courts or Debt Recovery Tribunals. Thus, it is a creditor protection Act. On the other hand, the Sick Industrial Companies (Special Provisions) Act, 1985 (“SICA”) is an Act to protect and revive companies suffering from industrial sickness. Thus, it is a debtor protection Act.

A very interesting question arises here – should these two special Acts have a head-on collision, which one would prevail? This was the issue which the Supreme Court was faced with in M/s. Madras Petrochem Ltd vs. BIFR, Civil Appeal Nos.614-615/2016, (Order dated 29th January 2016). The Apex Court analysed the interplay between the SARFAE SI and the SICA.

At a time when the Indian banking system is creaking under the weight of bad loans/NPAs and we are witnessing several high-profile loan default cases, this decision has several far reaching ramifications. According to press reports, over Rs. 1.14 lakh crore of bad loans were written off by public sector banks alone in 2012-15!

Overview of the SARFAESI
According to the SARFAE SI, a secured creditor can enforce any security interest created in its favour. This can be done without the intervention of any Court or Tribunal. If the borrower fails to repay the liabilities then the creditor can adopt one or more of the measures enshrined under this Act which includes, taking possession of or taking over the management of the secured assets of the borrower including the right to transfer by way of lease, assignment or sale for realising the secured asset; appointing a manager to manage the secured assets taken over by the secured creditor; requiring any person who has acquired any of the secured assets from the borrower and who has to pay any money to the borrower, to pay such amount to the secured creditor, etc. Details of the procedures have been laid down for taking over possession of and selling of movable/ immovable assetsby the secured creditor.

Section 37 of this Act states that the provisions of the Act would be in addition to and would not override the Companies Act, the Securities Contracts (Regulation) Act, the Securities and Exchange Board of India Act and the Recovery of Debts Due to Banks and Financial Institutions Act. Further, section 35 of this Act provides that the provisions of the SARFAE SI would have effect over any other inconsistent law.

Overview of the SICA
Under the SICA, any company whose networth has been fully eroded by its losses must make a reference to the Board of Industrial and Financial Reconstruction (BIFR). If the BIFR decides to admit the reference, then an inquiry will be made by the BIFR and efforts will be made to revive the company or if these efforts fail or are not possible, then the BIFR would order winding-up. However, no reference can be made to the BIFR where financial assets, i.e., any loan given to the sick company has been acquired by a securitisation company under the SARFAE SI. Further, if a reference is pending before the BIFR, then it would abate if 3/4th of the secured creditors decide to take recourse to the SARFAE SI to enforce their secured interest.

One of the most relevant provisions of the SICA is section 22 which provides that where any reference is made to the BIFR and it is admitted then no suit/proceedings will lie against the sick company for recovery of money or for the enforcement of any security against the sick company except with the consent of the BIFR. Thus, section 22 provides a shield to sick companies against any recovery proceedings. Accordingly, the issue before the Supreme Court in the current case was whether section 22 would bar any recovery measures by banks / FIs under the SARFAESI Act?

DRT Act
Yet another legislation to assist banks and financial institutions to deal with the menace of bad loans is the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (DRT Act) which allows banks/FIs to approach specially constituted Debt Recovery Tribunals for expeditious adjudication and recovery of debts. The Supreme Court in Mardia Chemicals Ltd. vs. Union of India (2004) 4 SCC 311 held that the SARFAE SI was enacted because the DRT Act had failed to achieve its desired results.

Contours of the 3 Statutes
The Supreme Court considered the genesis of these three legislations. It held that each of these dealt with different aspects of recovery of debts due to banks and financial institutions. Two of them referred to the creditors’ interests and how best to deal with recovery of outstanding loans and advances made by them, whereas the SICA dealt with certain debtors which were sick industrial companies and whether such debtors having become sick, were to be rehabilitated.

Interplay between SICA and Ot her Acts
The Supreme Court analysed the SICA’s relationship visa- vis other statutes. The decided cases on this issue were as follows:

(a) The SICA prevailed over the State Financial Corporations Act, 1951 since both were special statutes dealing with sickness/recovery of debts and containing non-obstante clauses, but SICA was the later Act– Maharashtra Tubes Ltd vs. State Industrial and Investment (1993) 2 SCC 144.

(b) The SICA prevailed over the Interest on Delayed Payments to Small Scale and Ancillary Industrial Undertakings Act, 1993 by virtue of an amendment in 1994 to SICA since the amendment was later than the 1993 Act – Jay Engineering Works vs. Industry Facilitation Council (2006) 8 SCC 677.

(c) The Arbitration and Conciliation Act, 1996 which contained a non-obstante clause was subordinate to SICA because the Arbitration Act’s non-obstante clause had a limited application to the extent of judicial intervention in arbitration proceedings – Morgan Securities and Credit P Ltd vs. Modi Rubber Ltd (2006) 12 SCC 642.

(d) The Companies Act being a general Act would yield to the SICA being a special Act – Tata Motors Ltd vs. Pharmaceutical Products of India Ltd (2008) 7 SCC 619. The same was the verdict in the case of Raheja Universal Ltd vs. NRC Ltd (2012) 4 SCC 148 which held that the Transfer of Property Act, 1882 being a general law was subordinate to the SICA which was a special law.

(e) The DRT Act and the SICA are both special laws – one to provide measures for restoration of sick companies and the other to provide for speedy recovery of debts of banks. However, with specific reference to sick companies, the SICA is a special law while it is a general law when it came to recovery of debts. In this respect, DRT was a special law. The DRT Act was also later in time than the SICA. However, since the DRT Act contained a specific provision in s.34(2) which provided that it would be in addition to and not in derogation of the SICA, it was held that the SICA would prevail over DRT – KSL & Industries Ltd vs. Arihant Threads Ltd (2015) 1 SCC 166.

SC’s Observations
The Supreme Court observed that section 37 of the SARFAE SI expressly provided that it would not be in derogation but in addition to 4 Acts ~ the Companies Act, the Securities Contracts (Regulation) Act, the Securities and Exchange Board of India Act and the Recovery of Debts Due to Banks and Financial Institutions Act. The SICA was not one of these 4 Acts. Hence, the Legislature was conscious of the fact that SARFAE SI would not be in addition to the SICA and could in fact, override it. This proposition was strengthened by the fact that section 41 of the SARFAESI amended the SICA but section 37 excluded the SICA. While the DRT Act was expressly mentioned u/s. 27, the SICA was not. Therefore, the SARFAESI must be given precedence over the SICA.

Further, section37 contained the words “or any other law for the time being in force” and section 35 contained that the provisions of the SARFAE SI would override any other inconsistent law. The Supreme Court applied the harmonious construction rule and held that section 35 was subject to the 4 laws expressly carved out in section 37. Thus, as respects these 4 laws, the SARFAESI would not override them. Moreover, the words “or any other law for the time being in force” contained in section 37, when viewed in connection with the 4 securities’ market laws, would only be restricted to other laws having relation to the securities market. Even on this count, the SICA would not be included u/s. 37 since it is not a special law dealing with the securities market.

It also observed that the Companies Amendment Act, 2002 as well as the Companies Act, 2013 incorporated the provisions of the SICA by providing for a reference to be made to the National Company Law Tribunal instead of the BIFR. Neither of these have been notified but interestingly, none of these Acts contain a provision similar to section 22 of the SICA. Thus, going forward, creditors would be able to initiate recovery proceedings even when reference is pending before the Tribunal. The modified laws lean in favour of creditors being able to realise their debts outside of the court process. It analysed statistics of debt recovery which showed that of the total bad loans recovered in 2011-12, over 70% was under the SARFAESI Act and only 28% was under the DRT Act. This according to the Court, showed the efficacy of the SARFAESI Act. Hence, it concluded that it would be loathe to give an interpretation which would thwart the recovery process under the SARFAE SI, which alone seems to have worked at least to some extent. Accordingly, it held that section 22 of the SICA would have to yield way to the recovery proceedings taken by banks/FIs under the SARFAE SI and the SICA would not offer a shield to the debtor company.

The SARFAESI Act is a complete code in itself and the earlier judgments rendered under the DRT Act cannot apply to it. Further, the incorporation of certain provisions of the Companies Act in the SARFAE SI Act shows that even the Companies Act is harmonised with it – Pegasus Asset Reconstruction P Ltd vs. M/s. Haryana Concast Ltd, Civil Appeal 3646/2011 (SC).

There are many situations in which the bar u/s. 22 of the SICA would not apply, for instance a rent act eviction petition on the ground of non-payment of rent. Such eviction petitions have been held not to be suits for recovery of money – Gujarat Steel Tube Co. Ltd. vs. Virchandbhai B. Shah, (1999) 8 SCC 11. In Kailash Nath Agarwal vs. Pradeshiya Industrial & Investment Corpn. of U.P. Ltd., (2003) 4 SCC 305, the U.P. Act under which recovery proceedings initiated against guarantors at a post-decree stage were held to be outside the purview of section 22.

Recovery Matrix
The Supreme Court laid down the recovery matrix for banks/other creditors in case of a sick company as follows: (a) In all cases where unsecured creditors of a sick company are involved, the SICA would override all the recovery proceedings, including under the DRT Act.

(b) Where secured creditors of a sick company are involved, the SICA would give way to the recovery proceedings, if any, initiated by the banks / FIs under the SARFAE SI. In this event, the recovery proceedings would be as under:

(i) If there is more than one secured creditor, then 60% of the secured creditors must agree to enforce their security under the SARFAE SI. In such a case, the SICA proceedings would abate.

(ii) If 60% consent is not achieved, then the bar on legal provisions u/s.22 of the SICA would apply.

(c) If instead of taking recourse under the SARFAE SI, secured creditors decide to approach the DRT under the DRT Act, then the shelter under the SICA would continue to be available to the sick company since the Supreme Court has held that the SICA is superior to the DRT Act.

Conclusion
This is a path-breaking judgment as far as banks are concerned. There are numerous instances of sick companies taking shelter under the SICA to prevent loan recoveries by banks and FIs. This decision should act as a booster shot to the floundering banking sector. At a time when the RBI is goading the banks to fasten the recovery process, this should encourage banks and asset reconstruction companies to monetise all NPAs under the SARFAE SI. It is interesting to note that in the decision under discussion, the company was referred to the BIFR in December 1989 while the Supreme Court’s decision permitting sale came in January 2016, a time gap of 27 years! Is it not surprising that the Indian banking system is mired with bad loans?

Numerous attempts to repeal the SICA have failed with this Act yet ruling the roost. Recently, the Finance Minister blamed the slow and complex legal system plagued with delays for the bad loan mess. He also mentioned that India desperately needed a comprehensive bankruptcy and insolvency code. Till the time something urgently is done on this front, this judgment would provide some solace to the banks.

Vakalatnama – An Advocate who does not have Vakalatnama in his favour cannot concede claim or confess judgement affecting rights of party.

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Manuel Sons Financial Enterprises (P) Ltd. vs. Ramakrishnan and Ors. AIR 2016 Ker. 47.

An important and an interesting legal question arose before the Kerala High court about the authority of a counsel, who does not hold a vakalat for the party, to make an endorsement on the plaint that the party-defendant has no objection in decreeing the suit as prayed for.

In this case while the suit for redemption of mortgage was pending, one advocate by name Sri Mahadevan endorsed on the reverse of the plaint, said to be on behalf of the defendant company, that it had no objection in decreeing the suit. On the basis of this endorsement, learned trial Judge passed a decree in the suit as prayed for on 29.06.2006. Later on, the said decree was challenged by the defendant.

The High Court held that from the records of the trial court it was found that the Managing Director of the defendant company had authorised Advocate Sri Unnikrishnan by executing a vakalat to appear and act on behalf of the company. Advocate Sri. Mahadevan’s name, who made the endorsement on the reverse of the plaint on 27.06.2006 agreeing to decree the suit, was not seen mentioned in the said vakalat. Further, there was no reason brought out from the records to hold that the counsel who filed a vakalat for the defendant company had authorised another counsel to plead on his behalf for the party. Even if one assumes so, such counsel gets no authority to confess judgment against the interest of the party for whom he was only authorised to plead. In other words, an advocate cannot, unless he has filed in the court a memorandum of appearance (vakalat) prescribed by the Rules, concede the claim or confess judgment affecting the rights of a party as it exceeds the authority. The power to “plead” would include within its scope and ambit, the right to examine witnesses, seek adjournments, address arguments, etc. But such a pleader however cannot have the power to compromise a case or withdraw a case or to do any other act which may have the effect of compromising the interest of the client. No court shall accept or act on such a compromise or confession or admission without verifying whether the advocate doing so had been authorised by the party by executing a vakalatnama. A decree passed in a case on the basis of an endorsement by an advocate, who had no vakalat in the case, cannot be said to be a consent decree.

Tenants – tenants covered by the Rent Control Act cannot be dispossessed in an action initiated by the bank against the landlord debtor under the SARFAESI Act. [SARFAESI Act, 2002, Section 14 ]

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Vishal N. Kalsaria vs. Bank of India and Others. AIR 2016 SC 530

The landlords had approached the Bank of India for a financial loan, which was granted against equitable mortgage of several properties belonging to them, including the property in which the Appellant before the Apex Court was a tenant. As the landlords failed to pay the dues within the stipulated time in terms of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (the SARFAE SI Act), their account became a non-performing asset. Consequently, the Bank filed an application before the Chief Metropolitan Magistrate, Mumbai, u/s. 14 of the SARFAE SI Act for seeking possession of the mortgaged properties which were in actual possession of the Appellant. The Appellant then filed an application as an intervenor to stay the execution of the order passed by the Chief Metropolitan Magistrate. The learned Chief Metropolitan Magistrate vide order dated 29.11.2014 dismissed the application filed by the Appellant. The matter ultimately reached the Apex court.

The broad point which required consideration was whether a protected tenant under the Maharashtra Rent Control Act, 1999 (Rent Control Act) can be treated as a lessee and whether the provisions of the SARFAE SI Act will override the provisions of the Rent Control Act.

The Apex court also laid down the law where the tenancy is not registered. The Apex court held that the provisions of the SARFAE SI Act cannot be used to override the provisions of the Rent Control Act. Once tenancy is created, a tenant can be evicted only after following the due process of law, as prescribed under the provisions of the Rent Control Act.

The Apex Court further held that according to section 106 of the Transfer of Property Act, 1882 a monthly tenancy shall be deemed to be a tenancy from month to month and must be registered if it is reduced into writing. The Transfer of Property Act, however, remains silent on the position of law in cases where the agreement is not reduced into writing. If the two parties are executing their rights and liabilities in the nature of a landlord – tenant relationship and if regular rent is being paid and accepted, then the mere factum of non-registration of deed will not make the lease itself a nugatory. Further, in terms of section 55(2) of the Rent Control Act, the onus to get such a deed registered is on the landlord. In light of the same, neither the landlord nor the banks can be permitted to exploit the fact of non-registration of the tenancy deed against the tenant.

Partition of property – A Hindu widow can on her own file suit for partition under Hindu Succession Act 1956 in respect of her husband’s share in the property. [Hindu Succession Act, 1956]

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Santosh Popat Chavan & Others vs. Mrs. Sulochana Rajiv & Others. AIR 2016 Bombay 29

The plaintiff-respondent herein, Sulochana, widow of Rajiv Chavan filed Civil Suit for partition against the brothers and sister of her deceased husband. The matter ultimately travelled to the Bombay High Court.

The Bombay High Court in the case of Ananda Krishna Tate since deceased by Legal Heirs vs. Draupadibai Krishna Tate and others; 2010 (1) BCJ 714, had taken a view that a Hindu woman (mother, in that case) had no right to file a suit for partition under the provisions of the Hindu Succession Act, 1956 (the Act of 1956), which was earlier available as per section 3(3) of the Hindu Women’s Rights to Property Act, 1937 (the Act of 1937). In the absence of any other coparcener in the joint family demanding partition of the joint family property, the suit on her own was not maintainable.

The Bombay High Court held that the Hindu Succession Act was brought into force in the year 1956 and for emancipation of right to the women, the widow was given exclusive right to the property by removing the limited right that was given to her under the Act of 1937. Thus, right to share has been given to a widow upon death of her husband as per the Act of 1956. Further, the Act of 1956 does not carve out any prohibition on her from filing the suit independently. Hence, it must be held that she has the right to file the suit independently.

Thus, the right having been given to a widow or mother or women under the Act of 1956, she cannot be told that though she has a right to get the share, she cannot file a suit for recovery of share of her deceased husband as she had no right to file a suit. When a right is given, the remedy has to be there namely remedy to file a suit for partition, which cannot depend upon the desire or demand of other coparceners in the family to have a partition of the joint family property. The decision in the case of Ananda (supra) was held to be per incuriam.

Interest-tax Act – Reassessment – Where there is no assessment order passed; there cannot be a notice for reassessment inasmuch as the question of reassessment arises only when there is an assessment in the first instance.

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Standard Chartered Finance Ltd. vs. CIT [2016] 381 ITR 453 (SC)

On the return of chargeable interest filed by the appellant/assessee under the Interest-tax Act, 1974 for the assessment year 1997-98, no assessment order was passed. However, much after the last date of the assessment year was over, the Assessing Officer sought to reopen the assessment by issuing notice u/s. 10 of the Act and thereafter proceeded to reassess the interest chargeable under the aforesaid Act. The matter was carried in appeal by the assessee. The main contention of the assessee was that when there was no assessment order passed in the original proceedings there was no question of reopening the so-called assessment and make the reassessment. The Commissioner of Incometax (Appeals) accepted the aforesaid contention and set aside the reassessment order. This order was upheld by the Income-tax Appellate Tribunal (“the Tribunal”) as well. However, in further appeal by the Revenue before the High Court, the High Court reversed the view taken by the Tribunal holding that even if there was no original assessment order passed u/s.10 of the Act, there could be a reassessment. The assessee had relied upon various judgments in support including the judgment of the Supreme Court in Trustees of H.E.H. the Nizam’s Supplemental Family Trust vs. CIT [2000] 242 ITR 381 (SC). The High Court held that the said judgment would not govern the case at hand.

The Supreme Court after hearing the learned counsel for the parties, was of the opinion that the High Court had wrongly ignored upon the ratio laid down in Trustees of H. E. H. the Nizam’s Supplemental Family Trust’s case which squarely applied in the instant case in favour of the assessee. The ratio of the said judgment was that in those situations where there is no assessment order passed, there could not be a notice for reassessment inasmuch as the question of reassessment arises only when there is an assessment in the first instance.

The Supreme Court allowed the appeal and set aside the order passed by the High Court.

Receipt of Interest and Full Value of Consideration

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Issue for consideration
In recent times, many cases have surfaced involving the receipt of interest by a shareholder for delay in making a public offer for sale. The magnitude becomes considerably higher where the transfer of shares is by a Foreign Institutional Investor. In many cases, the interest is paid under an order of the regulator or a court.

The issue under taxation that arises for consideration, in the hands of the recipient, is about the treatment of such interest, received by him for the delayed offer for sale.

Whether such a receipt would lead to increase the value of consideration and would enter into computation of the capital gains or would it be separately taxable as income from other sources. Conflicting decisions are available on the subject that requires consideration, due to sheer magnitude of the receipt.

Morgan Stanley Mauritius Co.’s case
The issue recently arose before the Mumbai bench of the Tribunal in the case of Morgan Stanley Mauritius Co. Ltd., ITA No.1625/Mum/2014 adjudicated under an order dated 29.01.2016.

The assessee company, incorporated in Mauritius, was registered with SEBI as a sub-account of Morgan Stanley and Company International Ltd. (MSCIL). It had transferred 13,79,979 shares of I-flex Solution Ltd. held by it, to Oracle Global (Mauritius) Ltd.(Oracle) under the open offer for sale made by Oracle for an agreed consideration. In addition to the said consideration, it had received an additional consideration of Rs.2.20 crore from Oracle over and above the sales consideration. The assessee had treated the said additional consideration as the part of the full value of consideration and had accordingly computed the capital gains for which it had claimed exemption from Indian taxation as per the DTAA with Mauritius. The AO held that;

the additional consideration was not linked to original consideration and hence it was to be treated and taxed separately,

the amount received by the assessee was penal in nature,

while making the payment of additional consideration the deductor i.e., Oracle had deducted TDS,

the deduction of tax proved that it was not part of sales consideration, and

the ‘penal interest’ had to be taxed @ 41.82 %.

The Commissioner (Appeals) confirmed the action of the AO.

In the appeal by the company to the Tribunal, it was contended that that the original and revised schedule to the offer proved that the additional compensation @ Rs.16 per share was paid by Oracle for a period up to January 2007 and that the compensation paid was for the delay in making the offer and not for delay in making payment and was not interest. In addition, it was contended that the additional consideration was not received in respect of any monies borrowed or debt incurred or for use of money by Oracle; that the additional consideration was also not a service fee/charge in respect of money borrowed/credit facility which was not utilised by Oracle; that the amount in question would not fall within the definition of ‘interest’ as per section 2(28A) of the Act; that for a receipt to be taxed as interest, existence of a debtor/creditor relationship was a must as per Article-11 of the DTAA ; that there was no Debtor/Creditor relationship between the assessee and Oracle; that the assessee had not made available any capital/funds to Oracle; that the money received by it constituted an integral part of the sales receipts of the shares; that the consideration and sale price arose from the same source i.e., the shares transferred to Oracle under the open offer. In the alternative, it was contended that the additional consideration could not be taxed as capital gains under Article-13 of the Treaty; that it was also not covered under any of the specific Articles of the Treaty; that it would fall under the head ‘income from other sources’ under Article-22 of the Treaty; that the assessee had no Permanent Establishment (PE) in India; that the income from other sources would not be taxable in India as per the provisions of the Act. In a further alternative, with regard to rate of tax to be levied, it was contended that AO had erred in not taxing the additional consideration in accordance with the provisions of section 115AD of the Act; that he should have applied the rate of 20.91% as against the rate of 41.82%. The assessee relied upon the order of the Tribunal dated 14.8.2013 in the case of Genesis Indian Investment Company Ltd. (ITA/2878/Mum/2006) in support of its main contention and also referred to the decisions in the cases of Sainiram Doongarmal, 42 ITR392, (SC) ; Sahani Steel Works & Press Works Ltd. 152 ITR 39(AP); K.G. Subramaniam, 195 ITR 199 (Karn.) and Hindustan Conductors P. Ltd., 240 ITR 762 (Bom).

In reply, the Department contended that the additional consideration was received for delay in making the payment of sales consideration; that it could not be taken as part of total sale value; that Oracle had deducted TDS while making payment to the assessee; that deduction of tax at source indicated that the amount was not part of sale consideration but represented the interest portion for delayed payments; that same had to be treated as income from other sources; that the letter of offer made by Oracle talked about interest payment of Rs.11.35 per share; that the assessee had accepted the open offer; that there was debtor/creditor relationship between the assessee and Oracle; that the buyer of the share should have paid the whole amount as per the scheduled dates of payments; that the nature of all consideration received by assessee was in the nature of interest; that it was governed by Article-11 of the India Mauritius DTAA ; that it could not be taxed under Article-22 of the treaty under the head “other income’; that the additional consideration was interest for late payment of the sale proceeds; that the interest income taxable in the hands of the assessee could not be treated as income from securities; and that the provisions of section 115AD were not applicable in the case under consideration.

The Tribunal found that an open offer was made by Oracle to the share holders of I-flex at the price of Rs.1,475/- per share; that the open offer indicated that additional offer of Rs.11.35 per share was to be payable to the share holders; that as per the letter of open offer the additional consideration per share was to be paid due to delay in making the open offer and in dispatching the letter of the offer based on the time line prescribed by SEBI; that later on, the consideration of open offer was revised to Rs.2,084/- per share; that the additional consideration for delay was revised to Rs.16/- per share; that the open offer letter and public announcement indicated that a revised offer of Rs.2,100/- per share (including additional consideration of Rs.16/-) was to be payable for the shares tendered by the share holders under the open offer; that in response to the open offer, the assessee tendered its holding of 13,97,879 shares of I-flex and received Rs.2,89,77,45,900/- which sum included additional consideration of Rs.2.20 crore.

The Tribunal found that the offer letter contained two schedules, original and revised, and the revised schedule contained the details of additional consideration to be paid by Oracle, which in the opinion of the Tribunal could not be treated as penal interest or interest for late payment of consideration by Oracle. It found that initially the additional consideration was fixed at Rs.11.35 per share, but, because of the delay in making the open offer and dispatching the letter of the offer, was later enhanced to Rs.16.00 per share and thus, there was increase in the offer price of the shares; it was a fact that the regulatory authority i.e. SEBI had approved the transaction; that the transaction could not be completed in due time because of certain reasons; that Oracle had revised the offer price. Considering all the factors, the Tribunal held that the additional consideration received by the assessee was part and parcel of the total consideration that could not be segregated under the heads ‘original sale consideration’ and ‘penal interest received from Oracle’. It observed that the business world was governed by its own rules and conventions and on due consideration of the time factor, if Oracle decided to increase the share price in the offer letter, it had to be taken as a part of original transaction. The Tribunal appreciated that in the original offer interest @ Rs.11.35 per share was offered by Oracle and after considering the delay in dispatch letter and other relevant factors, it decided to increase the interest @ of Rs.16 per share which was a business decision and the assessee had no control over the decision making process of Oracle. Importantly, it noted that the transaction did not have any debtor/creditor relationship between the assesse and Oracle and the sale of shares of I-flex in response to the open offer by Oracle was a pure and simple case of selling of shares; that the assessee had not entered into any negotiations with Oracle and transferred the shares as per a scheme that was approved by SEBI; that the assessee had not advanced any sum to Oracle and had not received any interest from it for delayed repayment of principal amount and in short, the additional consideration received by the assesse from Oracle was not penal interest and was part of the original consideration and was not taxable. The Tribunal noted with approval that in the decision in the case of Genesis Indian Investment Company Ltd.(ITA/2878/Mum /2006 / dated 14.08.2013) a similar issue had been decided by the Tribunal in favour of the assessee.

Dai Ichi Karkaria Ltd .’s case
The issue in the past had arisen in the case of Dai Ichi Karkaria Ltd, ITA No. 5584/Mum/2010 for A.Y. 2006- 07 decided on 28th December 2011. In that case, the assessee had raised the following issues in the appeal ;

“On the facts and in the circumstances of the case and in law, the ld CIT(A) erred in confirming the amount of Rs. 1,00,57,681/- as interest income and not allowing it as part of full value of consideration in computing long term capital gains in respect of buy back of shares and consequently erred in confirming long term capital gains at Rs.2,16,52,094/- as against Rs. 3,16,12,208 as claimed by the appellant.”

“On the facts and circumstances of the case, it is contended that the amount of interest of Rs. 1,00,57,681/- assessed by the Assessing Officer is not chargeable to tax under any provision of the I T Act.”

In that case, the assessee had computed the long term capital gains of Rs. 3,16,12,208 on transfer of shares under a scheme of buy back of shares of Colour Chem Ltd. The assessee had sold 71,233 shares @ Rs. 318 per share and had also received interest @ Rs.149.62 per share. In computing the capital gains, the assessee had added interest received as a part of sale consideration. The AO asked the assessee to explain as to why the interest of Rs. 1,06,57881, received on the investment, should not be treated as Income from other sources and taxed as such. In response, the assessee submitted that the said interest was paid by the company to eligible shareholders, including the assessee, pursuant to the order of the Supreme Court. It was explained that Colour Chem Ltd. had not deducted tax while making payment of the same, u/s. 194A of the Act, for the reason that the said payment was considered as part of sale consideration for calculating the Long Term Capital Gains.

The AO held as under: “The assessee has received interest in terms of the Supreme Court Order mentioned in the para 4.1 of the Letter of Offer to buy the shares of Colour Chem Ltd by EBITO Chemiebetelligungen AG, Claraint International Ltd and Clariant AG. The Supreme Court in its order has worked out interest at Rs. 149.62 per share. Assessee’s case falls under income by way of interest on securities which is specifically covered u/s 56(2)(id) of Income Tax Act. In fact the matter has been discussed in detail by the Hon’ble Madras High Court in the case of South India Shipping Corporation Ltd. (240 ITR 24), wherein, it has been held that the ratio of the decision of Supreme Court is applicable for existing Company also.” On appeal, the CIT(A) concurred with the view of the AO.

In an appeal to the Tribunal, it was contended by the assesseee company that the assessee had no statutory right to receive the interest or any compensation; the amount of interest received by the assessee was for the period prior to the time of the payments as well as actual transfer of the shares; the amount therefore was a part of the sale consideration and not a separate income of the assessee; there was no agreement or statutory rights to receive such interest; there was no mercantile practice to receive the interest and the amount was only compensatory in nature and could not be treated as a separate income.

It was contended that the interest paid by the acquirer of the shares was treated as the part of purchase consideration in the case of Burmah Castrol Plc., 307 ITR 324 (AAR) wherein interest paid by the acquirer was held as cost of acquisition of shares and on similar analogy, the interest received by the assessee on buyback of share, should be part of the sale consideration.

Highlighting the decision of the Supreme Court in the case of CIT vs. Ghanshyam (HUF), 315 ITR 001(SC), it was submitted that the court in that case held that the interest payable prior to the possession taken over shall be part of the compensation. Reliance was placed on the decision in the case of Manubhai Bhikhabhai vs. CIT, 205 ITR 505(Guj).

Narrating the litigation history of the case of acquiring the shares, it was explained that the purpose of the Supreme Court in awarding interest of Rs. 149.62 per share (net of dividends) was to compensate the shareholders of the target company for the loss of time or delay in making the offer and hence, such interest could under no stretch of imagination be construed to be interest income accruing in the hands of the assessee. Attention was drawn to the provisions of section 2(28A) of the Act, defining the term ‘interest’ to contend that for a receipt to be considered as interest the amount should arise from money borrowed or debt incurred and that in the given case, the assessee had invested in shares of the target company i.e. CCL and had not given any loans and that the scope of definition could not be expanded to include in itself something which by its very basic nature, did not amount to interest.

The facts of the case, it was explained, confirmed that the compensation was not on the grounds that the acquirer delayed the payment of the consideration to the shareholders but was awarded for making good the loss caused to the shareholders of CCL, due to the delay in making the offer of buy back by the acquirer.

It was pointed out that while deciding the issue of interest, the Supreme Court had clearly held that the shareholder did not have any right to get interest and the shareholders were only to be compensated for the loss of interest and nothing more ; therefore, when there was no right or any agreement to receive the interest then, the amount received by the assessee was only a part of the sale consideration.

Lastly, it was submitted that when there was no right to receive the interest and there was no source of income then, there was no provision to tax the same, as there was no source. CIT vs. Chiranji Lal Multani Mal Rai Bahadur (P) Ltd.,179 ITR 157(P&H).

On the other hand, the Department submitted that interest was received by the assessee for delay in payment of offer price; that ‘income’ included any amount received by the assessee and would fall u/s. 56 of the I. T. Act, since the money was lying with the acquirer and the interest was a compensation for such loss; that as per the provision of section 46A, only the consideration received by the shareholder, after adjustment of the cost of the acquisition of shares was deemed as capital gains arising to such shareholder.

The Tribunal considered the rival contentions and perused the relevant material on record. It examined in detail the factual background giving rise to the dispute of interest payment and transfer of the shares under buy-back scheme. It noted that the Supreme Court while deciding the issue of rate of interest, observed that “by reason of Regulation 44, as substituted in 2002, the discretionary jurisdiction of the Board is curtailed. In terms of Regulations 1997 could award interest by way of damages but by reason of Regulation 2002, its power is limited to grant interest to compensate the shareholders for the loss suffered by them arising out of the delay in making the public offer.” The tribunal noted that it was clear from the observations of the court that interest payable as per Regulations 44 was to compensate the shareholders for loss suffered by them for delay in making the public offer and that it was not penal in nature and was not towards a statutory right or a right arising from contract but the nature of payment of interest was to compensate the loss due to the delay in the payment by the acquirer and thus, the interest was paid to compensate the shareholder who were deprived of interest payable on difference of offer price and market price.

Importantly, the tribunal extensively quoted from the decision in the case of CIT vs. Ghanshyam (HUF) (supra) wherein the court after analysing the provisions of Land Acquisition Act, 1894 had given a detailed finding on the issue of interest payable u/s. 23, 28 as well as section 34 of the Land Acquisition Act. The Supreme Court in that case had addressed the issue whether the interest paid on enhanced compensation u/s. 23,28 and section 34 would be treated as part of compensation u/s. 45(5) of the I. T. Act 1961. The Tribunal quoted the following paragraph form the said decision;

“It is to answer the above questions that we have analysed the provisions of sections 23, 23(1A), 23(2), 28 and 34 of the 1894 Act. As discussed hereinabove, section 23(1A) provides for additional amount. It takes care of increase in the value at the rate of 12 per cent. per annum. Similarly, under section 23(2) of the 1894 Act, there is a provision for solatium which also represents part of enhanced compensation. Similarly, section 28 empowers the court in its discretion to award interest on the excess amount of compensation over and above what is awarded by the Collector. It includes additional amount under section 23(1A) and solatium under section 23(2) of the said Act. Section 28 of the 1894 Act applies only in respect of the excess amount determined by the court after reference under section 18 of the 1894 Act. It depends upon the claim, unlike interest under section 34 which depends on undue delay in making the award. It is true that “interest” is not compensation. It is equally true that section 45(5) of the 1961 Act refers to compensation. But, as discussed hereinabove, we have to go by the provisions of the 1894 Act which awards ” interest” both as an accretion in the value of the lands acquired and interest for undue delay. Interest under section 28 unlike interest under section 34 is an accretion to the value, hence it is a part of enhanced compensation or consideration which is not the case with interest under section 34 of the 1894 Act. So also additional amount under section 23(1A) and solatium under section 23(2) of the 1894 Act forms part of enhanced compensation under section 45(5)(b) of the 1961 Act. ”

In the opinion of the Tribunal, there was a fine distinction between the additional amount payable u/s. 23, award of interest u/s. 28 and interest payable u/s. 34 of the Land Acquisition Act which had led the court to hold that the additional amount u/s. 23 (1A) and solatium u/s. 23(2) of Land Acquisition Act formed a part of enhanced compensation u/s. 45(5)(b) of the I. T. Act, 1961 and when the amount was paid as a compensation for enhancement in the value of the asset transferred, the same would be part of full consideration; but when the interest was paid as a compensation to loss of interest, then it could not be treated as a part of sale consideration.

The Tribunal held that the interest received by the assessee, as was held by the court, while deciding the dispute of rate of interest was only a compensation for loss of interest, which was akin to payments made due to delay in public offer and delayed payments and was not the compensation for enhancement in the value of the asset. The fact that the offer price was more than the value of the share from 24.2.1998 till 7.4.2003 weighed heavily with the Tribunal. The Tribunal accordingly held that the interest received by the assessee as per the directions of the SEBI and in pursuance of the decision of the Supreme Court could not be treated as part of sale consideration of shares and accordingly, the lower authorities had rightly treated the same as taxable under the head ‘income from other sources’.

The Tribunal noted that merely by reason that the interest paid by the acquirer would be a part of acquisition of shares would not ipso facto conclude that the said interest in the hands of the shareholder would be part of sale consideration.

Observations
The issue though moving in a narrow circle has multiple dimensions;

Does the amount go to increase the ‘full value of consideration’ for the purposes of the Income-tax Act?

Does the additional amount, received in addition to the sale consideration, represent interest or can be classified as in the nature of interest?

Can such amount be treated as ‘interest’ within the meaning of the term as defined in section 2(28A) of the Act?

Do the provisions of section 46A alter the treatment of receipt? and

Can such an amount be classified as a capital receipt not liable to tax?

The issue on hand becomes more twisted when it is examined in the context of the provisions of Double Taxation Avoidance Agreements and in particular w.r.t. certain Articles that deal with the ‘capital gains’, ‘interest’ and ‘other income’. Issue also arises as to the applicability of rate of tax and the liability to deduct tax at source under the domestic laws. But then, these are the issues that are not intended to be discussed here for the sake of focusing on the issue under debate.

There is no dispute that the amount in question in both the cases, that has been received by the shareholder, is for compensating him for the delay made by the acquirer company in making a public offer for sale. The payment is made as per the SEBI regulations to compensate the shareholder for the delay in making the offer and is calculated as per the rules of SEBI. In the matters of dispute as to the quantification and the period, the courts have the jurisdiction to intervene and provide the finality to the dispute. There is also not a dispute that the shareholders have not lent any money to the acquirer company nor is there a debtor-creditor relationship between the company and the shareholder. It is also not anyone’s case that the company had delayed the payment of the offer price or even the additional payment ordered by the SEBI.

In computing the income under the head ‘capital gains’, an assessee, to begin with, is required to reduce the cost of acquisition from the full value of consideration. The term ‘full value of consideration’ is not defined under the Income-tax Act, but is largely held to represent the sale consideration or the consideration for transfer of a capital asset. It is immaterial whether the said consideration is received in part or in full at the time of transfer, and it is also not relevant whether such consideration is received from the transferee or not.

Obviously,the compensation paid, in our respectful opinion cannot be a part of the sale consideration simply, because it is not an ‘interest’ or that it is paid for the delay in making an offer. On a first blush, the consideration moving from the company to a shareholder can be taken to be the offer price, i.e. the price at which the company has agreed to purchase or buy the shares. However, when one takes in to account the event that has preceded the actual offer, on account of which event the company has been made to offer and pay an additional amount for delaying the offer, it is appropriate to say that the shareholder in question has accepted the said offer with full knowledge of the total receipt which he is likely to receive at the time of accepting the offer and in that view of the matter, it is apt to hold that the ‘full value of consideration’ in his case represents the acceptance price, i.e the total price. It is a settled position in law that the full value of consideration referred to in section 48 does not necessarily mean the apparent consideration. It rather is the price bargained for by the parties to the transaction. ‘Full value’ is the whole price and in its whole should be capable of including the additional amount agreed to be paid before the offer is accepted.

We do not think the receipt in any manner could ever be held to be representing interest. Interest is a compensation for delay in tendering the payment of the consideration. In the case under consideration, no consideration ever became payable before the offer for sale was made and was accepted. Importantly, once it was accepted, there was no delay in the payment thereof. These aspects of the facts are even confirmed by the Tribunal in the case of Dai Ich Karkaria Ltd.(supra). It is true that the compensation for the delay is measured in terms of the period of delay and is linked to the rate of interest but the methodology adopted for quantifying the damages can not be held to change the character of the payment which remains to be compensation, and not interest.

A bare reading of section 2(28A) confirms that the receipt inn question cannot be termed as ‘interest’. Not much will turn on section2(28A) in support of the case that it represents interest. None of the parameters help the case in favour of treating the receipt as interest.

Before we deal with the last part, it is relevant to examine whether provisions of section 46A of the I. T. Act, have any implication in deciding the issue. Apparently, the scope of section 46A is restricted to the buy back of shares by the issuing company and it’s scope cannot be extended to the case of public offer by a raiding company or any person other than the issuing company. Secondly, the provision requires the difference between the cost of acquisition and the value of consideration to be taxed under the head ‘capital gains’. The ‘value of consideration’ cannot be largely different than the ‘full value of consideration’ and as such the discussion in the earlier paragraphs will largely apply to section 46A with the same force.

Lastly, whether the receipt in question could be held to be a capital receipt, not liable to taxation, is an issue that was not before the Tribunal in any of the cases, but in our opinion is a possibility worth considering, in view of the fact that the receipt is in the nature of damages and represent compensation for an injury, which can be presented to represent a capital receipt not liable to taxation.

Tax on ‘Accreted Income’ – a Draconian Proposal

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The Finance Bill, 2016 presented by the Finance Minister (FM) in the Parliament has already been discussed threadbare. The proposal to tax accumulated provident fund was vociferously opposed and the FM had to beat a hasty retreat. While the proposal to tax charitable trusts on occurrence of certain events also met with criticism, it has been somewhat muted. The Society sends a postbudget representation in which the issues arising from this proposal will be pointed out. After the Bill becomes an Act, the Journal carries a detailed article analysing the provisions. However, the provisions as proposed in regard to charitable trusts are so devastating that they merit an editorial comment.

The exemption of charitable trusts is based on the rationale that these institutions supplement the activities of a welfare state. The revenue generated is utilised for benevolent objects. It is for this reason that the government foregoes tax revenue from such institutions. The tax provisions in regard to charitable institutions have undergone substantial changes over the last two decades. The provisions in the 1922 Act were extremely lenient. The current Income-tax Act has attempted to plug loopholes which were being misused by certain persons. Over the last few years, the provisions have become much stricter, so much so that one often felt that charity was given a step-motherly treatment. While it is true that, at times, charitable trusts have been used as vehicles of tax avoidance/tax evasion, the acts of a few unscrupulous should not result in burdening genuine trusts with huge tax liabilities. While some regulation is welcome, the inability of the tax officials to bring to book the drivers of such vehicles should not lead to the painting of all charitable trusts with the same brush. This is precisely what the proposals in the Finance Bill seek to do.

There are a number of provisions in the proposed Chapter XII-EB that are blatantly unfair. The tax on trusts liability could be triggered by the occurrence of certain specified events. Once any of such events occurs, the charitable institution would be saddled with a huge tax liability which if it is required to defray will result in its activities coming to a halt. As per the proposals in the Bill, such tax liability has to be discharged in a very short time, in the case of cancellation of registration within 14 days of the cancellation order being received. In such a situation if the trust is made to pay tax even before the order is tested by a judicial forum, it would be manifestly unjust.

Another aspect of the matter, is the impact of section 2(15), which often results in an adversarial action either by way of denial of the exemption u/s. 11 or by way of cancellation of registration u/s. 12AA. It must be appreciated that if the objects of the trust from the point of time that it obtained registration have remained unchanged, merely because the proviso to section 2(15) is attracted, there should not be an impact affecting the exemption of earlier years. In the proposal, as is mooted, such an entity would be taxed on its accreted income with disastrous consequences. In certain cases entities are required to modify their objects. One has witnessed many situations, where the registering authority on an application being made notifying it of the change in objects invokes the provisions of section 2(15) and rejects the application thereby cancelling the registration u/s. 12AA. Here again, requiring the charitable institution to pay tax without the action being tested by an appellate forum is grossly unfair.

The problem is compounded / accentuated by the definition of “accreted income”. Accreted income has been defined as “fair market value of total assets on the specified date as exceeding total liabilities”. A small illustration will highlight how unjust this provision is. If a charitable trust has acquired an office of 1,000 square feet, in 1975 for a sum of say Rs. 4 lakh, the same is being used for the objects of the trust. This today would be valued at Rs. 4 crore. According to the proposal, on the cancellation of the registration of such a trust it would be liable to pay tax on the market value which is a notional income which the trust has not earned and is never likely to earn. In most other situations where the concept of fair market value is used, the sale has taken place and it is only the consideration that is being substituted. In this case the proposal brings into play two fictions the first one assumes a sale and the second assumes it to be at market value. All this in the case of a charitable trust!

Another aspect of the matter is that these taxing provisions are, in a sense, retrospective. By taxing the net worth, that is excess of assets over the liabilities and that too at fair market value, the Finance Minister is proposing to tax accumulation of the past which may have arisen out of absolute genuine charitable activity. To illustrate, an NGO may have been pursuing its objectives lawfully over say three decades. In order to ensure continuation of activity it has accumulated unspent income. In a particular year there is a small infraction of section 13 like making an advance to an interested person or an investment not qualifying u/s. 11(5). In such a case if registration is cancelled it would be a gross violation of the principle of equity and fairness.

Another unfortunate aspect of the matter is that the charitable trust will have to pay tax within a short period of 14 days of the liability arising. The provisions do not contemplate keeping the matter in abeyance till an appeal is preferred and the issue tested. If the provisions are really to be complied with, the trust would have no option but to sell off its assets with tragic consequences. In states where there are Acts governing Charitable trusts (like Maharashtra), obtaining permission to sell assets in the form of immovable property also takes months.

I am at a loss to understand, as to how the same authorities, who on the day of the budget issued a very fair and beneficial circular directing stay of demand on payment of 15% of the tax dues till the first appeal is pending can even contemplate provisions as draconian as have been discussed in the earlier paragraphs.

On a reading of the provisions, it appears that the severe impact they will have on genuine charitable institutions seems to have escaped the attention of the FM. I hope that the representations from all quarters get the attention that they deserve so that the proposals are revisited, and the much awaited “acche din” arrive for charitable institutions.

THE THREE GATES OF HELL

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‘Desire,
Anger and Greed are the three gates to Hell which destroy the Soul.
Therefore, one must give up all three of them’, says Krishna to Arjun –
in the Bhagavad Gita.

Krishna also tells Arjun that one who is
able to be free from these three gates of hell, seeks that is best and
attains the highest.

We are familiar with all three, Desire,
Anger and Greed. It is seldom that a person is completely free from all
these three. We must understand each one of these three and seek a way
to keep ourselves as free from them as possible, and to ensure that they
do not become our masters.

Desires are very natural to us.
After all, God has given us different senses; senses of touch, smell,
sight, hearing and taste. The desire to gratify these senses is inborn
in us. These five senses are God’s gift to us. God has also created
sense objects. Senses obviously are given to us for putting them to
rightful use; sense of touch to have a feel of things, sense of smell to
enjoy the scent of flowers, sense of hearing to listen to good music
and words of wise men, sense of sight to enjoy the beautiful nature
around us, and sense of taste to enjoy the various tastes in the food
that we eat.God has also created the sense objects and there is nothing
wrong in enjoying those sense objects with our senses. When desire is
spoken of as a gate to hell, it is not the normal desire that is meant.
What is meant is kama i.e., passion, uncontrolled desire which
overpowers us. By “desire” here we mean wrongful desire, compelling
desire, which takes hold of us and which has to be satisfied at any cost
and by any means even though they may be unethical or immoral. This
desire can never get satisfied. It is like a fire that cannot be
extinguished, a thirst that cannot be quenched. Their fulfillment is by
nature temporary and incomplete. Fulfillment of these only gives
temporary respite. They raise their ugly head again and again. It is
only when these sense objects get hold of us and overpower us that our
troubles start. Desires, particularly uncontrolled desires, are a
gateway to hell. They are endless.

We erroneously believe that
satisfaction of a desire gives us happiness. Our soul, by nature, is
happy. When a desire arises it comes in the way of our happiness, like a
cloud blocking the view of the sun. Satisfaction removes that
obstruction and puts us in touch with our happiness again. It does not
give happiness per se. The same result can be achieved by overcoming the
desire as by gratifying our desire. Sublimating desires frees us from
further desires, which gratification of desires does not do.

Anger
is another gate of hell. When what we desire does not happen or what we
do not desire happens, it gives rise to anger. When we are angry, we go
wild and behave in a manner which is totally irrational. We shout and
scream and cause damage not only to others but even to ourselves because
our mind is not in our control, and it makes us do things which we
repent later. Anger gives rise to tension and both mental and physical
disorders. It can result in high blood pressure, paralytic stroke or
even heart attack. It is allowing one to be controlled by anger that is
to be avoided. It is the second gate to hell.

Just as
non-fulfillment of desire leads to anger, pursuance of wrongful desires
leads to greed. Having once enjoyed the wrongful sense pleasures, one
wants more and more of them. One believes that the only way of
gratifying those desires is wealth and more wealth. This leads to greed.
For fulfilling the desire of enjoyment of sensual needs, one wants more
and more wealth.

As Mahatma Gandhi has truly said, “There is
enough for everyone’s needs but not for everyone’s greed.” Greed is a
bottomless pit and no matter how much one tries, it can never be filled
up. This greed is the third gate to hell.

We have to learn to
live a life free from such excessive desires, uncontrolled anger and
endless greed. It is for us not to enter these gates of hell, be it
desire, anger or greed. I pray that Almighty grant us the strength to
close these three gates and to lead a happy and contented life.

OVERVIEW OF TRANSITION TO AND ADOPTION OF IND-AS

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INTRODUCTION
With the notification of the roadmap by the
Ministry of Corporate Affairs for adoption of International Financial
Reporting Standards (IFRS) converged Indian Accounting Standards (Ind
AS) by all listed companies and large unlisted companies, the adoption
of the same will lead to many changes in the financial statements of
companies, both in terms of presentation and numbers.

Apart from
changes in the accounting, there are several other areas where there
would be an impact, some of which are highlighted hereunder:

Impact of transition on the profit/loss, financial position and net worth of the entity.

Communication with the Board and/or Audit Committee.

Increased volatility in the results.

Increased
disclosure requirements, both quantitative and qualitative which would
result in greater transparency. There would be significantly detailed
disclosures about management judgements and estimates.

Changes in existing information systems requirements.

Impact on reporting on Internal Financial Controls.

Need for increased availability of and enhanced capability of resources.

Greater
alignment with business operations due to increased focus on substance
rather than legal form. There would be greater emphasis on the
underlying business rationale and true economics of various transaction.

Tax implications of and the cost associated with the transition

Loan covenants

Dividend distribution

Investor relations.

An
attempt has been made in the foregoing paragraphs to briefly examine
the various practical considerations in the transition to and adoption
of Ind AS by corporates.

PREPARA TION OF IND-AS OPENING BALANCE SHEET
The
first and foremost consideration in the transition to Ind-AS is the
preparation of the opening Balance sheet. Whilst preparing the Opening
Ind-AS Balance Sheet, subject to the mandatory exceptions and
exemptions, an entity would normally require to ascertain the
adjustments under the following broad headings:

Not to recognise items as assets and liabilities, if Ind-AS does not permit their recognition.

Recognise all assets and liabilities whose recognition is required by Ind-AS.

Reclassify assets, liabilities, and items of equity as per Ind-As requirements.

Measure all assets and liabilities in accordance with Ind-AS.

Let us now examine some of the common adjustments which may be required under each of the above heads.

Not to recognise items as assets and liabilities if Ind- AS does not permit their recognition:

Some of the common adjustments which may be required in this respect are briefly discussed hereunder:

Ind-AS-10 Events after the Reporting Period does not permit recognition of proposed dividends as
an adjusting event and hence the same is not to be presented as a
liability as is the case with AS-4. The proposed dividend is only
required to be disclosed as a note.

Any deferred income or expenditure
such as premium/discount on issue/redemption of debentures / bonds or
expenses on issue of debentures or bonds recognised in terms of the
special dispensation under AS-26, and which are an integral part of the
amortised cost of financial assets and liabilities should be factored in
to determine the effective interest rate and reversed in the opening
balance sheet.

The carried forward balance of any share issue expenses
which are amortised in terms of the special dispensation under AS-26
are required to be eliminated whilst preparing the opening balance
sheet. (The treatment to be adopted if already adjusted against Securities premium Account is not clear).

Any contingent assets or reimbursements like insurance or other claims which are not virtually certain and do not meet the recognition criteria under Ind-AS-37 should be reversed in the opening balance sheet.

In the opening consolidated financial statements, assets and liabilities of joint ventures which are included under the Proportionate Consolidated method should be reversed since the same is no longer permissible

Any held for sale subsidiary, associate or joint venture should be eliminated from consolidation and disclosed as a separate disposal group.

Recognise all assets and liabilities whose recognition is required by Ind-AS.

Some of the common adjustments which may be required in this respect are briefly discussed hereunder:

All derivative financial assets and liabilities and embedded derivatives shall be recognised if not done earlier.

Certain
provisions in the nature of restructuring obligations, onerous
contracts, decommissioning liabilities, site restoration, warranties,
litigation etc. need to be recognised based on constructive obligations, which may not have been recognised earlier or were disclosed as contingent liabilities.

Various intangible assets
like brands, customer lists etc. acquired in a business combination,
which earlier were part of goodwill need to be recognised if
retrospective application of Ind-AS 103 is opted for.

Recognition of certain new investment properties
in view of the differences in the recognition criteria e.g land held
for long term capital appreciation, building that is vacant but is held
to be leased under one or more operating leases etc.

Deferred tax assets and liabilities would need to be recognised based on the Balance sheet approach.

In the consolidated financial statements investments in joint ventures need to be recognised based on the equity method.

Assets
and liabilities of any held for sale subsidiary, associate or joint
venture would need to be recognised and presented as a disposal group.

Reclassify assets, liabilities, and items of equity as per Ind-As requirements.

Some of the common adjustments which may be required in this respect are briefly discussed hereunder:

Classification of financial liabilities and equity should be based on the substance
rather than legal form e.g. redeemable preference shares would need to
be reclassified as debt, fully convertible debentures would need to be
reclassified as equity etc.

Compound financial instruments need to be split into debt and equity components e.g. partly / optionally convertible bonds.

Financial assets, notably investments, need to be reclassified into amortised cost, fair value through profit and loss, fair value through other comprehensive income etc.

Certain intangible assets acquired as part of earlier business combinations may not meet the definition of intangible assets and hence need to be included as part of goodwill e.g. certain acquisition cost, promotional cost etc.

An entity preparing consolidated financial statements
for the first time or which has not consolidated any subsidiary under
AS-21 e.g. where the control is exercised through the power to govern
the operating policies and business decisions rather than through
shareholding alone would need to incorporate the relevant assets and
liabilities.

Measure all assets and liabilities in accordance with Ind-AS.

Some of the common adjustments which may be required in this respect are briefly discussed hereunder:

In case of purchase of inventories, fixed assets and intangible assets on deferred settlement terms, the interest element would need to be segregated.

In case of fixed assets, if the fair value model is opted for, it would necessitate a remeasurement.

Government grants in the form of non-monetary assets or concessional loans are to be measured at the fair value.

Borrowing cost are to be calculated using the effective interest rate method.

Where the time value of money is material, provisions should be on a discounted basis.

Share based payment transactions need to be recognised on a fair value basis.

Assets and liabilities acquired in a business combination need to be measured at fair value.

Non-current assets held for sale and Discontinued Operations need to be measured at fair value less costs to sell.

All
Financial assets and liabilities to be initially recognised at fair
value and subsequently measured based on their classification as above.

As
part of the transition to Ind-AS entities are also required to evaluate
the various exemptions, both mandatory and voluntary, which are
provided for under Ind-AS-101, the important ones of which are briefly
discussed hereunder:

MANDATORY EXEMPTIONS TO RETRO – SPECTIVE APPLICATION OF IND-AS
A first time adopter is provided with the following key mandatory exemptions to retrospective application of certain Ind-AS:

Derecognition of Financial Assets and Liabilities

There
is no need to recognise any financial asset or liability which is
already derocognised under local GAAP. Alternatively, the entity may
apply derecognition criteria retrospectively by choosing a cut off date.


Hedge Accounting

Any transactions entered into before the date of transition are not to be retrospectively designated as hedges.

Classification and Measurement of Financial Assets and Liabilities

The
determination of cash flows for time value measurement of financial
assets on the date of transition is not required when it is
impracticable to assess the same retrospectively, subject to adequate
disclosures being made till their derecognition.

For measurement
of existing financial assets and liabilities on the date of transition,
if it is impracticable to determine effective interest rate
retrospectively, the fair value on the date of transition shall be the
new gross carrying amount or the new amortised cost for applying the
effective interest method.

Embedded Derivatives

A
first time adopter shall assess whether an embedded derivative is
required to be separated from the host contract on the basis of
conditions that existed at the later of the date it first became a party
to the contract and the date of reassessment.

Government Loans

The
benefit of a government loan at below market rate of interest is not
required to be recognised as a government grant on the date of
transition.

VOLUNTARY EXEMPTIONS TO RETRO – SPECTIVE APPLICATION OF IND-AS
A
first time adopter is provided with the following key voluntary
exemptions to retrospective application of certain Ind-AS. Understanding
the same is of critical importance since it could impact comparability
of results of entities in the same sector.

Share based Payment Transactions

Voluntary
retrospective application of fair valuation in respect of equity
instruments granted, vested and not settled or any modification made
before the date of transition is available. Similar considerations apply
to any liabilities arising out of such transactions which are settled
before the date of transition. However, an entity may adopt earlier
application if fair value disclosures have been publicly made.

Deemed Cost of Property, Plant and Equipment and Intangible Assets

The
entity can opt for the previous GAAP carrying amount as deemed cost.
Alternatively, the fair value on the date of transition can also be
considered as the deemed cost provided it is comparable with what is
required under Ind-AS. In certain cases, an event driven fair value used
during a privatisation, IPO etc. can also be considered as a deemed
cost. In case fair value is taken as deemed cost, the same should be
allocated component wise and depreciation shall be calculated
accordingly.

Deemed Cost of Investment Property

These
may be identified on the date of transition based on Ind-AS criteria of
these being used to earn rentals or for capital appreciation as against
the AS-13 criteria of it not being intended to be used or occupied
substantially in the operations of the enterprise.

Leases

Separate
classification where lease includes both land and building into the
finance (normally for land) and operating lease, as applicable on the
date of transition is permissible where there is a composite lease of
land and building.

Determining whether an arrangement contains a lease on the date of transition based on the specific assets test – fulfilment of the arrangement is dependent on the use of a specific asset or right to use of an asset.

Cumulative Translation Differences

Cumulative
translation differences for all foreign operations (Ind-AS does not
distinguish between integral and non-integral operations) on the date of
translation shall be zero; and

Gains and losses on subsequent
disposal of foreign operations shall exclude translation differences
prior to the date of transition.

Long Term Foreign Currency Monetary Items

If these are reflected under FCMDTA account, similar treatment can continue on the date of transition.

In
case these are adjusted against the carrying value of the fixed assets,
similar treatment can continue only if the entity adopts the deemed
cost model as discussed above.

Investments in Subsidiaries, Associates and Joint Ventures

Deemed
cost as per previous GAAP (i.e. fair value in the separate financial
statements on date of transition or previous GAAP carrying amount) on
the date of transition can be used.

Assets and Liabilities of Subsidiaries, Associates and Joint Ventures

If
an entity adopts Ind-AS before or simultaneously with the
parent/investor, no adjustments required. However, if the entity adopts
Ind-AS later than the parent/investor, respective carrying amounts on
the date of the investor’s/ parent’s transition can be considered.

Compound Financial Instruments

An
entity is required to split into liability and equity components
retrospectively unless liability component is no longer outstanding on
date of transition.

Designation of Previously Recognised Financial Instruments

All Financial assets are required to be classified into three types, as under:

Fair value through Profit and Loss in
cases where the holding of the financial asset helps to eliminate or
significantly reduce measurement or recognition uncertainty or holding
period is less than 12 months. It can be used irrespective of the
business model discussed below.

Fair value through other comprehensive income in
cases where the business model involves collection of contractual cash
flows either through selling the asset or through principal and interest
payments.

Amortised cost, in cases where the business model involves collection of contractual cash flows of interest and principal.

All Financial liabilities are required to be classified into two types, as under:

1. Fair value through Profit and Loss (very selectively)
2. A mortised cost.

The above designations can be either at initial recognition or on the date of transition.

The
amortised cost of financial assets and liabilities shall be determined
on the basis of the benchmark interest rate on the date of transition,
if it is impractical to determine the same retrospectively.

All
Equity instruments always to be classified at fair value – either
through Profit & Loss or through Other Comprehensive Income and no
recycling permissible if option of classifying through OCI is selected –
No specific impairment analysis required

Fair Value Measurement of Financial Assets and Liabilities on Initial Recognition

This may be applied prospectively to transactions entered into on or after the date of transition.

Decommissioning Liabilities included in Cost of Fixed Assets

Where exemption from retrospective application is sought, following needs to be done:

Measure the liability on the date of transition as per Ind-AS 37.

To
the extent it is to be included in the cost of the asset, the amount
should be estimated based on the assumption that it would be included
when the liability first arose and then discounted accordingly, using
historical risk adjusted discount rates (based on average annual
inflation, and incremental borrowing rates).

Calculate accumulated depreciation on the above amount using current estimated useful life.

Service Concession Arrangements

Recognise financial assets and intangible assets on the date of transition.

Use the previous GAAP carrying amounts.

Test for impairment at the date of transition unless impractical to do so.

Joint Venture Accounting – Transition from Proportionate Consolidation to Equity Method

Business Combinations

An entity may choose not to apply Ind-AS-3 to business combinations that occurred before the date of transition.

However, if it decides to restate any past business combinations, it should restate all business combinations after that date.

Apart from the various exemptions, certain other key considerations under various Ind-AS are discussed hereunder:

OTHER KEY CONSIDERATIONS IN TRANSITION Ind-AS-2 Inventories

In
respect of inventories acquired on deferred settlement basis, the
interest element thereon shall be excluded. This needs to be adjusted on
the date of transition.

Sale of inventories after the reporting
period would be an adjusting event under Ind-AS 10 discussed below
which would need to be adjusted on the date of transition.

Ind-AS10 Events After Reporting Period

Any
provision for proposed dividend and related dividend distribution tax
after the reporting period shall be reversed and added back to retained
earnings.

Settlement of a court case after reporting period
confirms the existence of a present obligation and accordingly the
previously created provision needs to be adjusted or fresh provision
need to be created in terms of Ind-AS-37.

An entity shall adjust
cost of assets purchased based on information available after reporting
period if it opts for carrying value as the deemed cost.

On the
date of transition any legal and/or constructive obligations after the
reporting period shall be taken into account if not considered under
previous GAAP. (see discussion on Ind-AS 19 on Employee Benefits below)

Ind-AS 19 on Employee Benefits

Actuarial
gains and losses arising on defined benefit plans and other long term
employee benefits should be recognised in the Statement of Other
Comprehensive Income and cannot be recycled to the Profit and Loss
Account.

All past service costs need to be immediately expensed off.

Instead
of recognising interest cost in the Profit and Loss Account, Ind- AS-19
requires recognition of net interest cost based on the net defined
benefit asset or liability and the discount rate at the beginning of the
year.

Other miscellaneous adjustments in the actuarial assumptions.

Revised actuarial valuation would be required.

More
specific guidance on accounting for constructive obligations i.e. as a
result of informal practices. These would need to be henceforth
recognised in the financial statements

Ind-AS 23 on Borrowing Costs

Inventories
which are manufactured or otherwise produced in large quantities on a
repetitive basis are not considered as qualifying assets even if they
take a substantial period of time to get ready for their intended use or
sale. e.g wines, cheese etc.

Borrowing costs shall be measured
applying effective interest rate method from the date transition date.
Accordingly, ancillary borrowing cost written off earlier need to be
amortised. Earlier period borrowing costs should not be restated.

Dividend payable in respect of compulsorily redeemable preference shares
would also need to be considered as borrowing costs eligible for
capitalisation depending on the specific circumstances.

Ind-AS 12 Income
Taxes

Balance Sheet method to be adopted for computation of deferred
tax asset or liability by which the tax base is compared with accounting
base. Primary impact would be in respect of business combinations and
consolidation adjustments.

Tax base of an asset is the amount
deductible for tax purposes against any taxable economic benefits that
would flow to the entity when it recovers the carrying amount of the
asset. e.g depreciable assets, uncollected income taxed on a cash basis,
assets measured at fair value where the fair value gain is not taxed or
fair value loss is disallowed.

Tax base of a liability is its
carrying amount, less any amount deductible for tax purposes. E.g.
income received in advance taxed at a later date, loan payable having an
amortised cost.

A first time adopter would have to establish the
history of items that give rise to temporary differences and adopt
retrospective application.

Implications vis-à-vis ICDS needs to be
considered?

Ind-AS 38 Intangible Assets

Unamortised share issue
expenses need to be charged off. Amounts in the nature of transaction
cost need to be reduced from equity.

Any unamortised borrowing costs
need to be analysed. Initial transaction cost need to be reduced from
the borrowings and any ancillary cost needs to be considered in the
calculating the effective interest rate.

Revenue based amortisation
of toll roads would not be permitted for toll roads arising after the
transition date.

Amortisation of intangible assets with indefinite
useful life not permitted. E.g., Right of Way, Stock Exchange broking
card etc. These would however need to be tested for impairment.

Implications vis-à-vis adjustment against Securities Premium Account to be considered.

Ind-AS 21 Effects of Changes in Foreign Exchange Rates

The concept of functional currency introduced for the first time. No first time exemption provided. It is the currency of the primary economic environment
in which the entity operates. It is normally the currency which
influences the income and expenses the most. e. g. shipping company.

Ind-AS 37 Provisions, Contingent Liabilities and Contingent Assets

Specific
requirement to recognise provisions in respect of constructive
obligations. AS-29 does not specifically refer to the same. It only
refers to creation of provisions arising out of normal business customs
and practices, to maintain business relations etc.

Restructuring provisions need to be made based on constructive obligations as against legal obligations in terms of AS-29.

Discounting of provisions where effect of time value of money is material.

OTHER AREAS HAVING SIGNIFICANT IMPACT

FINANCIAL INSTRUMENTS

Recognition and Measurement

Greater use of fair value – use of judgement and valuation tools in many cases.

Impairment to be calculated on the Expected Credit Loss Model.

–
Assessment of whether there is a significant increase in the credit
risk since initial inception or there is a low credit risk; in which case
12 months expected credit losses are recognised.

– Where
significant increase in credit risk since initial inception and no
objective evidence of impairment, in which case life time expected
credit losses to be recognised on a PD basis

– Where there is
objective evidence of impairment, life time expected credit losses are
recognised and interest income is computed on the net basis (i.e. net of
credit allowances)

– The above will have a big impact on financial institutions and NBFCs which are covered at a later date. However, in the interim any loans granted by non- financial entities would still need to be evaluated since currently they are not even covered by the prudential guidelines. Financing of group entities would need closer scrutiny.

Derivative Instruments- Currently, there are diverse practices adopted. Whilst some entities were adopting AS-30 (which is recommendatory in nature), other entities are following the ICAI announcement which requires only losses to be recognised. Post adoption of Ind-AS, consistency would creep in and recognition of both gains and losses either through Profit and Loss or OCI (where hedge accounting is adopted) would be required. The impact would be greater for entities who were hitherto following the ICAI announcement and recognising only losses.

Transaction Costs
– In respect of long term borrowings, these will be recognised over the tenor of the borrowing using the effective interest rate method as against the current practice of charging off.

– In respect of financial assets, these would need to be charged off as against the current practice of capitalising the same, unless these are in respect of financial assets recorded on amortised cost basis, in which case they would need to be adjusted against the carrying value.

BUSINESS COMBINATIONS

Recognition and Measurement

Acquisition Value
– Assets and liabilities to be recognised at fair value.
– Contingent Liabilities and Intangible Assets not recognised in the acquiree’s financial statements would also need to be recognised at fair value.

– Non controlling interests to be measured at fair value.

– Significant changes in the value of goodwill reflecting a more accurate depiction of the premium paid on acquisition even though the legal form of the acquisition has not changed.

– Recording of assets at fair value will normally result in higher depreciation and amortisation – In case of intangibles with indefinite useful life or with higher useful life lower or no amortisation.

– Goodwill will not have to be amortised but tested for impairment.

– In case of a business combination in stages, the previously held equity interest to be measured at acquisition date fair value, with resultant gain or loss recognised in the Profit and Loss resulting in greater volatility in the Income Statement.

Accounting for Transaction Costs
– These need to be charged off as against the current practice of generally capitalising them.

Accounting vis-à-vis High Court Orders
– Under the Companies Act, 2013, certificate from the auditors required whether scheme is in accordance with the Accounting Standards thereby doing away with the leeway provided under the Companies Act, 1956.

– Position in the intervening period till the notification of the relevant sections under the Companies Act, 2013, especially for non-listed companies not clear.

CONSOLIDATED/GROUP ACCOUNTS

Recognition and Measurement

Preparation of Consolidated Financial statements – Many additional SPEs would get consolidated and there could be deconsolidation of certain subsidiaries since two companies cannot consolidate the same subsidiary since control can be exercised only by one entity. Investment entities are also not required to be consolidated.

– Consolidation mandated under the Companies Act, 2013 of associates and joint ventures even if there are no subsidiaries.

– Proportionate consolidation method no longer permissible.

– Definition of control is different. An investor is deemed to control an enterprise only when he has the power over the entity or when he has exposure or rights to variable returns from its involvement with the investee and has the ability/power the affect these returns. Such powers can be exercise even when there is no majority ownership. Even potential voting rights are relevant.

– Changes in ownership interest that do not result in loss of control should be adjusted against equity. No guidance under current GAAP and hence differing practices were adopted.

– Losses incurred by the subsidiary to be allocated between the controlling and non-controlling interest as against the practice under Indian GAAP of adjusting these against the majority, unless there is a binding obligation to make good the losses.

Uniform Accounting Policies
– Not very rigid and strictly enforceable under current GAAP. – Challenges could be encountered especially in case of associates over which control is not exercised.

– Many group entities would be required to change their policies, the individual impact of which would need to be evaluated.

Uniform Financial Year
– Maximum gap reduced to three months as against six months. – On adoption many entities would be compelled to change their year ends.

INCOME TAXES

Recognition and Measurement

Recognition based on Balance Sheet method for taxable temporary differences as against timing differences under the current GAAP.

Recognition of deferred tax on business combinations.

Recognition of deferred tax assets on losses is not very stringent.

Deferred tax liability required to be recognised in consolidated financial statements for all taxable temporary differences in connection with group investments unless the investor is able to control the timing of the reversal in the foreseeable future.

Significantly detailed disclosures and reconciliations.

EMPLOYEE BENEFITS AND SHARE BASED PAYMENTS

Recognition and Measurement

Actuarial gains and losses to be taken to Other Comprehensive Income which will reduce volatility.

Employee benefits are required to be recognised based on constructive obligation as against the current practice of generally recognising the same based on legal obligation.

ESOPS to be mandatorily recorded on a fair value basis which would result in increased charges and hence have a significant impact on key performance indicators like EPS.

Share based payments to non-employees like vendors against supply of goods and services would need to be recorded on a fair value basis in all cases, which is currently missing. Only fixed assets so acquired are accounted for at fair value in terms of AS-10. This could have a negative impact on the financial results and other performance indices, dividend servicing abilities and loans covenants, amongst others.

PROPERTY, PLANT AND EQUIPMENT

Recognition and Measurement

Mandatory Component Accounting

– Any cost which is significant in relation to the total cost and has a separately defined useful life need to be separately identified and depreciated accordingly.
– Residual value calculations and estimates need to be evaluated afresh.
– Even companies not adopting Ind-AS need to adopt the same in terms of the Companies Act, 2013.
– Expected to a have a material and significant impact on highly capitalised manufacturing entities and IT technology companies.
– Could have a significant impact on insurance, asset backed financing, amongst other matters.

Revaluation of Assets
– No selective revaluation permitted.
– Updation of revaluation on a regular basis.

– Depreciation charge to be charged off to Income Statement. Even companies not adopting Ind- AS need to follow the same in terms of the Companies Act, 2013

– Since it is an option it can affect comparability of results of the same class of companies and hence uniformity in terms of loan covenants including security cover etc. would be an issue.

–For companies adopting the revaluation route whilst the asset base would be higher, there would also be a higher corresponding depreciation charge

Repairs and Overhaul expenditure
– Needs to be capitalised if it satisfies the recognition criteria.

– Corresponding decapitalisation of the replaced parts.

– Closer scrutiny of the renewal and asset maintenance policies of companies, especially those which are asset heavy.

Unrealised Exchange Differences
– These are required to be charged off in all cases prospectively.
– Companies who have opted for the transitional relief for continuing treatment of capitalisation in terms of para 46A of AS-11 till the tenor of the loans or till FY 2020. This would impact comparability of results.
– Greater volatility in the results of companies who have large overseas borrowings.

INTANGIBLE ASSETS

Recognition and Measurement

Intangible assets can have indefinite useful lives, identification of which should be adequately and appropriately demonstrated and justified. Such assets need to be subjected to an annual impairment assessment.

Fair valuation is now permissible especially if an active market exists.

CONCLUSION
The above assessment is just the tip of the ice-berg and in actual practice there could be many other issues, challenges and implications which would merit a detailed assessment.

RULES FOR INTERPRETATION OF TAX LAWS – PAR T 1

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1.Introduction:
No enactment has been enacted by the Legislature for Interpretation of Statues including on Tax Laws. However, in many an acts, definition clause is inserted to mean a ‘word’ or ‘expression’. Explanations and Provisos are inserted to expand or curtail. No codified rules have been made by the rule making authority or the Legislature. Rules are judge made, keeping due regard of the objects, intent and purpose of the enacted provision. Interpretation is the primary function of a court of law. The Court interprets the provision whenever a challenge is thrown before it. Interpretation would not be arbitrary or fanciful but an honest continuous exercise by the Courts.

1.1. The expression “interpretation” and “construction” are generally understood as synonymous even though jurisprudentially both are distinct and different. “Interpretation” means the art of finding out of true sense of the enactment whereas “Construction” means drawing conclusions on the documents based on its language, phraseology clauses, terms and conditions. Rules for Interpretation of “Tax Laws” are to some extent different than the General Principles of Interpretation of Common Law. Rules of Interpretation which govern the tax laws are being dealt in this series of articles.

2. Particulars in a Statute:
Every enactment normally contains Short title; Long title; Preamble; Marginal notes; Headings of a group of sections or of individual sections; Definition of interpretation clauses; Provisos; Illustrations; Exceptions and saving clauses; Explanations; Schedules; Punctuations; etc. Title may be short or long. Preamble contains the main object. Marginal notes are given. Chapters and Headings are group of sections. In the Finance Bill, Memorandum containing explanation on every clause, intent and purpose for the proposal is given. Central Board of Direct Taxes issues Circulars explaining each clause. Finance Minister in his speech refers to the proposed insertions, amendments, alterations, modifications etc. It is highly desirable to go through such material apart from unmodified provision for proper understanding, pleadings and arguments.

3. Classification of the Statute:
Statute can be of various classifications. Providing date of commencement, territorial jurisdiction, mandatory or directory, object, whether codifying or consolidating or declaratory or remedial or enabling or disabling, penal, explanatory, amending retrospective or retroactive or repeal with savings or curative, corrective or validating. Applicability can be on all the subjects or class of persons or specified territorial area or specified industries etc. Assent of the President is a requisite condition. Rules have to be framed by the rule making authority and to be operative from specified date or notified date.

4. The General Principles of Interpretation:
Broadly, the general principles, as applied from time to time by the Courts are : The literal or grammatical interpretation; The mischief rule; The golden rule; Harmonious construction; The statute should be read as a whole; Construction ut res magis valeat quam pereat; Identical expressions to have same meaning; Construction noscitur a sociis; Construction ejusdem generis; Construction expression unius est exclusion alterius; Construction contemporanea exposition est fortissimo in lege; etc. Taxation statutes collecting taxes, duty, cess, levies, etc. from the subjects, have to be beneficially and liberally construed in favour of the tax payers. Penal statutes have to be construed strictly and the benefit of doubt to go to the culprit. Penalty provisions are a civil liability, but have to be construed reasonably. Penalty is corrective and not revenue earner. Levy of interest is compensatory and is treated as mandatory. Charge should be specific and there must be satisfaction of the authority issuing show-cause and levying penalty.

4.1. Other statutes in pari-materia have to be cautiously applied and if phraseology and intent is identical, may apply. Ratio decendai may also apply. Amending statutes are normally prospective unless specifically stated as retrospective. There are mandatory and directory or conjunctive and disjunctive enactments. There exist internal or external aids to interpretation. There can be retrospective, prospective or retroactive operation of a provision. Many maxims are used for interpretation. While interpreting tax laws ‘Double Taxation Avoidance Agreements’ have to be considered as supreme and would prevail even if meaning and language in the statute is different and there exists a confrontation. No provision should be in infringement of the Constitution and it should not be violative or unconstitutional but intravires – not ultravires. Certain issues may be resintegra or nonintegra.

4.2. There are binding precedents under articles 141 and 226 – 227 of the Constitution of India. Even order of the Income Tax Appellate Tribunal and High Court, other than the jurisdictional High Court, have to be respected. Judgment of larger bench as well as co-ordinate bench has to be followed unless and until raised issue is referred to the President of the Income Tax Appellate Tribunal or the Chief Justice, as the case may be, for constituting a larger bench. Judgment of the Constitutional Bench prevails over judgments of lower authorities and single benches. However recently it has been noticed that even orders of the Income Tax Appellate Tribunal or Single or Division Bench of High Courts have been referred and considered, if no appeal has been filed by the Revenue and their ratio has been accepted impliedly or explicitly.

4.3. The General Clauses Act, 1897, contains definitions, which are applicable to all common laws including tax laws, unless and until any repugnant or different definition is contained in the definition section of the tax laws. It also contains general rules of construction, which are applied on common law as well as tax laws. Provisions of Civil Law, Criminal Law, Hindu Law, Evidence Act, Transfer of Property Act, Partnership Act, Companies Act and other specific, relevant and ancillary laws equally apply unless until a different provision is enacted in tax statute and such laws expressly excluded. As analysed, about 108 Acts other than tax statutes need be read, referred and relied upon to make an effective representation, knowledge whereof is imperative.

4.4. Ordinances are also issued, which have limited life, till the statute is enacted or for the specified period. Its purpose is to be operative during the intervening period, where after it automatically lapses. Circulars, instructions, directions are issued statutorily as well as internally, which are binding on tax administration, but not on a tax payer. By such circulars, scope of exemption, deduction or allowance can be expanded, even though literal meaning of the relevant provision may be to the contrary; being beneficial to the tax payer.

5. The Tax and Litigation:
Return is filed. Assessment is framed by the assessing authority. First appeal lies with the Commissioner of Income-tax (Appeals), a superior assessing authority. Second appeal lies, and lis commences, on appeal to the Income Tax Appellate Tribunal. Income Tax Appellate Tribunal is final fact finding body. Third appeal lies with the Division Bench of the jurisdictional High Court, on substantial question of law and finality is given by the Supreme Court, where an appeal as well as a Special leave Petition can be filed. Appeal is statutory and S.L.P. is discretionary. Scope is larger on SLP. Revisional power is with the Commissioner of Income-tax u/s. 263 as well as 264. Writ remedy can be availed before the jurisdictional High Court, if there is no alternative, effective, efficacious remedy of appeal or if there is lack of jurisdiction or violation of principles of natural justice or perversity or arbitrariness, disturbing conscious of the Court. The Hon’ble High Courts are slow in permitting writ jurisdiction. Even notice u/s.148 can be challenged by writ, on lack of jurisdictional requirements. Substantial disputes can be settled through the medium of Income Tax Settlement Commission and Dispute Resolution mechanism. Interpretation of documents is a substantial question of law as held by the Apex Court in Unitech Ltd. vs. Union of India (2016) 381-ITR-456 (S.C.).

5.1. Eminent Jurist Cardozo states, “You may say that there is no assurance that judges will interpret the mores of their day more wisely and truly than other men. I am not disposed to deny this, but in my view it is quite beside the point. The point is rather that this power of interpretation must be lodged somewhere, and the custom of the Constitution has lodged it in the Judges. If they are to fulfill their function as Judges, it could hardly be lodged elsewhere. Their conclusions must, indeed, be subject to constant testing and retesting, revision and readjustment; but if they act with conscience and intelligence, they ought to attain in their conclusions a fair average of truth and wisdom.”

5.2. Article 265 of the constitution mandates that no tax shall be levied or collected except by the authority of law. It provides that not only levy but also the collection of a tax must be under the authority of some law. The tax proposed to be levied must be within the legislative competence of the Legislature imposing the tax. The validity of the tax is to be determined with reference to the competence of the Legislature at the time when the taxing law was enacted. The law must be validly enacted i.e. by the proper body which has the legislative authority and in the manner required to give its Acts, the force of law. The law must not be a colourable use of or a fraud upon the legislative power to tax. The tax must not violate the conditions laid down in the constitution and must not also contravene the specific provisions of the constitution.

5.3. No tax can be imposed by any bye-law, rule or regulation unless the ‘statute’ under which the subordinate legislation is made specifically authorises the imposition and the authorisation must be express not implied. The procedure prescribed by the statute must be followed. Tax is a compulsory exaction made under an enactment. The word tax, in its wider sense includes all money raised by taxation including taxes levied by the Union and State Legislatures; rates and other charges levied by local authorities under statutory powers. Tax includes any ‘impost’ general, special or local. It would thus include duties, cesses or fees, surcharge, administrative charges etc. A broad meaning has to be given to the word “tax.”

5.4. Taxes are levied and collected to meet the cost of governance, safety, security and for welfare of the economically weaker sections of the Society. It is well established that the Legislature enjoys wide latitude in the matter of selection of persons, subject-matter, events, etc., for taxation. The tests of the vice of discrimination in a taxing law are less rigorous. It is well established that the Legislature is promulgated to exercise an extremely wide discretion in classifying for tax purposes, so long as it refrains from clear and hostile discrimination against particular persons or classes. In Jaipur Hosiery Mills (P.) Ltd. vs. State of Rajasthan (1970) 26-STC-341; the apex court while upholding the classification made on the basis of the value of sold garments, held that the statute is not open to attack on the mere ground that it taxes some persons or objects and not others. The same view has been taken in State of Gujarat vs. Shri Ambica Mills Ltd., (1974) 4-SCC-916. In ITO vs. N. Takin Roy Rymbai (1976) 103-ITR-82 (SC); (1976) 1 SCC 916, the apex court held that the Legislature has ample freedom to select and classify persons, districts, goods, properties, incomes and objects which it would tax, and which it would not tax.

5.5. With National litigation policy of the Government of India, the Central Board of Direct Taxes issued Instruction No. 5 dated July 10, 2014 and lately in exercise of powers conferred u/s. 268(A) of the Income-tax Act issued Circular dated December 10, 2015 bearing No. 21 of 2015, enhancing monetary limits for an appeal before the Tribunal exceeding tax Rs. 10 lakh, before the High Court exceeding tax Rs. 20 lakh and before the Hon’ble Supreme Court exceeding tax Rs. 25 lakh with specified exceptions. Tax would not include interest. Same limit for penalty appeals. It applies to pending appeals and references. Writs have been excluded. The instruction will apply retrospectively to pending appeals and appeals to be filed henceforth in High Courts/Tribunals. Pending appeals below the specified tax limits may be withdrawn or not pressed. Appeals before the Supreme Court will be governed by the instructions on this subject, operative at the time when such appeal was filed.

5.6. The Hon’ble Bombay High Court in C.I.T. vs. Sunny Sounds Pvt. Ltd. (2016) 281-ITR-443 (Bom.) at 452 observed: “The need for the Central Board of Direct Taxes to issue the December 15, 2015, Circular and to clarify that it would apply retrospectively to govern even pending appeals arose on account of the enormous increase in the number of appeals being filed by the Revenue over the years”. It also observed: “This policy of non-filing and of not pressing and/or withdrawing admitted appeals having tax effect of less than Rs. 20 lakh has been specifically declared to be retrospective by the Circular dated December 10, 2015. There is no reason why the circular4 should not apply to pending references where the tax effect is less than Rs. 20 lakh as the objective of the Circular would stand fulfilled on its application even to pending references”. Ultimately reference application of the Revenue was returned unanswered. The Ahmedabad Bench of I.T.A.T. in Dy. Commissioner vs. Some Textiles & Industries Ltd. and Others (2016) 175-TTJ (Ahd.) 1 by Order dated 15.12.2015 have also held so for pending appeals. Thus cost of the Government has been saved. Fairly large number of pending appeals have been / are being withdrawn. Appeals / References which fall under the Circular as interpreted by the Courts and Tribunals need be brought to the notice of the relevant forum or the concerned Commissioner for its expeditious withdrawal. It is ‘Professional Social Responsibility’ of each one of us. I have noticed department is slack and is not filing withdrawal applications or providing lists to the I.T.A.T./ High Courts. It is improper.

5.7. Regularly at short intervals, Voluntary Disclose or Declaration Schemes and Schemes to reduce / waive outstanding demands like Kar Vivad Samadhan Scheme etc. are introduced. The Finance Bill, 2016 also introduces (1) The Income Declaration Scheme, 2016; (2) The Direct Tax Dispute Resolutions Scheme, 2016, benefit whereof deserves to be availed of by the eligible persons. It is advisable to cut down tax disputes, purchase peace and concentrate on earning income after developing tax culture. Our duty is to guide clients for payment of due and legitimate taxes.

5.8. In tax administration, accountability is absent, work culture is missing and slackness is apparent. High pitched additions are made, arbitrarily, capriciously, with perversity and malafides. Corruption is flagrant. The Raja Chelliah report suggested that black marks be given to such officers, whose additions do not stand test of appeal. But the same was not accepted. However, by the Finance Bill, 2016 some steps towards accountability and expeditious are proposed. Such steps need to be implemented vigorously to usher in discipline. Many more measures are necessary and expedient in the interest of just collection.

6. Charging and Machinery Provision :

The rule of construction of a charging section is that before taxing any person, it must be shown that he falls within the ambit of the charging section by clear words used in the section. No one can be taxed by implication. A charging section has to be construed strictly. If a person has not been brought within the ambit of the charging section by clear words, he cannot be taxed at all. The Supreme Court in CWT vs. Ellis Bridge Gymkhana and Others (1998) 229 ITR 1 held: “The Legislature deliberately excluded a firm or an association of persons from the charge of wealth-tax and the word “individual” in the charging section cannot be stretched to include entities which had been deliberately left out of the charge.

6.1. The charging section which fixes the liability is strictly construed but that rule of strict construction is not extended to the machinery provisions which are construed like any other statute. The machinery provisions must, no doubt, be so construed as would effectuate the object and purpose of the statute and not defeat the same. (See Whitney vs. Commissioner of Inland Revenue (1926) AC 37, Commissioner of Income-tax vs. Mahaliram Ramjidas (1940) 8-ITR-442 (PC), India United Mills Ltd. vs. Commissioner of Excess Profits Tax, Bombay (1955) 27-ITR-20 (SC); and Gursahai Saigal vs. Commissioner of Income-tax, Punjab (1963) 48-ITR-1 (SC).

6.2. The choice between a strict and a liberal construction arises only in case of doubt in regard to the intention of the Legislature, manifest on the statutory language. Indeed, the need to resort to any interpretative process arises only when the meaning is not manifest on the plain words of the statute. If the words are plain and clear and directly convey the meaning, there is no need for any interpretation. Liberal and strict construction of an exemption provision are, as stated in Union of India vs. Wood Papers Ltd. (1991) 83-STC-251 (SC) “to be invoked at different stages of interpreting it. When the question is whether a subject falls in the notification or in the exemption clause then it being in the nature of exception is to be construed strictly and against the subject. But once ambiguity or doubt about applicability is lifted and the subject falls in the notification then full play should be given to it and it calls for a wider and liberal construction.”

6.3. The Apex Court in C.I.T. vs. Calcutta Knitwears (2014) 362-ITR-673 (S.C.) stated: “The courts, while interpreting the provisions of a fiscal legislation, should neither add nor subtract a word from the provisions. The foremost principle of interpretation of fiscal statutes in every system of interpretation is the rule of strict interpretation which provides that where the words of the statute are absolutely clear and unambiguous, recourse cannot be had to the principles of interpretation other than the literal rule”. It also observed: “Hardship or inconvenience cannot alter the meaning of the language employed by the Legislature if such meaning is clear and apparent. Hence, departure from the literal rule should only be in very rare cases, and ordinarily there should be judicial restraint to do so” and : It is the duty of the court while interpreting machinery provisions of a taxing statute to give effect to its manifest purpose. Wherever the intention to impose liability is clear, the courts ought not to be hesitant in espousing a common sense interpretation of the machinery provisions so that the charge does not fail. The machinery provisions must, no doubt, be so construed as would effectuate the object and purpose of the statute and not defeat it”.

Depreciation – Carry forward and set off – Amendment to section 32(2) by the Finance (No.2) Act, 1996 – Effect – Unabsorbed Depreciation as on 1-4-1997 can be set off against income from any head for assessment year immediately following 1-4-1997 and thereafter unabsorbed depreciation if any to be set off only against business income for a period of eight assessment years.

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Peerless General Finance and Investment Co. Ltd. vs. CIT [2016] 380 ITR 165 (SC)

The Tribunal had held that under the provisions of section 32(2)(iii)(a) and (b) the amount of unabsorbed depreciation allowance shall be set off against the profits and gains, if any, of any business or profession carried on by him and assessable for that assessment year; if not wholly so set off, the amount of unabsorbed depreciation allowance not so set off shall be carried forward to the following assessment year not being more than eight assessment years immediately succeeding the assessment year for which the aforesaid allowance was first computed.

The Tribunal further held that since in this case, business income after adjusting brought forward business loss had been determined at nil, therefore, in the absence of any other business income, the amount of brought forward unabsorbed depreciation allowance shall not be set off from the other income, i.e., income from “house property” and “Other Sources” and shall be carried forward to the following assessment year(s) as per the provisions of section 32(2)(iii)(a) and (b) of the Income-tax Act, 1961.

The High Court admitted the appeal on the following questions:

(i) Whether, on the facts and in the circumstances of the case, the Tribunal erred in construing the amendment of section 32(2) by the Finance (No.2) Act, 1996, as retrospective in effect so as to preclude the assessee’s claim for adjustment of accumulated unabsorbed depreciation allowance brought forward as on the 1st April, 1997, from earlier years against income from house property and income from other sources for the assessment year 1998-99 ?

(ii) Whether the assurance of the Finance Minister in Parliament that set off of the cumulative unabsorbed depreciation brought forward from earlier years as on April 1st, 1997, can be set off against the profits and gains of a business or profession or any other income of the taxpayer for the assessment year 1997-98 and subsequent year forms part of the legislative intent and any construction contrary thereto is erroneous?

The High Court held that the provisions introduced suggest that where the unabsorbed depreciation allowance could not be wholly set off against the profits and gains, if any, of any business or profession carried on by the assessee, the unabsorbed depreciation allowance could be set off from the income under any other head during the assessment year 1997-98. If the unabsorbed depreciation allowance could only be wholly set off during the assessment year 1997-98, the left over could only be set off against the profits and gains, if any, of the business or profession in the assessment year 1998-99.

The High Court therefore answered both the question in the negative and in favour of the Revenue.

On further appeal, the Supreme Court dismissed the SLP subject to the observation that the unabsorbed depreciation as on April 1, 1997, can be set off against the income from any head for the immediate assessment year following April 1, 1997 and thereafter if there still is any unabsorbed depreciation the same can be set off only against the business income for a period of eight assessment years.

ACIT vs. Rupam Impex ITAT, Rajkot bench, Rajkot Before Pramod Kumar (A.M.) and S S Godara (J.M.) I.T.A. No.: 472/RJT/2014 A.Y.: 2008-09 Date of Order: 21st January, 2016 Counsel for Assessee / Revenue : Vimal Desai / Yogesh Pandey and C S Anjaria

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Section 154 – Who is responsible for the mistake is not material for the purpose of proceedings u/s. 154; what is material is that there is a mistake – AO directed to rectify the mistake even though it was alleged to have been made by the assessee.

Facts
In the assessment order passed by the AO u/s. 143(3) of the Act, the assessee noted that the AO had erred in computing its assessed income on account of the following discrepancies in the order passed:

The AO was, accordingly, urged to rectify the mistake which was apparent on record. However, the AO rejected this request primarily on the ground that the assessee himself had computed the income on the basis of these figures. On appeal, the CIT(A) held the action of the AO as incorrect and directed the AO to rectify the mistakes u/s. 154.

Before the Tribunal, the revenue justified the stand of the AO and submitted that since the claim of the assessee, as made in the income tax return, was accepted, the assessee could not make a fresh claim without a revised return.

Held
According to the Tribunal, a lot of emphasis was placed by the AO on the fact that the mistake was committed by the assessee ignoring the fact of the complete non-application of mind by him to the facts of the case and making a mockery of the scrutiny assessment proceedings. According to the Tribunal who is responsible for the mistake was not material for the purpose of proceedings u/s. 154; what is material is that there is a mistake – a mistake which is clear, glaring and which is incapable of two views being taken. According to the Tribunal, the fact that mistake has occurred was beyond doubt. It is attributed to the error of the assessee does not obliterate the fact of mistake or legal remedies for a mistake having crept in. According to it, the income liable to be taxed has to be worked out in accordance with the law as in force. In this process, it is not open to the Revenue authorities to take advantage of mistakes committed by the assessee. Tax cannot be levied on an assessee at a higher amount or at a higher rate merely because the assessee, under a mistaken belief or due to an error, offered the income for taxation at that amount or that rate. It can only be levied when it is authorised by the law, as is the mandate of Article 265 of the Constitution of India. According to it, a sense of fair play by the field officers towards the taxpayers is not an act of benevolence by the field officers but it is call of duty in a socially accountable governance.

Dismissing the appeal of the revenue the Tribunal made it clear that it was not awarding any costs but put in a word of caution. It pointed out that there has to be proper mechanism to ensure that such frivolous appeals are not filed. And if that does not happen and the frivolous appeals continue to clog the system, it is only a matter of time that the Tribunal would start awarding costs, as a measure to deterrence to the officers concerned.

[2016] 67 taxmann.com 65 (Hyderabad ) Virtusa (India)(P.) Ltd. vs. DCIT A.Y.: 2012-13 Date of Order: 4th March, 2016

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Section 115JAA – Reliance by the assessee on ITR-6 format to arrive at the total liability as well as MAT credit calculations, for payment of tax, is proper. Addition made by the AO by making calculations applying his own interpretation which is not in line with ITR 6 needs to be deleted.

Facts
The assessee company filed its return of income for assessment year 2012-13 on 30.11.2012 admitting a total income of Rs. 42,87,89,690. The return of income was processed by CPC, Bangalore u/s. 143(1) raising a demand of Rs. 32,06,700. The difference in computation of tax by the assessee and the AO was on account of the Assessing Officer (AO) computing MAT credit without including surcharge and education cess while arriving at the amount of tax payable under normal provisions of the Act and u/s. 115JB of the Act.

Aggrieved, the assessee preferred an appeal to the CIT(A) who relying on the decision of the Tribunal in the case of Richa Global Exports Pvt. Ltd. confirmed the action of the AO.

Aggrieved, the assessee preferred an appeal to the Tribunal.

Held
The Tribunal held that as per section 115JAA(2A), tax credit to be allowed shall be the difference of tax paid for any assessment year under sub-section (1) of section 115JB and the amount of tax payable on his total income computed in accordance with the other provisions of the Act. The important word used is tax paid and as per the Hon’ble Apex Court decision in the case of K. Srinivasan vs. CIT [1972] 83 ITR 346 (SC), the term `tax’ includes surcharge.

The Tribunal observed that sub-section (5) of section 115JAA grants set off in respect of brought forward tax credit to the extent of the difference between tax on his total income and the tax which would have been payable u/s 115JB, as the case may be for that assessment year. It noted that the term used is `tax’ and not `income-tax’ or any other term. It held that the term `tax’ includes surcharge.

The Tribunal noted that the provisions of sub-section (5) of section 115JAA are applied in ITR-6. It observed that ITR-6 form is designed and approved by the apex body CBDT and this form is universally used by all the company assessees. It observed that these are standard forms which are expected to be followed by all the assessees. It noted that the format of ITR-6 was amended w.e.f. AY 2012-13 by CBDT. It held that the AO cannot overlook these formats and (interpret in his own method of calculating tax credit while making assessment u/s. 143(1) of the Act) proceed to calculate the MAT credit to compute assessment u/s. 143(1) applying different methods when the proper and correct method is proposed by CBDT in ITR-6. The AO is expected to follow ITR-6 format to complete the assessment u/s. 143(1) or 143(3) of the Act.

As regards the decision of the Delhi Bench of ITAT in the case of Richa Global Exports Pvt. Ltd., the Tribunal held that the decision of Apex Court in the case of K. Srinivasan may not have been brought to the knowledge of the Delhi Bench.

It noted that earlier judgments in the cases of Universal Medicare, Valmet India and Wyeth Limited were decided relying on ITR-6 as applicable in those assessment years. Applying the ITR-6 format, which was applied by the assessee as well, the Tribunal deleted the addition made.

This ground of appeal filed by the assessee was allowed.

(2016) 156 ITD 524 (Delhi ) ITO (Exemption) v. Satyug Darshan Trust A.Y.: 2009-10. Date of Order: 4th November, 2015

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Section 115BBC – Where assessee established for charitable and religious purposes receives anonymous donation without any specific direction that such donation is for any university or other educational institutions or any hospital or other medical institutions run by the assessee, then such donation cannot be taxed by invoking provisions of section 115BBC(1).

Facts
The assessee was a religious and charitable trust registered u/s. 12AA and its income was exempt u/s.11. The assessee was running Satyug Darshan Sangeet Kala Kendra and also running a school under the name and style of Satyug Darshan Vidhyalaya.

The AO noticed certain sum under the head ‘Donation Golak’. The explanation of the assessee that the said amount was less than 5 per cent of the total receipt was not accepted by the AO and the AO invoking the provisions of section 115BBC(1) taxed the said sum as the income of the assessee.

On appeal, the CIT(A) deleted the addition holding that the assessee was a charitable and religious trust and provisions of section 115BC would not be applicable to it. Aggrieved, the revenue preferred an appeal before the Tribunal.

Held
The AO while framing the original assessment had categorically stated that the activities of the assessee are charitable within the meaning of section 2(15) and there was no change in the aims and objects of the assessee as compared to the earlier years.

The provisions of section 115BBC(1) are applicable for the anonymous donations received by any university or other educational institution or any hospital or any trust or institution referred to in sub-clauses (iiiad) or (vi) or (iiiae) or (via) or (iv) or (v) of clause (23C) of section 10. However, sub-section (2) of section 115BBC carves out exceptions to provisions of section 115BBC(1).

In the present case, the assessee is established for religious and charitable purposes and the anonymous donation was received without any specific direction that such donation is for any university or other educational institution or any hospital or other medical institution run by the assessee trust and therefore, the ld. CIT(A) had rightly deleted the said addition in view of the provisions of section 115BBC(2)(b) of the Act.

In the result, the appeal filed by the department is dismissed.

(2016) 156 ITD 528 (Delhi .) A.K. Capital Markets Ltd. vs. Deputy CIT A.Y.: 2006-07. Date of Order: 4th December, 2015.

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Section 73 read with Sections 56 and 72 – Where assessee earns positive income, falling under head ‘Income From Other Sources’, in form of dividend income and interest income, assessee would fall within purview of exception carved out in Explanation to section 73 and therefore would be entitled to claim set-off of loss arising out of trading in Futures and Options/derivatives against such other income.

Facts
During the year under consideration, the assessee had earned dividend income of Rs. 14.64 lakh and interest income amounting to Rs. 39,236. In the return so filed it had also declared loss of Rs. 3.93 crore arising out of trading in Futures and Options/derivatives and had claimed set-off of the same against such other income.

The AO disallowed the set-off claimed by the assessee on the grounds that the case of the assessee was covered by Explanation to section 73. The CIT (A) upheld the order of the AO.

Aggrieved, the assessee preferred an appeal before the Tribunal.

Held
A bare reading of the Explanation to section 73 clarifies that where any part of the business of a company other than the investment company or banking company or finance company relates to the purchase and sale of shares, such company shall for the purpose of this section be deemed to be carrying on a speculative business to the extent the business consists of purchase and sale of shares. However, the Explanation also states that if the gross income of the company consists mainly of income which is chargeable under the heads – interest on securities, income from house property, capital gains and income from other sources then this Explanation is not applicable.

In the instant case, the AO himself had admitted in the assessment order that the only positive income earned by the assessee was Rs. 14.64 lakh on account of the dividend which was claimed as exempt. It is also noticed that an interest income of Rs. 39,236 was received by the assessee.

The dividend income and interest income come under the definition of ‘income from other sources’ as per the provisions of section 56. The assessee is having the income only under the head ‘income from other sources’. Profit or loss on account of share trading is not to be considered as income of the assessee while computing the gross total income. If the said loss is to be considered as income of the assessee, then it will be adjustable u/s. 72 which is exactly prohibited by the provisions of section 73. Moreover, section 72(1) prohibits inclusion of the speculation loss for computing the income. In the instant case, for computing the gross total income, the only positive income is under the head ‘income from other sources’. Therefore, the assessee would not be deemed to be carrying on speculative business for the purpose of section 73(1).

In view of the aforesaid, the assessee was entitled to claim set-off of loss in question against other income.

Gift of Tenanted property – Under Mohammedan law, if the donor and donee being husband and wife are residing in the same property it is not essential that the donor should depart from the premises to deliver possession to the donee and same law will apply even when part of the premises are occupied by the tenants.

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Mehmood and Ors. vs. Nargis Begum and Ors. AIR 2016 (NOC) 172 (Cal).

A
suit was brought about by the children of first wife of one Md. Bashir,
a Mohammedan, against his widow and the off-springs through his second
marriage for a declaration that the transfer by Md. Bashir of certain
premises to his widow by the alleged registered deed of gift dated 3rd
August, 2003 is voidable.

The alleged deed of gift was
challenged on the ground that under Mohammedan law, a gift of immovable
property is complete and valid only by delivery of possession. 80% of
the property was tenanted and that to make the gift complete and valid
there had to be delivery of possession of the tenanted portion by the
tenants attorning the tenancy in favour of the donee. Further, Md.
Bashir continued to issue rent receipts in his own name. No mutation of
the property with Kolkata Municipal Corporation was made.

The
court held that Chapter VII of the Transfer of Property Act relating to
gifts specifically stipulates in section 129 thereof that the provisions
in the Chapter do not “affect any rule of Mohammedan law.” This simply
meant that the gift would have to be justified in terms of Mohammedan
law.

Under the Mohammedan law, if the donor and donee are
residing in the same property, it is not essential that the donor should
depart from the premises to deliver possession to the donee. The gift
is completed by any overt act on the part of the donor to divest himself
of the control over the property. (paragraph 152 (2) of Mohammedan law
by Mulla). In paragraph 153, Mulla says that the same rule applies in
the case of husband and wife where the property is used for the joint
residence or is let out to tenants or partly used for residence and
partly let out to tenants. The husband is the natural manager of the
wife. Even if after gift of the property the husband collects rents from
the tenants, he is deemed to be doing so as the manager of his wife.
(paragraph 153 of Mulla). Hence, there were sufficient overt acts to
make the gift valid.

[2016-TIOL-450-CESTAT-CHD] M/s. Carrier Air-conditioning and Refrigeration Ltd vs. Commissioner of Central Excise, Delhi-IV

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CENVAT credit of service tax paid on renting of branch offices, health insurance of employees upto 31/03/2011, construction services upto 31/03/2011, travel agent services and interior decorator and architect service is allowable.

Facts
The Appellant paid rent for their branch offices which assisted in procurement of orders and delivery of goods and was used for provision of erection, commissioning and repair services. Insurance services were availed in relation to employees who travel for business meetings, sales, training etc. and for loss or damage to the goods. Further, credit was availed on construction services for dismantling of building and construction of a storage shed and on travel agent service used for travel for the purpose of business meetings, sales etc. Credit was also availed on interior decorator and architect’s services in relation to branch offices and showrooms. The department contended that the service of renting was utilised beyond the place of removal and the other services had no nexus with the manufacturing activity and thus credit was denied.

Held
The Tribunal relying on the decision of Oracle Granito Ltd. [2013-TIOL-822-CESTAT-AHM] wherein CENVAT credit on renting of immovable property for marketing offices was allowed, it was held that such service is eligible for CENVAT credit and also considering that the premises were used for provision of services credit was allowed. Further, relying on the decision of Stanzen Toyotetsu India P. Ltd [2011 (23) STR 444 (Kar.)] credit on health insurance of employees was allowed upto 01/03/2011. Insurance for loss or damage of goods was allowed to the extent they covered journey of goods upto the place of removal. In relation to construction services it was noted that as per Rule 2(l) of the CENVAT Credit Rules, 2004, input services includes service in relation to setting up, modernisation, renovation or repairs of a factory and relying on the decision of Commissioner of C. Ex. Delhi III vs. Bellsonica Auto Companies India Pvt. Ltd. [2015(40) STR 41 (P&H)] [Refer BCAJ December 2015] credit was allowed. Further relying on the decision of Goodluck Steel Tubes Ltd. [2013 (32) STR 123 (Tri.-Del)] credit was allowed on travel agent’s services. Credit on interior decorator and architect’s services was also allowed being in the nature of modernisation/renovation or repair of factory or an office relating to such factory or premises.

[2016-TIOL-576-CESTAT-MUM] Aditya Birla Nuvo Ltd. vs. Commissioner of Central Excise, LTU Mumbai

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There is only one charging section in service tax i.e. section 66 and section 66A is only a deeming provision. Therefore when tax is paid u/s. 66, credit is admissible. Further when the tax is not required to be paid, credit is nothing but refund of the tax erroneously paid.

Facts
The Appellant paid service tax on commission paid by them to the foreign commission agents for the period January 2006 to April 2010 under the provisions of the Act read with Rule 2(1)(d)(iv) of the Service Tax Rules, 1994 and availed CENVAT credit of such amount. The department denied the credit on the ground that section 66A creating a charge of service tax on services received from outside India by a person in India is not specified in Rule 3 of the CENVAT Credit Rules, 2004. The Commissioner allowed credit for the period from 18/04/2006 i.e. from retrospective insertion of section 66A in Rule 3 of the Rules. Being aggrieved by the order the present appeal is filed.

Held
In respect of omission of section 66A in Rule 3(1), the Tribunal noted that there is only one charging section i.e. section 66. Section 66A is merely a deeming provision and is not a charging section which is also made clear by circular 354/148/2009-TRU dated 16/07/2009 wherein it is provided that “provisions under section 66A state………….. and accordingly all the provisions of Chapter V of the Finance Act, 1994 would apply. Therefore, it is clear that section 66A is not a charging section by itself. The charging section remains section 66 even for the services imported. In other words, the tax collected from the recipient in terms of section 66A is also tax chargeable under section 66”. Further, the said circular provides that there is no mistake or omission in the relevant provisions of CENVAT Credit Rules, 2004 and credit should be allowed if they are in the nature of input services. Further, while allowing the credit it was held that when tax itself was not required to be paid prior to 18/04/2006 the credit is nothing but a refund of the tax erroneously paid. Further, it was held that extended period cannot be invoked as the credits were reflected in the ER-1 returns and the matter involved interpretation of statutory provisions.

[2016-TIOL-337-CESTAT-BANG] M/s Gem Motors vs. Commissioner of Central Excise & Service Tax, Coimbatore

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Rule 6(3) of the CENVAT Credit Rules, 2004 applies only when there is use of the common input without maintenance of separate accounts. When an area is allocated to be used for provision of taxable service CENVAT credit attributable thereto is available in full.

Facts
The Appellant uses an earmarked space for providing taxable services and the lease deed provides the sq. ft. area used for that purpose. Service tax paid on the rent for such area is availed as CENVAT credit. The department contended that the formula prescribed by Rule 6(3) of the CENVAT Credit Rules, 2004 should be applied to determine the eligible CENVAT credit.

Held
On verifying the lease deed, the Tribunal observed that the document provided the area attributable to the provision of service. Therefore, it was held that in absence of any physical inspection report showing anything contrary, CENVAT credit of service tax paid on rent paid in respect of that space used was allowed.

2015 (41) STR 379 (Mad.) Transcoastal Cargo & Shipping Ltd. vs. UOI

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Passing of adjudication order without personal hearing amounts to violation of principle of natural justice.

Facts
Show Cause Notice (SCN) was issued for non-payment of service tax. Appellant filed its reply and thereafter, a personal hearing was fixed and an adjournment was sought. Next date for personal hearing was granted, but no notice was given. Meanwhile, an order confirming demand was passed citing non-appearance during personal hearing. The said order was challenged before the High Court.

Held
The High Court observed that the department had passed the order against the assessee on account of non-appearance. On being asked to produce the evidence of serving of letter for hearing, the department could not produce the acknowledgement for dispatch of such notice. It was held that it is imperative to give an opportunity of hearing where the question of law has to be properly dealt with as it may affect the Appellant with civil consequences. Taking note of non-production of evidence of service of notice, the department was directed to grant a hearing and then pass the order.

[2016] 66 taxmann.com 31 (Gujarat ) – Commissioner of Central Excise vs. Dashion Ltd.

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Since detailed records were maintained, even though assessee failed
to take registration as input service distributor, utilisation of CENVAT
credit by one unit for discharging liability of another unit located in
the same place was allowed.

Facts
Assessee, having five
manufacturing units and also engaged in providing services, availed
CENVAT credit of duty paid on inputs, input services and capital goods.
Without obtaining registration as input service distributor (ISD),
CENVAT credit of one unit was utilised for discharging liability of
another unit. However, detailed records were maintained in respect of
such cross utilisation. Revenue authorities denied credit on the ground
that ISD registration was not obtained and that credit of one unit is
utilised for discharging liability of another unit without pro-rata
distribution. However, the Tribunal decided the matter in assessee’s
favour. Revenue preferred appeal before the High Court.

Held
The
Hon’ble High Court observed that at the relevant time, there was no
restriction of pro-rata distribution in Rule 7 of CENVAT Credit Rules.
It further held that there is nothing in Registration Rules or in CENVAT
Credit Rules, which would automatically and without additional reasons
disentitle an ISD from availing CENVAT credit unless and until such
registration was applied and granted. The High Court affirmed the
decision of the Tribunal that in such circumstances, requirement of
registration is procedural and curable in nature, particularly when it
is found that full records were maintained and were available to
department verifying its correctness. Accordingly, appeal of the
department was dismissed.

2016 (41) STR 418 (Guj.) Devang Paper Mills Pvt. Ltd. vs. Union of India

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Mere mentioning of incorrect code does not amount to non-payment of duty.

Facts
The Appellant by oversight deposited excise duty in an incorrect assessee code. This fact was informed to the department with a request to rectify the same. However, the department rejected the request and issued Show Cause Notice for recovery of duty with penalty and interest. The said notice was challenged by filing the present writ petition.

Held
The High Court held that merely mentioning of an incorrect code does not amount to non-payment of duty as government had received payment in that incorrect code and this fact was not denied. Further, it was noted that there was no separate manufacturing activity inviting separate duty liability under that code. Accordingly, the department directed the accounting division to give due credit.

[2016] 66 taxmann.com 196 (Gujarat) – Commissioner of Central Excise and Service Tax vs. Saurashtra Cement Ltd.

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There cannot be said to be intention of duty evasion when assessee
relies upon favourable judgment which later on turns out to be against
assessee by order of higher judicial forum.

Facts
By
applying the ratio of a favourable Tribunal judgment, the assessee
availed CENVAT credit of service tax in respect of certain services.
However, said judgment was later reversed by jurisdictional High Court. A
Show Cause Notice for recovery of CENVAT credit was issued to assessee
by invoking extended period of limitation by alleging malafide intention
of evasion of duty. The assessee did not dispute tax demand, but
contended that extended period was not invokable as the Tribunal
judgment relied upon was in their favor at that point of time and there
was no intention of evasion of duty.

Held
The Hon’ble
High Court held that when the issue was disputable and at one point of
time, the view of the Tribunal was in favour of the assessee, extended
period of limitation was not invokable and penalty not leviable.

[2016] 66 taxmann.com 133 (Karnataka HC) – Commissioner of Service Tax, Bangalore vs. Kyocera Wireless (I) (P) Ltd.

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Method of passing final order by making reference to paragraphs of common “interim order” passed by clubbing various cases on similar issues, is held to be invalid.

Facts
With a view to reduce pending appeals on identical issues relating to refund of CENVAT credit under Rule 5 of CENVAT Credit Rules, 2004, the Tribunal passed a common interim order by clubbing nearly 192 cases, and treating those cases as partly heard. Based on the said order, a final order was passed. Appellant contended that Tribunal erred in deciding the appeal in line with the observations made in the interim order, which is not in accordance with the law.

Held:
The Hon’ble High Court held that scope of interim order is very limited as it is temporary and effective only during the pendency of litigation and ceases to exist as soon as the final order is passed. No law can be laid down in an interim order and hence, passing final order referring to the paragraphs in the interim order is not a speaking order. Accordingly, it was held that passing a common interim order and applying the same to the final order of the individual cases is strange and contrary to the settled principles of law. It however suggested that instead of referring to interim order, the Tribunal can pass final order in one case and adopt the same in other batch of cases.

[2016-TIOL-433-HC-MUM-CX] Tien Yuan India Pvt. Ltd vs. The Union of India.

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If duty ordered to be refunded is not refunded within three months
from the date of receipt of the application, then interest mandated by
section 11BB(1) of the Central Excise Act, 1944 must follow.

Facts
An
order sanctioning refund was passed by the Tribunal. The Revenue
appealed against the order and the same is admitted and pending in this
Court. However the order of the Tribunal was not stayed. The Assistant
Commissioner refunded the amount without interest.

Held
The
Court held that when the duty ordered to be refunded u/s. 11B(2) of the
Central Excise Act, 1944 is not refunded within three months from the
date of receipt of application u/s. 11B(1) of the Act, the award of
interest must follow as mandated by section 11BB(1) of the Act. The
Court directed the department to pay the interest @ 6% from the expiry
of three months of the receipt of application till the date of refund
within 2 weeks from the receipt of the Court’s order.

Transportation activity vis-à-vis Lease of Vehicles

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Introduction
It is always a debatable issue as to whether transportation activity is a service or it is an activity involving leasing of vehicles. Transportation can be of goods or of passengers. Normally, in transportation activity the respective vehicles like trucks or buses are operated by the owners. However, there can be different kinds of agreements. If the relevant agreement is held to be an agreement for service then it may be liable for service tax, but there will not be any liability under the State VAT laws. However, if the transaction is determined to be a transaction of leasing vehicles, then VAT will apply.

The situation depends upon facts of each case. There are number of judgments having different interpretations. Recently, Maharashtra Sales Tax Tribunal (MSTT) had an occasion to deal with one such issue.

Buthello Travels vs. State of Maharashtra (VAT A.No.1135 of 2015 dt.11.12.2015)

Facts
The Hon. Tribunal has noted the facts as under: “12. Now in this case the issue agitated before us, which is regarding the amount received by the appellant from PMPML towards hire charges of the buses. In this context it would be useful to refer the settled legal position. The legal position is referred by Andhra Pradesh High Court in the case of State Bank of India and Others vs. State of Andhra Pradesh (70 STC 215). The principle is as under-

“With that there is a transfer of the right to use or not is a question of fact which has to be determined in each case having regard to the terms of contract under which there is said to be a transfer of right to use.”

The second principle laid down is that the agreement has to be read as a whole to determine the nature of transaction. Therefore, it is very essential to refer to the Lease Agreement for Hiring of Buses. In view of the above, we reproduce herewith some relevant portions of the agreement dated 22nd July 2004:

“Whereas
a) Pune Municipal Transport (PMT) intends to expand and augment its existing fleet of passenger buses.
b) to achieve the same, Pune Municipal Corporation suggested to hire passenger buses. Accordingly PMT published a tender notice as on 28/04/2003 in Marathi and English newspapers.
c) in response to the above advertisement 1 of the bidder is present contractor who is second part of this Agreement submitted his tender as per the terms and conditions thereof.

Now therefore this agreement witnesseth and it is hereby agreed by and between the parties as follows: 1

) This agreement will come into force only after buses are handed over by the contract work to PMT as per schedule “B”, duly registered with RTO Pune and permitted by RTO Pune to ply the buses on stage carriage permits held by PMT and no liability will be incurred on PMT till the agreement comes into force.

2) Buses must comply to the specification as enumerated in Annexure ‘A’ and the number and size of buses to be provided shall be as per Annexure ‘B’.

3) Tenure of the Agreement will be for a period of 5 (five) years from the date of permission to ply the buses of contract on PMT permit granted by RTO Pune.

4) The hired buses will be registered with RTO Pune in the name of PMT as lessee and will be operated as stage carriages within operational area of the PMT. The medium buses will be operated minimum 7,000 km per month, the minibuses will be operated minimum 6,000 km. per month, subject to the reasonable daily operation.

5) (i) the PMT will provide conductor with tickets, way bill and other conductor’s equipment.
(ii) It shall be the right of PMT to collect the fare charges. The fare charges will be credited to the account of PMT. The contractor shall not have any right to claim over the cash collection for any reason whatsoever.
(iii) The conductor of the bus alone shall collect all the fare and luggage charges. Neither the private bus contractor nor the driver who shall have any claim on the fare and luggage charges or any amount so collected.

6) The General Manager PMT shall have sole discretion to identify the routes on which hired buses shall be deployed. The contractor shall have no right to claim any particular route for operation.

(7) Responsibilities of the Contractor
(i) To provide the bus with driver possessing valid driving license with P.S.V. badge and complying PMT norms and certificate of medical fitness from competent authority. Driver shall follow the instructions of the authorities of the PMT. The driver will have to undergo training and test of driving. If necessary, driver should undergo medical examination by the medical officer of the corporation. Only successful driver will be approved. Expenditure of the training of the driver by PMT will have to be borne by the contractor. Driver must fulfill the norms prescribed by PMT. The driver should have knowledge of Pune City. However Contractor will be permitted to employ the surplus bus drivers employed with PMT where the post of drivers has become surplus on the Establishment of PMT.
(ii) It will be the responsibility of contractor to ensure that driver maintains close coordination with conductor and provide facilities to passengers and ensure that the passengers are not put to any inconvenience. The driver should have polite behavior with public and passengers and PMT staff.
(iii) The contractor shall not employ a person as a driver for operating a bus on hire basis who has been removed or dismissed, retired on superannuation from the service of PMT or any other Public Undertaking. Also driver must be of the age less than 58 years. Driver who has met with a fatal accident during the contract period should not be continued for 2 months.

Thereafter the driver will be continued by the contractor on his satisfaction given in writing to the PMT that the driver was not at fault for the accident.

(iv) The contractor shall provide uniform to the driver as prescribed by the PMT. The contractor shall provide an identity card with photo attested by contractor and PMT to the driver. Contractor shall furnish photo copy of the driving license of the driver to PMT.
(vi) The contractor/driver shall scrupulously follow instructions issued by the PMT periodically. As and when the PMT finds behaviour and conduct of the driver questionable, upon the notice, the contractor of hired buses shall replace him with the substitute driver immediately. If the private bus contractor fails to replace such a driver within a period of 7 days of notice thereafter, the bus assigned to that driver shall be liable to be discontinued without prior notice and no hire charges will be payable to contractor.
(xiv) The contractor shall produce the vehicle for inspection at the time of deployment and also subsequently whenever required by the PMT.
(xv) Contractor shall inform the place where he will be parking the vehicles and place where he will be repairing the vehicles. This may be checked by PMT authorities.

8) Calculation of kilometres of hired buses
(iii) Distance operated for making payment will be reckoned from appointed terminus for plying vehicles as per the kilometers of the trip distance as per time table.
(iv) Cancelled kilometers on account of mechanical breakdown enroute and any other reasons beyond the control of PMT shall be deducted.
(v) The contractor shall make available the bus for a minimum 16 hours a day. In case bus is not made available minimum 16 steering hours a day, it will not be counted as a day for the purpose of reckoning the number of days operated in a month.
(vi) In case of cancellation of trips for any reasons deduction shall be made and actual kilometres operated be reckoned for payment for hire charges.
(vii) In case of breakdowns PMT can divert the passengers to any other hired bus or bus of PMT. On such occasion the kilometers from the point of the breakdown to the destination point shall be deducted.
(viii) Increase in kilometers due to enforcement of law and order shall not be reckoned for hire charges where PMT has not changed its fare structure. …”

There are further terms which are not reproduced here for the sake of brevity.

The Hon. Tribunal has referred to number of judgments cited byboth the sides about nature of lease transaction. Hon. Tribunal has referred to judgments including that of Bharat Sanchar Nigam Ltd. (145 STC 91)(SC) and also considered the criteria laid down in the said judgment about nature of lease transaction.

After referring to citations, the Hon. Tribunal has arrived at the following conclusion.

“13. After having perused the copy of Agreement between the appellant and PMT, it becomes amply clear that the appellant has given the buses on hire to PMT for a specified period. During the entire period of contract, and when the buses are standing idle or have free time or are not being used by PMT, the contractor (appellant) is prohibited from using these same buses for his personal use or gain. This proves that, during this period of agreement the buses along with the drivers are completely at the disposal and under the control of PMT. Now we need to address the appellant’s claim that he is not a ‘dealer’ as defined under section 2 (8) of MVAT Act. In support of his claim the appellant has relied on the judgment of Honourable Bombay High Court in the case of Commissioner of Sales Tax, Maharashtra State, Mumbai vs. General Cranes [2015] 82 VST 560 (Bom).

14. In order to determine whether there is a transfer of right to use goods so as to make the contract one of sale under article 366 (29 A) (d) on the point of law, both the parties are unanimous that the test is of effective control and possession with respect to the goods.

In para 13 of the judgment of Honourable Bombay High Court, in the case of Commissioner of Sales Tax, Maharashtra State, Mumbai vs. General Cranes [2015] 82 VST 560 (Bom), their Lordships observed that, “In the present case, the permissions and licenses with respect to the cabs are not available to the transferee and remained in control and possession of the respondent. It is the driver of the vehicle who keeps in his custody and control the permissions and licenses with respect to the Maruti Omni Cabs or the said permissions and licenses remained in possession of the respondent. These are never transferred to M/s NDPL. It, therefore, cannot be said that there is a sale of goods, as transfer of right to use in as much as a necessary ingredient of sale, the transfer of right to use the goods, is absent”.

15. In the present case before us, it is very crucial to understand the nature of transaction. It is broadly outlined, as we understand from the records and documents placed before us. The Pune Municipal Transport is a public transport undertaking established as per the provisions of section 66 (20) of the BPMC Act 1949, to cater to the needs of commuters in and around the Pune City, who holds the stage carriage permits. The appellant does not hold or own stage carriage permit.

It is agreed between the parties that, the buses must comply with the specification as enumerated in the terms and conditions of the agreement. Tenure of the agreement will be for a period of 5 years from the date of permission to ply these buses of contractor on PMT permit granted by RTO , Pune.

16. On perusal of the copy of the agreement before us, it clearly specifies that the buses should be registered in the name of PMT as lessee. Clause number 15 of the agreement indicates that, the copy of the RC book, insurance policy and fitness certificate of the bus be deposited with PMT or duly exhibit the copy of the documents in the bus. This clearly exhibits that, overall custody and control of the documents is with the PMT. The admitted position which emerges is that, PMT is made available with the legal consequence and legal right to use the goods, namely the permissions and licenses with respect to the goods. This being the factual difference in the present case and the case of Commissioner of Sales Tax, Maharashtra State, Mumbai vs. General Cranes [2015] 82 VST 560 (Bom), the appellant is rightly held as a dealer under the MVAT Act, and assessed as unregistered dealer.”

Thus, The Hon. Tribunal has considered the given transportation activity as liable to tax under MVAT Act as Transfer of Right to Use goods.

A further position considered by the Hon. Tribunal is that, there were receipts for other transportation where the facts were not same as discussed above. Hon. Tribunal has directed the deletion of tax on such receipts. The said direction is as under:

“17. In our considered opinion, all the criteria as set out by Honourable Supreme Court in the judgment in the case of Bharat Sanchar Nigam Ltd. and another vs. Union of India and Others [2006] 3 VST 95 (SC), are satisfied. Therefore, we have no hesitation to determine the impugned transaction with PMT as a sale, as per section 2 (24) Explanation – (b) (iv) of MVAT Act, liable to tax. However, on perusal of assessment order it is observed that the assessing officer has taxed the total income of the appellant, which includes bus hire receipts from other customers. In our considered opinion the appellant is entitled to relief of tax including consequential interest and penalty levied on the turnover of income from other customers, other than PMT.

Hence, we pass the following order.”

Conclusion
Thus, the situation about attraction of service tax or VAT in relation to transportation activity is to be seen in light of individual facts and terms of agreement. As different facts are considered by courts, broad principles will gradually emerge.

SERVICES PROVIDED BY A GOVERNMENT OR A LOCAL AUTHORITY TO BUSINESS ENTITIES

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Preliminary
With effect from July 01, 2012, service tax regime has undergone a complete overhaul and most of the services are now covered under the service tax ambit. Earlier, every activity (service), which was liable for service tax was defined by way of specific nomenclature and a definition was provided for each service. However, since the definition of ‘service’ is now introduced, the onus is shifted to the service provider and in some cases to service receiver under Reverse Charge Mechanism (RCM), to ascertain whether a particular activity is a service or not and failure to do so would result into a tax liability or lead to a litigation.

One of the significant amendments made in the negative list based taxation of services governed u/s. 66D (a) (iv) of the Finance Act, 1994 (“Act”) comes into effect from April 01, 2016. For many business enterprises receiving services provided by a government or a local authority, this is very important as it is likely to have far reaching implications. To understand the said amendment in its entirety, one needs to go through section 66D (a) (iv) of the Act before the amendment was made which is reproduced below for easy reference:

Position before the amendment

“Section 66D of the Act (Negative List of Services)

“The Negative list shall comprise of the following services, namely:-

a) Services by Government or local authority excluding the following services to the extent they are not covered elsewhere
i) services by the Department of Posts by way of speed post, express parcel post, life insurance and agency service provided to a person other than Government;

ii) services in relation to an aircraft or a vessel, inside or outside the precincts of a port or an airport;

iii) Transport of goods or passengers; or

iv) Support services, other than services covered under clauses(i) to (iii) above, provided to business entities;”

b) ……….
c) ……….”.
………….

“Support Service” was defined u/s 65B (49) of the Act as under :

“support services” means infrastructural, operational, administrative, logistic, marketing or any other support of any kind comprising functions that entities carry out in ordinary course of operations themselves but may obtain as services by outsourcing from others for any reason whatsoever and shall include advertisement and promotion, construction or works contract, renting of immovable property, security, testing and analysis.”

If above stated support services are provided by the government or a local authority, the liability of discharging service tax is shifted to the services receiver under RCM in terms of Section 68(2) of the Act read with Notification No. 30/ 12 – ST dated 20/6/12 (as amended).

Position after the amendment

Section 66D(a)(iv) of the Act

Vide Clause 107 of the Finance Act, 2015, section 66D (a) (iv) of the Act has been amended, which has been made effective from April 01, 2016 vide Notification No 15/2016 – ST dated March 01/2016. The amended section 66D (a)

(iv) of the Act is reproduced below:

Section 66D (Negative List of Services)

The Negative List shall comprise of the following services, namely:-

“a) Services by government or a Local Authority excluding the following services to the extent they are not covered elsewhere-

i) (unchanged)
ii) “
iii) “
 iv) Any services, other than services covered under clauses i) to iii) above, provided to business entities.”

Also, vide clause 105 (h) of the Finance Act, 2015, the definition of “support service” as defined under section 65B (49) of the Act has been omitted with effect from April 01, 2016.

Notification No. 30/2012 – ST dated 20/6/12 (as amended vide Notification No. 18/2016 – ST dt. 1/3/16 (Relevant Extracts) I The taxable services – ……..

(A) (iv) provided or agreed to be provided by – …….

(C) Government or local authority excluding,-

1) Renting of immovable property, and

2) Services specified in sub-clauses (i), (ii) and (iii) of the clause (a) of section 66D of the Finance A ct, 1994.

to any business entity located in the taxable territory;

II The extent of service tax payable thereon by the person who provides the service and any other person liable for paying service tax for the taxable services specified in paragraph I shall be as specified in the following Table, namely: –

Brief Analysis of Amendment

Criteria for taxability

A large number of the services provided by the government or a local authority to a business entity may get covered under the service tax net if they satisfy the following criteria for taxability:

Whether any activity carried out or done falls under the definition of ’service’ or not? (‘Service’)

Whether such service is provided or agreed to be provided by the government or a local authority? (‘Government’ / Local Authority)

Whether the recipient of such service is a Business Entity? (“Business Entity”)

Whether there is a consideration paid or payable for such activity/ service? (‘Consideration’)

Whether such activity carried out/ service provided is covered under exemption/ negative list of services or falls under exclusion portion of the definition of service?(Excluded/Exempted)

If the answers to the criteria stated in (a) to (d) above is ‘YES’ and the answer to the last criteria (e) is ‘NO’”, service tax would become payable by the recipient of the service under RCM

Criteria to ascertain whether any activity constitutes ‘service’ u/s. 65B (44) of the Act As mentioned earlier, the major task that would have to be decided is whether a particular activity performed by one person for another is still a service or not. Also, in view of a declared service definition u/s. 66E (e) of the Act [viz. “agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act”,] it is very difficult to arrive at a conclusion as to which activity amounts to service and which does not. To ascertain whether any activity falls under the definition of a service or not, the following criteria need to be applied:

Whether any activity constitutes merely – a transfer of title in goods or immovable property, by way of sale, gift or in any other manner?

Whether any activity constitutes- a transaction in money or actionable claim?

Whether any activity constitutes- a provision of service by an employee to the employer in the course of or in relation to his employment?

Whether any activity constitutes – fees taken in any Court or Tribunal established under any law for the time being in force?

Whether any activity constitutes – the functions performed by the members of Parliament, members of State Legislative, members of Panchayats, members of Municipalities and members of other local authorities who receive any consideration in performing the functions of that office as such member?

Whether any activity constitutes – the duties performed by any person who holds any post in pursuance of the provisions of the Constitution in that capacity?

Whether any activity constitutes – the duties performed by any person as a Chairperson or a Director in a body established by the Central Government or State Government or local authority and who is not deemed as an employee before the commencement of this section?

Whether such activity is covered under exempted list of services/negative list of services?

Determination of Taxability

It is important to note that, after ascertaining whether a particular activity is a service or not per se so as to attract service tax, taxability will be determined on satisfaction of the following two conditions viz.:

Whether such service is provided or agreed to be provided by a ‘person’ for “another person”?

Whether such service is provided for a consideration?

If the answers to the above two conditions is ‘YES’, then service tax becomes payable

For the correct interpretation of the amended section 66D (a) (iv) of the Act, understanding of the following important definitions would be very much essential:

“Business Entity” defined u/s. 65B (17) of the Act is as under:

“business entity” means any person ordinarily carrying out any activity relating to industries, commerce or any other business or profession.

“Government” defined u/s. 65B (26A) of the Act as under:

“Government” means the Departments of the Central Government, a State Government and its Departments and a Union Territory and its Departments, but shall not include any entity, whether created by a statute or otherwise, the accounts of which are not required to be kept in accordance with Article 150 of the Constitution or the rules made thereunder.

“Local Authority” defined u/s. 65B(31) of the Act as under :

“local authority” means –

a) a Panchayat as referred to in cause (d) of article 243 of the Constitution;

b) a Municipality as referred to in clause (e) of article 243P of the Constitution;

c) a Municipal Committee and a District Board, legally entitled to, or entrusted by the government with the control or management of a municipal or local fund;

d) a Cantonment Board as defined in section 3 of the Cantonments Act, 2006 (41 of 2006);

e) a regional council or a district council constituted under the Sixth Schedule to the Constitution;

f) a development board constituted under article 371 of the Constitution; or

g) a regional council constituted under article 371A of the Constitution.”;

Taxability Position
With effect from April 01, 2016, a large number of activities /services provided by government/local authority to business entities would come within the ambit of service tax under RCM. Hence, it would be a huge challenge to determine taxability, on the basis of criteria discussed above.

It needs to be expressly noted that, under RCM there is no threshold limit prescribed for payment of service tax. Hence, say when a trader who is not registered with service tax department makes a payment of fees for Rs. 10,000/- to government/local authority which is liable to service tax he would have to register and comply with the service tax law despite very low service tax liability of Rs.1,500/-. This is likely to enhance compliance burden on small and medium businesses, in particular and would be totally contrary to government’s initiative to promote “ease of doing business.”

Taxability Position is discussed hereafter with some illustrations :

Merchant Overtime Charge (MOT)

MOT charge paid for availing services of verification of export goods and sealing thereof by the Department of Excise, Government of India, provided to a business entity would get covered within service tax net under RCM since it fulfills all the conditions/criteria for taxability.

Registration Fees for registering title documents

Since registration fees are collected for providing the service by a state government department for registration of the title documents and preservation thereof in their records to a business entity, service tax under RCM would become payable. However, if the said fees are paid by an individual personally & not as business entity, service tax would not be payable.

Deduction made by government departments for the deposit of Service provider for poor service quality

Since tolerating an act by the government department of poor quality of construction is a service specified under a Declared Service [section 66E (e) of the Act,] and the consideration for such service is the amount so deducted from the deposit, service tax under RCM may become payable by the service provider as a service recipient.

Fees for Filing of Appeals etc paid to CESTAT

Such service falls under the exclusion portion of the definition of ‘Service’ and hence would be not taxable under service tax nor under RCM in terms of Clause (c) of section 65B (44) of the Act.

The above are only a few illustrations. However, facts of every case would have to be examined to determine taxability. Implications of taxability in cases like license fees for 3G/4G, Allocation of coal blocks for mining and related work could have a far reaching implications. The same would require a very detailed study and examination.

Conclusion
Considering far reaching implications of taxability of services provided by government/local authority to business entities with effect from April 01/2016, the following is suggested:

Applicability of RCM needs a serious consideration so as to ease compliance burden, particularly on small and medium business enterprises, who may not be registered with service tax department.

If taxability under RCM is maintained, it is essential that for ease of doing business a transaction threshold (say Rs. 50,000/-) is prescribed.

Detailed guidelines/clarifications need to be issued by CBEC with practical examples to facilitate understanding & avoid litigation.

Welcome GST Transitional Provisions under GST

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Whenever there is a change in the existing system of taxing goods and services or introduction of a new tax in the nature of indirect taxes, there arises a need of designing appropriate provisions for its smooth transition. These transitional provisions play an important role in the successful implementation of the new system. Almost all countries, all over the world, have passed through such a situation. The Indian taxation system has also undergone various reforms in the past and the biggest reform in the field of indirect taxes is nearly ready for introduction.

We have discussed, in the past few months, on how successfully the system of VAT (GST) has been implemented worldwide, and, we have also discussed some important aspects of GST law and procedures of some of the leading countries. While our discussion will continue till our Government finalises an appropriate draft of Indian GST law, let us consider some basic issues concerning transition from existing multiple taxation system to one single law (called GST) to be operative all over India. In comparision to other countries, the law makers in India will have to devote little more efforts in designing the transitional provisions. The basic reason for that, is present, we have several laws taxing various transactions at certain stages of procurement, production and supplies, and, some of these laws are governed by the Central Government and some by the States. There are various methods under which these taxes are being levied and collected at present, while some have the features of VAT or partial VAT , the others are still continuing with the old system of sales tax (For example: Central Sales Tax). Another area of concern is ‘dual GST’, which will have two major components CGST and SGST, and, in addition thereto IGST. As the proposed ‘dual GST’ is likely to subsume all these taxes like Excise Duty, Service Tax, State VAT , Central Sales Tax, etc., it is necessary to understand the complexities of transactions and taxation thereof, particularly during transition.

Although, the government has already issued certain draft procedures like procedure for registration, returns, payment of tax and refunds, all these draft reports need a complete overhaul so as to achieve the desired results. Any new tax law has important ingredients like point of taxation, valuation, the subject matter of tax, place of supply and the transitional provisions, etc. It is equally important that smooth flow of input credit (i.e. excise duty on inputs and capital of goods, sales tax or VAT , Central Sales Tax, service tax) is allowed to be transmitted conveniently and without hassles into the new law. In absence of any guidelines from the authorities, the probable scenarios of the transitional provisions are stated by referring to GST Acts of several countries. The purpose of this article is to provoke thoughts on the subject.

The potential concerns that arise in smooth transition may be listed as follows:

Registration and obligations of the assessees
Goods in stock (including lying with agents and job workers)
Goods in transit or consignments pending approval of customer
Goods return and/or subsequent revision in price
Branch transfers
Inter-state transactions
Sale in Transit
Carry forward and transfer of input tax credits
Pending Refunds
Point of taxation for overlapping transactions
Exempt goods and services in current regime, which are no longer exempt in GST and vice versa
Treatment of unutilised credit
Continuing supplies and works contract
Dealers governed by composition schemes
Dealers enjoying incentive schemes

There may be many other areas of potential concerns that are required to be addressed during the transition period. Some of the issues, concerning above points, are discussed in brief herein below:

Registration and obligations of the assessees

Transitional provisions should ensure that the existing registered dealers/assessees continue with their registration or get registration under GST law automatically without any hassles. Such transition should be paperless to the maximum extent possible and within pre-fixed time line. The registration number should be such that the constitution of the assessee, the nature of business in which he is engaged into, location of the assessee including principal place of business, branches and other premises, contact details, jurisdiction of the assessing officer can be tracked easily. The registration number as linked to PAN should also facilitate with smooth transfer of information between different tax authorities such as Customs, Income Tax, registrar of documents, etc.

The registration details with various departments, at present, should be updated in advance with necessary information as may be required for issuing new registration numbers. The entire procedure for granting new numbers should be online and uniform for all the States all over India. It may be necessary to ascertain, in advance, from existing dealers that whether they would like to continue with their registration and whether in one State only or all the States or in some of the selected States. The registration numbers need to be granted accordingly at the option of existing registered dealers/assessees, without any hassles.

Goods in stock including lying with agents and goods in transit or consignments pending approval of customer
In respect of stock on hand in pre-GST regime, the sale taking place in post GST regime (called as ‘supply of goods and services’) will be subject to GST on sale value in case of domestic transactions. In case of exports of goods and services, place of supply rules will be formulated. These rules will cover inter-state supplies also. The enabling rules will be required to be framed for levy of GST to the assessee’s own depot in another state and supply made thereafter. In case when the goods sold prior to the appointed day1 are returned subsequently, the rules are required to be framed for refund of payment of sales tax2 /VAT / CST paid in the pre-GST regime.

In case of goods lying at agent’s premises, whether the agent sales goods to a customer on behalf of the principal or return them back to the principal, both the cases may have to be treated as taxable supply in GST regime. A suitable declaration of such stock and its valuation on the appointed day from the agent as certified by the principal may be required for this purpose.

Point of Taxation Rules prescribing time of supply will be required to be framed for sale contracted in pre- GST regime but actual sale takes place in post-GST regime. Such rules may be different for ascertained and appropriated goods for supply and the goods which are under process of manufacture and the unascertained goods. Pre-GST regime of sales tax/VAT may apply if the payment is received in that period though actual supply may take place in post-GST regime. In case of part payment, sale may be recognized for the purpose of payment of sales tax/VAT to the extent payment is received.

Goods in transit may be subjected to sales tax/VAT even if such goods are received by the customer after the appointed day as the supplier would have charged sales tax/VAT at the time of supply under pre-GST regime, being in origin based tax system. It is possible that the goods involved in overlapping transactions, would cross check posts after implementation of GST and may be lacking in documentation requirement under GST. In such a situation reasonable time, may be allowed to complete the documentation and retain the taxability under pre- GST regime.

In case of sale on approval basis, GST may be charged if the customers approve such sale after the appointed day. Detailed rules/guidelines may be required to be framed in this regards.

Those contracts which are inclusive of taxes in pre-GST regime may be required to be bifurcated in taxable value and tax element separately under post-GST regime. The stock, work in progress etc., may be stated in these terms on the appointed day for smooth transition of credits.

In case of services, the existing Point of Taxation Rules may have to be reframed with necessary changes as may be required.

Branch transfers
In pre-GST regime the branch transfers are not taxable. Inter-state branch transfers, post-GST regime, may be liable for GST. The dealers may be required to give a declaration of stock lying at branch along with the component of tax thereon. For this purpose, the dealer’s warehouse or depot will also constitute a branch.

Carry forward and transfer of input credits
The transitional issue of input credit may arise in following circumstance when the goods purchased and lying in stock, which are sold post-GST including the tax exempt goods in post-GST regime upon removal of exemption.

Goods purchased from registered dealers and those remain in stock in trade on appointed day and sold in post-GST regime can further be classified into the goods with invoices showing the sales tax/VAT element separately and the invoices not showing sales tax/VAT so separately but are inclusive of such levies. In case of invoices inclusive of tax, some formula needs to be prescribed to find out the tax element in it. On the basis of some estimation like some percentage basis or as may be appropriate. Malaysia has adopted a general rule of element of 10% of taxes included in purchases for carry forward the tax element in post-GST regime or issue of refund in pre-GST regime if the assessee does not have authentic evidence.

But, what about excise duty involved in the goods lying in stock on the appointed day? There may be situations where the element of excise duty is visible on the ‘Tax Invoice’ and there may also be purchases lying in stock for which ‘tax invoices’ have been issued by resellers, thus excise duty is not shown separately, but included in the sale price (purchase price).

Goods purchased from unregistered dealers on which purchase tax is paid under the State law, the same may have to be allowed to carry forward in the GST regime under transitional provisions. The dealer may be allowed to carry forward only such input tax credit which is supported by adequate disclosure in the returns. In case of services, which have suffered reverse charge payment of service tax, the same should also be allowed to carry forward in post- GST regime.

Goods lying at branch or with agents, or with customers on approval basis, or in transit with invoices showing VAT /sales tax element separately or not which is inclusive of taxes. Credit of such tax or duty should be allowed to carry forward.

Refunds should be allowed in respect of goods or services lying in stock which was subject to tax in pre- GST regime but exempt in post – GST regime. Proper safeguards may have to be introduced to element goods/ services that have not suffered tax or duty due to purchases during basic or other exception periods.

Credit on semi-finished (under process) goods may be allowed on the basis of appropriate mechanism.

Credit in respect of capital goods – the assessee may be allowed to carry forward tax paid in pre-GST regime in relation to eligible capital goods lying in stock as having availed the credit including the deferred credit. In case of partial allowance of credit in the pre GST regime, the balance should be allowed to carry forward in post-GST regime.

No artificial restrictions may be imposed for the claim of input tax credit. No apportionment of input tax credit should be done when it can be attributed wholly to taxable supplies.

Credits forgone due to artificial restrictions should be allowed to be brought back. This should apply even for assessees hitherto paying under composition tax schemes under various laws.

Point of Taxation to avoid overlapping transactions
Different indirect tax laws in the country have different point of taxation. For example, in case of excise duty, the point of taxation is the time of removal from the place of removal of goods; In case of sales tax/VAT laws, the point of taxation is issuance of invoice and in case of service tax there is a separate mechanism called point of taxation. The GST law may have different rules for point of taxation which would determine the tax liability on supply of goods and services. The same set of rules should avoid double taxation on overlapping transactions under pre-GST regime and under post-GST regime. The instances of such overlapping transactions are given in the “Discussion Paper on Key Transitional Issues in Proposed GST Regime” issued by ICAI, and enumerated as follows:

i) Invoice is billed under pre-GST but the goods or services are supplied and consideration for the said supply made in the GST regime.

ii) Goods or services are supplied in the pre-GST regime but invoice for supply and consideration for supply made in the GST regime.

iii) Advance received during the pre-GST regime but invoice and supply made during the GST regime.

iv) Invoice and payment against the said invoice is received prior to GST regime but supply of goods or services is made in the GST regime. v) Invoice and supply of goods or services is made during the pre-GST regime but payment for the said supply is made in the GST regime.

vi) Payment is received in advance and supply of goods or services is made prior to GST regime but invoice for the said supply is made during the GST regime.

Sale of goods
In case of sale of goods, where the goods has already suffered levy of sales tax/VAT and is supplied in post-GST regime, it should be the differential rate of tax, i.e. rate of tax in GST less sales tax/VAT only be payable. In other words, the credit of sales tax/VAT paid should be allowed under the GST regime.

Provision of service
There may be situation where provision of service fall in both the pre and post GST regime. Presently, the conditions for levy of service tax are; a) provision of service, b) issue of invoices and c) payment of consideration. In GST regime only first two conditions are recommended. They should,

i) Where the service is completed in pre-GST regime and its invoice is also issued before implementation of GST, in such case, POT for the service would lie in pre-GST regime.

ii) In case a service is completed in post-GST regime or the invoice issued in case of service completed in pre- GST regime is issued in post-GST regime, the POT for the service would lie in GST regime.

iii) In case of continuing transactions like long term lease, license to use, hire purchase agreements, the agreements entered in pre-GST regime should be liable to GST from the appointed day for services provided from that day. In case full amount is paid in the pre-GST regime, the same should not be liable for GST for the remaining period of the transaction.

iv) In case of a contract of continuous supply of service made in pre-GST period but the same is cancelled subsequently, service tax paid for the terminated period may be refunded subject to the conditions as may be prescribed.

The above propositions will take care of the situation where a given service is taxable both in pre-GST as well as in the GST regime. In case where the given service is not taxable in pre-GST regime but has become taxable in GST regime or vice-versa, the criteria to determine the POT should be the date of ‘completion of service’.

Manufacture of goods
In case of a manufacturer of dutiable goods in pre-GST regime and removal thereof in GST regime, the point of taxation should be under GST regime.

Works Contract or other continuing transactions
Presently, under service tax, date of completion determines the point of taxation. However, in case of services continuing for a longer period of time like works contract, determination of date of completion of service may be done based on a criteria similar to the one in the Point of Taxation Rules, 2011, under the Service Tax Law in relation to ‘continuous supply of service’.

At the entry point of GST, from the current sales tax / VAT , it would be appropriate that value of the work done does not enter into GST regime and dual levy is avoided. The periodical RA bills issued and approved by the customer may be regarded as sufficient evidence. Similarly, there should be smooth transition of input credits of any tax, duty etc., lying in stocks or in unfinished works.

In case, any project (for e.g. infrastructure projects) are zero rated in GST regime the credits embodied in the stocks or work in progress should be refunded after putting in place adequate safeguard mechanism.

Real Estate transaction related to under construction properties
In case of under construction units, GST may be payable either on commercial properties or on residential properties or on both, the credit of input service tax, inputs and capital goods embodied in stocks or work in progress should be allowed in post-GST regime. Credit of tax paid on works contract service should be allowed when building is used for commercial/industrial purposes.

Exceptional scenarios
The law should also provide adequate provisions to deal with exceptional transactions like,

The transaction is under composition scheme under Pre-GST but not so under GST regime or vice versa.

Where property in goods has been transferred with option to return them within prescribed time frame given in pre-GST regime but are subsequently returned in post-GST regime; or

Where possession of goods has been transferred to job-worker to return within prescribed time frame given in pre-GST regime and are subsequently returned in post-GST regime; or

Where service provided in pre-GST regime is subsequently declared deficient in post-GST regime; etc.

Exempt goods and services in current regime, no longer so in GST and vice versa
Goods in stocks which has suffered input tax or services which has suffered input service tax should be allowed to be set off against GST payable on final output.

Ineligible credits (including that of CST inputs), on account of earlier exempt regime be allowed to be brought back in post-GST regime when they become taxable.

In long term contracts, sufficient time should be given to change the tender/contractual terms wherever necessary (e.g. in Malaysian GST, the existing contracts can be reviewed up to the first opportunity for such renewal or within the time limit of 5 years and till such review or expiry of time limit, such contracts are made zero rated). In case the contracts are not reviewable, GST may become cost to enterprise.

Treatment of unutilised credit in case the goods exempt in post-GST regime
Refund should be granted for unutilised credit provided the goods and services have suffered taxes before the appointed day. The assessee may be given option to carry forward the unutilised credit and set off against the tax payable under GST.

Conclusion
Success of GST depends largely on smooth transition of taxes and duties from pre-GST to post-GST regime. India has a complex system of taxes. There are various types of indirect taxes prevailing in the system with levies and exemptions that too vary State to State. Transitional provisions should be fair to the assessees and also it needs to be ensured that the prices do not escalate for the consumers. The best example is Malaysia which has joined band wagon of GST very recently, i.e. from 1st April 2015, after deliberating for more than 10 years. The country has introduced one of the fairest system of transition including allowance of refunds for taxes paid in pre-GST regime if levy becomes exempt later. Some other countries have also enacted appropriate provisions for smooth transition and allowance of hassle free credits in the new regime. Australia and New Zealand have separate transition Act. Singapore also has elaborate procedure and it has been ensured that smooth flow of credit is not artificially hampered. Elaborate procedure for allowance of refund is also formed whenever the supply is exempt in GST regime. It is expected that India will adopt a fair transitory process from existing levies to implementation of GST so that the businesses do not suffer and the interest of consumers is not affected by heavy terminal tax.

COPY OF MINUTES OF INTERACTIVE SESSION WITH THE OFFICIALS AS A PART OF VIGILANCE AWARENESS WEEK

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OFFICE OF THE
PR. CHIEF COMMISSIONER OF INCOME TA X, MUMBAI
ADDL.COMMISSIONER OF INCOME TA X (HQ) (VIGILANCE)
ROOM N0.361, AAYA KAR BHAVAN, M.K. MARG, MUMBAI- 20

TEL- (022) 22011594
PABX- 22039131 EXTN. 2361

No. Addi.CIT(Vig.)/VAW/2015-16 / 392 December 07 , 2015

The Chief CIT- 1 to 11 & Central I & II, (IT) & (TDS)
The Director General of Income Tax (lnv.),
The CIT (Exemp), DTRTI, (I&CI) & (LTU)
The Addl. Director Generai(Vig.)(West)CBDT
The CIT Judicial, (Admn. & CO), (Audit)- I & II,
The CIT (DR) ITAT & ITSC
Mumbai.

Sir/Madam,

SUB : Observance of Vigilance Awareness Week- 2015 From 26.10.2015 to 31.10.2015-

Kindly refer to the above.

As a part of observance of Vigilance Awareness Week, an Interactive Session was held on 30.10.2015 at 11 .30 a.m. at Conference Hall, Aayakar Bhavan, Mumbai, with members of the BCAS, CTC, FICCI, WIRC(ICAI) etc. and Sr. Officers of the Department which was chaired by Pr. CCIT, Mumbai.

In this connection, I am directed to enclose a copy of minutes of the said Interactive Session for information & appropriate action.

Yours faithfully,
[ R. K. SINGH ]
Dy. Commissioner of Income Tax (HQ)
(Vigilance), Mumbai.

Encl.: as above.
Copy to (alongwith minutes of Interactive Session) :
(i) CTC, (ii) BCAS, (iii) FICCI, (iv) WIRC & (v) IMC
DCIT(HQ)(Vig.), Mumbai.

Minutes of the Interactive Session held on 30/10/2015 at 11.30 A.M. at the Conference Room, Aayakar Bhavan, Mumbai

An interactive session was held by the Income Tax Department, Mumbai in the Conference Room, Aayakar Bhavan, 3rd floor at 11 . 30 A.M. on 30.10.2015 as part of the endeavour to sensitize its officials to the need for lmproving quality of public service rendered and mitigating the potential areas of corruption during the Vigilance Awareness Week. The interactive session was chaired by Shri D. S. Saksena, Pr .CCIT, Mumbai. The following officers also participated in the Interactive Session:

2. The following members of Federation of Indian Chambers of Commerce and Industry (FICCI), Bombay Chartered Accountants ‘ Society (BCAS) , Indian Merchants’ Chamber (IMC) , Western India Regional Council of the Institute of Chartered Accountants of India (WIRC of ICAI) and Chamber of Tax Consultants (CTC) were present:

Federation of Indian Chambers of Commerce and Industry

• Mr. Deepak Mukhi, Head of FICCI – MSC

Bombay Chartered Accountants’ Society

• Mr. Raman Jokhakar, President, BCAS

• Mr. Ameet Patel, Co Chairman, Taxation Committee, BCAS

• Mr. Jagdish Punjabi, Convenor, Taxation Committee, BCAS

Indian Merchants’ Chamber

• Mr. Ketan Dalal, Chairman, Direct Tax Committee
• Mr. Gautam Nayak, Co-Chairman, Direct Tax Committee
• Mr. Sushil Lakhani, Member, Direct Tax Committee

Western India Regional Council of ICAI

• Mr. Shardul Shah, Regional Council Member

Chamber of Tax Consultants

• Mr. Avinash Lalwani, President

• Mr. Mahendra Sanghvi, Co-Chairman, Law & Representation Committee

• Mr. Krish Desai, Vice- Chairman, Law & Representation Committee

• Mr. Amrit Porwal- Convenor, Law & Representation Committee

• Ms. Nishta Pandya – Convenor, Law & Representation Committee

3. The Pr. CCIT(CCA) welcomed the participants and expressed his happiness on meeting the members from esteemed associations such as FICCI, BCAS, IMC, WIRC of ICAI and CTC. The Pr. CCIT remarked that each department has its own vigilance setup and in that process we have Addl. Director General (Vig.), West Zone. This is the formal structure in the department. The Pr. CCIT further informed that the refunds are being issued directly in the bank accounts of the assessee by CPC. However, we should have the system to safeguard the rights of the taxpayers to receive the refunds without coming numerous rounds to the income tax office. Therefore, the department wants to act positively and proactively by having interaction with the associations so that ideas can be shared and improvement in the systems and processes can be made.

4. Shri Deepak Mukhi of FICCI – MSC initiated the discussion by expressing his compliments for organising the meeting. He also thanked for circulating the minutes of the last years meetings and sorting out the grievances using the technology. He also suggested that whatever decision would be taken in deliberation should be followed up. Further, following issues/ suggestions were also made by FICCI –

(a) Proper monitoring and action by CCsIT is essential to ensure that Office Memorandum dated 7th November 2014 issued by CBDT regarding a non adversarial tax regime and other instructions are actually implemented at the ground level.

(b) There has to be adequate monitoring and supervision in relation to passing of assessment orders, so that the corruption possibilities could be significantly mitigated.

(c) In the assessment proceedings, Questionnaire should not be roving but shiould be ringfenced and specific. Also, the number of hearings should be restricted to a maximum of 5 hearing, which will compel tax officers to be specific and focused and will reduce the possibility to harass assesses. Further, notices for hearings must at least be delivered 20 days in advance and subsequent hearings should have minimum 3 weeks gap and each hearing not being more than 2-3 hours. In this regard internal guidelines may be issued.

(d) There have been a ‘large number of CBDT circulars, but several of them are not followed. In this regard internal guidelines may be issued. Issues such as non disposal of rectification orders, not giving effect to CIT(A) orders and non issue of appellate orders, for which CBDT has issued instructions, should be monitored strictly.

4.1 Shri Ameet Patel of BCAS appreciated the efforts made by the Department regarding issue of refunds, but added that the grievances relating to refund/ rectification are mainly due to the TDS-mismatch and lack of coordination between CPC and jurisdictional officer and that most of the problems are on account of nonmigration of PAN due to internal re-structuring of the Department. He also said that there was a lot of problems in giving the appeal effects in so many cases. Further, following suggestions were also made by BCAS –

(a) Wide publicity should be given to the Vigilance mechanism of the department. It is suggested that the same may be published in the journal of BCAS as well as having prominent notices within the premises of Income-tax offices at different places and not just at the main entrance, so that professionals as well as assesses are adequately aware of the vigilance mechanism of the department and they may approach the appropriate authority to redress their grievances.

(b) The process of rectifications, appeal effects, etc can be streamlined by giving acknowledgement numbers to applications and displaying on Notice Boards or on a website, the details of their disposal in timely manner. Likewise, the total number of assessments completed, demand raised and amount recovered, refunds issued, etc. in each Charge/Range may also be displayed or published on notice boards/ websites.

(c) Though corruption initiated by the officer gets often noticed and addressed through vigilance mechanism, the corruption initiated by an assessee does not get noticed. The officers should also be made aware of their duty to report such incidences for curbing corruption.

(d) In order to bring transparency in the process of delivery of notices to the assesses, the notices should also be sent in parallel by email.

(e) The Transfer & Posting policy needs to be adhered to by ensuring that officers with an adverse track record should not be posted in the charges having public contact and also no supervisory officer should be allowed to remain in one position beyond two years.

4.2 Shri Ketan Dalal of IMC made suggestion for issuing clarification/ guidelines regarding pre-assessment/ post-assessment proceeding like – directing AO’s not to issue142(1) mechanically but with application of mind and also to avoid passing high pitch assessment-order.

4.3 Shri Sushil Lakhani of IMC has conveyed that foreign companies have wrong perception about taxation departments in India and because of that they prefer to shift all the responsilities I liabilities pertaining to taxation matters to theirs Indian counterparts. Further, he also suggested that Income-tax Department of Mumbai, being major contributor to the exchequer, should show the way in this regard.

5. Shri B. K. Mishra, CCIT suggested that it is duty of the tax practitioners also to educate their clients and change their mindset to pay their legitimate taxes honestly in India, as lot of good things are happening in the Department which are not properly propagated.

5.1 Shri Abhay Charan Naik, CCIT suggested to provide specific case with PAN pertaining to Internationaltaxation regarding incidence of harassment, if any.

5.2 The Pr. CCIT informed the members present there about the vigilance set-up of the department. There is an established complaint handling mechanism in place in the Department in the form of vigilance set-up under Director General of Income-tax (Vigilance). The official website of the Department also provides detailed information about the vigilance set-up and complaint handling mechanism. He also informed about the display of notice boards in all the buildings of the department regarding the same.

6. Shri Raman Jokhakar of BCAS requested to put up the Charter of Demand on the website and also display at jurisdictional level.

6.1 Shri Shradul Shah of WIRC of ICAI suggested to call feedback from tax-payers and tax practitioners regarding functioning of the Department vis-a-vis assessments, refunds, rectifications and appeal effects etc.

6.2 Shri Ameet Patel of BCAS suggested to conduct awareness programme about the various initiatives taken by the Department for the benefit of the assesses in coordination with institutes/ associations like WIRC of ICAI/ BCAS/ IMC etc.

6.3. Shri Avinash Lalwani of CTC expressed that AOs are not properly maintaining the record of proceeding of assessment and suggested to maintain digital proceeding sheet. He also suggested that scanned copy of proceeding sheet should be uploaded in respective assessee’s account, to be accessible by the officers as well as assesses. Further, he pointed out that the ASK-Centres were not properly performing. Proper monitoring and reviews should be done by the Department in this regard. He also said that the certification of lowerI nil deduction of tax at source u/s 195 & 197 and disposal of rectification applications are not being done properly and that unnecessary and irrelevant information were asked for in this regard without first verifying the data available on the website of the Department. Regarding search and seizure proceedings, he said that the department insist the tax-payers to switch off the close circuit cameras while the proceeding were going on. He suggested that the CCTV should be remain on during the search action. He insisted that the department should video graphed the entire proceeding in order to ensure the transparency in the proceedings and avoid any sort of corruption. It was also suggested that due publicity should be given about the role of vigilance wing so that assesses are aware of such wing and approach the wing without fear.

7. The Pr. CCIT has informed the members to communicate such incidence, where malpractices are noticed, to the Department so the department could take necessary action against those officers/ officials.

7.1 Shri A. C. Naik CCIT-4 said that the Department is under the process of paperless office by using etechnology. There are lot of suggestions received in this respect which will be considered in on going project.

7.2 Shri Rakesh Mishra, Pr.CIT – 31, Mumbai has given the trail to take out light of E-Sehyog Project started on Pilot Project basis in the office of Pr. CIT 31, Mumbai. For that, he said that that notices from the Department would be sent to the assessee through mail and immediately after sending the mail, it would be deemed to be treated as served to the assessee. He suggested that the submissions made by the assessee through mail must be digitally signed so the evidentiary value & genuineness of the same can be ensured. He also suggested that the tax-payers and tax practitioners can meet higher authorities any time if they are having any genuine grievances with lower functionaries. He pointed out that every Wednesday forenoon has already been declared as a time for public meeting by the Central Government Department.

8. Shri Ketan Dalal of IMC – had said that the technology (E – SEHYOG) of Department by sending their e-mails etc should be implemented not only in assessment proceedings but in appellate proceedings also. He also insisted that the assessment, especially where substantial addition/ disallowances are made, should be finalized only after proper show-cause and after providing reasonable time to reply that show-cause.

8.1 Mr. Amrit Porwal of CTC has insisted that while proceeding with grievances, rectification applications, giving effect to the order of various appellate orders and issuing refunds, first the due procedure should be strictly followed in order to avoid any sort of corruption.

8.2 Shri Sushil Lakhani of IMC pointed out that proceeding under the section 148 initiated on the basis of information received from Sales Tax Department in the past two years has given wrong image to the Department because in such cases assessment has been completed mechanically and without application of mind.

9. Shri D. S. Saksena, Pr. CCIT, Mumbai said that the Department has no option but to initiate proceddings under Section 148, once such information is received, to verify the correctness of the information and assessments are being completed after doing proper verification from various agencies and documentary evidences brought on record.

9.1 Mr. Rakesh Mishra Pr. CIT- 31 provided his office email id and personal email id (Mumbai.cit31@incometax. gov.in & rakesh.mishra@incometax.gov.in respectvely) with a request to mail all the grievances/ suggestions etc related to his jurisdiction that is Goregaon and Jogeshwari. Accordingly the AO having jurisdiction over the case will look into the matter.

9.2 Shri S. S. Rana, Addl. Director General(Vig), West Zone informed that the grievances filed by the assessee or tax practitioners are dealt with by the Department in effective manner especially those which is filed through ASK or CPGRAMS. Problems arise with those grievances only which the assesssee file directly with AO’s. He suggested that the assessee and tax practitioners should file all the grievances through ASK or CPGRAMS only and also they should inform higher authorities from time to time regarding pendency of grievances. Regarding high pitch assessment, they should meet higher authorities or may seek direction u/s 144A from the range head the moment show – cause is issued to the assessee by the AO. He suggested that the tax practitioners as well as assessee should avoid to follow any grievance I obligation directly with the staff members and call the AO’s and instead of that it should be rooted through ASK. He also said that the tax practitioners should also follow the rules and explain true facts and legal position to the tax-payers instead of misguiding and frightening them.

9.3 The Pr. CCIT responded to the participants by informing the members present there that the guidelines have been laid down in the Charter of Demand to tackle all the issues within the time limit as prescribed therein. He pointed out that many of the complaints are anonymous or pseudonymous and there is general reluctance of complainants revealing their identity. Unless there is a specific information that can be acted upon, anonymous and pseudonymous complaints do not help in mitigating the menace of corruption. Issue regarding further publicity about the vigilance set-up and complaint handling mechanism would be considered.

He further informed the Members that necessary guidelines were already issued in respect of issuing questionnaire for scrutiny assessment cases. If the assessing officer issues questionnaire in routine manner, the same should be brought into the notice of higher authorities. In response to the dissatisfaction expressed by members of various CA Associations in respect of functioning of Aayakar Seva Kendra, the Pr. CCIT has stated that the Department will look Into the various aspects as suggested by members of CA Associations.

As regards the display of information or publicity in respect of additions made in income tax assessment, he remarked that secrecy of the assessee’s information is important and cannot be violated. Being policy matter and also for the sake of uniformity, issue relating to publicity of addition/ disallowances made while finalizing the assessment could be addressed by the CBDT only.

10. It was requested by the members of the Associations to send Minutes of the Meetings to all the associations so that common thread is maintained for future purpose.

11. The participants agreed on the need for greater co-ordination between the department and the professional bodies to improve the quality of tax administration and to help each other to ensure that the officers of the Department and the tax practitioners would work towards creating a transparent and vigilant environment. The group deliberated on the challenges and opportunities present before the Income Tax Department and agreed that the education of the tax payers on their rights and duties require immediate attention. The Pr.CCIT assured the group that they would continue to meet and discuss areas of concern and consider the suggestions made to ensure transparency and accountability. The interactive session was concluded on the positive note that the Department and all the stake holders would co-operate to ensure that the tax administration is fair and just.

(AJAI PRATA P SINGH)
Addl. Commissioner of Income Tax(HQ)
(Vigilance), Mumbai.

Section 271(1)(c) – Where assessee’s claim for deduction under section 80-IB was rejected for not satisfying conditions u/s. 80-IB(7A), penalty u/s. 271(1)(c) was not leviable

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CIT vs. Rave Entertainment (P.) Ltd. SLP No 16002/2015 dated
07/09/2015 (Afirmed Rave Entertainment (P.) Ltd. vs. CIT (2015) 2015 376
ITR 544 (All.)(HC)

The assessee claimed deduction u/s.
80-IB. The claim was rejected by the Assessing Officer. At the same
time, the Assessing Officer had opined that the assessee had wrongly
made the above claim which amounted to concealment of income, so he
levied the penalty u/s. 271(1)(c). It was held by the Hon. High Court that in the audit report in Form 10CCBA relevant to the assessment year 2006-07 also the date of completion of construction has been mentioned as 1-5-2002, falling in the assessment year 2003-04. On the basis of these facts, there was a strong justification for the assessee to claim exemption u/s. 80-IB(7A) in the assessment year 2006-07, as it was the fourth year and the benefit is available for five consecutive years beginning from the initial assessment year. The fact about the completion of construction as noted by the Commissioner (Appeals), supported by the audit report, remained undisputed at the stage of the Tribunal. Therefore, the assessee cannot be visited with the charge of filing inaccurate particulars, on the basis of which penalty u/s. 271(1)(c) has been levied by the Assessing Officer.

The Assessing Officer has only stated that such claim was not allowable as the conditions envisaged u/s. 80-IB(7A) were not fulfilled. Thus, the claim was found to be legally unacceptable but it does not amount to furnishing of the inaccurate particulars/concealment of income. It is a simple case of non-allowance of the legal claim for which the penalty is not desirable. Hence, penalty order was set aside by the Hon’ble High Court .

Revenue filed an SLP against the Order of Hon’ble Allahabad High court, which was dismissed.

Section 80IB Deduction – 100% export oriented undertaking – Duty drawback receipt, duty drawback receipt not derived from industrial undertaking –

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Arvind Footwear (P.) Ltd. vs. CIT, SLP NO. (CC) 10365/2014 dated 4/8/2014: (Allahabad High court order dated 17/1/2014 100 DTR 425) (Reversed : Arvind Footwear (P.) Ltd. vs. Dy.CIT, Range -6, Kanpur [2013] 153 ITD 264 (Luck))

The assessee claimed that the “duty drawback” receipt of Rs.1.53 crore was eligible for deduction u/s 80-IB on the ground that the said duty drawback refund was a refund of customs and central excise duty on inputs used in manufacturing of its products. The AO & CIT(A) rejected the claim by relying on Liberty India 317 ITR 218 (SC) where it was held that duty drawback was not “derived” from the industrial undertaking.

The Tribunal observed that though in Liberty India it was held that duty drawback and DEPB arises from an independent source and is not “derived” from the industrial undertaking, in Dharam Pal Premchand 317 ITR 353 (Del) (SLP dismissed) it was held that refund of excise duty had a direct nexus with the manufacturing activity & was eligible for section 80-IB deduction. Accordingly, though duty drawback & DEPB were held in Liberty India to be an independent source of income and to not have a “first degree” nexus with the undertaking, this was in the context of a fact-situation where the duty drawback & DEPB did not arise from core activities of the undertaking and was an additional, ancillary or supplemental profit. There can be situations in which duty drawback itself could be more than the overall profits and in such situations, the duty drawback may not be seen on standalone basis or as an independent source of income because the overall profit is only a part of the duty drawback receipt, and the commercial motivation of running the industrial undertaking is earning only that part of duty drawback receipts. On the present facts, the duty drawback was more than the entire operational profit and so there cannot be an open and shut inference that the duty drawback receipts are an independent source of income and have no first degree nexus with the business activity of the industrial undertaking. There is still room for consideration of the plea that but for the duty drawback the assessee would not have carried out the business activity in the industrial undertaking, because, that would have meant carrying out business for incurring losses. If that be so, the duty drawback receipts can be said to derived from the undertaking and to be eligible for section 80-IB deduction. The Tribunal therefore remitted the matter for fact finding.

The Hon’ble Allahabad High Court reversed the decision of the Tribunal, holding that the issue stood concluded by a decision of the Supreme court and therefore the remand was not proper. On SLP being filed by the assessee, the same was rejected.

Section 68 – Share Application Money & Unsecured loan from family members of directors – Unexplained cash credits

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Earthmetal Electrical Pvt. Ltd. SLP allowed by Supreme Court Civil Appeal No. 618 of 2010 dt. 30/7/2010 (Bombay High court order Appeal No 590 0f 2005 dt 15/10/2008 and Mumbai Tribunal order (2005) 4 SOT 484 (Mum.) reversed)

The Assessing Officer, having found certain share capital money and unsecured loan in the books of account of the assessee-company directed the assessee to explain the share capital money as well as unsecured loan. In response to the Assessing Officer’s query, the assessee submitted confirmation and disclosed that share capital and unsecured loan had been taken from the family members of the directors. The Assessing Officer, having noted that the alleged confirmation did not contain the necessary details, issued notice u/s. 133(6) to all those persons who had allegedly contributed to the share capital of the assesseecompany as well as given unsecured loan. In response to the notice, no one gave any reply. The Assessing Officer also procured information u/s. 131 from the bankers and compared the transaction from information gathered from bank but could not co-relate them. He then issued notice to the assessee, but the assessee never appeared before the Assessing Officer. The Assessing Officer, therefore, treated the share capital money and unsecured loan as unexplained cash credit falling u/s. 68 and, accordingly, made addition to the income of the assessee. The ITAT Mumbai and Hon’ble Bombay High Court confirmed the order of A.O.

The Hon’ble Supreme Court allowed the SLP filed by the assessee following the Supreme Court in case of CIT vs. Lovely Exports (P) Ltd. (2008) 216 CTR 195 / (2008) 6 DTR 308 held that, if the share application money is received by the assessee company from alleged bogus shareholders, whose names are given to the A.O., then the department is free to proceed to reopen their individual assessments in accordance with law, but it cannot be regarded as undisclosed income of the assessee company.