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Institute of Chartered Accountants of India
(ICAI) had come out with an announcement in February 2011, on
Application of AS 30, Financial instruments: Recognition and
Measurement. It was clarified that ‘the prepares of Financial Statements
are encouraged to follow the principles enunciated in accounting
treatments contained in AS 30’. This is subject to any existing
accounting standard or any regulatory requirement, which will prevail
over AS 30. Thus, considering the above exception, an entity can only
follow ‘Hedge Accounting’ only to a certain extent i.e. only for forward
contracts for highly probable future transactions or firm commitments
in foreign currency, as these are excluded from the scope of AS 11.
This
Article brings out the aspect of hedging currency exposure during the
commitment period, by applying cash flow hedge accounting, taking a
currency forward contract as an example for the concept, accounting and
measurement; with limited application of AS 30, in line with ICAI’s
announcement in February 2011 in comparison to accounting such contract
without applying AS 30.
To begin with, till the time Ind AS
implementation dates are notified, entities can take the benefit of
following hedge accounting and avoid volatility in income statement that
arises from mark to market of forward contracts, taken for highly
probable forecast transactions or firm commitments.
Entities
enter into foreign exchange transactions during its regular course of
business. These foreign exchange transactions include purchase &
sale of goods and services as well as financing transactions such as
foreign currency borrowings to leverage the interest rates of the
international market. It is to be noted that these entities continue to
operate in India and are thus exposed to foreign exchange fluctuation.
Foreign Currency Exposure in a Business Let
us consider an entity that has started a trading business with a $100
loan, received on 1/4/xx when the rate was Rs. 45. Thus the total loan
amount received in is Rs. 4,500. The same amount was invested to buy
goods for trade in the Indian domestic market. Assume the repayment
period of 12 months and margin of 10%, the entity could recover Rs.
4,950 (Rs. 4,500 investment and Rs. 450 profit) over a period of 12
months. If the exchange rate remains constant, there is no risk or
exposure to the entity on foreign exchange borrowings. It will be able
to retain Rs. 450 in its own bank account and repay the $100 loan by
transferring Rs. 4,500 to the lending bank.
In the above case,
if the exchange rate depreciates to Rs. 50, the expected cash obligation
for repayment of $100 loan will be Rs. 5,000. In this case, the entity
would lose the entire margin earned from its pure business and incur a
loss of Rs. 50 (Rs. 4,950 – Rs. 5,000).
The above example
considers one side exposure of foreign exchange. If the business was to
trade the goods in the international market with the dollar, it would
have been able to get some natural offset on exchange fluctuations on
the revenue front. This is because the debtors would have also got
converted in Rupees at a higher rate. Thus, the loss would have
restricted only to the extent of mismatch in foreign currency inflows
and outflows.
What is Hedge? In simple terms, it is a
technique or an approach whereby the entity in the above example can
secure or protect its profit margin, even when the exchange rate
depreciates to Rs. 50. However, if the exchange rate goes to Rs. 40, the
opportunity to take advantage of the exchange is lost. Thus, the profit
may not increase but will remain intact.
It is to note that
hedging is not about gaining or losing. It is about fixing the price
risk, like freezing the volatility for the future. It can be on account
of interest rates, commodity prices, currency, etc.
“Hedge is a way of protecting oneself against financial loss or other adverse circumstances” – Oxford Dictionary
“A hedge
is an investment position intended to offset potential losses that may
be incurred by a companion investment. In simple language, Hedge
(Hedging Technique) is used to reduce any substantial losses suffered by
an individual or an organization.” – Wikipedia
An entity
can protect its profits and meet its business plan by entering into
various types of derivative contracts. Exposure on foreign currency can
be hedged by forward contracts, future contracts and currency options,
etc. These contracts can be entered into with various banks as counter
parties.
The entity can buy these contracts from market
participants such as banks who charge certain costs that include the
interest differential and transaction fees. This cost is known as
‘premium’. In above example discussed, the entity could protect its
margin by paying a premium, say Rs. 50, and thus, secure a net margin of
Rs. 400 irrespective of change in exchange rates.
Hedge Accounting: “A hedging instrument
is a designated derivative or (for a hedge of the risk of changes in
foreign currency exchange rates only) a designated nonderivative
financial asset or non-derivative financial liability whose fair value
or cash flows are expected to offset changes in the fair value or cash
flows of a designated hedged item.
“A hedged item is an
asset, liability, firm commitment, highly probable forecast transaction
or net investment in a foreign operation that (a) exposes the entity to
risk of changes in fair value or future cash flows and (b) is designated
as being hedged”. (Paragraph 8 of AS 30)
The objective of Hedge accounting is to offset the gain/loss of the Hedge instrument with that of the hedge item.
A
hedge taken by way of a forward contract can be of two types, namely
cash flow hedge or fair value hedge. The governing factor for
identifying the correct type of designation is dependent on the hedged
item and goes with the objective of hedge accounting.
“Cash flow hedge is a hedge of the exposure to variability in cash flows that:
(i)
is attributable to a particular risk associated with a recognised asset
or liability (such as all or some future interest payments on variable
rate debt) or a highly probable forecast transaction and
(ii) could affect profit or loss.
Fair
value hedge is a hedge of the exposure to changes in fair value of a
recognised asset or liability or an unrecognised firm commitment, or an
identified portion of such an asset, liability or firm commitment, that
is attributable to a particular risk and could affect profit or loss.” (Paragraph 86 of AS 30)
“A hedge of the foreign currency risk of a firm commitment may be accounted for as a fair value hedge or as a cash flow hedge.” (Paragraph 97 of AS 30)
As an exception to the identification of a type of hedge, entities can choose to account derivatives taken such as forward contracts, to hedge the foreign currency exposure on raw material or capital commitments, as either a ‘cash flow hedge’ or a ‘fair value hedge’.
As seen from various practical implementations, an entity usually chooses to designate such forward contracts as a cash flow hedge. This designation allows posting of mark to market (MTM) gains and losses in ‘hedging reserve’, which is part of reserves and surplus, without impacting the profit & loss account. Since the transaction will happen in the future, there is no offset available in the current period’s profit & loss account and hence, it is more logical to defer the impact till the transaction happens.
The documentation, accounting treatment and hedge effectiveness testing can be done on the assumption that the hedge is entered into prior to booking the asset and related liability in the accounts, i.e. there is only a commitment at the point the hedge is entered into.
Sample documentation for hedging a foreign currency exposure on firm commitment for purchase of raw material is illustrated in Table 2.
Table 2: Documentation for Hedging of a Foreign Currency Exposure
Application of AS 30 under existing Indian GAAP as per ICAI’s announcement:
ICAI vide its circular dated 11th February 2011, has clarified that in respect of the financial statements or other financial information for the accounting periods commencing on or after 1st April 2009 and ending on or before 31st March 2011, the status of AS 30 would be as below:
(i) To the extent of accounting treatments covered by any of the existing notified accounting standards (for eg. AS 11, AS 13 etc,) the existing accounting standards would continue to prevail over AS 30.
(ii) In cases where a relevant regulatory authority has prescribed specific regulatory requirements (e.g. Loan impairment, investment classification or accounting for securitisations by the RBI, etc), the prescribed regulatory requirements would continue to prevail over AS 30.
(iii) The preparers of the financial statements are encouraged to follow the principles enunciated in the accounting treatments contained in AS 30. The aforesaid is, however, subject to (i) and (ii) above.
From 1st April 2011 onwards (i) the entities to which converged Indian accounting standards will be applied as per the roadmap issued by MCA, the Indian Accounting Standard (Ind AS) 39, Financial Instruments; Recognition and Measurement, will apply.
(ii) for entities other than those covered under paragraph (i) above, the status of AS 30 will continue as clarified in paragraph above.
Let us take an example of an Indian entity: – Entered into a $ 100 payable commitment to import raw material on 1st January, 20xx – Delivery of raw material is on 31st December, 20xx and payment on the same date. – On 1st January, 20xx, the entity enters into a forward contract to hedge the foreign currency risk – As part of the treasury policy, the entity first enters a shorter period contract till 30th June, 20xx – Rolls it over on 30th June, 20xx to meet the cash outflow on 31st December, 20xx – Refer Table 3 for details of exchange rates and MTMs on various dates.
Note: a. Forward rates mentioned in the above table are the Mark to Market (MTM) rates. They are arrived at by considering the spot rate with reference to reporting date plus premium quoted for balance maturity of each contract on that date.
b. Forward rate and spot rate on final settlement is same because the balance period in that case for premium quote is Zero. c. Entity has designated the forward to hedge ‘forward rates’ and has been fully effective during the period.
Accounting Schema as follows:
1st January, 20xx: The contract has zero value; therefore no entry is required. The commitment is also not yet recognised. The hedge is designated as cash flow hedge in line with the choice available under para 97 of AS 30 read with notification issued by ICAI in February 2011.
Example: A Forward cover is taken on 01/01/xx with maturity of 30/06/xx @ Rs. 42.5/$ for $100. There would be no accounting entry as on 01/01/xx. 31st March, 20xx: The commitment is not yet recognised. MTM gain/loss on cover till the date of period closing would be recognised in hedging reserve (Equity), following cash flow hedge accounting.
As on 31/03/xx, forward cover for maturity of 30/06/xx is available @ Rs. 43.50/$, thus MTM gain of Rs. 1.00/$ (MTM forward rate – Original forward rate) would be accounted as under.
31/03/11 Debit Derivative Asset 100 Credit Hedging Reserve 100 30th June, 20xx: The commitment is not yet recognised hence the cover is rolled forward. The rolled forward contract is treated as a new contract, part of the existing hedge strategy. It is still a Cash flow hedge.
[Paragraph 112a of AS 30:”……replacement or rollover of a hedging instrument into another hedging instrument is not an expiration or termination if such replacement or rollover is part of the entity’s documented hedging strategy”.]
As on 30/06/xx, the rolled forward rate is Rs. 44/$ for maturity of 31/12/xx when the spot rate is Rs. 43.75/$, thus following entries are passed:
a. For booking Settlement gain on cover (43.75/$ – 43.50/$) (i.e. Spot value – last MTM forward rate)
b. Rollover gain received from bank (43.75/$ – 42.50/$) (i.e. Spot value – Original forward value)
30/06/xx Debit Bank 125 Credit Derivative Asset 125
30th September, 20xx :
The commitment is not yet recognised. MTM gain/ loss on cover till the date of period closing would be recognised in hedging reserve (Equity), following cash flow hedge accounting.
As on 30/09/xx, forward cover with maturity of 31/12/xx is available @ Rs. 44.50/$. Thus, MTM gain of Rs. 0.50/$ . (MTM forward rate $44.50– original forward rate of the rolled over contract $ 44.00)
d. Net Settlement loss paid to bank (43.5/$ – 44.0/$) (i.e. Spot value – Original forward value)
31/12/xx Debit Derivative Asset 50 Credit Bank 50
e. Balance in hedging reserve transferred to income statement
31/12/xx Debit Hedging Reserve 75 Credit Cost of Goods Sold 75
The commitment recognised in books at the rate mentioned in Bill of lading and the change in fair value of forward contract from the date of inception to the date of recognising commitment is allocated to cost of raw material consumed.
“Paragraph 109b of AS 30: “It removes the as-sociated gains and losses that were recognised in other comprehensive income in accordance with paragraph 106, and includes them in the initial cost or other carrying amount of the asset or liability”
Note: As per AS 30 para 109b, head of Profit & Loss Account would depend upon the nature of underlying for which the cover the taken. Since AS 2 on Inventory Valuation does not permit MTM as part of valuation for unsold goods, the MTM will be released from hedging reserve to profit & loss account as and when the inventory is consumed. Thus the MTM will remain in Hedging Reserve till the underlying transaction is debited in Profit & loss account. This essentially in line with option available under para 109a of AS 30.
Refer table 4 for various accounts at a glance for entries passed above at various dates.
Commercial Analysis
It can be seen in the above example, that the organisation had an exposure on import of raw material. The exposure started from the date when it entered into a firm commitment and ended when the actual outflow is made.
The exchange rate has been volatile during the period as it moved upwards from Rs. 42.5/$ as on 01/1 to Rs. 44.25/$ on 30/9 before closing at Rs. 43.5/$ on 31/12. The company decided to fix its outflow on the date of its commitment and entered into a forward contract to buy dollars at Rs..42.5 per dollar. Subsequently the same contract was rolled over for meeting the scheduled payment to the creditor by incurring 0.25 paisa premium per dollar bought. The Company’s exposure was hedged by two contracts at the effective cost of Rs. 42.75 per dollar. These types of two contracts are common where the underlying exposure is longer.
The Company’s cost of raw material has not been impacted on account of the volatilities in foreign exchange rate and is accounted at Rs. 4,275. Refer Table 5 below to understand the effective rate per $.
The above entries hold true even when the entity has a commitment for capital asset. The raw material account in the above example will be replaced by fixed asset account/depreciation.
Accounting without Application of AS 30 Principles
The forward contract being taken for a firm commitment, will not fall under AS 11. It will have to follow the conservative principles of AS 1 as laid down by ICAI in its announcement on 29-03-08.
“In case an entity does not follow AS 30, keeping in view the principle of prudence as enunciated in AS 1, Disclosure of Accounting Policies, the entity is required to provide for losses in respect of all outstanding derivative contracts at the balance sheet date by marking them to market.”
In the above example, as on 31st March, the MTM is a gain and hence, there is no accounting entry for this contract. Had there been a loss in the contract, entity would have provided for the same.
The auditors would consider making appropriate disclosures in their reports if the aforesaid accounting treatment and disclosures are not made.
One may note that ICAI’s announcement dated 16-12-05 on disclosure continues to apply in both scenarios (i.e. AS 30 is applied or ICAI announcement dated 29-03-08 is followed). Thus, enterprises continue to make the following disclosures regarding Derivative
Instruments in their financial statements irrespective of accounting choice:
1. category-wise quantitative data about derivative instruments that are outstanding at the balance sheet date,
2. the purpose, viz., hedging or speculation, for which such derivative instruments have been acquired, and
3. the foreign currency exposures that are not hedged by a derivative instrument or otherwise.
A. Industry Applications
Mahindra & Mahindra Ltd (March 2012)
Derivative Instruments and Hedge Accounting:
The Company uses foreign currency forward contracts/options to hedge its risks associated with foreign currency fluctuations relating to certain forecasted transactions. Effective 1st April, 2007, the company designates some of these as cash flow hedges, applying the recognition and measurement principles set out in the Accounting Standard 30 “Financial Instruments: Recognition and Measurements”(AS 30).
Foreign currency forward contract/option derivative instruments are initially measured at fair value and are re-measured at subsequent reporting dates. Changes in the fair value of these derivatives that are designated and effective as hedges of future cash flows are recognised directly in reserves and the ineffective portion is recognised immediately in Profit & Loss Account.
The accumulated gains and losses on the derivatives in reserves are transferred to Profit and Loss Account in the same period in which gains or losses on the item hedged are recognised in Profit & Loss Account.
Changes in the fair value of derivative financial instruments that do not qualify for hedge accounting are recognised in the Profit & Loss Account as they arise. Great Eastern Shipping (March 2012) Derivative Financial Instruments and Hedging
Cash Flow Hedge:
Commodity future contracts, forward exchange contracts entered into to hedge foreign currency risks of firm commitments or highly probable fore-cast transactions, forward rate options, interest rate swaps and currency swaps which do not form an integral part of the loans, that qualify as cash flow hedges, are recorded in accordance with the principles of hedge accounting enunciated in Accounting Standard (AS) 30–Financial Instruments: Recognition and Measurement as issued by the Institute of Chartered Accountant of India. The gains or losses on designated hedging instruments that qualify as effective hedges is recorded in the Hedging Reserve Account and is recognised in the Statement of Profit and Loss in the same period or periods during which the hedged transaction affects profit and loss or is transferred to the cost of the hedged non-monetary asset upon acquisition. Gains or losses on the ineffective transactions are immediately recognised in the Statement of Profit and Loss. When a forecasted transaction is no longer expected to occur, the gains and losses that were previously recognised in the Hedging Reserve, are transferred to the Statement of Profit and Loss immediately.
Companies that have adopted AS 30 under Indian GAAP include Essar Shipping Limited, First Source Solutions, Tata Coffee, Sterlite Industries (I) Limited, etc.
Introduction It is well known that any kind of external supervision cannot replace rigorous self-evaluation in any profession. However, the need for supervision and monitoring is universally recognised. The role of an auditor is very critical from an external verification and supervision point of view. This role has changed quite dramatically over a period of time, during which the expectations from the auditor have increased exponentially. Numerous studies have shown that there are considerable differences between what the public expects from an audit and what the auditing profession believes that the auditor should do. The expectation gap resulting from this is a major source of concern for the audit profession since the greater the gap in expectations, the lower is the credibility and prestige associated with audit. It is an issue for the public at large, because the proper functioning of a market economy depends heavily on confidence in the audited financial statements. The role of the statutory auditor should consider the needs and the expectations of the users to the extent that they are reasonable, as well as his ability to respond to those needs and expectations.
In the backdrop of the above, an auditor faces several dilemmas in practising his profession and conducting the audit process primarily because of the complexities of the business transactions, regulatory requirements, nature of his job, and the varying expectations of the stakeholders. This article summarises some of those dilemmas, for better understanding of the ground level issues relating to the audit profession and the dynamics surrounding the same.
Profession Vs Business In simple terms, business generally involves an activity relating to purchase and sale of goods with an objective of earning profit, whereas a profession renders specialised services for a reward called a fee.
Whether a Chartered Accountant when acting in his capacity as an auditor is performing the role of a professional or like any other service provider selling his service or as a businessman? The border line between the two is very thin and many times, an auditor has to balance the same carefully. Whilst, in a competitive environment, he has to necessarily carry out his job in a manner which makes commercial sense for him, and he should never forget the fact that audit is statutorily required in order to serve the interests of the general public and various other stakeholders.
The role of the statutory auditor has recently been the subject of serious debates worldwide. In view of the number of major financial failures, questions have been raised concerning the function of the statutory audit and the independence of the auditor. In recent years, concern has been expressed about the threats which have developed to the auditor’s independence. Several surveys have reported that companies were increasingly prepared to challenge their auditors, to shop for opinions, to seek legal advice on their auditors’ views and to change auditors. Some reports concluded that, given the competitive pressures, it would be idealistic to assume that all auditors are at all times unmindful of the risk of losing business. Criticism has been voiced that the professionalism of the audit function has diminished, in favour of a more “business-like” and “accommodative” attitude.
In view of these perceptions, there is a compelling need for the auditor to keep in mind the core principles of a profession, which should never be compromised at any cost inspite of business compulsions.
Propriety Focus Vs. Accounting Focus What is the role of an auditor regarding propriety matters? Is he responsible for matters of impropriety? Can he take a blind view on such matters? Performing audits with a propriety focus poses serious challenges in carrying out the audits especially of private entities. Whilst the expectations from the regulators and other stakeholders could demand comfort from the auditors on propriety aspects as well, meeting such expectations totally through the audit process for private entities is usually a big challenge. Identification of acts of impropriety also poses challenges to the auditor in view of the subjectivities involved.
However, the auditor should perform the required procedures in accordance with the auditing standards, to ensure that there is no cause of concern relating to propriety aspects within the defined boundary and if there are any propriety issues, the same need to be reported to those in charge of governance.
Fraud Specialist Vs. Financial Accountant Until recently, the standard quote on the role of the auditor was to say that an auditor’s prime role is not to prevent or detect fraud, which is, in any event, impossible. Regulatory bodies in many countries have issued auditing guidelines related to the statutory auditor’s responsibility in relation to fraud, other irregularities and errors. In India, Auditing Standard SA 240 – “The Auditor’s Responsibilities relating to fraud in an audit of the financial statements” specify the responsibilities of the auditor.
It is a known fact that the management of an entity has the primary responsibility for the prevention and detection of fraud, other irregularities and errors which is seen as part of the management’s stewardship role. The auditor’s responsibility is to plan, perform and evaluate his audit work so as to have a reasonable expectation of detecting material misstatements in the accounts, whether they are caused by fraud, other irregularities or errors.
If a fraud is identified in an entity post audit completion, the first and the foremost important question raised by everyone is the role of the auditor and the effectiveness of his audit. Inspite of such allegations, the fact remains that the auditor is not an investigating specialist challenging and suspecting each and every transaction, which would change the entire purpose of the audit and the true nature of the profession. However, in view of the peculiarity of the role played by him, an auditor has to be cognizant of this aspect and he needs to perform procedures to ensure that there are no significant frauds impacting the true and fair view of the financial statements. Representation to the Auditor Vs. Information to the Reader of the Financial Statements While executing the audit, an auditor many times faces a situation where he has to rely on the representations made by the auditee/management. At times, such representations have far reaching implications on the financial statements. One has to remember that, whilst obtaining representations from the auditee/management is a required audit procedure, it does not absolve the auditor from his responsibilities.
A typical dilemma that could arise during the audit process, is the extent of disclosures that are required to be made in the financial statements or in the audit report, regarding such representations having a material impact on the financial statements. Careful evaluation needs to be made as regards the representations made by the auditee/management on significant matters, having a material impact as to whether such representations are part of the audit documentation or the same should be made available to any reader of the financial statements by way of an appropriate disclosure in the financial statement or in the audit report. For example, if a provision is made for an item based on a technical evaluation, which is very significant to the financial statements, the need for disclosing that fact along with the basis, rationale and significant assumptions driving such provisions etc., need to be evaluated by the auditor.
This article is
part 2 of the series on Big Data. This article briefly deals with issues
such as, why Big Data is gaining so much importance and what are the
recent trends in Big Data collection and analysis. The write up also
discusses some of the technologies being used for Big Data analysis.
The
previous write up briefly touched upon what is Big Data and some
background on the vital role played by it. This write up will delve a
little further and deal with some of the trends and developments in this
arena.
Background: Big Data, as discussed earlier,
is all about collecting, storing, analysing and using the results for
betterment (one sincerely hopes so). It is typically characterised by
features such as volume, velocity, variety and veracity. While Big Data
is not entirely a recent development, but the manner in which data is
gathered, the sources of information, techniques for storage and
technologies for analysis, have evolved significantly in recent times.
Big Data is for Everyone: Generally
speaking, most people believe that Big Data is for large corporations
and businesses or for the Government. But the truth is, whether you’re a
5 person shop or part of the Fortune 500, you can have Big Data and it
can help you to grow and become profitable. Today, if one wants to
remain competitive, he has to analyse both internal and external data,
as quickly and cost effectively as possible. This (rule) applies equally
to all types of organisations, big or small, giants or dwarfs.
Right
now, you may be asking how will Big Data help me to find the
opportunities by analysing new sources of data? Here is one small
example:
As the world becomes more instrumented, with RFID tags,
sensors and other sources, we are creating more and more data. When
paired with external data – like that generated by social media sites –
there’s incredible opportunity that is largely untapped and unanalysed.
This is where Big Data analysis comes into the picture. Every day,
companies of all sizes “cut through the noise” created by so much data
to find valuable insights.
Not just businesses and commercial
organizations, Big Data analysis can be applied to the social sector
too. Using the same techniques and tools (i.e. used for developing
marketing and risk management tools), Big Data analysis when applied to
the social sector, has the potential to revolutionise the functioning of
those sectors. For instance, imagine the advantages of using Big Data
analysis in:
the public sector;
the healthcare sector; or
(to put it more generally,) mainly those sectors where an ethos of treating all citizens in the same way is kind of expected.
Advantages would traverse beyond commercials to the realm of mass social betterment. How Big Data is Used:
Big data allows organisations to create highly specific segmentations
and to tailor products and services precisely to meet those needs.
Consumer
goods and service companies that have used segmentation for many years
are beginning to deploy ever more sophisticated Big Data techniques,
such as the real-time micro-segmentation of customers to target
promotions and advertising. As they create and store more transactional
data in digital form, organisations can collect more accurate and
detailed performance data, in real or near real time, on everything from
product inventories to personnel sick days. Information Technology is
used to instrument processes and then set up controlled experiments.
Data
generated therefrom is used to understand the root causes of the
results, thus enabling leaders to make decisions and implement change.
Big Data technologies: Some of the key Big Data technologies which are in play are described below:
Cassandra: Cassandra is an open source (free) database management
system, designed to handle huge amounts of data on a distributed system.
This system was originally developed at Facebook and is now managed as a
project of the Apache Software foundation.
Dynamo: Is a proprietary software developed by Amazon.
Hadoop: Is an open source software framework for processing huge
datasets on certain kinds of problems on a distributed system. Its
development was inspired by Google’s MapReduce and Google File System.
It was originally developed at Yahoo! and is now managed as a project of
the Apache Software Foundation.
R: “R” is an open source
programming language and software environment for statistical computing
and graphics. The R language has become a de facto standard among
statisticians for developing statistical software and is widely used for
statistical software development and data analysis. R is part of the
GNU Project, a collaboration that supports open source projects.
HBase: Is an open source (free), distributed, non-relational database
modeled on Google’s Big Table. It was originally developed by Powerset
and is now managed as a project of the Apache Software foundation as
part of the Hadoop.
MapReduce: A software framework introduced
by Google for processing huge datasets on certain kinds of problems on a
distributed system.32. This too has been implemented in Hadoop.
Stream processing: Also known as event stream processing. This refers
to technologies designed to process large real-time streams of event
data. Stream processing enables applications such as algorithmic trading
in financial services, RFID event processing applications, fraud
detection, process monitoring, and location-based services in
telecommunications.
Visualisation: This refers to technologies
used for creating images, diagrams, or animations to communicate a
message that are often used to synthesise the results of big data
analyses. Some of the instances of visualisation are: Tag clouds,
Clustergram, History flow, etc.
Myths surrounding Big Data: While
there are many myths surrounding Big Data, for the purpose of this
write up, I have briefly summarised few myths commonly associated with
Big Data. These are: Big Data is only about massive volumes of data:
As
discussed in part 1, volume is only one of the factors. Generally, the
industry considers petabytes of data as a starting point. However, it is
only a starting point, there are other aspects such as velocity,
variety and veracity to deal with.
Big Data means unstructured data:
While
variety is an important characteristic, it should be understood in
terms of format in which the data is gathered and stored. Many people
have a mistaken belief that the data would be in an unstructured format.
As a matter of fact, the term “unstructured” is misleading to a certain
extent. This is because, one doesn’t take in to account the many
varying and subtle structures typically associated with Big Data types.
Candidly, many industry insiders admit that Big Data may well have
different data types within the same set that do not contain the same
structure. Some suggest that the better way to describe Big Data would
be to term it “multi structured”. Big Data is a silver bullet type solution:
This
is an avoidable pitfall. Most businesses have a tendency to believe
that Big Data is a silver bullet to their growth strategy. The
applications available only offer one of the means to analyse data.
Application of the learnings from the analysis is altogether a different
thing. What needs to be understood is that, Big Data is only a means to
the end and not the end itself.
What to expect in future:
Big Data will be an important driver of business activities in the future. Almost all businesses will leverage the insights from Big Data based research to hone in their strategy. Be it innovations, competition or value addition, Big Data’s contribution will be significant.
The impact of Big Data will span across sectors. Among these health sciences and natural sciences are likely to have a positive impact on the larger society.
One can expect that the sources of data and volume of data itself will grow exponentially. Consequently, the data integration process will become more efficient.
There will be a demand for talented personnel. Notable demand will not be restricted to personnel possessing the requisite skill for collecting and analysing Big Data. The need will be for personnel who know how to use the results of Big Data analysis in effective decision making.
Decision making as we know it (and put in practice) today, is likely to undergo a drastic change. Sophisticated analytics can substantially improve decision making, minimise risks, and unearth valuable insights that would otherwise remain hidden.
We are likely to see a sea of change in the regulatory environment, mainly related to privacy, intellectual property rights and public liability.
Well, this concludes the part 2 of the write up on Big Data. In my next write up I intend to deal with “the (ab)use of social media”. I intend to cover some (disturbing) trends that have caught the attention of many. Its still a thought, but the idea is fresh.
Disclaimer: The information/factual data provided in the above write up is based on several news reports, articles, etc., available in the public domain. The purpose of this write up is not to promote or malign any person or company or entity, the purpose is merely to create an awareness and share the knowledge that is already available in the public domain.
MPs will quiz executives of Starbucks, Google and Amazon about how they have managed to pay only small amounts of tax in Britain while racking up billions of dollars worth of sales here.
The Public Accounts Committee (PAC), which is charged with monitoring government financial affairs, has invited the companies to give evidence amid mounting public and political concern about tax avoidance by big international companies.
Britain and Germany announced plans to push the Group of 20 economic powers to make multinational companies pay their “fair share” of taxes following reports of large firms exploiting loopholes to avoid taxes.
Starbucks had paid no corporation or income tax in the UK in the past three years.
The world’s biggest coffee chain paid only £8.6 million in total UK tax over 13 years during which it recorded sales of £3.1 billion.
(Source: The Economic Times dated 13-11-2012)
(Comment: Do we want a similar situation in our country?)
A leading Gujarati industrialist recently asked me the reason for the drop in the pecking order of Marwaris in India’s top business groups. We tried to name a few potential next generation leaders from the community. Except for Kumar Birla, Prashant Ruia, Rajiv Bajaj, all now above 40 years, none else came to mind.
Rewind to early 20th century. The Marwaris exemplified a feisty and formidable spirit— traders who escaped the barren business landscape of their homes and created trading outposts in remote areas. Many of them had settled in Kolkata, which emerged as a commercial hub and offered manifold trading opportunities. Over time, they tried their hand at manufacturing which, after Independence, was clearly the future. But, as long as the manufacturing activity involved commodities and the economy was protected, it was fine. The moment there was a shift in the ruling industry paradigm, the pre-dominant Marwari business construct seems to have got challenged.
The community is currently exercised by an unavoidable question: Has the spirit of Marwari enterprise started flagging? The provocation for such introspection stems from the rise of a new entrepreneurial class in India which comprises very few Marwaris and consists of primarily Gujaratis, Punjabis and South Indian industrial groups. Over the past few years, the leaders in emerging industry categories— infrastructure, pharmaceuticals, information technology, telecom—have been markedly non-Marwaris.
The SC on Tuesday gave its nod for an accused to seek the postponement of media reporting of a trial if it interferes with the administration of justice.The bench of Chief Justice S. H. Kapadia and Justices D. K. Jain, S. S. Nijjar, R. P. Desai and J. S. Khehar said they (orders of postponement ) should be passed only when necessary to prevent real and substantial risk to the fairness of the trial, if reasonable alternative methods or measures such as change of venue or postponement of trial will not prevent the said risk and when the salutary effects of such orders outweigh the deleterious effects to the free expression of those (media) affected by the prior restraint order. But the SC said the media had a right to appeal against postponement orders. Such orders of postponement should be for a limited duration and without disturbing the content of the publication. The order of postponement will only be appropriate in cases where the balancing test otherwise favours nonpublication for a limited period, Justice Kapadia, who authored the 56-page judgment on behalf of the bench,said.
Importantly, the SC said constitutional courts could temporarily prohibit media statements if they had the potential to prejudice or obstruct or interfere with the administration of justice. The bench said the doctrine of postponement was for the benefit of journalists, who otherwise would be on the wrong side of contempt of court law. The doctrine of postponement will serve as a Laxman Rekha for journalists and warn them not to cross it, the CJI said.
To the long record of government leaders promising jam tomorrow, we must add the prime minister’s forecast on Independence Day that GDP growth this year will be better than last year’s 6.5 %. Now, three months later, the finance minister has lowered expectations to the 5.5 % – 6.0 %t range, but he expects growth next year to be back upto 7 %. In other words, “jam tomorrow” once again. If you keep predicting this till kingdom come, it will eventually turn out to be true. But will it be next year, or the year after, or still later? And has the economy bottomed out, as Montek Singh Ahluwalia says, although the latest monthly industrial production, trade and inflation figures are as depressing as any? Could we, instead, be heading for more bad, indeed worse, news? The pointers to the future are the macroeconomic numbers – the fiscal deficit, the trade deficit, and the level of inflation – which you could say are the equivalent of the system’s pulse rate, blood pressure and temperature. All of them are higher than normal, or what is desirable; indeed they are higher than what is being recorded by most other economies. And all three readings have stayed stubbornly high despite the government’s ministrations. In short, India’s economy has been and continues to be off balance. The more accurate metaphor would be “over-heated”, except that it is odd to say so when growth is slower than it has been in a decade. Still, the logical conclusion would be that the system needs to slow down some more, so that its vital signs get closer to normalcy, before structural adjustment measures (ie., real reforms) prepare the ground once again for faster growth. In short, not jam tomorrow but more pain before (at some point) the good times return.
(Source: Weekend Ruminations by T.N. Ninan in Business Standard dated 17-11-2012).
Construction of residential quarters for Central Government employees/police department/Pondicherry University not chargeable to service tax in view of exclusion clause under construction of complex services.
Facts: The department contended that the activity of constructing residential quarters for Central Government employees/police department/Pondicherry University carried out by the appellants was leviable to service tax under construction of complex services. Further, the activity of construction of tower foundation for BSNL was leviable to service tax under construction of commercial or industrial construction services or works contract services. The appellants contested that they provided construction services to income tax and police departments for their own use and not for sale and therefore, service tax was not leviable.
Held: It was an undisputed fact that the apartments/ houses were constructed for Pondicherry University and police department, which were used by them and were not sold by them. The Tribunal observed that since the complexes were meant for personal use, according to the exclusion clause, the services were not taxable. Further, since the lower adjudicating authority had accepted the stand of the appellants that the activity of construction of tower for BSNL was leviable to service tax under “works contract services” for the period from 01-06-2007 to 19-12-2009, the said activity cannot be taxed under commercial or industrial construction services for the period from January, 2006 to May, 2007.
Carrying out business promotion activities along with commission agent – deprived from benefit of Notification no. 13/2003-ST dated 20-06-2003.
Valuation issue – Reimbursement of expenses necessary to provide services are liable to Service tax. However, expenses which are not necessary for provision of services but expended when reimbursed, can be excluded from the value of services.
Facts: The respondents had entered into agreements with M/s. Skol Beverages Ltd. for promotion and marketing of Indian manufactured Foreign Liquor/Beer products. The respondents were required to take initiatives to maximise brand visibility, to monitor, report competitor’s activities, to provide infrastructure facilities to the staff of M/s. Skol Beverages Ltd., to submit periodic sales report, etc. It had received service charges under the following heads: • Primary claim/Retailer scheme: It included discounts offered by the liquor manufacturer to the retailer. Further, to increase sales, rebate was paid to the retailers by the respondents on submission of certain proofs. The said amounts were thereafter claimed from the manufacturer by the respondents without adding any margins. • Commission claim: It included payments for the marketing services provided by the respondents to the manufacturers and also the return on investments made by the respondents such as payment to retailers, excise duty, etc. • Merchandiser expenses: The salary and other expenses expended by the respondents to carry out sales promotion activity were reimbursed by the manufacturer. • Fixed office/other expenses: The respondents arranged transportation, loading – unloading etc. for which they got reimbursements from the manufacturer. The respondents paid service tax on commission income and did not pay service tax on reimbursements and the said position was confirmed by the Commissioner (Appeals).
Aggrieved by the same, the department filed an appeal contesting that the respondents were also engaged in business promotion activities along with being a commission agent and therefore, they were not entitled to the benefit of Notification no. 13/2003-ST dated 20-06-2003. Further, it was not proved that the reimbursements were actual expenses and therefore, were included in the value of taxable services and that the respondents had malafide intentions to suppress the value of taxable services and therefore, penalty u/s. 76 and 78 of the Finance Act, 1994 were also leviable.
Held: The Tribunal observed that the commission was not merely based on volume of sales and there were reimbursements of salary of salaried personnel and therefore, the said arrangement cannot be termed to be covered within the definition of “commission agent” as provided under Notification no. 13/2003-ST dated 20-06-2003. Further, the discounts given to customers i.e. the primary claim/ retailer scheme cannot be included in the “gross amount charged” for the taxable services. However, following the Larger Bench decision in the case of Shri Bhagavathy Traders vs. CCE 2011 (24) STR 290 (Tri.-LB), merchandise, fixed office and other expenses forms integral part of the value of services and therefore, were includible in the value of taxable services, since it was necessary for the respondents to have manpower to provide agreed services. With respect to misc. expenses such as registration fees for label or brand, transportation, etc., since the expenses were not for providing services, the same may be excluded from the value of services, provided the respondents provided proof regarding such expenditure and reimbursements thereof. The respondents gave their own interpretation to the Notification and they arranged to claim reimbursements of staff expenses and therefore, section 80 of the Finance Act, 1994 (the Act) could not be invoked and the adjudicating authority may provide an option to the respondents to pay penalty @25% of the service tax dues within 30 days from the receipt of the order. However, penalty u/s. 76 of the Act need not be imposed, since penalty was imposed u/s. 78 of the Act.
CENVAT credit balance can be utilised to pay service tax demand arising out of adjudication order in view of the self assessment system under service tax laws.
Facts: Short payment of service tax along with interest and penalty was confirmed against the appellants. The appellants did not dispute the short levy, and hence, utilised the CENVAT credit availed in the service tax return to make good the short levy. This was not considered by the department while computing the said short payment to make part payment of the demand under adjudication order. However, the original adjudicating authority rejected the utilisation of CENVAT credit, since there was no evidence of admissibility of CENVAT credit. The Commissioner (Appeals) observed that due to self-assessment system under service tax laws, the role of adjudicating authority is limited to scrutiny and issuing SCNs and hence, there is no question of obtaining any approval for availment and utilisation of CENVAT credit. Further, the admissibility or inadmissibility of the credit cannot be the subject matter of the proceedings.
Held: Noting the observations made by the Commissioner (Appeals), the issue was decided in favour of the appellants and the reversal of CENVAT credit was taken to mean payment of service tax payable as a consequence of adjudication proceedings.
Extended period of limitation cannot be invoked when benefit of section 80 of the Finance Act, 1994 is granted since it meant acceptance of presence of bonafide intentions by the original authority.
Facts: The SCN was issued on 01-10-2010 for the period 01-04-2005 to 31-03-2010. The appellants pleaded that the extended period of limitation could not be invoked in the present case since the Joint Commissioner did not impose any penalty by invoking section 80 on the ground of reasonable cause. Therefore, it can be conceded that there was no suppression or misstatement with an intent of evasion. Further, there were various Tribunal decisions laying down that in case of nonimposition of penalty with the finding that there was no intention to evade taxes, the analogy must be drawn with respect to extended period of limitation also.
Held: Following various precedents, the appeal was allowed on the grounds of limitation by observing as under:
Service tax was not deposited due to unawareness and there was also findings of the Joint Commissioner of Service Tax regarding reasonable cause to extend the benefit of section 80.
Harmonised reading of section 73 and section 80 of the Finance Act, 1994, leads to conclusion that the appellants should be bonafide to take the benefit of section 80 of the Finance Act, 1994. Therefore, once such benefit was extended to the appellants, it was not open for the adjudicating authority to invoke extended period of limitation. As such, the matter was remanded back to the original authority to quantify the service tax demand for the normal period of limitation.
Erection, commissioning or installation services- When installation charges not separately collected, whether the activity would be covered under the scope of this service? Only the service element needed to be taxed, the matter was remanded for considering relevant records.
Facts: The appellant, manufacturer of solar water heater system, sold these goods to dealers and customers on site. The appellant did not charge separately for installation of such system, but the dealers were charging installation charges. The department issued SCNs that the appellant was required to pay service tax on the activity of installation @ 33% on the total value, considering the abatement under notification no. 15/2004. The appellant provided the cost sheet of manufacturing solar system and the service component included therein. However, the adjudicating authority did not consider the same and confirmed the demand on the grounds that the appellant failed to provide the service component separately in the invoices. The appellant relied on the decision of Kaushal Solar Equipments Pvt. Ltd. 2012 (26) STR 561 (Tri.-Mumbai) wherein on identical facts, the matter was remanded back for quantification of service component.
Held: The activity of installation was covered under erection, commissioning or installation services even when the same was not separately shown on invoices. The matter was remanded back to work out the service component from the data provided by the appellant in view of the Hon’ble Tribunal’s decision in case of Kaushal Solar (supra).
Wrong availment of excess CENVAT Credit – In view of accounting mistake, the appellant being a public sector unit and having regard to the size and operations of the Company and the fact that the appellant had excess CENVAT Credit during the relevant period, section 80 of the Finance Act, 1994 was invoked and penalty was set aside. Wrong availment of excess CENVAT Credit – Interest payable in view of Hon’ble Supreme Court’s decision in case of Ind Swift Laboratories Ltd. 2011 (265) ELT 2 (SC).
Facts: The appellants availed CENVAT credit in excess on those services which were not covered under Rule 6(5) but once the department indicated the same, the appellants immediately reversed such CENVAT credit wrongly availed, but did not pay the interest under Rule 15 of CCR, 2004 r.w.s. 11AC of Central Excise Act, 1944.
The appellant did not pay interest, in view of the interpretation of law prevailing during the relevant time wherein there were several decisions of the Tribunal and the High Court taking a view that interest was not payable if CENVAT credit was taken but not utilised. It was a fact that the excess CENVAT could not have been so utilised, as the appellant did not utilise credit more than the disputed amount during the said period.
The appellants prayed for waiver of penalty in view of section 80 as the mistake was bonafide.
Held: Interest was payable on wrong availment of CENVAT credit in view of the Hon’ble Supreme Court’s decision in case of Ind Swift Laboratories Ltd. (supra)
The appellants were a public sector unit and having regard to the size and operations of the appellants and the peculiar situation that there was an accounting error and that there was excess CENVAT credit with the appellants during the relevant period, penalty was set aside.
Section 74(1) – Amendment with effect from A.Y. 2003-04 restricting set off of long-term capital loss only against long-term capital gain applies only in respect of losses for the A.Y. 2003-04 & onwards and not to losses of prior assessment years.
Facts: The assessee filed its return of income wherein the brought forward long-term capital loss of A.Y. 2001- 02 was set off against the short-term capital gain arising during the present assessment year (i.e. A.Y. 2003-04). According to the Assessing Officer, the assessee was entitled to set off the brought forward long-term capital loss only against long-term capital gain and not against short-term capital gain by virtue of the provisions of section 74(1) as amended w.e.f. 1st April, 2003. He held that since the said provisions were amended w.e.f. 1st April, 2003, they were applicable to the year under consideration i.e. A.Y. 2003-04. The action of the Assessing Officer in disallowing the assessee’s claim for such set off was upheld by the learned CIT(A).
Held: In the case of Komaf Financial Services Ltd. vs. ITO [132 TTJ (Mumbai) 359], the Mumbai Bench had taken a view that amended provisions of section 74(1) will apply to the losses under the head capital gains for any assessment year and not only to the losses relating to the A.Y. 2003-04 onwards. A contrary view, however, was taken by another Division Bench at Mumbai in the case of Geetanjali Trading Ltd. vs. ITO [ITA No. 5428/Mum/2007], wherein it was held that the amended provisions of section 74(1) will apply only in respect of losses for A.Y. 2003-04 and onwards. Therefore, the Special Bench was constituted to decide this question of law.
In the provisions of section 74(1) as substituted w.e.f. 1st April, 2003 present tense has been used, which refers to the long-term capital loss of the current year. The said provisions thus are applicable to the long-term capital loss of A.Y. 2003-04 onwards and not to the long-term capital loss relating to the period prior to A.Y. 2003-04. Therefore, the provisions of section 74(1) as substituted w.e.f. 1st April, 2003 are not applicable to the long-term capital loss relating to the period prior to A.Y. 2003- 04 and set off of such loss is therefore governed by the provisions of section 74(1) as stood prior to the amendment made by the Finance Act, 2002 w.e.f. 1st April, 2003.
The right accrued to the assessee by virtue of section 74(1) as it stood prior to the amendment made w.e.f 1st April, 2003 thus has not been taken away either expressly by the provisions of section 74(1) as amended w.e.f. 1st April, 2003 or even by implication. The golden rule of construction is that, in the absence of anything in the enactment to show that it is to have retrospective operation, it cannot be so construed as to have the effect of altering the law applicable to a claim in litigation at the time when the Act was passed. The right accrued to the assessee by virtue of section 74(1) as it stood prior to the amendment made w.e.f. 1st April, 2003 to set off brought forward long-term capital loss relating to the period prior to A.Y. 2003-04 against short-term capital gain of subsequent year/s has not been taken away by the provisions of section 74(1) substituted w.e.f. 1st April, 2003. The provisions of section 74 which deal with carry forward and set off of losses under the head “Capital gains” as amended by Finance Act, 2002, will apply only to the unabsorbed capital loss for the A.Y. 2003-04 and onwards and will not apply to the unabsorbed capital losses relating to the assessment years prior to the A.Y. 2003-04.
The provisions of the
Income Tax Act, 1961 (‘the Act’) presently govern the computation of
taxable profits; however, the Act does not comprehensively specify the
accounting principles to be followed for this purpose. In this context,
the Central Government, empowered u/s. 145(2) of the Act, notified only
two accounting standards, on ‘Disclosure of Accounting Policies’ and
‘Disclosure of Prior Period Items and Extraordinary Items and Changes in
Accounting Policies’.
Litigation pertaining to various
accounting related matters continues between the tax authorities and
companies that seek to follow the guidance in Accounting Standards (AS)
issued by the Institute of Chartered Accountants of India (ICAI) and the
Ministry of Corporate Affairs (MCA). There is consequential
uncertainty. With the impending convergence with International Financial
Reporting Standards in India (Ind AS), this issue assumes greater
importance. In this context, the Central Board of Direct Taxes (CBDT)
constituted the Accounting Standard Committee (the Committee) in
December 2010, with the following terms of reference:
1 To study
the harmonisation of Accounting Standards issued by the ICAI with
regard to the direct tax laws in India, and suggest Accounting Standards
which need to be adopted u/s. 145 (2) of the Act, along with relevant
modifications;
2 To suggest a method for determination of tax
base (book profit) for the purpose of Minimum Alternate Tax (MAT) in
case of companies migrating to IFRS (Ind AS) in the initial year of
adoption and thereafter; and
3 To suggest appropriate amendments to the Act in view of transition to Ind AS regime.
The
Ministry of Finance subsequently issued a Discussion Paper on Tax
Accounting Standards on 17th October, 2011 with draft recommendations by
the Committee and draft Tax Accounting Standards (TAS) on ‘Construction
Contracts’ and ‘Government Grants’. Key matters are discussed below. Approach for Formulation of Tax Accounting Standards
On
deliberation by the Committee on whether all the standards issued by
ICAI should be considered for harmonisation, it observed that some
standards were not relevant from the perspective of computing taxable
income, because the Act contains specific requirements for matters
covered by these standards or these standards mainly relate to
disclosures in financial statements. Also accounting standards
pertaining to consolidated financial statements i.e. AS 21, 23 and 27
were not relevant, since consolidated financial statements are not
relevant under the Act.
Further, accounting standards such as AS
30, 31 and 32 relating to financial instruments, have not been notified
under the Companies Act, 1956 and are therefore not currently mandatory
in nature, were also not considered for harmonisation. Other reasons
for not evaluating these standards were the uncertain status of these
standards and their limited application to the area of derivatives and
hedge accounting. The accounting issues related to derivatives are
partly covered by the TAS on Accounting Policies.
The Committee
also recommended TAS for the areas where currently no accounting
standards have been issued by ICAI and guidance for computation of
taxable income is required. Consequently, TAS may be issued in the
future for areas such as: i) Share based payment ii) Revenue recognition
by real estate developers iii) Service concession arrangements iv)
Exploration for and evaluation of mineral resources.
Following are various other considerations and recommendations by the Committee:
TAS to be applicable only to those taxpayers that follow the mercantile system for tax purposes; 1
Return of income and Form 3CD to be modified to determine whether the
taxable income is computed in accordance with TAS. This could be
achieved by requiring reconciliation between the income as per the
statutory financial statements and the income as computed per TAS;
Disclosure requirements prescribed in individual TAS and their inclusion in the return of income;
Transitional provisions, wherever required, to be notified along with
TAS to avoid situations wherein income arising from a particular
transactions is taxed neither in the pre-TAS period nor in the post-TAS
period or may be taxable in both the periods. For example, if the
assessee has claimed lease rentals as a deduction in the pre-TAS period
for assets obtained on finance lease, basis for claiming deduction of
depreciation and interest cost in the post-TAS period will need to be
clarified by the transition guidance.
Final recommendations The
final recommendations of the Committee are included in a report that
was issued for public comment on 26th October, 2012 which also contains
drafts of 14 individual TAS (including TAS on Construction Contracts and
Government Grants that were initially issued in October 2011).
The Committee recommended that:
TAS needs to be in harmony with the provisions of the Act;
TAS needs to lay down specific rules to enable computation of taxable income with certainty and clarity;
TAS to remove alternatives, to the extent possible;
AS issued by ICAI could not be notified under the Act without modification and hence, the TAS to modify AS;
TAS should be applicable only to computation of taxable income and
taxpayers will not be required to maintain separate books of accounts on
the basis of TAS;
TAS to apply to all taxpayers without
specifying any thresholds relating to turnover/income in order to bring
uniformity in computation of taxable income;
In case of a conflict between the Act and TAS, the provisions of the Act will prevail;
Transition provisions to be notified with each TAS as relevant, in order to prevent any tax leakage or any double taxation;
Appropriate modifications be made to the return of income to monitor
TAS compliance. Modification of Form 3CD so that tax auditor is required
to certify computation of taxable income in compliance with TAS;
Amendments to be made to the Act to provide certainty on issue of
allowability of depreciation on goodwill arising on amalgamation,
allowability of the provision made for the payment of pension on
retirement or termination of an employee.
Significant impact areas A
few of the important implications around accounting policies,
inventories, prior period expenses, construction contracts, revenue
recognition and fixed assets are covered below. Impacts for other areas
such as the effects of changes in foreign exchange rates, government
grants, securities, borrowing costs, leases, intangible assets and
provisions, contingent liabilities and contingent assets will be covered
in our next article.
Accounting policies
AS 1
considers prudence as an important factor in selection and application
of accounting policies and requires provisions for all known liabilities
and losses on best estimate basis. Unlike AS 1, TAS eliminates the
concept of prudence and disallows recognition of any such provisions of
expected losses or mark to market (MTM) losses, unless specifically
provided under TAS. Consequently, fair valuation gain/loss provisions on
derivatives or other instruments would not be allowed under TAS.
Unlike AS 1, TAS does not permit a change in accounting policy merely
on account of ‘more appropriate presentation’ and requires reasonable
cause to do so. What constitutes ‘reasonable cause’ would require
judgement by management and tax authorities.
TAS does not provide any specific guidance on how the impact of any such change in policies should be included in the computation of income.
Valuation of inventories
Under current practice, on conversion of capital asset into stock-in-trade, the fair value on the date of conversion is deemed to be consideration and accordingly treated as the cost of stock-in-trade. The definition of cost for valuation of inventory per TAS does not specifically address this situation and it is possible that such deemed cost may not be allowed post implementation of the TAS;
TAS specifies that opening stock will be valued as at the close of the immediately preceding previous year. This nullifies the impact of judicial decisions which provided that opening stock should be valued on the ‘same basis’ as closing stock, in cases where there is a change in policy for inventory valuation during the year;
Events occurring after the end of the previous year
Similar to AS 4, TAS also allows adjustment for events till the date of approval of the financial statements by the Board of Directors or other approving authority for a non-corporate entity. This may result in a change in current practice where such adjustments are permitted for events till the date of filing the return of income.
Prior period expense
No specific guidance is provided on prior period income in TAS. This seems to be in line with the current practice, whereby prior period income is subjected to tax in the current year.
Prior period expenses are explicitly covered under TAS and provide that no deduction can be allowed in the current year. In line with the current practice, even if the prior period expense can be claimed as a deduction for the year to which it pertains (pursuant to a revised return), there are practical limitations on filing a revised return in all such cases e.g. a revised return can be filed only for the two immediately preceding previous years.
Construction contracts
Percentage of completion method for revenue recognition is mandatory under TAS and accordingly, use of the completed contract method is no longer permitted.
Although TAS permits non-recognition of margins during the early stages of a contract, it prohibits such deferral if the stage of completion exceeds 25 %.
Unlike AS 7, TAS does not permit recognition of expected losses on onerous contracts.
Under TAS, any incidental income in the nature of interest, dividend or capital gains cannot be reduced from the contract cost; however, other incidental income can be reduced from the costs.
Unlike AS 7, TAS does not permit non-recognition of revenue due to uncertainty in collection. If other conditions for revenue recognition per TAS are met, revenue needs to be recognised. A corresponding bad debt expense deduction can be claimed in accordance with the provisions of the Act.
Revenue recognition
Unlike AS 9, TAS does not require revenue to be measurable or collectible at the time of sale (there is an exception for price escalation claims and export incentives). As such, revenue will have to be recognised even if the sales proceeds are not collectible. A corresponding bad debt expense deduction can be claimed in accordance with the provisions of the Act.
Unlike AS 9, TAS requires revenue recognition for all services based on percentage of completion method. As such, completed contract method as per AS 9 is no longer permitted under TAS. Though the TAS does not clarify whether expected losses on onerous service contracts should be recognised on a proportionate basis or in their entirety, given the provisions in the TAS on Construction Contracts and Accounting Policies, it is likely that such expected losses cannot be provided.
AS 9 contains certain illustrations that provide more clarity on application of revenue recognition principles to specific types of transactions. For example, a sale and repurchase agreement may be in substance a financing arrangement, or an upfront membership fee may be consideration for future discounted products or services. Since similar illustrations are not included in TAS, the position around such specific transactions may be unclear.
Unlike AS 9, TAS does not contain guidance on recognition of revenue as a principal or as an agent (gross vs. net). This may impact turnover determination u/s. 44AB, coverage under presumptive taxation and other similar cases where determination of gross turnover is relevant under the Act.
A separate TAS for revenue recognition for real estate developers is supposed to be issued as per Committee recommendation. Until that time, inconsistent practices may continue to exist in the manner in which real estate developers apply the principles of TAS.
Tangible fixed assets
AS 16 provides for capitalisation of exchange differences along with the underlying asset to the extent that such exchange differences qualify as borrowing costs or when the company has adopted the notifications on AS 11 issued by the Ministry of Corporate Affairs that permit such capitalisation. TAS reiterates the fact that capitalisation of exchange differences relating to fixed assets shall be in accordance with section 43A of the Act that states that any increase/ decrease in the liability in Indian currency shall be recognised only at the time of payment, which could be materially different from the provisions of AS 10, AS 16 and AS 11.
TAS provides that the actual cost in cases where an asset is acquired in exchange for another asset, shares or securities shall be the lower of the fair market value of the asset acquired or the assets/securities given up/issued. However AS 10 requires that its actual cost shall be determined by reference to the fair market value of the consideration given or asset acquired whichever is more clearly evident.
TAS prescribes maintenance of a Fixed Asset Register with specific disclosures. Currently, non-corporate assessees may not be maintaining Fixed Asset Registers in the prescribed format.
Conclusion
The Final committee report with draft TAS will provide a comprehensive framework for companies to determine their taxable income each year, by adjusting their accounting profits as many of the difference between AS and TAS will harmonise the computation basis for taxable profits with the existing provisions of the Act. This represents a significant progress in providing a consistent basis for computation of taxable income.
Some of the changes could extensively impact certain companies, as the TAS provisions would provide guidance on areas that are subject matters of considerable litigation and areas where there is no guidance under the current tax provisions. Depending upon the tax positions taken by a company these provisions would have an impact on the taxable profits under TAS regime.
Although TAS purports to remove one of the hurdles to implementation of Ind AS by providing independent framework regardless if GAAP followed (Indian GAAP or Ind AS), the issue of impact on computation of the Minimum Alternate Tax (MAT), which is based on the accounting profits still remains open, due to uncertainty around the adoption of Ind AS.
Finally, the key challenge lies in thorough implementation of the TAS framework by the tax authorities and the judiciary. This would go a long way in achieving tax uniformity and consistency across different companies.
Editor’s Note: One of the authors is a member of the Accounting Standards Committee.
The assessee, engaged in manufacturing yarn, filed its return of income for the assessment year 1998-99 on 30-11-1998 showing total income of Rs.36,27,866 inter alia after claiming deduction u/s. 80IA of Rs.15,54,800 being 30% of the gross total income of Rs.51,82,666. The Assessing Officer found that the assessee had sold raw wool, wool waste and textile and knitting clothes and that the assessee had not maintained a separate trading and Profit and Loss account for the goods manufactured. The assessee contended that for certain business exigencies in the assessment year in question, it had sold the above items but such sale would not disentitle him from claiming the benefit u/s. 80IA on the told sum of Rs.51,82,666. The Assessing Officer, in the absence of separate accounts for manufacture of yarn actually produced as a part of the industrial undertaking, worked out on his own, the manufacturing account giving bifurcation in terms of quantity of wool produced. The assessee challenged the preparation of separate trading account by the Assessing Officer in respect of manufacturing and trading activity before the Commissioner of Income Tax (Appeals). The Commissioner of Income Tax (Appeals) allowed the appeal. The Tribunal reversed the order of the Commissioner of Income Tax (Appeals). The High Court upheld the order of the Tribunal.
On further appeal, the Supreme Court was of the view that the finding given by the Tribunal and the High Court were findings of fact. The Supreme Court dismissed the appeal, observing that the assessee ought to have maintained a separate account in respect of raw material which it had sold during the assessment year, so that a clear picture would have emerged indicating the income occurring from manufacturing activity and the income occurring on sale of raw materials.
The most effective leaders are alike in one crucial way: They all have a high degree of what is known as emotional intelligence. Self-awareness, which is a deep understanding of one’s emotions, strengths, weaknesses, needs and drives, is the first component of emotional intelligence.
People with strong self awareness are neither overly critical nor unrealistically hopeful. Rather, they are honest with themselves and with others. People who have a high degree of self-awareness recognize how their feelings affect them, other people, and their job performance.
Someone highly self-aware knows where he is headed and why; so, for example, he will be able to be firm in turning down a job offer that is tempting financially but does not fit with his principles or long-term goals. A person who lacks self-awareness is apt to make decisions that bring on inner turmoil.
“The money looked good so I signed on,” someone might say two years into a job, “but the work means so little to me.” Decisions of self-aware people mesh with their values; so they find work energizing. How can one recognize self-awareness? First, it shows itself as candor and an ability to assess oneself realistically. Such people are able to speak accurately and openly, though not necessarily effusively or confessionally, about their emotions and the impact they have on their work.
The documents that Arvind Kejriwal released last week, which he claimed were leaked witness statements recorded by income tax officials in the course of a raid, raise serious questions about the Indian entity of the Hongkong and Shanghai Banking Corporation (HSBC). While the bank has refused to comment on any specific details, the government has refused to acknowledge Mr. Kejriwal’s charges and only said it was taking action against all individuals named in the list pertaining to black money given to it by France in June of 2011. Anything less would lead to a major loss of faith in India’s regulatory capacity. Unfortunately, while the banking regulator – the Reserve Bank of India – has long sat on HSBC’s request to extend its branch network, it is yet to address these concerns directly.
How does the procedure that the three high-networth individuals who feature in Mr. Kejriwal’s documents describe differ from hawala? All three, apparently, independently told the tax authorities as to how they managed from Delhi to open, operate and get back cash deposited in accounts in HSBC’s branch in Geneva. If the documents released by India Against Corruption are to be believed, all that is required is a phone call to HSBC, which will then depute its officers to open the account, collect cash in rupees, have it deposited abroad in a currency of your choice, operate it under your instructions — and then pay you cash in rupees, as and when required in India. None of the beneficiaries needed to go out of India to open or operate an account. If the charges are found to be true, this is a blatant case of flouting money laundering laws.
HSBC has been accused in other jurisdictions of similar acts. In the United States, the bank has admitted that a fine for a violation of federal anti-money laundering laws could cost it around $1.5 billion, and might lead to criminal charges — damaging the bank’s reputation and forcing it to set aside a further $800 million to cover a potential fine for breaches in anti-money laundering controls in Mexico as well as other violations. The provisioning was on top of $700 million it put aside in July. A US Senate report in July criticised HSBC for letting clients shift potentially illicit funds from several countries, including India. The size of the fine expected by HSBC dwarfs every other similar case, including the previous record set by ING Bank, which agreed in June to forfeit $619 million to resolve allegations that it illegally moved money on behalf of sanctioned entities in Cuba and Iran.
The 2G spectrum auction hasn’t quite hit the jackpot. It’s raised Rs 9,407 crore – far less than the government’s target of Rs 40,000 crore and niggardly compared to Rs 67,719 crore raised via 3G spectrum bidding. Look deeper and it’s clear expectations of market demand were pitched at outlandish levels. What the dud event did generate, however, is plenty of lessons.
First, CAG’s astronomical figure – Rs 1.76 lakh crore – flies out the window on being tested on the ground. Booty amassed in 2010 from sale of a restricted amount of 3G spectrum was hardly a realistic revenue-garnering benchmark. This isn’t to say the latest auction couldn’t have scored better, had the reserve price been less eye-popping and India’s investment climate more propitious. But that’s exactly why the government shouldn’t have been bamboozled to rush into an auction, using TRAI’s play-safe floor price. Nor is this to argue that the FCFS policy wasn’t messed with by former telecom minister A Raja. This is merely to reiterate that mobile telephony wouldn’t have soared had we been fixated on maximising revenue.
Second, outrage over corruption scandals shouldn’t blind us to issues of jurisdictional propriety and economic sense. It’s not for CAG or courts to dictate policy. In its response to the presidential reference on allocation of natural resources, the Supreme Court made this clear. Identifying ‘common good’ as the key criterion for resource disbursal, it said policymaking is the government’s turf. Yes, government must work with institutional checks and balances. But institutional overreach can lead to unhappy denouements, as with the lacklustre spectrum auction.
Third, resources are best mobilised through the expansion of telecom which fosters overall economic growth. But the sector can’t grow to potential with exorbitant costs of entry that would mar competition by barring smaller players, financially burden companies and raise prices for consumers. It’s important here that spectrum distribution isn’t opaque, whatever the modality. For instance, single-step e-auctions can work well with safeguards. So can a technology-enabled system where all licensees can access pooled spectrum. What we need now is to focus on practical ways to boost telecom infrastructure and transparency in policy implementation. What we don’t need is sound and fury over controversies blown out of all proportion. As we’ve seen, that only makes policymakers bungle on the side of caution, which chokes off investor feel-good and raises prices all round.
From the above, it is clearly evident that the significance of articles relating to Limitation of Benefits clause cannot be undermined. All concerned parties would need to pay specific attention to LOB clauses in India’s Tax treaties. India is increasingly including Limitation of Benefits clause in the new treaties and in some cases including the same in the existing treaties by renegotiating existing treaties through the protocols as in the cases of Singapore and UAE. A taxpayer would be well advised to look for and examine relevant LOB clauses very minutely before taking any decisions ‘in relation to the relevant DTAAs.
It is absurd that foreign portfolio investors (FPIs) are facing fresh income-tax queries after the government granted them a retrospective exemption from the minimum alternate tax ( mat ), based on the recommendations of the justice A . P. Shah panel. however, FPIs will now reportedly have to convince tax authorities that they do not have a permanent establishment (PE) here to escape the tax.
Foreign institutional investors, now FPIs, have been in relentless fear that tax authorities could construe their domestic custodian as a PE in India, making them liable to pay tax. The government must come out with a clear communiqué on what constitutes a P E , and not leave it to interpretation. Waffling on the promise to scrap MAT on FPIs could create mayhem on the markets, needlessly. do servers, for example, create a permanent presence? In the OECD’s view, a server i fixed, automated equipment that can perform important and essential business functions – may be sufficient to create a PE at the equipment location without the presence of human beings. Conflicting rulings by the authority of advance rulings have only added to uncertainty in this area of taxation. t he government should clear the air to mitigate investor concerns.
In this case, FPIs have approached the Dispute r esolution m echanism ( DR. P). t he need is to ensure its robust functioning – the DR. P has a pool of dedicated tax officers. India has slipped in the World Bank’s latest ease of doing business index in terms of paying taxes, and mounting disputes could be a major reason. t he country’s tax regime must be reformed to minimise disputes. o ur tax officers should be better trained to deal with complex transactions as India globalises. Predictability of tax conduct is on par with simplicity of the law.
CIT vs. I. P. Support Services India (P) Ltd.; 378 ITR 240 (Del):
In the A. Y. 2009-10, the assessee had earned dividend income which was exempt. The Assessing Officer asked the assessee to furnish an explanation why the expenses relevant to the earning of dividend should not be disallowed u/s. 14A. The assessee submitted that as no expenses had been incurred for earning dividend income, this was not a case for making any disallowance. The assessing Officer held that the invocation of section 14A is automatic and comes into operation, without any exception. He disallowed an amount of Rs. 33,35,986/- u/s. 14A read with rule 8D and added the amount to the total income. The Commissioner (Appeals) found that no interest expenditure was incurred and that the investments were done by using administrative machinery of PMS, who did not charge any fees. He deleted the addition. The Tribunal affirmed the order of the Commissioner (Appeals).
In appeal by the Revenue, the Delhi High Court upheld the decision of the Tribunal and held as under:
“i) The Assessing Officer had indeed proceeded on the erroneous premise that the invocation of section 14A is automatic and comes into operation as soon as the dividend income is claimed as exempt. The recording of satisfaction as to why the voluntary disallowance made by the assessee was unreasonable or unsatisfactory, is a mandatory requirement of the law.
ii) N o substantial question of law arises. The appeal is dismissed.”
Sections 5, 9, the Act – since funds raised by issue of FCCBs were utilised for investment in foreign subsidiary carrying on business outside India, interest paid to bond holders was covered under exclusion in section 9(1) (v)(b) of the Act
Facts The taxpayer had raised funds from certain nonresident investors by issuing FCCBs to them. The funds were invested in a company which was incorporated outside and which was carrying on business outside India. The taxpayer remitted interest to the bond holders without withholding tax on the ground that interest was neither received by non-resident bond holders in India nor had it accrued in India. Even if it was deemed to have accrued in India, the same was eligible for source rule exclusion as the borrowed funds were utilised for the purpose of earning income from source outside India.
According to the AO, the interest accrued or arose to non-resident bond holders in India. Consequently, the income was primarily subject to section 5(2). Accordingly, resorting to section 9 was not permissible. Therefore, the AO held that the income was chargeable to tax under section 5(2) and exclusion u/s. 9(l)(v)(b) was not relevant.
Held Identical issue was considered in case of the taxpayer in earlier year. The Tribunal had observed that funds raised by issue of FCCBs were invested in foreign subsidiary which was involved in financing of businesses abroad.
The term “business” is wide enough to include investment in subsidiaries or joint ventures which are further involved in business or commerce. Therefore, the AO’s observation that the taxpayer was not earning out of business carried on outside India was not correct. Exclusion clause will not have any purpose unless the income is covered within the provision to which exclusion clause applies. Hence, the presence of exclusion in section 9(1)(v)(b) proves that the income is falling within the ambit of deeming provision. Thus, it cannot be accepted that the same income can also fall within the ambit of income which has accrued and arisen in India.
Since nothing contrary was brought on record in the relevant tax year, following the order of the Tribunal in case of the taxpayer, interest earned by non-resident bond holders was not chargeable to tax in India.
In the last 3 years since our last Article on the subject published in
the December, 2012 issue of BCAJ, India has signed DTAAs with 8
countries and has entered into revised DTAAs with 4 countries. India has
also amended few DTAAs by signing Protocols amending the existing
DTAAs. In this Article, our intention is to highlight the salient
features of such DTAAs or Protocols amending the DTAAs. The purpose is
not to deal with such DTAAs or Protocols extensively or exhaustively. It
will be seen that the recent treaties/protocols follow more or less a
similar pattern.
Further, the DTAAs with certain countries have
been modified primarily to include ‘Limitation of Benefits (LOB)
Clause’. Further, Articles on ‘Exchange of Information’ and ‘Assistance
in Collection of Taxes’ have been included or the scope of such existing
Articles has been extended.
The reader is advised to refer the text of the relevant DTAA or the Protocol while dealing with facts of a particular case.
10. M/S Durga Projects Inc vs. State of Karnataka and Another, [2013] 62 VSTs 482 (Karn)
VAT – Works Contract – Goods Involved in Execution of Works Contract – Rate of Tax Applicable to The Goods Deemed to be Sold, section 4(1)(c)of The Karnataka Value Added Tax Act, 2003
Facts
The appellant, a partnership firm, engaged in the business of civil works contract, purchased necessary building materials, hardware, etc., the goods falling under Schedule III, certain items of ‘declared goods’ falling u/s. 15 of the CST Act and other non-scheduled goods from within and outside the State as well as from unregistered dealers. The appellant made an application u/s. 60 of the KVAT Act before the Authority for Clarifications and Advance Rulings (ACAR for short) seeking for clarification in respect of: a) A pplicability of the rate of tax on execution of civil works contract under the Act; and b) Whether input tax credit can be availed out of output tax paid by the contractor. The ACAR, after examining the matter in detail, by its order dated 2-8-2006 came to the conclusion that there is no specific entry providing rate of tax on works contract under the KVAT Act, up to 31-3-2006 and therefore, tax should be levied as per the rate applicable on the value of each class of goods involved in the execution of works contract i.e. if the goods involved are taxable at the rate of 4%, then works contract rate would be at 4% and if the rate is 12.5%, the works contract rate would also be at 12.5%. With regard to the clarification of input tax credit is concerned, no finding was given. The appellant subsequently sought for rectification of the order dated 2-8-2006 before the ACAR. The ACAR further clarified on 7-12-2006 stating that iron and steel is one of the commodities specified u/s. 14 of the CST Act 1956, as goods of special importance and therefore, the iron and steel are to be subjected to works contract tax at 4%, when it was used in the same form and if they are used in manufacture or fabrication of product, it would no longer qualify as iron and steel and would have to be subjected to works contract tax at 12.5%.The Commissioner for Commercial Taxes after noticing the clarification order passed by the ACAR found that the order passed by the ACAR is erroneous and prejudice to the interest of the revenue and issued notice u/s. 64(2) of the Act on 25- 8-2010. The Commissioner for Commercial Taxes, after considering the objections filed by the appellant, by its order dated 12-10-2010 set aside the order passed by the ACAR in exercise of its suo-motu revisionary power and held that the goods used in the works contract cannot be treated on par with the normal sale of goods for the purpose of arriving at the rate for the period prior to 1-4- 2006. Further, the iron and steel or any other declared goods used for executing the works contract would be liable to be taxed as per the State Law. The appellant, being aggrieved by the order dated 12-10-2010 passed by the Commissioner of Commercial Taxes, filed appeal before the Karnataka High Court.
Held
Section 4(1)(c) was inserted by Act No.4 of 2006 w.e.f. 1-4-2006 thereby levying tax on the works contract by specifying the rate of tax under the Sixth Schedule. Prior to the amendment, the tax was being collected on the rate applicable to sale of each class of goods under Section 3(1) of the Act. Section 3(1) of the Act provides for levy of tax on sale of goods. Section 4 prescribes the rate of tax. Neither section 3 nor section 4 of the Act seeks or intend to levy or prescribe different rate of tax for the goods involved in the normal sale and for the goods involved in the deemed sale. Both normal sale as well as the deemed sale should be treated as one and the same with respect to levy of tax on sale of goods. Admittedly, prior to 1-4- 2006 insertion of clause (c) to section 4, the rate of tax was not prescribed in respect of transfer of the property in goods, (whether as goods or in any other form) involved in the execution of works contract. Hence, the tax has to be levied as per section 3(1) of the Act. The sale under the works contract is a deemed sale of transfer of the goods alone and it is not different from the normal sale. Hence, the tax has to be levied on the price of the goods and material used in the works contract as if there was a sale of goods and materials. The property in the goods used in the work contract will be deemed to have been passed over to the buyer as soon as the goods or material used are incorporated to the moveable property by principle of accretion to the moveable property. For the period prior to 1-4-2006, tax has to be levied as per section 3(1) of the Act and for the period subsequent to 1-4-2006, tax has to be levied as per section 4(1)(c) of the Act. Accordingly, the High Court allowed the appeal filed by the firm. The order passed by the Commissioner was set aside and the order passed by the ACAR was restored.
CBDT Circular No. 14, dated 11-4-1955 — In the case of an
assessee following mercantile system of accounting interest expenditure which
has accrued during the previous year is allowable as deduction even if it was
not debited to P&L Account and also not claimed in the return of income but
was claimed by filing a letter, before the assessment, making the claim.
Facts :
The assessee was following mercantile system of accounting,
which was accepted by the Assessing Officer. The assessee had not debited some
interest in its books of accounts and consequently the same was not even
claimed as deduction while computing the total income. The assessee did not
revise its return of income but filed a letter, before completion of
assessment, making a claim that deduction for interest accrued during the
previous year be allowed in accordance with the method of accounting regularly
followed by it. The AO did not accept the claim made by the assessee.
The CIT(A) directed the AO to allow liability of interest
although the same was not debited to the books of account and the said claim
was not made by filing a revised return.
Aggrieved, the revenue preferred an appeal to the Tribunal.
Held :
The CBDT has issued circulars, which are binding on the
Department, to the effect that the assessee should be properly guided in
relation to the claims. The CBDT has emphasized upon the AOs to assess the
correct income to tax. If the assessee is following a particular method of
accounting and he has omitted to claim the deduction or exemption, to which he
is otherwise entitled, the Board has emphasized that the AO should guide the
assessee so that the correct income is assessed as per the provisions of the
Act. In Circular No. 14 dated 11-4-1955 CBDT has emphasized that the
Department should not take advantage of the assessee’s ignorance to collect
more tax out of him than the liability due from him. This Circular is very
much binding on the Department. In the light of the said Circular and also in
view of the findings of the CIT(A) that the claim made by the assessee was a
perfectly legal claim supported by the method of accounting which the AO has
accepted from year to year, the Tribunal upheld the order of CIT(A).
S. 80IA(4), Explanation to S. 80IA(13), S. 255(3) and S.
255(4) — There is a material difference in the circumstances where a reference
is made to a Special bench u/s.255(3) and a Third Member or Larger Bench
u/s.255(4) — A Third Member/Larger Bench is constituted only when there are
differing orders — A Bench constituted u/s.255(4) has to apply the law as
amended with retrospective effect even though such law was not available at
the time of passing of the separate orders by the dissenting Members — S.
80IA(4) (even prior to amendment) applies to a ‘developer’ and not to a
‘contractor’ —Deduction u/s.80IA(4) is allowable only to a person directly
engaged in developing, maintaining and operating the facility — There should
be a complete development of the facility and not just a part of it.
Facts :
The assessee was a civil contractor engaged in construction
of various projects of Governments and local authorities. It claimed deduction
u/s.80IA on the ground that it had undertaken ‘infrastructure projects’. The
Assessing Officer (AO) did not allow the deduction on the ground that the
assessee did not do any business in infrastructure facility but had merely
constructed the properties belonging to the Government/statutory bodies for a
fixed consideration. He also held that the other conditions of S. 80IA(4) were
not satisfied.
The CIT(A) confirmed the action of the AO.
Aggrieved, the assessee preferred an appeal to the
Tribunal. The JM upheld the claim on the ground that the assessee is a
developer. The AM dissented after taking note of Explanation to S. 80IA then
proposed to be inserted by Finance Bill, 2007 w.e.f. 1-4-2000, rejected the
claim. The President, acting as Third Member, noted that as the AM had decided
on the basis of a point not raised by the parties during the hearing, a
solitary TM decision on the issue may create complications and so the issue
was referred to a Larger Bench.
Before the Larger Bench, apart from the issue under
consideration, two more questions arose (i) whether the reference was made
u/s.255(4) or u/s.255(3) since scope and limitations in both the situations
are different; and (ii) whether the Bench constituted u/s.255(4) has to apply
the law as amended with retrospective effect even though such law was not
available at the time of passing of the separate orders by the dissenting
Members.
Held :
(i) There is a material difference in the circumstances
where a reference is made to a Special Bench u/s.255(3) and a Third Member or
a Larger Bench u/s.255(4). Ss.(4) is a special provision dealing only with a
particular situation in which the members who earlier heard the case differ on
a point or points, as against the language of the relevant part of Ss.(3)
which refers to constituting a Special Bench consisting of three or more
members couched in a general manner. Special Bench u/s.255(3) is always
constituted in the absence of differing opinion expressed by the Members in
that particular case through their separate orders.
(ii) In the present case, the Members had passed differing
orders. Consequently, the reference was u/s.255(4). A Third Member/Larger
Bench is constituted only when there are differing orders.
(iii) Proceedings u/s.255(4) are confined to the point or
points on which Members of the Division Bench differ. One or more of the other
Members appointed under Ss.(4) are supposed to confine himself/themselves only
to the facts of the case before the Bench. Since the Bench has to confine
itself to the facts of the case, interveners are normally not allowed.
(iv) The rule that interveners are not allowed in
proceedings u/s.255(4) is subject to the exception where pure and substantial
question of law is involved in proceedings u/s.255(4). Interveners are allowed
provided their arguments are confined to the substantial legal question posed
before the Bench u/s.255(4).
(v) Proceedings qua the point of difference continue before
the Bench constituted u/s.255(4) and are deemed to continue till passing of
order under this sub-section. A bench constituted u/s.255(4) has to apply the
law as amended with retrospective effect even though such law was not
available at the time of passing of the separate orders by the dissenting
members. The order of the TM/Bench is final and conclusive on the point in
difference and the failure to apply the applicable law will render the order
of the TM/Bench absurd and erroneous.
(vi) On merits, S. 80IA(4) [even prior to insertion of
Explanation below S. 80IA(13)] applies to a ‘developer’ and not to a
‘contractor’. ‘Developer’ is a person who conceives the project which he may
execute himself or assign some parts of it to others. On the contrary
Contractor is the one who is assigned a particular job to be accomplished on
behalf of the developer. His duty is to translate such design into reality.
There may, in certain circumstances, be overlapping in the work of developer
and contractor, but the line of demarcation between the two is thick and
unbreachable. The role of a developer is much larger than that of contractor.
In certain circumstances a developer may also do the work of a contractor but
a mere contractor per se can never be called as a developer. The assessee in
this case was held to be a contractor. Moreover, it did not even own the
facility.
S. 45, S. 47, Explanation (iii) to S. 48 — In respect of a
capital asset received as a gift, indexed cost of acquisition needs to be
computed by applying cost inflation index of the year in which the previous
owner had first held the asset.
Facts :
The assessee transferred a capital asset which was received
by her as a gift on 1-2-2003. The previous owner had acquired the capital
asset on 29-1-2003. While computing long term capital gain, the assessee
computed indexed cost of acquisition by applying cost inflation index of the
year in which the previous owner first held the asset. The AO was of the view
that the provisions of Explanation (iii) to S. 48 which define the term
‘indexed cost of acquisition’ are very clear and as per those provisions the
assessee is entitled to indexation from the year in which the asset was first
held by the assessee and not by the previous owner.
Aggrieved, the assessee preferred an appeal to CIT(A) which
was allowed.
Aggrieved by the order of CIT(A), Revenue preferred an
appeal to the Tribunal. Since there were divergent decisions of Division
Benches on this issue, a Special Bench was constituted to consider the issue.
Held :
A literal reading of Explanation (iii) to S. 48 suggests
that one has to go by the year in which the asset was held by the assessee.
The scheme of the Act as reflected in the definition of ‘short term capital
asset’ in Explanation 1(b) to S. 2(42A) provides that the period for which the
asset was held by the previous owner also has to be taken into account. Also,
the cost of acquisition of the previous owner is regarded as cost of
acquisition of the assessee. It is not logical that the cost of acquisition
and the period of holding is determined with reference to the previous owner
and the indexation factor is determined with reference to the date of
acquisition by the assessee. Therefore, literal interpretation of Explanation
(iii) to S. 48 is inconsistent with the scheme of the Act. Also, literal
interpretation will lead to absurdity and unjust results and will defeat the
purpose of the concept of ‘indexed cost of acquisition’. In accordance with
the principles of purposive interpretation of statutes, Explanation (iii) to
S. 48 has to be read to mean that the indexed cost of acquisition has to be
computed by taking into account the period for which the asset was held by the
previous owner.
S. 115JB — For purpose of computing book profits u/s.115JB,
although provisions made by an assessee are not allowable as deduction, yet
certain provisions which are capable of estimation with a reasonable certainty
without quantification are allowable, as they are ascertainable.
For the relevant assessment year, the assessee-company
added back the amount of provision for gratuity while computing its total
income but did not do the same while computing book profits in terms of S.
115JB. The Assessing Officer, having found that the assessee had failed to
follow AS-15 and the actuarial method referred to therein with regard to
gratuity for determining actual liability, added back the provision for
gratuity to the book profits u/s.115JB. On appeal, the CIT(A) upheld the
action of the Assessing Officer.
The Tribunal, following the decisions in Dy. CIT v. Oman
International Bank SAOG, (2006) 100 ITD 285 Delhi (SB) and Bharat Earth
Movers v. CIT, (2000) 245 ITR 428/112 Taxman 61 (SC), set aside the order
of the CIT(A). The Tribunal noted as under :
(a) The provisions of S. 115JB are a code by themselves
and determination of the book profits has to be done only as per the
provisions of S. 115JB, which unambiguously provide for exclusion of
provision of ascertained liabilities for the purpose of ‘book profits’.
(b) Although the provisions are not allowable as
deduction, yet certain provisions which are capable of estimation with a
reasonable certainty without quantification are allowable, as they are
ascertainable. On finding that the actual quantification is not a legal
necessity in matters of ascertainment of the gratuity, the provision of
gratuity in the assessee’s case was capable of being estimated with a
reasonable certainty and, therefore, it was not a contingent or
unascertained liability. It was an ascertained liability and the same was
outside the scope of the provisions of clause (c) of Explanation 1 to S.
115JB, warranting no addition to the ‘book profits’.
(c) The Supreme Court has held in the case of Bharat
Earth Movers (supra) as under :
“Business liability arising in the accounting year — the
deduction should be allowed although the liability may have to be quantified
and discharged at a future date. What should be certain is the incurring of
the liability. It should also be capable of being estimated with reasonable
certainty without actual quantification. Till these requirements are
satisfied, the liability is not a contingent one. The liability is in
presenti though it will be discharged at a future date. It does not make any
difference if the date on which the liability has to be discharged it is not
certain.”
To say that we are constantly surrounded by advanced
technologies would be a cliché. What would be even more clichéd is the fact that
every day we see, hear and read about some new development in the field of
information technology. This may be about the next generation televisions or the
newest Apple ‘i’ product or the latest handheld device or other
products/services. These developments have not only made our lives a little bit
easier (A LOT easier if you ask me), they have made us more efficient at the
things we do best (or ‘handicapped’ due to technological innovation as a
naysayer would prefer to say).
In this connection, mobile phones have become increasingly
popular and more affordable over the past few years and thanks to Android,
Blackberry and the iPhone, smart phones are in demand. In fact, a majority of
the mobile devices that are purchased worldwide are a type of smart phone.
People have now started realising that these smart phones are in fact miniature
computers. They run a variant of computer operating systems such as Linux
(Android), Mac (iPhone), and Windows (Windows Mobile), and can do pretty much
anything that a computer can do. Most smart phones also pack powerful
processors, a hefty amount of RAM and a lot of storage space — in some cases up
to 48 Gigs ! (it all depends on the size and depth of your wallet). The downside
is that even though a smart phone is a handheld computer, most users don’t treat
it the same way as their computer at office/home.
Duh ! ! ! ! So what’s the point ? ? ? ?.
Well, to start with, bet you didn’t know :
More than 54 million smart phones were shipped worldwide in the first three
months of this year, a 57% jump from a year ago, according to research
reports.
Less
than 40% of the users (as per recent surveys) follow the practice of securing
their smart devices. As a natural corollary, the vast majority doesn’t even
bother securing their mobiles, PDAs or smart phones by using, and regularly
changing, a password or PIN.
The
information that many of us keep on our mobile phones : phone numbers,
addresses, birthdays and even bank account numbers, is the just the kind of
information which, in the wrong hands (half-robinhoods), can be used to
perpetrate frauds (which would include re-creating your identity — please
refer to my write-up on Facebook frauds — Stranded in London).
It
isn’t just the user of the phone who is at risk, but also the organisations
they work for (especially since many of us use the same device in both our
work and personal life). The reality is that any gadget that has access to the
Internet presents a risk to an organisation if the user doesn’t secure the
device properly.
Smart phones are very susceptible to being hacked and catching viruses, in
some ways even easier than a computer.
All
of the above facts are not lost on cyber criminals.
If you still think the above is the stuff we see only in
Hollywood thrillers, then read on.
Smart phones the weak link :
Most people purchase their mobile devices solely based on the
number of ‘cool’ applications that it can run. The more apps the better,
right ? Wrong. Cyber criminals love this idea of an ‘Application
Market’, ‘Store’, or whatever one may want to call it, because now they can
transmit malware easily throughout the world without having to put forth any
effort at all. All you need to do is download an infected app and BAM ! Your
phone is infected.
In January 2010, a mobile application developer (who goes by
the name of ‘Droid09’) uploaded a malicious application to the Android App Store
that posed as the ‘Official First Tech Credit Union’ banking application. This
application was nothing more than a way to steal personal information like
banking logins and passwords. Eventually, the application was removed, but not
before a few customers felt the effect of this rogue application.
Similar to this a Trojan malware virus directed at smart
phones running Google’s Android operating system. The Trojan, named Trojan-SMS.AndroidOS.FakePlayer.a,
infected a number of mobile devices. Once installed on the phone, the Trojan
begins sending text messages, or SMS messages, to premium rate numbers — numbers
that charge a fee — without the owners’ knowledge or consent, taking money from
users’ accounts and sending it to the cyber criminals.
In both instances of a Trojan on the Android platform was
mainly affected only by spyware (a software that obtains information from a
user’s device without the user’s knowledge or consent), and phishing attacks (a
process used by cyber criminals to acquire a user’s personal information by
masquerading as a trustworthy entity in an electronic communication). Needless
to say that the motive behind this attack was profit.
(while I have cited 2 instances of Trojans on Android, let
me assure you there are equal or more on the other systems. Press reports
suggest that there are as many as 500 viruses and many which are capable of
attacking the all the popular platforms.)
News reports suggest the proliferation of smart phones is the primary contributor (thats like saying marriage is the root cause of divorce). And now with smart phone use becoming more widespread, the bad guys are looking at web browsing and the downloading of web applications (apps) as two ways to attack Android handsets, iPhones, BlackBerrys and Windows Mobile smart phones and spread those malicious web apps. Some of these viruses are rumoured to have the capability of harvesting or erasing stored phone numbers and text messages and retrieving information that can be used to disclose a user’s location.
The rising tide:
According to a well-respected security firm, the reason there haven’t been more mobile phone attacks is because Windows XP computers are still the easiest devices to exploit. And although Microsoft no longer supports it, the Windows XP operating system is still extensively used throughout the world. But as XP disappears, the cyber crooks will begin looking to smart phones, because it’s easy to make money exploiting them.
While smart phones running any operating system can be targeted, speculation is that those running the iPhone, Android and Symbian operating systems will be the targets of choice for the criminals. This is because they are the most commonly used. So far attacks on smart phones have mostly involved tricking users into clicking on a link and divulging personal information. But one can expect to see mobile smart phone worms, a form of malicious software, that replicate and automatically spread to everyone listed in a phone’s address book. Such a worm could spread an infection worldwide in only a couple of minutes.
Mainstream security firms are predicting that in 2011 smart phones are likely to be attacked by more malware, sophisticated data stealing Trojans. These attacks could be launched by targeting social networks, HTML 5, stealing digital certificate (like Stuxnet), among other things.
In conclusion one can say that viruses and other malware have long been a threat to computers only. But as smart phones become too smart (for their own good), the bad guys are likely to target them more and more with viruses. And as has already happened with computers, the smart phone assault is expected to be led by cyber criminals aiming to turn a profit. Characteristically, there seems to be a lag between adopting new technology and taking the appropriate action to secure it. Simply put, first we embrace it, then we become aware of the potential risks it may bring, and only after that do we make the effort to secure it in order to better protect ourselves. We went through the same cycle with the introduction of email and learning the value of anti-virus and anti-spam protection, and more recently with social networking (and the need to be careful about what information you make publically available). We are now going through that cycle with Internet-enabled mobile devices.
The risk increases significantly when you consider that a vast majority of employees in any company use at least one self-purchased technology device at work.
The sad part is that many organisations have not yet caught up with the security protection and policies that the latest mobile gadgets require.
As a parting shot, just think about it: There are more phones on the planet than computers. And it’s easier to steal money from phones. Are you prepared to deal with this eventuality?
Given below are the highlights of certain RBI Circulars.
25. A.P. (DIR Series) Circular No. 17, dated 16-11-2010 —
Processing and settlement of export-related receipts facilitated by Online
Payment Gateways.
This Circular allows banks, subject to certain conditions, to
offer the facility of repatriation of export-related remittances by entering
into standing arrangements with Online Payment Gateway Services Providers
(OPGSP). Some of the important conditions are :
1. Banks offering this facility must carry out the due
diligence of the OPGSP.
2. This facility will only be available for export of
goods and services of value not exceeding US $ 500.
3. Banks providing such facilities must open a NOSTRO
collection account for receipt of the export-related payments facilitated
through such arrangements.
4. A separate NOSTRO collection account must be
maintained for each OPGSP or the bank must be able to delineate the
transactions in the NOSTRO account of each OPGSP.
5. Only the following debits will be permitted to the
NOSTRO collection account opened under this arrangement :
(a) Repatriation of funds representing export proceeds to
India for credit to the exporters’ account;
(b) Payment of fee/commission to the OPGSP as per the
predetermined rates/frequency/arrangement; and
(c) Charge back to the importer where the exporter has
failed in discharging his obligations under the sale contract.
6. Balances in the NOSTRO collection account must be
repatriated and credited to the respective exporter’s account with a bank in
India within seven days from the date of credit to the NOSTRO collection
account.
7. Banks shall satisfy themselves as to the bona fides of
the transactions.
8. OPGSP who are already providing such services as per the
specific holding-on approvals issued by the Reserve Bank shall open a liaison
office in India within three months from the date of this Circular. All new
OPGSP must open a liaison office with the approval of the Reserve Bank before
operationalising the arrangement.
Given below are the highlights of certain RBI Circulars.
24. A.P. (DIR Series) Circular No. 16, dated 16-11-2010 —
Reporting Mechanism — Data of Authorised Deler Category-I Branches.
Presently, banks are required to inform RBI, via email, any
changes in the categorisation of their branches dealing in foreign exchange.
This Circular states that the path to the web directory has been changed from
www.rbi.org.in to http://dbie.rbi.org.in. The full details of the path and
options are given in Annex-II to this Circular.
S. 28, S. 41 — Waiver of amount of loan taken for acquiring
capital asset is not taxable under the Act.
Facts :
The assessee had in 1998 received a sum of Rs.82,91,076
from its holding company towards share application money which was
subsequently transferred to unsecured loans. The amount was utilised for
investment in shares of other concerns. The shares so purchased with borrowed
funds were held as capital assets and income arising on transfer of shares was
offered for tax under the head ‘Income from Capital Gains’. In view of the
losses incurred by the assessee, the holding company had written off the
amount as unrecoverable whereas the assessee company had not written back the
said amount as cessation of liability. The AO taxed the sum of Rs.82,91,076
u/s.41(1) of the Act.
On appeal by the assessee CIT(A), the CIT(A) held that the
provisions of S. 41(1) are not attracted but he held that the assessee’s
business activity comprised investment in shares and securities and
advancement of loan to various parties on interest. He also held that the
amount was obtained in the course of business and by virtue of waiver of the
amount by the holding company the assessee had gained in the course of the
business and therefore the sum waived was held to be taxable u/s.28 of the
Act.
Aggrieved, the assessee preferred an appeal to the
Tribunal.
Held :
(i) The CIT(A) was correct in holding that the provisions
of S. 41(1) do not apply.
(ii) In view of the assessee’s contention that it has not
done any trading activity nor shown any income as business income on
investments made the findings of the CIT(A) that the amount was received in
the course of its business are against his findings given while considering
the addition u/s.41(1).
(iii) The assessee’s business activity may comprise
investment in shares and securities, but as far as computation of income is
concerned the profit and loss in those transactions are said to be under the
head ‘Capital Gains’ but not ‘Business Income’, hence, the gain earned by the
assessee in the course of business in investment and advance of loans is in
the capital field but cannot be on the revenue field.
(iv) Remission of a debt by the holding company which was
not claimed and allowed as a deduction in any manner in any earlier previous
year could not be brought to tax either u/s. 41(1) or u/s.28(iv). There is no
benefit or perquisite arising to the assessee in this regard.
(v) The decision of the Bombay High Court in the case of
Solid Containers Ltd. v. Dy. CIT, (308 ITR 417) does not apply to the
facts of the case. The facts of the present case are similar to the decision
of the Bombay High Court in the case of Mahindra & Mahindra Ltd. v. CIT,
(261 ITR 501). The loans availed for acquiring the capital assets i.e.,
shares, when waived cannot be treated as assessable income by invoking the
provisions of S. 28.
(vi) Since the original receipt was undoubtedly capital in
nature its waiver does not have the quality of changing the same into a
revenue receipt.
(vii) On facts, the provisions of S. 28 do not apply and
the amount is not taxable.
S. 14A r.w. S. 143(3) and S. 147 — Proviso to S. 14A
inserted by Finance Act, 2002 w.e.f. 11-5-2001 does not confer any
jurisdiction on Assessing Officer to make reassessment u/s.147 for any
assessment year beginning on or before 1-4-2001.
For the relevant A.Y. 1998-99, the Assessing Officer issued
notice u/s.148 on 21-4-2004, with a view to reopen the concluded assessment
and disallowed certain expenses, which the assessee had claimed as deduction,
on account of exempted income u/s.14A. On appeal, the CIT(A) upheld the order
of the Assessing Officer.
The Tribunal held that the disallowance made was contrary
to the proviso to S. 14A, as the same was not permissible under reassessment
proceedings u/s.147 in respect of the assessment year beginning on or before
1-4-2001.
The Tribunal noted as under :
1. A bare perusal of the proviso to S. 14A clearly
demonstrates the legislative intent in placing absolute embargo on the
jurisdiction of the Assessing Officer to re-assess the case u/s.147. Having
regard to the express legislative intent, as enshrined by the Parliament,
vide the Finance Act 2002, w.e.f. 11-5-2001, the Assessing Officer ceases to
have any jurisdiction to re-assess any case u/s.147. In such a statutorily
explicit and undisputed position, the question of reopening of the case or
initiation of the re-assessment proceedings u/s.147 r.w. S. 148, is
inconceivable and incomprehensible. Thus, in the absence of existence of
statutory jurisdiction, in terms of proviso to S. 14A with the Assessing
Officer, to make reassessment u/s.47 the very discussion on the validity or
otherwise of assumption of such jurisdiction, by way of issuance of the said
notice u/s.148, is irrelevant and an exercise in futility.
2. The CBDT issued Circular No. 11 of 2001, dated
23-7-2001, and placed restrictions on reopening of completed assessments, on
account of provisions of S. 14A. The said circular clearly demonstrates the
legislative intent in interpreting the newly inserted proviso to S. 14A.
3. The Circulars issued by the CBDT are binding on the
Assessing Officer, even where the same are not in consonance with the
meaning of the provisions, if they are benevolent and issued to mitigate the
hardship of the assessee. It is pertinent to add that the Assessing Officer
had ignored the said Circular of the Board and judicial mandate of the Apex
Court as contained in the various decisions and initiated reassessment
proceedings, in the instant case, despite there being express exclusion of
such jurisdiction of the Assessing Officer by the proviso to S. 14A.
Turner Broadcasting System Asia Pacific, Inc., America v.
Asst. DIT
ITA Nos. 724, 728 and 733 (Delhi) of 2008
A.Ys. : 2001-02 & 2004-05
Dated : 13-3-2009
S. 234B r.w. S. 195 and S. 209 — No interest can be levied
where advance tax is not paid in respect of income on which tax is not
deducted at source by payers who were obliged to deduct the same.
During the relevant assessment years, various parties
advertising their products paid consideration to the Indian agent of the
assessee, who, in turn, remitted such amounts to the assessee. Neither the
advertiser nor the agent deducted tax at source before payment or repatriation
of money, respectively, as provided u/s.195. The AO levied interest upon the
assessee u/s.234B for non-payment of advance tax. The CIT(A) upheld the levy
of interest.
The Tribunal, applying the decisions in the following
cases, deleted the interest levied u/s.234B :
(a) CIT v. Madras Fertilizers Ltd., (1984) 49 ITR
703 (Mad.)
(c) CIT v. Sedco Forex International Drilling Co.
Ltd., (2003) 264 ITR 320/(2004) 134 Taxman 109 (Uttaranchal)
The Tribunal noted as under :
1. Since the assessee was a non-resident person, the
amounts paid to their agent in India by the Indian advertisers were liable
for tax deduction u/s.195. The tax had not been so deducted and,
consequently, not paid to the credit of the Government.
2. As provided in S. 209, while computing the amount of
advance tax, the tax deductible at source was to be reduced from the total
tax liability.
3. In the assessee’s case the advance tax payable was Nil
after considering the amount of tax deductible at source u/s.195. It was not
the assessee’s fault, if no tax was deducted by the payers.
4. Since no advance tax was payable as per calculations
in terms of S. 209 and S. 195, there would be no liability to pay interest
u/s.234B. The charge of interest will follow only if there is a default of
non-payment of advance tax. In the absence of default, interest cannot be
charged.
S. 41(1) — Limitation of time is not a determining factor
in matters relating to remission or cessation of liabilities.
For the relevant assessment year, in respect of certain
creditors appearing in the Balance Sheet of the assessee, the AO found that
there was neither a pending litigation in existence nor any correspondence
from the parties demanding for clearing the liabilities and held that the
assessee had not proved that it was yet to make the payment of the said
outstanding balances to the creditors, that it had the intention to make the
said payment, and that the liability had not ceased. He, accordingly, invoked
the provisions of S. 41(1) and deemed the liabilities of the creditors as the
profits and gains of business or profession and treated them as the income of
the year. The CIT(A) upheld the order of the AO.
The Tribunal set aside the orders of the lower authorities.
The Tribunal noted as under :
2. From the rival positions of both parties as well as
the provisions of S. 41(1) and the legal propositions of various judicial
fora, the following issues have emerged :
the
issue of limitation of period of three years
the
issue of discharge of onus when the assessee had not unilaterally written
them off
the
issue of unilateral write-off for the assessments of the post-amendment
period, i.e., after 1-4-1997.
3. Regarding the issue of limitation of three years, it
was noticed that there is no such limitation provided in S. 41(1) or in its
Explanation 1. In the case of Dy. CIT v. Himalaya Refrigeration & Air
Conditioning Co. (P.) Ltd., (2003) 91 TTJ (Delhi) 296, the Tribunal held
that in the absence of any evidence of cessation of liabilities, mere fact
that the liabilities were outstanding for more than three years and were
time barred, was not sufficient ground for addition u/s.41(1). The
limitation of time is not a determining factor in the matters relating to
remission or cessation of liabilities.
4. Regarding the issue of discharging of onus, it was
held that when the assessee continues to reflect or record the liabilities
as still payable to the creditors and decides not to write them off
unilaterally, the Assessing Officer has higher levels of responsibility and,
hence, he has to establish with evidence that the said book entries are
wrong or not bona fide and, thus, the Assessing Officer is under the
obligation to discharge the onus in this regard. The onus is on the revenue
to prove that the liabilities have ceased finally and there is no
possibility of their revival.
5. Regarding the issue of unilateral write off for the
assessments of the post amendment period, i.e. 1-4-1997, it was
noticed that Explanation 1 was brought into statute by the Finance (No. 2)
Act, 1996 with effect from 1-4-1997. Mere unilateral transfer entry in the
accounts does not confer any benefit to the assessee and, therefore, the
revenue cannot invoke S. 41(1). The assessee’s case, being one where the
alleged liabilities were not unilaterally written off, the requirements of
the Explanation were not met and, therefore, it could not be considered as
the case of obtaining of the benefit during the year under consideration.
(a) S. 68 of the Income-tax Act, 1961 — Since no new
amount had been credited in accounts of creditors during year under
consideration, addition could not be made u/s.68.
(b) S. 41(1) of the Income-tax Act, 1961 — Brought
forward balances of creditors could not be added to assessee’s income, as
question of genuineness could be examined only in the year in which they were
credited to the account.
During the relevant assessment year, the Assessing Officer
asked the assessee-company to prove the genuineness of certain sundry creditors.
The assessee could not file confirmations from the said creditors except one.
The Assessing Officer, thus, treated the credit balances appearing in the
assessee’s books of account as unexplained credits u/s.68. On appeal, the CIT(A)
confirmed the additions u/s.41(1).
The Tribunal deleted the additions made u/s.68 and u/s.41(1).
The Tribunal followed the decisions in the cases of :
(a) CIT v. Sugauli Sugar Works (P.) Ltd., (1999) 236
ITR 518; 102 Taxman 713 (SC)
(a) No new amount had been credited by the assessee in
their accounts during the year under consideration. Therefore, applicability
of S. 68 was ruled out and addition could not be made under this Section.
(b) The balances were brought forward balances. If the same
were added on account of their non-genuineness, then also those amounts could
not be added to the income of the assessee for the year under consideration,
as the question of genuineness thereof could be examined only in the year in
which they were credited to the account.
(c) The amount could also not be considered to be the
income of the assessee on the ground of expiry of limitation, as according to
well-settled law explained by the Supreme Court in the case of CIT v.
Sugauli Sugar Works (P.) Ltd., (1999) 236 ITR 518; 102 Taxman 713 in the
absence of creditor, it is not possible for the Department to come to the
conclusion that the debt is barred and has become un-enforceable as there may
be some circumstances which may enable the creditor to come with a proceeding
for enforcement of the debt even after expiry of the normal period of
limitation, as provided in the Limitation Act, 1963.
(d) It had not been shown by the CIT(A) that the assessee
had acquired any benefit from these liabilities which were still outstanding
in the balance sheet of the assessee and it had also not been shown that these
liabilities had ceased finally without the possibility of revival. Thus, the
onus had wrongly been shifted by the Revenue on the assessee. The assessee had
shown these liabilities outstanding in its balance sheet. Therefore, there was
no occasion to treat the said amounts as taxable u/s.41(1) and if the
Department intended to assess the same by applying the provisions of S. 41(1),
then the onus was on the Revenue to show that the liabilities which were
appearing in the balance sheet had ceased finally and there was no possibility
of their revival.
S. 48, read with S. 45 and S. 55 of the Income-tax Act, 1961
— Right to construct additional floors under Development Control Regulations,
1991, acquired by assessee without incurring any cost and, moreover, such right
had no inherent quality of being available on expenditure of money — Such right
is outside the scope of S. 45.
The assessee, a co-operative housing society established in
the year 1962, owned a building in Santacruz, Mumbai. This building had been
constructed after utilising the entire FSI available to it and, therefore, no
right was available for any further construction on this plot of land. However,
the Bombay Municipal Corporation (BMC) relaxed the development regulations in
the year 1991 and on that account additional Transferable Development Right
(TDR) of FSI was allowed under the newly enacted Development Control
Regulations, 1991 (DCR). Thus, the assessee became entitled to construct
additional space of 15,000 sq.ft. In view of the availability of such right, the
assessee entered into an agreement with two developers on 25-11-2002 for
construction of additional floors on the existing structure of the society’s
building and development of the said property against a consideration of Rs.42
lacs. Under this agreement, TDR was to be arranged by the developers at their
own cost. For the relevant A.Y. 2003-04, the assessee did not admit of any
capital gain tax liability on the aforesaid amount of Rs.42 lacs. The Assessing
Officer held that as per the amended provisions of S. 55(2) applicable to the
year under consideration, the cost of acquisition was to be taken as NIL and,
since the assessee had surrendered its right to the developers against the
consideration, the income had accrued to it in the year under consideration. The
Assessing Officer, therefore, assessed the entire sum of Rs.42 lacs in the hands
of the assessee as long-term capital gain, holding that the right to construct
was embedded in the land which was held by the assessee for more than three
years.
The CIT(A) upheld the order of the Assessing Officer and also
held that the instant issue was akin to the issue of bonus shares, which are
issued only to the persons who own the original shares. He also held that the
decision of the Supreme Court in the case of B. C. Shrinivasa Shetty (1981) 128
ITR 294/5 Taxman, relied on by the assessee was not applicable in the instant
case.
The Tribunal set aside the orders of the lower authorities
and held that the sum of Rs.42 lacs received by the assessee was not chargeable
to tax u/s.45. Relying on the decision of the Mumbai Bench of the Tribunal in
the case of Jethalal D. Mehta v. Dy. CIT, (2005) 2 SOT 422, the Tribunal
noted as under :
(a) Clause (aa) and Clause (ab) of S. 55(2) deal with the
case of shares or securities and, therefore, the same are not relevant for
disposal of the instant appeal.
(b) The perusal of S. 55(2)(a) reveals that the cost of
acquisition is to be taken at NIL in those cases where the capital asset
transferred is either goodwill of business or a trademark or a brand name
associated with business or a right to manufacture, produce or process any
article or thing or right to carry on any business, tenancy rights, stage
carrier permits or loom hours. In the instant case, the assessee was not
carrying on any business and the right to construct additional floors was not
covered by any of the assets mentioned in the aforesaid Ss.(2) of S. 55.
Therefore, the amended provisions of S. 55(2) did not apply to the instant
case and the lower authorities were not justified in taking the cost of
acquisition of the capital asset being a right to construct the additional
floors at NIL.
(c) Further, the contention of the Revenue that right to
construct the additional floors was embedded in the land and, therefore, the
instant case was akin to the issue of bonus shares and, consequently, it could
not be said that there was no cost of acquisition in respect of such right,
was not acceptable for two reasons, firstly, because it was not the case of AO
or the CIT(A) that the cost of acquisition was taken by them as NIL as per the
amended provisions; secondly, because the theory of spreading over the cost of
original shares over the original shares and bonus shares was based on the
fact that bonus shares were issued to the detriment of the original shares. In
the instant case, the right to construct attached to the land on the date of
purchase of land had already been exhausted by construction of flats prior to
1991 as per the FSI available according to law as was in force. Therefore,
there was no further right to construct any flat on that land. It was because
of DCR, 1991 that additional right had accrued to the assessee, which was
distinct and separate from the original right. Therefore, it could not be said
that such right was embedded in the land. Even assuming, for the sake of
argument, that such right was embedded in the land, there was no detriment to
the cost of land by granting such right on the assessee-society. On the
contrary, price of the land had increased because of the additional right made
available to the assessee-society.
d) Ignoring the events involving the surrendered row house and on examination of the facts regarding the flat in Abhijit building, the assessee’s investment of capital gain in the purchase of block of shares of company, which, in turn, got him entitled to a flat in the Abhijit building, was within the period of three years. After all, the purchases of block of shares of company’S’ and procuring the entitlement to a flat were composite transactions which were interlinked. Therefore, the investment in block of shares of the company’S’ was the investment of capital gain in the flat.
e) On the issue of how the assessee’s case was a case of construction, the assessee’s reliance on Circular Nos. 471 and 672 was relevant. The combined reading of Circular Nos. 471 and 672 shows that investment as in the assessee’s case was to be treated as a case of construction for the purpose of 5. 54F. The assessee’s investment of Rs.30.50 lacs in the construction of the house in Abhijit building fell within three years of the first sale of the shares.
f) Therefore, the investment of the long-term capital gain in the flat in Abhijit building was a case of construction and applicable time limitation was three years and not two years as held in the impugned order by the CIT(A).
S. 54F of the Income-tax Act, 1961 — On facts, investment of
long-term capital gain in a flat in a building under construction was a case of
‘construction’ and time limit of three years (and not two years) was applicable
— Exemption u/s.54F was available.
The assessee invested a sum of Rs.30.50 lacs with a builder
for purchase of a row house. Subsequently, the assessee having come to know that
there was a drive by District Authorities for demolition of row houses,
cancelled the aforesaid agreement dated 26-8-1996 and received back whole amount
from the builder. Subsequently, the assessee entered into an agreement with a
company ‘S’, which was engaged in construction of a building known as Abhijit,
and paid a sum of Rs.30.50 lacs to ‘S’ for purchasing ‘block of shares’ of
company ‘S’ and got them transferred to his name. On this basis, the assessee
became entitled to allotment of a flat in the under-construction building,
Abhijit. The said building was constructed and the assessee got occupancy
certificate from the Municipal Corporation of Greater Mumbai (MCGM). The
assessee’s claim for exemption u/s.54F was denied by the Assessing Officer, on
the ground that the investment in the row house was an investment for purchase
of a ‘new asset’ as per Ss.(1) of the S. 54F and that cancellation of the above
transaction amounted to transfer of new asset during the lock-in period of 3
years, violating the condition of Ss.(3) of S. 54F. He, therefore, ignored the
investment in flat in Abhijit building and, thus, denied the exemption u/s.54F.
The CIT(A) held that the assessee’s case is the case of
purchase of new asset and not the construction of new asset and, accordingly,
the applicable time limit is of two years and not three years, hence the
exemption is not available. Further, the CIT(A) also observed that the assessee
has not utilised long-term capital gains for the purchase or construction of new
asset before filing the return of income u/s.139 and also failed to deposit the
same as per the scheme specified in Ss.(4) of S. 54F and, therefore, the
exemption should be denied on this ground also.
The Tribunal held that the assessee was entitled to exemption
u/s.54F. The Tribunal relied on the decisions in the following cases :
(a) CIT v. T. N. Aravinda Reddy, (1979) 120 ITR 46/
2 Taxman 541
(a) The sequence of events in the instant case revealed
that the assessee’s intention to invest the capital gains in the residential
house to avail of the exemption u/s.54 was beyond any doubt. The Assessing
Officer had not established that the agreement with the first builder and the
agreement for cancellation were bogus. Therefore, the cancellation of the
agreement by the assessee would fall within the ambit of the doctrine of
caveat emptor (i.e., buyers beware) and surrender of row house was
legally justified. The assessee was not expected to proceed to buy a defective
residential house (new asset), which was prone to demolition by the Municipal
Authorities, in order to qualify for exemption for exemption u/s.54F.
Therefore, the decision of the lower authorities in treating the row house as
a new asset was misplaced.
(b) Ss.(3) of S. 54F stipulates that the ‘new asset’
purchased or constructed must not be transferred within the lock-in period of
3 years from the date of such purchase or construction of ‘new asset’. The
Assessing Officer denied the claim of exemption u/s.54F for the reason of
violation of the said condition, considering the row house as a ‘new asset’.
The assessee did not actually purchase a ‘new asset’ and, therefore, the
refund received by the assessee from ‘D’ in respect of the surrender of the
row house was not relatable to any transfer of the new asset. Resultantly, the
violation of the said condition in Ss.(3) of S. 54F did not arise.
(c) Ss.(4) of S. 54F provides for depositing the unutilised
capital gains in the bank as per the prescribed Capital Gain Scheme and manner
of taxing such gains if not utilised before the due date for furnishing the
return of income u/s.139. Since the assessee had already parted with the
capital gain before the due date for filing the return in connection with the
‘row house’ acquisition, there was no way in which the assessee would have
complied with the condition of depositing it in the bank as per Ss.(4) of S.
54F. There was no violation of the condition of Ss.(4) of S. 54F by the
assessee.
(d) Ignoring the events involving the surrendered row house
and on examination of the facts regarding the flat in Abhijit building, the
assessee’s investment of capital gain in the purchase of block of shares of
company ‘S’, which, in turn, got him entitled to a flat in the Abhijit
building, was within the period of three years. After all, the purchases of
block of shares of company ‘S’ and procuring the entitlement to a flat were
composite transactions which were interlinked. Therefore, the investment in
block of shares of the company ‘S’ was the investment of capital gain in the
flat.
S. 45 r.w. S. 28(i) of the Income-tax Act, 1961 — In absence
of specific provision in S. 45(2) to deal with a situation where stock-in-trade
is converted into investment and later on investment is sold for profit, formula
which is favourable to an assessee should be accepted.
The assessee had converted some shares from stock-in-trade to
investment as on 1-4-1998 at its book value. Thereafter, the assessee sold some
of the shares out of the above shares and offered profit earned as long-term
capital gain. The Assessing Officer opined that in view of the provisions laid
down u/s.45(2), the income of the assessee would be computed separately as
business income till the date of conversion of the shares from the stock to
investment and, thereafter, as long-term capital gain. The AO, therefore, took
the highest market rate of the said shares on the date of conversion and
computed the business income, being the difference in the value at which the
said shares were converted into investment and the market value of the said
shares on the date of conversion, i.e., 1-4-1998 and, further computed
the long-term capital gain at Rs.457.62 lacs being the difference between the
market value and the actual sale value of the shares.
The CIT(A) held that the action of the Assessing Officer to
segregate the long-term capital gain as shown by the assessee in the return of
income into business income and capital gain was totally arbitrary and
unjustified.
The Tribunal held in favour of the assessee. The Tribunal
relied on the decisions in the following cases :
(a) Sir Kikabhai Premchand v. CIT, (1953) 24 ITR 506
(SC)
(a) The provisions of S. 45(2) deal with the issue of
capital gain where the investment is converted into stock-in-trade.
(b) While incorporating Ss.(2) to S. 45, the Legislature
has not visualised the situation in other way round, where the stock-in-trade
is to be converted into investment and later on the investment is sold on
profit. In the absence of a specific provision to deal with this type of
situation, a rational formula should be worked out to determine the profits
and gains on transfer of the asset.
(c) In the absence of a specific provision to deal with the
present situation, two formulas can be evolved to work out the profits and
gains on transfer of the assets.
(d) One formula which had been adopted by the Assessing
Officer, i.e., difference between the book value of the shares and the
market value of the shares on the date of conversion should be taken as a
business income and the difference between the sale price of the shares, and
the market value of the shares on the date of conversion, be taken as a
capital gain.
(e) The other formula which was adopted by the assessee, i.e., the difference between the sale price
of the shares and the cost of acquisition of shares, which was the book value
on the date of conversion with indexation from the date of conversion, should
be computed as a capital gain.
(f) In the absence of a specific provision, out of these
two formulae, the formula which was favourable to the assessee should be
accepted.
S. 2(22)(e) of the Income-tax Act, 1961 r.w. S. 78 of the
Companies Act, 1956 — Payment made by a company out of its Share Premium a/c.
cannot be taxed in hands of receiver as deemed dividend.
During the A.Y. 1996-97, an amount of Rs.25.43 lacs was
advanced to the assessee-company by another company ‘G’ Ltd., in which the
assessee held 40% of shares. The amount was advanced in the nature of loans and
advances. Towards the end of the year, the assessee repaid Rs.14.31 lacs and the
AO included the balance amount of Rs.11.12 lacs as deemed dividend in the hands
of the assessee u/s. 2(22)(e). The case of the assessee was that entire reserve
and surplus amount appearing in the books of ‘G’ Ltd. consisted of share premium
which was a capital receipt and could not have been distributed as dividend. The
AO, however, treated the amount as deemed dividend u/s.2(22)(e). The CIT(A)
accepted the assessee’s contention.
The Tribunal also ruled in favour of the assessee. The
Tribunal noted as under :
(a) S. 78(2) of the Companies Act, 1956 states the five
purposes for which the Share Premium a/c. may be used. The Share Premium a/c.
cannot be used otherwise than for the specified purposes.
(b) When there is a statutory bar on the Share Premium a/c.
being used for distribution of dividend, the deeming provisions of S. 2(22)(e)
cannot apply.
(c) Not only is there a prohibition on the distribution of
the Share Premium a/c. as dividend under the 1956 Act, but the same is obliged
to be treated as a part of the share capital of the company and this is made
clear in S. 78(1) of the 1956 Act, which says that any payment out of the
Share Premium a/c., except for purposes authorised by Ss.(2), will be treated
as reduction of share capital attracting the provisions of the 1956 Act in
relation thereto.
(d) This provision of the 1956 Act takes care of the
argument of the Revenue that S. 2(22)(e) does not use the expression ‘whether
capitalised or not’. These words can have application only where the profits
are capable of being capitalised. They are not applicable where the receipt in
question forms part of the share capital of the company under the provisions
of the 1956 Act.
Whether the mere inclusion of land in industrial zone could
convert agricultural land into non-agricultural land, given that there had been
no infrastructure development on the same, and the fact that it had been used
for non-agricultural purposes had also not been established — Held, No.
Therefore, whether the gain arising on sale of such agricultural land by the
assessee was exempted from tax — Held, Yes.
Facts :
The assessee sold certain agricultural land in the relevant
A.Y., and thus claimed exemption of the long-term capital gains arising
therefrom. The AO accepted the assessee’s claim in the assessment completed
u/s.143(3). Subsequently, the Commissioner noted the fact that the land was
located in industrial zone, the fact which the AO had failed to take note of,
and therefore, under powers assigned to him u/s.263, he set aside the order and
directed the AO to reconsider the exemption granted to the assessee from the
capital gains tax.
Accordingly, the AO after issue of notice u/s.143(2) and
after considering the assessee’s submission, concluded that the land was not
used for agricultural purposes, and hence was not an agricultural land, and the
exemption allowed earlier was withdrawn. On appeal, the Commissioner (Appeals)
upheld the AO’s decision.
On second appeal before the Tribunal, it was observed as
under :
1. The question as to whether a land is agricultural
or not is a question of fact to be answered having regard to the facts and
circumstances of each case. In the instant case, the said land had been
classified in the Revenue records as agricultural land. The assessee had not
given any evidence of incurring any expenditure on agricultural operations on
the said land, as also he had not established that any agricultural produce in
the nature of rice, jowar, etc. was produced from the land.
2. On the other hand, the Revenue has also not produced any
evidence to show that the land was used for other than agricultural purposes.
No permission for non-agricultural use had been obtained by the assessee, and
no evidence of such use was brought on record.
3. Merely the fact that the land in question was brought in
an industrial zone could not be a determining factor by itself to say that the
land was converted into use for agricultural purposes.
4. Further, the profit motive of the assessee in selling
the land, without anything more than itself, could never be decisive to say
that the assessee had used the land for non-agricultural purposes. Therefore,
the land in question sold by the assessee was an agricultural land in nature
at the relevant point of time when the land was sold, and any gain arising
from such sale was exempted from tax.
Cases referred to :
(i) CIT v. Raja Benoy Kumar Sahas Roy, (1957) 32 ITR
566 (SC)
(ii) ACIT v. Tarachand Jain, (1980) 123 ITR 567
(Patna)
(iii) CWT v. Officer-in-charge (Court of Wards) Paigah,
(1976) 105 ITR 133 (SC)
Whether in view of the fact that the assessee had advanced
certain amounts to its sister concerns from the monies available to it, because
it had been prevented by Government regulations from prepaying its External
Commercial Borrowings, interest income on the same could be considered to have
close nexus with the business of the assessee, and would be assessable under the
head ‘business income’ — Yes. Post-amendment to S. 10B, as entire profits
derived from business of an undertaking are to be considered for calculation of
eligible deduction, whether the assessee would be entitled to deduction of such
interest income, and expenses incurred in relation to such income were allowable
— Yes.
Facts :
The assessee-company earned certain interest income from
deposits lying in the EEFC account and from advancing of intercorporate loans
out of the funds of the undertaking. The assessee had certain External
Commercial Borrowings (ECB’s) obtained in the earlier years, which could be
repaid only in accordance with the repayment schedule, and thus it could repay
only a small portion of its outstanding loans, even though it had the liquidity
to pay more. The assessee took a business decision to place these funds with
various sister concerns as inter- corporate deposits. The assessee claimed that
both these types of interest income were a part of ‘income from business’.
Further, from A.Y. 2001-02, S. 10B has been substituted and
as per the new provisions, the interest income so derived would be entitled to
deduction u/s.10B.
According to the AO, only those profits derived from an
eligible undertaking from export of article or thing were entitled for deduction
for A.Y. 2001-02. On appeal, the CIT(A) upheld the order of the AO. On second
appeal, the Tribunal held that :
1. The interest income arose on deposits in the EEFC
account from export profits. The Government had stipulated the maximum amount
that could be held as deposits in the EEFC account, and as per the relevant
regulations, the assessee had also been prevented from pre-paying the External
Commercial Borrowings. Therefore, the assessee advanced the monies to its
sister concerns. The interest income on the same could be considered as having
close nexus with the business activity of the assessee and was assessable
under ‘business income’.
2. For the A.Ys 1997-98 and 1998-99, the assessee was not
eligible for grant of relief on interest income while computing deduction
u/s.10A and 10B. From A.Y 2001-02, S. 10B was substituted. Earlier, it was an
exemption Section, and income from these undertakings did not form part of
total income. However from that particular year, even though the Section
appears in Chapter 3, a deduction from business income from the undertaking is
to be granted by applying the substituted provision. For the A.Y in
discussion, the AO was directed to recompute the deduction u/s.10A and
u/s.10B, such that entire profits derived from the business of the undertaking
would be taken into consideration.
3. Regarding the allowability of expenditure relatable to
the interest income, as it had already been held that interest income was
assessable as business income, all related expenditures had to be allowed in
computing the interest income.
S. 36(1)(vii) r/w S. 36(2) — Money-lending activity is a part
of non-banking finance business — Providing funds to entities where assessee was
a promoter was a part of fund-based activities carried on by the company —
Whether where assessee had provided funds to one such assessee, and the said
amount had become irrecoverable, the same could be claimed as bad debts — Also,
where the assessee had given certain amount to an entity for allotment of
preference shares — The entity refused to allot the same, and further the said
amount advanced by the assessee to this entity also became irrecoverable — Held,
the same could be claimed as bad debts.
Facts :
The assessee, a non-banking finance company, was incorporated
in the year 1987, and was mainly engaged in providing fund- and non-fund-based
financial services. In the relevant assessment years,
the assessee had paid certain amount to some villagers as advance for purchase
of land for business of development activities. Further, the assessee had also
advanced money to two companies, ‘F’ and ‘P’. The assessee had promoted ‘F’ and
had deposited certain amount with a bank and stood guarantor for money given to
‘F’ by the bank. On the guarantee money, the assessee earned interest from bank
as well as from ‘F’ and offered the same for taxation. Business of ‘F’ was
abandoned and despite all efforts, the assessee was not able to recover the
amount from ‘F’ and claimed the same as bad debts u/s.36(1)(vii). Further, the
assessee had given certain amount to ‘P’ for allotment of preference shares, but
‘P’ refused to allot the same. The assessee, therefore, asked ‘P’ to refund the
amount with interest and on P’s failure, claimed the said amount as bad debts.
The assessee’s claim was disallowed on the ground that it was
not carrying on any money-lending business.
On appeal before the Tribunal, the Tribunal held the
following :
1. The contention of the lower authorities that the
assessee was not carrying on any money-lending business was incorrect. This
was because; carrying on money-lending activities was a part of doing
non-banking financial business. Huge amounts earned as interest were offered
for taxation, and the same had been taxed in the earlier years as well as the
year under consideration. The objects clause of the assessee-company clearly
stated that the object of the assessee was to run non-banking business and
advance money as intercorporate deposits.
2. The Delhi Bench of the Tribunal has held that there is
no qualification in S. 36(2) that the business of money lending should be
understood only in traditional sense.
3. Further, the guarantee stood by the assessee has to be
taken as an activity of money lending. The assessee has earned interest on the
guarantee amount from the bank as well as from ‘F’. As the business of ‘F’
company was abandoned, whatever amount was recoverable from it by the assessee
was treated as bad debts by the assessee. All the conditions of S. 36(1)(vii)
r/w S. 36(2) being satisfied in this case, amount recoverable from ‘F’ was
allowable as bad debts.
4. With regard to the amount advanced to ‘P’, for allotment
of preference shares, the Tribunal observed that since ‘P’ had refused to
allot the shares, the assessee had asked it to refund the amount. ‘P’ in turn
had instructed its debtor M to pay the said amount to the assessee on its
behalf. The assessee had shown this amount as intercorporate deposit with M,
and interest had also been shown. Therefore, it cannot be said that the said
amount had the character of share application money, as it was in the nature
of intercorporate deposit, on which the assessee was to receive interest. The
conditions of S. 36(2) were satisfied in this case, and the amount recoverable
from ‘P’ was allowable as bad debts u/s.36(1)(vii).
Case referred to :
DCIT v. SREI International Finance Ltd., 10 SOT 722
(2006) (Delhi) (para 11)
Persons appointed or authorised by the lottery organising
State for marketing lottery tickets, would be exempted from service tax if the
distributor or selling agent avails of optional composition scheme notified vide
Notification No. 49/2010-ST, dated 8-10-2010 in respect of such lottery during
the financial year.
22. Optional Composition Scheme for Distributor/Selling Agent
of Lottery Notification No. 49/2010-ST, dated 8-10-2010.
Under the lottery or lottery scheme, where the guaranteed
prize payout is more than 80%, a distributor or selling agent can opt to pay
flat service tax of Rs.6000 and where the guaranteed prize payout is less than
80%, he can opt to pay flat service tax of Rs.9000, on every Rs.10 lakh of
aggregate face value of lottery tickets printed by the organising State for a
draw.
Such option will have to be exercised within one month of the
beginning of each financial year (for F.Y. 2010-11 by 7-11-2010) for the entire
financial year. A new service provider can exercise such option within one month
of providing such service.
Procedure and instructions for E-Services
Enrolment/Registration for Profession Tax RC holders (PTRC) displayed on sales
tax website.
Trade Circular has not yet been issued.
The Department through this instruction has specified the
procedure and has required all the employers paying profession tax, to register/enrol
for PTRC e-services immediately and latest by 31st December, 2010. This
enrolment process is not meant for PTEC holders.
Facility of e-return filing would be extended to PTRC holders
and thereafter e-payment facility.
Changes relating to Company Law for the period 15th October,
2010 to 15th November, 2010.
Additional fees payable as per S. 611(2).
The Ministry of Corporate Affairs has decided to revise the
additional fees payable as per S. 611(2) of the Companies Act, 1956 (except Form
5) as per details in the Table 1 with effect from 5-12-2010 :
Table 1
Period of delay
Fixed rate of additional fee
Up to 30 days
Two times of normal filing fee
More than 30 days and up to 60 days
Four times of normal
filing fee
More than 60 days and up to 90 days
Six times of normal
filing fee
More than 90 days
Nine times of normal filing fee
In order to avoid payment of additional fees, please file
within stipulated time.
A comparative between old rates and new rates of additional
fees is given below in
Certiorari is a latin term used in law referring to a
type of writ seeking judicial review. Derived from Certiorare, it
literally means ‘to search’. In law it is used for requesting the court to look
for irregularity and provide remedy against injustice meted out.
2. Historically in the U.K., Certiorari was used to
bring the record of an inferior court into the King’s Bench for review or to
remove indictment for trial from that court. It evolves now as a general remedy
to bring decision of an inferior court or Tribunal or Public Authority before
the superior court for review, so that the court can determine whether to quash
such decisions or allow them to operate. In the U.S.A., Certiorari is one
of the two ways to have a case from US Court of Appeal reviewed by the U.S.
Supreme Court. Appeal being one, Certiorari is the other. In India,
Certiorari is not an alternate remedy, but operates generally in cases where
the relevant statute does not provide for remedy and where gross injustice has
occurred or where fundamental rights are violated.
3. The provisions in many modern statutes attempt to keep
away decisions of authorities — administrative or judicial — from review by the
higher courts by making these decisions ‘final’ or ‘conclusive’. The legal
import of these words was discussed by Denning L.J. in R v. Medical Appeal
Tribunal ex p.Gilmore, (1957) I.O.B. 574, 583. His Lordship observed “The
remedy by certiorari is never to be taken away by statute except by the
most clear and explicit words. The word ‘final’ is not enough. That only means
‘without appeal’. It does not mean without recourse to certiorari. It
makes the decision final on facts, but not final in law. Notwithstanding that
the decision is by a statute made ‘final’, certiorari can still issue for
excess of jurisdiction or for error of law on the face of the record”.
4. The Constitution of India in Articles 32 and 226 grants
remedy by way of certiorari. Article 32 grants right to move the Supreme
Court for enforcement of fundamental rights by authorising the court to issue
directions or orders or writs including writs in the nature of habeas corpus,
mandamus, prohibition, quo warranto and certiorari. Similar
powers under Article 226 have been vested in High Courts. Powers of High Courts
are not confined to enforcement of fundamental rights, but extend to other cases
involving breach of right resulting in failure of justice.
5. Writs of certiorari are issued after review of
records of proceedings of the Tribunals or Public Authority having legal
authority to determine questions affecting the rights of subjects and having the
duty to act judicially. Writ quashes the orders which go beyond jurisdiction. It
is corrective in nature issued to the inferior tribunals dealing with civil
rights of persons as a public authority and is issued for absence of
jurisdiction, wrongly usurping the jurisdiction, acting in excess of
jurisdiction or failing to exercise jurisdiction. Certiorari is also
issued for violation of principles of natural justice. Errors apparent on the
face of the record are, for the purpose of interference by certiorari,
treated as errors of jurisdiction.
6. The Court acting in certiorari does not act in
appellate jurisdiction, but only in supervisory capacity. It, therefore, follows
that while a decision to deny certiorari lets the lower court’s ruling
stand, it does not constitute a decision by the Supreme Court/High Court on any
of the legal issues raised. The decision to grant or deny certiorari is
discretionary.
7. Determination of jurisdiction in many cases involves
decision about the existence of ‘jurisdictional fact’ which must exist before a
court, Tribunal or an Authority assumes jurisdiction over a particular matter.
By erroneously assuming existence of such jurisdictional fact, no authority can
confer upon itself jurisdiction which it otherwise does not possess. The Supreme
Court in Arun Kumar and Others v. U.O.I., (2006) 286 ITR 89 (SC) was
seized of the question of the legality of Rule 3 of I.T. Rules dealing with
house perquisite. While holding the Rule as intra vires, the Court held
that ‘concession’ under clause (ii) of Ss.(2) of S. 17 is a ‘jurisdictional
fact’. It is only when there is a concession in the matter of rent respecting
any accommodation provided by an employer to his employee that the mode, method
or manner as to how such concession can be computed can arise. In other words,
concession is a ‘jurisdictional fact’, method of fixation of amount is ‘fact in
issue’ or ‘adjudicatory fact’. It was therefore, held that in spite of the legal
position that Rule 3 is intra vires, valid and not inconsistent with the
provisions of the parent Act u/s.17(2)(ii) of the Act, it is still open to the
assessee to contend that there is no ‘concession’ in the matter of accommodation
provided by the employer to the employee and hence the case did not fall within
the mischief of S. 17(2)(ii) of the Act. The jurisdiction to invoke Rule 3
arises only when the existence of concession in the matter of rent is
established. The decision led to insertion of an explanation to S. 17(2)(ii)
nullifying the effect of the Supreme Court decision.
8. In Province of Bombay v. Kusaldas S. Advani & Ors., 1950 AIR 222, where the order of the State Authorities requisitioning land was challenged in a writ of certiorari for want of jurisdiction, the existence of ‘Public purpose’ was a ‘jurisdictional fact’. The issue was whether determination of such fact is judicial, quasi-judicial or administrative act. Kania CJ, Fazal Ali, Patanjali Shastri and Das JJ held that on proper construction of S. 3 of the ordinance, the decision of the Bombay Government that the property was required for a public purpose was not a judicial or quasi-judicial decision, but an administrative act and the High Court of Bombay had, therefore, no jurisdiction to issue a writ of certiorari in respect of the order of requisition. In their dissenting judgment, Mahajan and Mukherjea JJ held the view that the Government of Bombay is a body of persons having legal authority to determine questions affecting the rights of subject and in deciding whether a land was required for public purpose ul s.3 of the Ordinance, it had to act judicially. The conditions necessary for the granting of a writ of certiorari were, accordingly satisfied and the High Court of Bombay had power to issue the writ.
9. The observations of Denning L. J. (supra) that the remedy by certiorari is never to be taken away by the statute, finds expression in Indian judicial decisions. Articles 323-A and 323-B provide for setting up Administrative Tribunals and other Tribunals for adjudication or trial of disputes in respect of recruitment and conditions of service of public servants and disputes with regard to other matters including levy, assessment collection and enforcement of any tax. Both these Articles exclude the jurisdiction of all courts except the jurisdiction of the Supreme Court under Article 136. The legality of ouster of jurisdiction of High Courts was considered by the Supreme Court in L. Chandrakumar v. UOI, (1997) 3 SCC 261 in a matter decided by the Central Administration Tribunal set up under Article 323-A. The Act constituting the Tribunal in S. 28 incorporated the provision of the Constitution providing for ouster of jurisdiction of courts except the Supreme Court under Article 136. The Apex Court was to decide whether the power to exclude jurisdiction of all courts runs counter to the powers of judicial review conferred on the High Courts under Article 226/227 and on the Supreme Court under Article 32 of the Constitution. It was held that such Tribunals could not be held to be substitute of the High Court for the purpose of exercising jurisdiction under Article 226/227 of the constitution. Following this judgment, the Court in RK lain v. U.O.I., 1993(4) SCC 119 held that judicial review applications lie to the High Court against judgment of CAT and only thereafter one can approach the Supreme Court. The procedure is based on the basic structure doctrine in relation to Art. 226, 227 of the Constitution which cannot be circumvented by any law which seeks to oust the jurisdiction of the High Court. National Tax Tribunal is a Tribunal set up under Article 323 B. The Act constituting the Tribunal having similar provision ousting the jurisdiction of High Courts is under challenge. With the view already taken by the Supreme Court in the matter, the sustainability of this part at least is doubtful.
10. Whether remedy of certiorari is available when remedy is prescribed in the relevant statute itself? The issue was considered by the Supreme Court in Commissioner of Wealth Tax, Hyderabad v. Trustees of H.E.H., (2003) INSC 193. As observed, it has been settled by a long catena of decisions that when a right or liability is created by a statute which itself prescribes the remedy or procedure for enforcing the right or liability, resort must be had to that particular statutory remedy before seeking the discretionary remedy under Article 226 of the Constitution. This rule of exhaustion of statutory remedies is, no doubt, a rule of policy, convenience and discretion and the court may in exceptional cases issue a discretionary writ of certiorari. Such cases are where there is complete lack of jurisdiction for the officer or Authority or Tribunal to take the action or there has been a contravention of fundamental rights or there has been a violation of rules of natural justice or where the Tribunal acted under a provision of law, which is ultra vires.
The Ministry of Labour and Employment, Government of India
has cleared the abovementioned scheme which modifies the Employees’ Provident
Fund Scheme, 1952. This scheme has enlarged the applicability to all non-Indians
employed in India and all Indians employed abroad.
A new category has been introduced of an ‘International
Worker’, defined to mean an Indian employee who has worked/or going to work in a
foreign country with which India has a social security agreement on reciprocal
basis. This is with the condition that the employee is eligible under the social
security agreement. International Worker also includes an employee, other than
an Indian employee, holding other than an Indian passport and working for an
establishment in India to which the PF Act applies. This scheme is however not
applicable to International Workers who is contributing to the Social Security
Schemes of his country of origin viz. Belgium, France and Germany with
whom, India has signed Social Security Agreements or Totalisation Agreements
thereby enjoying the status of a detached worker. This scheme is also applicable
to International Workers who are employed by third parties. These changes will
result in additional financial burden of 12% of base pay (8.33% towards
Provident Fund and 3.67% towards Pension Scheme) on the employees and a similar
amount (i.e. 12% of base pay) on the employer. Employers have to incur
additional compliance cost by way of filing returns with the Indian authorities
on a regular basis. This amendment would be effective once notified in the
gazette.
2. Clarification on Instruction No. 49 on FTWZ issues —
Instruction No. 71, dated 12 November 2010 (reproduced)
I am directed to refer to Instruction No. 49 dated 12 March
2010 of this Department and to amend the point no. (iv) of the above-mentioned
instruction to the extent that instrad of there being no limitation on units set
up in FTWZ located in sector specific SEZs to carry out trading and warehousing
activities in respect of any products, it has been decided that units in Free
Trade Warehousing Zones (FTWZ) in a Sector Specific SEZ can store goods required
for development of zone or setting up of units or for manufacturing and export/DTA
sale of goods and services or
finished products of the units in that particular sector-specific zone.
Yours faithfully
G. Muthuraja
Under Secretary to the Government of India
10. S 45. Beneficial ownership of the balance FSI and right
to use TDR was that of the members of the society. The members transferred the
rights and received consideration for such transfer.
Per N. V. Vasudevan :
Facts :
The assessee-society was the owner of land together with two
buildings situated thereon. The society had sixteen members who held, on
ownership basis, sixteen flats in the said buildings. It was possible to
construct additional flats on the existing buildings by utilising balance FSI of
the property and FSI that may be obtained from other properties under the TDR
scheme. The total area of the property was 1063.60 sq. mts., it was possible to
construct 11,448 sq. feet on the said property by procuring TDR FSI.
The society, at its Special General Body Meeting held on 15th
July, 2001 passed a resolution to the effect that the benefit of constructing
additional flats by utilising any FSI available on the said property and by
bringing in TDR/FSI belongs to the members equally. Each member thus became
entitled to 715.50 sq. feet by way of TDR/FSI. The society agreed that each
member would be entitled at their own costs to procure proportionate TDR/FSI and
to use his/her respective entitlement for constructing a new flat for himself or
each member may grant development rights to a common developer.
The developer vide agreement dated 29-8-2001 agreed to pay to
the society an amount of Rs.1,76,000 as well as carry out works of repairs and
improvements to the existing buildings and compound of the society in
consideration of the society permitting the developer to construct additional
floors from the entitlement of each of the members of the society.
The developers agreed to pay each of the members a lump sum
of Rs.7,00,000 as compensation for inconveniences and hardships faced or to be
faced by the members during and on account of additional construction. Further,
in consideration of the member granting development rights in respect of his/her
entitlement to the developers, the developers agreed to pay the member a lump
sum monetary consideration of Rs.7,20,000.
In the course of assessment proceedings u/s.147, the assessee
took the stand that by virtue of a resolution passed by the Managing Committee
of the society, the society has specifically authorised each of the members to
sell and transfer their proportionate rights in the FSI and development of the
building with the consent of the society, which means the society has renounced
its rights in favour of individual members and on the basis of this resolution
and upon renouncement of the rights in favour of individual members, the members
were fully authorised and having accepted the renunciation, have a legal
sanction to sell their proportionate right to the builders for development. The
income received by individual members is their individual income and the same is
not liable to be taxed in the hands of the society. The members had filed their
return of income offering to tax receipts on sale of their rights. The AO held
that since the society is the owner of the plot of land, the FSI/TDR is
available to the society and individual members cannot transfer the FSI/TDR
directly to the developers. He taxed the entire compensation received (including
amounts received by the members) in the hands of the assessee.
Aggrieved, the assessee preferred an appeal to the
Commissioner of Income-tax (Appeals) who upon considering the definition of the
term ‘society’ as defined in the Maharashtra Co-operative Societies Act and also
the fact that the Bombay Stamp Act provides for payment of stamp duty by each
member at the time of purchase of individual flat and that such registered
agreements are deemed to be conveyance, held that capital gains have to be taxed
in the hands of the members of the society who have accounted for the same in
their individual returns of income. He allowed the appeal filed by the assessee.
Aggrieved, the Revenue preferred an appeal to the Tribunal.
Held :
The Tribunal held that the order passed by the CIT(A) does
not call for interference. It held that the beneficial ownership was that of the
members of the society. It was the members who transferred the rights and
received consideration for such transfer. The Tribunal agreed with the view of
the CIT(A) holding the conclusion of the AO to the contrary to be not proper.
9. S. 143(3) read with S. 252 — De novo Assessment pursuant
to order of the Tribunal — Whether AO justified in enhancing assessed income
while doing de novo assessment — Held, No.
Per K. G. Bansal :
Facts :
The assessee had filed return of income declaring total
income of Rs.1,980. The income was assessed u/s.143(3) at Rs.10.19 lac. This
order was set aside by the Tribunal to the file of the AO for making fresh
assessment after taking into account evidences including the evidence in the
form of books of accounts. In pursuance thereof, the assessment was framed
determining the total income at Rs.40.64 lac. The major addition was on account
of share application money of Rs.38.84 lac. The CIT(A) on appeal deleted the
addition made on this count.
Before the Tribunal, the Revenue contended that when the
Tribunal restored the matter to the file of the AO with a view to take into
account all the evidences, the AO was well within his right to consider all
matters, including the issue regarding share application money, which was not
the subject-matter of appeal before the Tribunal.
Held :
The Tribunal noted that although it has all the powers to
decide an issue before it, in any manner, the accepted position of law is that
it has no power to enhance the assessment. In such a situation, the order of the
Tribunal restoring the matter to the file of the AO cannot be construed in a
manner as to grant power to the AO to include a totally new issue, which has the
effect of enhancing the income. Thus, what cannot be done directly, cannot be
done indirectly also. Accordingly, it dismissed the appeal filed by the Revenue.
8. S. 11 read with S. 12A(1)(b) — Non-filing of Auditor’s
Report in Form 10B — Whether AO’s action of denying exemption justified — Held,
No.
Per N. V. Vasudevan :
Facts :
The assessee was registered as a charitable institution
u/s.12A of the Act. During the year, the assessee had earned capital gain on the
sale of immovable property, interest income, dividend and donation. It filed
return of income declaring total income at Nil. The AO noticed that the assessee
had not filed an Audit Report in Form 10B. The AO issued notices u/s.143(2) and
u/s.142(1) and amongst others, called for a copy of Form 10B. Simultaneously,
the AO also summoned one of the trustees u/s.131. During the interview on
3-10-2008 – to one of the questions viz., ‘Was any Audit Report prepared in Form
No. 10B which could not be filed for any reason ?’ the reply of the trustee was
‘No. Since the same was not applicable, no Audit Report in Form No. 10B was ever
prepared.’
The assessee, in response to the notices issued by the AO,
filed its reply and along with the same, it also filed an audit report in Form
10B dated 11-10-2006.
On 3-12-2008, the AO issued show-cause notice as to why the
exemption claimed u/s.11 should not be denied to the assessee. In reply, the
assessee filed two affidavits — one from the trustee who was interviewed by the
AO and second from the auditor who had audited the accounts. In his affidavit,
the trustee stated that his reply that he was a computer software consultant and
not an expert in the field of accountancy and taxation, and therefore, did not
know about the audit report in Form 10B had not been correctly recorded. He
further affirmed that he could not see what was being recorded by the AO on his
laptop and he had signed the statement without reading the content. While the
auditor in his affidavit confirmed that he had audited the accounts as per S.
12A(1)(b) and had issued his report in Form 10B on 11-10-2006.
However, the AO rejected the assessee’s explanation as
according to him :
the statement recorded u/s.131 had evidentiary value;
no explanation was offered in respect of omission to file report along
with the return of income.
Accordingly, applying the provisions of S. 12A(1)(b), the
claim for exemption made u/s.11 was denied.
On appeal, the CIT(A) accepted the contention of the assessee
and allowed the appeal.
Before the Tribunal, the Revenue relied on the order of the
AO and submitted that the circumstances in which the Report was filed throw
doubts on the claim of the assessee that its books were duly audited as required
by the Act.
Held :
The Tribunal relied on the Calcutta High Court decision in
the case of CIT v. Hardeodas Agarwalla Trust, (198 ITR 511) where the audit
report obtained during the course of assessment proceedings was also accepted as
due compliance of law, and dismissed the appeal filed by the Revenue. In coming
to this conclusion, it also relied on the fact that along with the return, the
assessee had also filed the Auditor’s Report obtained under the Bombay Public
Trust Act. Thus, according to it, the plea of the assessee of bonafide omission
to file Form 10B should not be rejected.
7. S. 40A(3) read with S. 145(3) — Assessment made u/s.143(3)
read with S. 145(3) — No disallowance made u/s.40A(3) — Whether AO’s order could
be considered as erroneous — Held, No.
Per R. K. Gupta :
Facts :
The assessment was made by invoking provisions of S. 145(3).
Net profit @12% on contract receipts subject to allowance of depreciation and
interest to banks was adopted. The CIT found that disallowance to be made
u/s.40A(3) was not considered by the AO while applying net profit rate, hence,
his order was erroneous and prejudicial to the interest of the Revenue. The
submissions of the assessee were rejected.
Held :
The Tribunal noted that as per the Allahabad High Court
decision in the case of CIT v. Banwarilal Banshidhar, (229 ITR 229), once the
net profit rate is applied by invoking the provisions of S. 145(3), no further
disallowance can be made u/s.40A(3). Further, since no contrary decision was
available, it held that the initiation of proceedings by the CIT u/s.263 was not
justified.
S. 28 and S. 37(1) — Exchange loss arising on application
of AS-11 — Allowable as business loss/expenditure — Ultimate utilisation of
fund for investment purpose would not affect the al-lowability of loss.
Per B. Ramakotaiah :
Facts :
The assessee was a film actress. She had shown her
professional receipts to the tune of Rs.6.12 crore and declared a total income
of Rs.6.04 crore. During the course of assessment the AO noticed that the
assessee had claimed foreign exchange loss of Rs.7.25 lacs. As per the
assessee the loss was arising out of exchange rate difference in the EEFC
account. The assessee had a large amount of dollar fund in the account at the
beginning of the year and after deposits during the year into the same
account, it was closed and converted into Indian Rupees. On conversion, due to
reduction in the value of dollar vis-à-vis Rupee, there was a
loss/reduction in the professional income accounted, which was claimed as a
loss.
This method of accounting, which was based on Ac-counting
Standard 11, was consistently followed by the assessee and the Department had
also assessed the profits earned therefrom in earlier years. However, during
the year, the AO disallowed the exchange loss, holding that the funds after
conversion were utilised for investing in tax relief bonds/fixed deposits.
Thus, since according to the AO, the utili-sation
of foreign currency balance was not for profes-sional purposes, the exchange
loss was disallowed.
Before the Tribunal the Revenue contended that the
Assessing Officer’s finding was correct that the amount was not utilised for
professional activities. It also relied on the decision of the Calcutta High
Court in the case of invest import and contended that the capital loss cannot
he allowed.
Held :
According to the Tribunal the facts do indicate that the
assessee had deposited her professional receipts in the said EEFC account.
Secondly, as noted by the CIT(A), the assessee was consistently following the
Mercantile system of accounting and also AS-11. Further, according to it, the
ultimate utilisation of the professional receipts after its conversion from
dollar to Indian Rupee was not material (relevant). The subsequent utilisation
of the amount cannot convert such loss as capital loss. According to it, the
Calcutta high Court decision relied on by the revenue, was distinguishable by
facts and hence, cannot be applied to the facts of the assessee’s case.
If further observed that the CIT(A) also erred in
up-holding that it was a notional loss. This was an actual loss after
conversion of balance in US $ into Indian Rupee. Accordingly, it was held that
the loss was an allowable loss against professional receipts.
S. 28 and S. 45 — Gains arising to the society on sale of
50% of the areas constructed by the builder, at his own cost, by utilising
additional FSI received by society from BMC in lieu of roads taken over by BMC
are chargeable to tax as Capital Gains.
Per R. K. Gupta :
Facts :
The assessee co-operative society was formed in 1971. The
land on which the building of the society stood had roads on two sides. The
BMC acquired some part of the society’s land in 1991 and again in 1994 for the
purposes of road widening and as compensation therefor granted additional FSI
to the society which the society decided to utilise on existing building.
Accordingly, the society entered into an Agreement with the builder pursuant
to which the builder agreed to put up the entire construction at his own cost
and in turn would be entitled to 50% of the area of the constructed flats. The
society was entitled to the balance 50% of the area of the constructed flats.
The construction was completed in 1999. Upon completion of construction, the
flats coming to the share of the society were sold for Rs.1,06,18,000. The
sale consideration of flats was returned by the society as long term capital
gains. The AO reassessed this amount under the head ‘Income from Business’ on
the ground that the society did not have funds for construction and therefore
it indirectly has obtained loan from the builder and has instructed the
builder for appointing architect for getting various sanctions of plans and
approvals to construct the flats. These factors, according to him, were
indicative that the society was engaged in a trade with profit motive.
Aggrieved, the society preferred an appeal to the CIT(A)
where it contended that the income be assessed as long term capital gains or
alternatively, if it is assessed as business income, then, in terms of S.
45(2), fair market value of FSI on date of conversion should be taken as cost
for computing profits of the said business. The CIT(A) held that the income
was chargeable to tax as ‘Income from Capital Gains’.
Aggrieved, the Revenue preferred an appeal to the Tribunal.
Held :
There is no evidence on record that the amount spent by the
assessee was loan. The builder was to put up construction at its own cost and
in turn would be entitled to 50% of the area of the constructed flats and
after completion of the project the remaining 50% of the area shall be given
to the society which can be sold by the society. BMC had allowed FSI to the
society in lieu of land taken over by the BMC. The Tribunal concurred with the
findings and decision of the CIT(A) viz. that there were no business
considerations in undertaking the transaction by the assessee, the assessee
could have either sold FSI or utilised it by constructing additional areas; by
deciding to utilise it in construction of additional areas it had maximised
its gains but maximisation of gains cannot by itself impress a transaction
with the character of business; the society did not have profit sharing
arrangement with the builder; the transaction under consideration cannot be
held to be a business transaction.
The Tribunal dismissed the appeal filed by the Revenue.
S. 50C in the event of the assessee contending that
valuation as done by Stamp Valuation Authority is not acceptable to him and
asking the Assessing Officer to make a reference to the Valuation Officer, it
is mandatory on the part of the Assessing Officer to make such a reference
notwithstanding that the assessee has not filed an appeal against such
valuation.
Per P. Madhavi Devi :
Facts :
The assessee, a partnership firm, filed its return of
income declaring total income of Rs.1,75,108. The assessee had sold its
factory premises for a consideration of Rs.15,05,000 and had shown profit on
sale of factory premises amounting to Rs.10,94,721. The market value of the
factory premises as per stamp valuation authorities was Rs.43,98,500. The
assessee drew the attention of the AO to the observations of the Bombay High
Court while admitting the petition filed by Practicing Valuers Association
and Others v. State of Maharashtra, (Writ Petition No. 2027 of 2001) and
contended that the valuation given in the stamp duty ready reckoner cannot be
universally accepted. It was also submitted that it had not preferred an
appeal against the valuation as done by Stamp Valuation Authorities since the
purchaser had already paid stamp duty. However, the assessee requested the AO
to make a reference to the valuation cell of the Department as per the
provisions of S. 50C. The AO held that the reference to the valuation officer
is optional and since the assessee had not objected to the value adopted by
the stamp valuation authority there was no need to refer the matter to the
valuation officer. He, accordingly, adopted the value of the property at
Rs.43,98,500 and computed short term capital gain at Rs.35,89,503.
The CIT(A) confirmed the order passed by the AO.
Aggrieved, the assessee preferred an appeal to the Tribunal
where it mainly argued that the matter be sent back to the file of the AO with
a direction to refer the same to the valuation officer for valuing the
property at market rate. It was also pointed out that the assessee was not the
owner of the land but was only a lessee and capital gain has arisen on
transfer of leasehold rights. It was also contended that in the case of
assignment of rights after obtaining necessary permission, S. 50C is not
applicable.
Held :
The assessee had transferred leasehold rights and had
itself offered capital gain on the same. S. 50C is a special provision for
determining full value of consideration in certain cases. The assessee while
making the claim before the AO has to satisfy him that the valuation adopted
by the stamp valuation authority is not based on sound criteria. In such a
case, the AO is bound to refer the matter to the DVO for arriving at the fair
market value of the property. The assessee had vide its letter filed with the
AO relied upon two decisions to the effect that the valuation given in the
stamp duty ready reckoner cannot be universally adopted. In such cases, it is
necessary for the AO to refer the matter to the DVO. The Tribunal has in
ITO v. Smt. Manju Rani Jain, 24 SOT 24 (Del.) and Mehraj Baid v. ITO,
(2008) 23 SOT 25 (Jodh.) held that the word ‘may’ used in S. 50C should be
read as ‘should’ and the AO has no discretion but to refer the matter to the
DVO for the valuation of the property. The Tribunal remanded the issue to the
file of the AO with a direction to refer the valuation of the property to the
DVO and determine the value in accordance with law.
S. 271(1)(c) — Penalty for concealment of income —
Additions/disallowances sustained by the appellate authority — Whether
sufficient ground for levy of penalty — Since full disclosure of particulars
of transactions were made and additions were on ac-count of different view
adopted, penalty cannot be imposed.
Per R. K. Panda :
Facts :
The assessee was a company incorporated in 1983. During the
year it had not carried on the business and it had returned a loss of Rs.1.41
crore. On account of the flood which took place on 26/27 July in Mumbai, all
its records and documents got destroyed and it was not able to produce
documents asked for by the AO. However, a copy of the police complaint and the
certificate issued by the Chartered Engineer evaluating the bad impact of the
flood and loss of material were furnished by the assessee. The AO however,
completed the assessment u/s.144 determining income at Nil after setting off
carried forward loss of Rs.11.15 lacs. The major disallowances made were as
under :
à
Stock valuation : A plot of land of Rs.6.56 crore, held as stock in
trade, was mortgaged to a bank. In order to recover its dues, the bank had
initiated the process of the sale of plot and the sale price mentioned was
Rs.5.2 crore. In view of the same, the assessee had valued the plot of land
at the said price thereby resulting into a loss of Rs.1.35 crore. The AO was
not satisfied with the explanation and disregarded the downward valuation of
stock;
à
Depreciation : Since the Company was defunct, according to the AO, it
cannot be allowed depreciation of Rs.9.74 lacs.
The assessee did not prefer any appeal when the AO’s order
was upheld by the CIT(A). The AO initiated penalty proceedings and after
hearing, held that the assessee was in default u/s.271(1)(c) read with
Explanation 4(a). He accordingly, levied penalty of Rs.54.46 lacs being the
minimum penalty @100% of tax sought to be evaded.
The CIT(A) on appeal cancelled the penalty levied as
according to him, no inaccurate particulars were furnished by the assessee and
the disallowance was not based on any independent evidence brought on record
by the AO.
Before the Tribunal the Revenue submitted that the
non-filing of any appeal against the assessment order amounted to the
acceptance by the assessee that it had furnished inaccurate particulars.
Further, relying on the decision of the Supreme Court in the case of
Dharmendra Textiles Processors & Others, it contended that mens rea was not an
essential condition for levying of penalty.
Held :
The Tribunal noted that the assessee had made full
disclosure of all the particulars relating to the transactions in its accounts
filed with the Income-tax Department. The additions were made merely because
the AO did not share the views of the assessee. It was not disputed that the
plot of land was treated as stock in trade and was sold at a loss. As regards
claim for depreciation, it was noted that there were diverse decisions, both
for and against the assessee when the business was discontinued. As regards
the other expenses disallowed, it agreed with the assessee that in order to
maintain the corporate entity, certain expenses need to be incurred. Thus,
according to it, the decision of the Supreme Court in the case of Dharmendra
Textiles was not applicable to the facts of the case of the assessee. Further,
according to it there was sufficient force in the assessee’s submission that,
in view of the huge amount of brought forward losses, no appeal was filed
against the CIT(A)’s order. For the reasons stated as above, it was held that
the CIT(A) was justified in cancelling the penalty.
ACIT v. Honeywell Technology Solutions Lab
Pvt. Ltd.
ITAT ‘A’ Bench, Bangalore
Before Shailendra Kumar Yadav (JM) and
A. Mohan Alankamony (AM)
ITA Nos. 344 & 345/Bang./2009
A.Ys. : 2003-04 & 2004-05. Decided on : 4-8-2009
Counsel for revenue/assessee :
Vishweshwar Mudigonda/Preeti Garg
S. 70 read with S. 10A — Exemption u/s.10A was of income
earned without setting off of loss of non-STPI unit — Loss of the non-STPI
unit is allowed to be carried forward.
Per Shailendra Kumar Yadav :
Facts :
The assessee, a wholly owned subsidiary of Honeywell, USA,
was engaged in the business of performing high quality software development,
offer testing and support services to other units of the Honeywell group. One
of its units was a 100% software development export oriented undertaking under
the Software Technology Parks Scheme of Government of India. One of the issues
before the tribunal was whether the exemption u/s.10A was of the income earned
without setting off of loss of the non-STPI unit.
Held :
Analysing the provisions of S. 10A, the tribunal noted
that :
à
The provisions of S. 10A were placed under Chapter III which only relates to
‘Incomes which do not form part of total income’;
à
The word ‘such’ refers to the profits and gains of the undertaking which is
engaged in the export of articles or things or computer software; and
à
The word ‘an’ which qualifies the word ‘undertaking’ means that it refers to
a single undertaking.
Referring to the provisions governing computation of
business income, it was noted that as per S. 29, profits and gains of business
are to be computed in accordance with the provisions contained u/s.30 to
u/s.43D. Thus, the provisions of S. 10A do not form part of the sections
mentioned in S. 29. It further noted that the provisions of S. 70 govern
setting off of a loss from one source against income from another source under
the same head of income. Therefore, it observed that since S. 10A was not
forming part of the sections mentioned in S. 29, business losses of the
undertaking whose income was not exempt u/s.10A cannot be set off against the
profits of the undertaking whose income is exempt u/s.10A. Further, relying on
the decisions of the Bangalore tribunal in the cases of Yokogawa India Ltd.
and in the case of Nous Infosystems Pvt. Ltd., the tribunal upheld the
decision of the CIT(A) directing the AO to allow exemption u/s.10A without
setting off of loss of non-STPI unit and consequently, allowing the carry
forward of such losses of non-STPI unit.
Cases referred to :
1. ACIT v. Yokogawa India Ltd., 111 TTJ 548/13 SOT
470 (Bang.);
2. Nous Infosystems Pvt. Ltd. v. ITO, (ITA No.
1042/ Bang./2007 dated 3-6-2008)
S. 145 read with S. 35E of the Income-tax Act, 1961 — Change
in method of accounting — Assessee engaged in the business of prospecting and
exploring ores and minerals changed its earlier method of accounting of
capitalising the expenditure incurred to charging the same to profit and loss
account — Whether the change was bona fide — Held, Yes.
Per K. G. Bansal :
Facts :
The assessee was engaged in the business of prospecting and
exploring ores and minerals. As per its method of accounting, expenditure
incurred on such activities was capitalised. During the year under appeal the
assessee changed its accounting policy in respect of the same and the
expenditure incurred on such activities was charged to profit and loss account.
The AO did not accept the change for the following reasons :
Change was not bona fide and it was made only to get over the provisions of S.
35E;
New method of accounting led to mismatch of the expenditure with the receipts;
Business of the assessee i.e., mining minerals and ores, had not commenced;
To
align its accounting policy with its parent company was not a good ground to
justify the change.
The CIT(A) on appeal came to the conclusion that the assessee
was in the business of exploration, and not mining as held by the AO. Further,
being satisfied that the change made in accounting policy was bona fide, the
CIT(A) allowed the assessee’s appeal.
Before the Tribunal the Revenue contended that the assessee
had changed its policy only to frustrate the provisions contained in S. 35E of
the Act and submitted that the order of the AO be restored.
Held :
Referring to the main objects as per the Memorandum of
Association of the assessee company, the Tribunal noted that the assessee
company was formed to carry on the business of prospecting or exploring the ores
and minerals. According to it, the conclusion got further strength from the FIPB
approval received by the assessee, which was only for carrying out exploration
activity. Thus, the Tribunal held that the mainstay of AO that the business of
the assessee had not commenced and therefore, the expenses cannot be charged to
profit and loss account failed. Further, the Tribunal held that to align the
accounting policy with that of one’s parent, could be a valid ground and it did
not agree with the AO that it was not a good ground to permit the change.
According to it, the change would lead to more appropriate preparation and
presentation of the financial statement for the reason that the losses will not
unnecessarily be carried forward as work-in-progress, when there was none.
S. 254 of the Income-tax Act, 1961 (‘the Act’) — When the
fact of pendency of Department’s appeal was not pointed out at the time of
hearing of the appeal of the assessee, can it be said that the Tribunal has
committed an error while hearing only the assessee’s appeal — Held, No.
Per Vijay Pal Rao :
Facts :
The Tribunal in ITA No. 731/Mds./2007 passed an order on
15-2-2008 in an appeal filed by the assessee, whereas the appeal filed by the
Department was not disposed of together. The assessee had made a petition with
the registry of the Tribunal for clubbing of both the appeals and being heard
together. Since the appeal of the Department was not heard along with the
assessee’s appeal, the Revenue filed this miscellaneous petition contending that
there was an error in the order of the Tribunal dated 15-2-2008. The Revenue
pointed out that the Apex Court in the case of Vijai Int. Udyog has held that
cross appeals of the assessee and the department should be heard together and if
the Departmental appeal is not heard along with the assessee’s appeal, then the
order passed in the assessee’s appeal is clearly erroneous. Thus, it was
contended that the appeal was disposed of by overlooking the mandatory direction
of the Apex Court and the order dated 15-2-2008 of the Tribunal may be recalled
and heard along with the appeal of the Department.
Held :
The Tribunal noted that admittedly, the fact of pendency of
Department’s appeal was not pointed out at the time of hearing of the appeal of
the assessee. The Tribunal observed that the appeal of the Department was
allowed by the Apex Court in the case of Vijai Int. Udyog, because both the
parties consented to the rehearing of the case. It also noted that the Apex
Court has in para 13 of the decision in the case of Vasant Manganlal Chokshi
held that unless and until the Department had pointed out to the Tribunal that
its appeal was also pending, the Tribunal cannot be said to have committed an
error by adjudicating only the assessee’s appeal. The Tribunal also noted that
though the order of the Apex Court in the case of Vasant Manganlal Chokshi was
by way of dismissal of SLP, it was a case of dismissal with reasons. As the Apex
Court had in the case of Kunhayammed & Others held that when the Apex Court
passes an order in SLP and also gives reasons, then such order would also
constitute binding precedent on the lower Courts. Accordingly, the Tribunal held
that it has not committed an error while hearing only the assessee’s appeal. The
Tribunal found that there was no error apparent from the order of the Tribunal.
The miscellaneous petition was rejected.
Cases referred to :
1. Commissioner of Sales Tax v. Vijai Int. Udyog, (152 ITR
111)(SC)
2. Commissioner of Customs v. Vasant Manganlal Chokshi,
(204 ELT 5) (SC)
3. Kunhayammed & Others v. State of Kerala & Another, (245
ITR 360) (SC)
4. V. M. Salgaocar & Bros. (P) Ltd. v. CIT, 243 ITR 383
(SC)
S. 22 and S. 28 of the Income-tax Act, 1961 (‘the Act’) —
Whether income earned by a company from leasing information technology park,
constructed by it on land belonging to the company (which land was initially
taken on lease and was later on acquired) which construction was financed by
borrowings from banks secured on immovable property of the company, and
providing various amenities and services is chargeable to tax under the head
‘Income from Business’ and not ‘Income from House Property’ as assessed by the
AO — Held, Yes.
Per K. K. Gupta :
Facts :
The assessee developed the land allotted to it by Karnataka
Industrial Areas Development Board and constructed an information technology
park thereon. The information technology park consisted of two large blocks of
buildings with four floors in each block, service block, cafeteria, library,
gymnasium, utilities for staff, rest rooms, security, ATM, and Geodesic Dome.
The assessee provided/installed in the said information technology park
landscaping and construction of steel reinforced cement roads and high-security
compound wall fitted with motorised gate, huge water tank fitted with high
pressure-pumps, reservoir and sump, borewell, sewage treatment plant, lifts,
rainwater harvesting system, high-standard electrical installation including
transformer and generators, air conditioning, fire fighting and smoke detector
equipments, etc. Various amenities and services were provided in the nature of
maintenance of staff, monitoring of the generator room, water supply, etc. Land
and infrastructure were provided by the assessee by obtaining loan from a bank
which had mortgaged the immovable property and had also taken personal
guarantees of the Directors. The assessee received rental income from persons
with whom it entered into an agreement for leasing the information technology
park. The assessee considered rental income to be chargeable under the head
‘Income from Business’. The Assessing Officer was of the view that the lease
deed has been entered into by the assessee as absolute owner of the property
with the tenant and therefore placing reliance upon the decisions of Podar
Cement P. Ltd., East India Housing and Land Development Trust Ltd. and Bhoopalam
Enterprises, he assessed rental income under the head ‘Income from House
Property’. The Commissioner of Income-tax (Appeals) upheld the action of the
Assessing Officer. The assessee preferred an appeal to the Tribunal.
Held :
The Tribunal observed that the assessee was incorporated with
the sole intention of developing technology park for which it obtained leasehold
land from the Karnataka Industrial Areas Development Board and also obtained
loan from Union Bank of India for constructing super structure thereon. Such
conduct according to the Tribunal could not be considered as investment in a
property for earning rental income only. The Tribunal noted that since the lease
of the property was shown as part of the business activity, the income received
therefrom cannot be said as income received as a land owner but as a trader.
According to the Tribunal, if the property is taken on lease and thereafter
developed and leased it, is part of the business activity of the assessee as an
owner, and the income has to be treated as business income. The Tribunal found
that the activity was done by the assessee as a business venture and was in
accordance with the main object of the company. It observed that the intention
of any prudent businessman is to earn profit at a maximum level and investment
made in the business never lost its main intention for which the assessee was
incorporated. Since the entire cost of construction was met by way of obtaining
loan, it was found to be a risk as adventure in the nature of trade. According
to the Tribunal, the conversion from leasehold to ownership leads to a pure
commercial proposition resulting in a business venture carried out by the
assessee company. The Tribunal was of the view that the assessee’s providing
amenities, such as ward and watch, maintenance of common area, maintenance of
light in the common area, supply of water, providing lift, installation of
electric transformer, power to the lessees, providing generator, overhead water
tanks, maintenance of drainage, etc. clearly establish that the entire activity
is carried on in an organised manner to earn profit out of investment made by
the assessee as a commercial venture. The Tribunal noted that the case law cited
by the jurisdictional High Court in the case of Balaji Enterprises had
considered the Apex Court decision in the case of S. G. Mercantile Corporation.
It found the case law relied upon by the learned CIT(A) (Bhoopalan Commercial
Complex & Industries Pvt. Ltd.) to be distinguishable on facts. It found force
in the submission of learned counsel that the term ‘business’, as defined in the
provision of infrastructure facility as provided in sub-clause (iv) of S. 80IA
clearly explains the development and operation of the technology park, has not
been controverted by the authorities below. It noted that in the assessee’s case
the main intention was to exploit the immovable property by way of commercial
application and there was no room for doubting that the intention of the
assessee was in providing software development facility in the Electronic City
in the industrial area within the limits of Bangalore South District, Bangalore.
According to the Tribunal, any activity undertaken with a profit motive would
amount to business and not a mere return on investment when it is exploited. It
found the facts of the assessee’s case to be similar to those of Balaji
Enterprises and also S. G. Mercantile Corporation. In view thereof, the Tribunal
directed the AO to assess the rental income as from business.
Cases referred to :
1. East India Housing and Land Development Trust Ltd. v.
CIT, 42 ITR 49
9 Article 11 of India Japan modified :
Notification No. 96/2008 dated 8-10-2008.
Article 11 deals with interest clause in the tax treaty. It
has been modified to alter the definition of Central Bank and financial
institution wholly owned by the Government to replace Japan Bank for
International Co-operation with International business unit of Japan Finance
Corporation.
8 Clarifications on TDS from salary for the
financial year 2008-09 : CBDT Circular no. 9/2008 dated 29-9-2008.
The CBDT has issued a detailed annual Circular on tax
deduction at source from salaries, which outlines estimations to be made while
computing salary income, the deductions available, the procedural aspects,
calculation of TDS on arrears of salary, etc.
This scheme has been notified with effect from 1 April 2008.
The highlights of the scheme are as under :
National Housing Board, scheduled bank and a registered housing company are
defined as approved lending institutions.
Either a single individual or a couple of whom one of them is of sixty years
of age or more can mortgage their residential house property located in India,
with the approved lending institutions to obtain a loan, provided the house is
owned and free from any encumbrance.
The approved lending institution would enter into a loan agreement with the
person mortgaging his property.
The loan would be given either as periodic payments to be mutually decided or
a lumpsum payment limited to 50% of the loan amount sanctioned.
The loan under reverse mortgage shall not be granted for more than 20 years
from the date of the loan agreement.
In case of foreclosure of loan, the person or his legal heirs would be liable
for repayment of principle amount of loan along with interest to the approved
lending institution.
6 Procedure for filing TDS returns with
insufficient deductee PAN
The CBDT has made it mandatory for deductors to file TDS/TCS
statements with a threshold limit of PAN of deductees. To facilitate deductors
who face problem in filing TDS returns because of insufficiency of PAN of the
deductees and also to accommodate the deductees who have intimated their PAN,
the Department has suggested that a deductor can file a return containing
deductee details, who have provided valid PAN. It can subsequently file a
correction return with details of remaining deductees. The challan amount of TDS
needs however to be of the complete amount.
S. 80IB of the Income-tax Act, 1961 (‘the Act’) — Whether
business of the assessee, which is producing masala of different varieties, is
manufacture of goods or is only processing of goods — Held, it is manufacture of
goods.
Per Rajendra Singh :
Facts :
The assessee, engaged in business of masala, claimed for the
relevant assessment year, deduction u/s.80IB of the Act by treating the business
as industrial undertaking for manufacture and sale of masala. The Assessing
Officer (AO) noted that the assessee was only purchasing raw material in the
form of different spices which were grinded and mixed and filled in pouches and
then sold. The AO placed reliance on the judgments of the Supreme Court
(sic-Calcutta High Court) in the case of Apeejay Plantation and also in the case
of Indian Hotels and on the judgment of Madras High Court in the case of Sacs
Eagles Chicory and held that the activity of the assessee amounts to processing
and not manufacture and accordingly he disallowed the claim of deduction
u/s.80IB. Before the CIT(A) it was contended by the assessee that it was
manufacturing various types of masala, such as chivda masala, pickle masala,
etc. which involved different formulas and process; the raw material i.e., raw
spices underwent changes and the final product was masala which was sold in the
market as a distinct and different commercial product; each type of masala was
different in taste and uses; the manufacturing process involved various
activities such as cleaning of various raw spices, roasting, frying, polishing,
mixing, boiling, pulping, grinding, etc. which are done with the help of
machinery. Reliance was placed by the assessee on the judgment of the Supreme
Court in the case of Aspinwall & Co. Reference was also made to the decision of
the Mumbai Tribunal in the cases of Pankaj Jain and Comet Foods & Metals Ltd.
The CIT(A) being satisfied with the explanation, held that the end product in
this case was completely different from the raw material and therefore the
activity carried on by the assessee was manufacture and not processing. He also
observed that the Department had allowed the
claim of manufacture in earlier years. Accordingly, he allowed the claim for
deduction u/s.80IB treating the business as manufacture of masala. Aggrieved,
the Revenue preferred an appeal to the Tribunal.
Held :
It is settled legal position that producing articles whether
by any labour or by machine will amount to manufacture if the final product is
different from the input and is known as a commercially different product in the
business parlance. The assessee is producing different variety of masala, such
as chiwda masala, pickle masala, etc. which are commercially known products in
the market and these products are different from the different spices used in
the process. In case of the assessee, different raw spices which are inputs are
combined in different proportions and undergo different processes to produce the
final product which is masala and which is different from the input raw
material. The assessee is producing different types of masala using different
formula with the help of input spices and these products are commercially known
products, such as garam masala, mutton masala, pav bhaji masala and have
different uses. The Tribunal noted that the judgment of the Supreme Court in
Aspinwall & Co. supports the case of the assessee and that the decision of the
Tribunal in the case of Tirupathi Microtech Pvt. Ltd. is in favour of the
assessee. The judgments relied upon by the AO viz. Appejay Plantation, Indian
Hotels and Sacs Eagles Chicory were found to be distinguishable. Accordingly,
the Tribunal held that the assessee is a manufacturing concern entitled to
deduction u/s.80IB.
Cases referred to :
1. Indian Hotels Co. Ltd. & Ors. v. Income Tax Officer &
Ors., (245 ITR 538) (SC)
2. Aspinwall and Co. Ltd. v. Commissioner of Income-tax,
(251 ITR 323) (SC)
3. Apeejay Plantation (206 ITR 367) (Cal.)
4. Commissioner of Income-tax v. Sacs Eagles Chicory, (241
ITR 319) (Mad.)
S. 14A of the Income-tax Act, 1961 — Disallowance of
expenditure incurred to earn exempt income — Where no nexus is established
between the expenditure and the income earned, can the expenditure be disallowed
— Held, No.
Per Deepak R. Shah :
Facts :
The assessee was engaged in the business of export and import
of iron, steel and allied products and as commission agent. During the year it
earned dividend income of Rs.78.05 lacs which was claimed as exempt u/s.10(33).
According to the AO, the provisions of S. 14A were applicable and as the
assessee had not furnished any evidence to establish that no expenses had been
incurred in earning the dividend income, it was held that 5% of dividend income
was incurred for earning dividend income.
The CIT(A) on appeal held that the AO had rightly applied the
provisions of S. 14A, as incurring of expenditure had to be inferred from the
accounts. According to it, if no expenses were debited against the exempt
income, the AO was justified in estimating the same.
Before the Tribunal, the Revenue relied on the Mumbai Bench
Tribunal decision in the case of Citicorp Finance (India) Ltd. and contended
that the orders of the lower authorities be upheld.
Held :
According to the Tribunal, the pre-requisite for disallowance
u/s.14A is that the expenditure should have been incurred in relation to exempt
income. In the given case, the assessee had all along claimed that it had not
incurred any expenditure. It further noted that the AO had not been able to
correlate any expenditure, which could be said to have been incurred for earning
exempt income. According to it, the decision in the case of Citicorp Finance
(India) Ltd. relied on by the Revenue was based on the provisions in Ss.(2) and
(3) which were inserted by the Finance Act, 2006 w.e.f. 1-4-2007. According to
it, the insertion of the said provisions was not retrospective in nature. Hence,
the ratio as laid down in the said Tribunal decision cannot be applied to the
case of the assessee. Further, relying on the decision of the Delhi Tribunal in
the case of Wimco Seedling Ltd., the Tribunal allowed the appeal of the assessee.
Cases referred to :
1. ACIT v. Citicorp Finance (India) Ltd., 12 SOT 248 (Mum.)
2. Wimco Seedling Ltd. v. DCIT, 107 TTJ 267 (Del)
Note :
Attention of the readers is drawn to the insertion of Ss.(2)
and (3) to S. 14A by the Finance Act, 2006 w.e.f. 1-4-2007 and the Rule 8D which
prescribes the method in which expenditure incurred to earn exempt income could
be determined.
S. 79 and S. 115JB of the Income-tax Act, 1961 — In arriving
at the book profit u/s.115JB, the lower of the amount of brought forward loss or
unabsorbed depreciation as appearing in the books of account of the assessee has
to be reduced, irrespective of the fact whether the same is allowable u/s.79 or
not.
While computing the book profit u/s.115JB for A.Y. 2003-04,
the Assessing Officer held that since there was a substantial change in
shareholding in A.Y. 2000-01, the provisions of S. 79 were attracted. Therefore,
the brought forward loss/depreciation up to A.Y. 2000-01 is not to be carried
forward for computing the business income as well as for the purposes of S.
115JB. The Assessing Officer also held that there is no direct case law on the
subject, but logic demands that prohibition u/s.79 shall apply both to normal
computation u/s.28 to u/s.43C as well as u/s.115JB. The CIT(A) upheld the
Assessing Officer’s order.
The Tribunal held in favour of the assessee. The Tribunal
noted as under :
(a) Clause (iii) of the Explanation to S. 115JB(2)
specifically provides that the amount of loss brought forward or unabsorbed
depreciation as per the books of account is to be reduced from the book profit
and it is lower of the two amounts that is to be reduced. It is the amount
which is as per the books of accounts that is to be reduced and not as per the
income-tax records which has been computed under the provisions of the Act.
(b) The admissibility of loss as per other provisions of
the Act has nothing to do with the computation of book profit and that is made
clear by the provisions of clause (iii) of the Explanation. If it is appearing
in the books of accounts and not set off in the subsequent year’s profit, the
effect is to be given in the impugned year of profit while computing the book
profit of the assessee.
S. 67A of the Income-tax Act, 1961 — Share of loss of company
in an AOP could be set off against other income of the company.
For the relevant year, the assessee-company, which was a
member of an AOP, set off its share of loss from the AOP against its other
income. The claim of the assessee was rejected by the Assessing Officer on the
following grounds :
that S. 67A is not applicable in the assessee’s case.
the provisions of S. 67A can only be applied in those cases where a member of
an AOP or a BOI is not a company or a co-operative society or a society
registered under the Societies Registration Act.
since the assessee is a company, its total income cannot be computed as per
provisions of S. 67A and as such, the loss booked by the assessee cannot be
allowed to be set off against the other income of the assessee.
The CIT(A) also disallowed the assessee’s claim.
Since there was a difference of opinion between the members,
the matter was referred to the Third Member u/s.255(4).
The Third Member, relying on the decision in the case of
CIT v. Salem District Urban Bank Ltd., (1940) 8 ITR 269 (Mad.), held in
favour of the assessee. The Third Member noted as under :
(a) The purpose of S. 67A is to compute the share of
income/loss in the AOP/BOI. If all the provisions are read together, the
entities specified in the parenthesis in S. 67A would qualify the AOP/BOI and
not the member of such AOP/BOI.
(b) Reference to S. 2(17) indicates that the expression
‘AOP’ includes a company or a cooperative society or a society mentioned in
parenthesis in S. 67A.
(c) The purpose of S. 67A is to determine the share of
income/loss in the profits/losses of the AOP since share is to be included in
the income of the member of AOP for rate purpose as per the provisions of S.
86. However, in the case of a company, cooperative society or society, the
income is not apportioned amongst the members constituting these entities.
Such entities may have income, but may not declare dividend and thus nothing
would be includible in the income of the members of such entities. On the
other hand, these entities may not have income, still they may declare
dividend out of their accumulated profits. Therefore, despite there being no
income in the hands of such entities, the dividend declared by them would be
assessable as income in the hands of members. Therefore, considering the
different schemes of taxation in respect of income received by members from
such entities, the Legislature has excluded these entities from the ambit of
the expression ‘AOP/BOI’.
(d) Had the Legislature not excluded the entities specified
in the parenthesis, it would have resulted in double taxation — once as per
share determined u/s.67A read with S. 86, and again when dividend income is
distributed by such entities to its members.
(e) If the contention of the Revenue is accepted, then it
will lead to absurd result not intended by the Legislature and also will be
detrimental to the interest of the Revenue itself. If it is held that the
words in the parenthesis qualify the word ‘member’ and not the AOP/BOI, then
the company or a cooperative society or a society or other entities in the
parenthesis would not be liable to pay any tax in respect of their share of
income in the AOP/BOI as per the provisions of S. 86, even though such share
of income is includible in the total income. In such cases, the companies or
societies by themselves may not carry on any business and may form various
AOPs/BOIs and may get away by paying lesser rate of tax on such AOP/BOI, since
AOP/BOI (having members whose shares are determinate or known) would be
chargeable to normal rate of tax applicable to individuals. The interpretation
put forth by the Revenue would give birth to legal device for evading the tax
by the entities specified in the parenthesis. Such absurd result could never
have been intended by the Legislature.
(f) It is a well-settled rule of interpretation that
provisions of a statute should be interpreted in a manner which augments the
object behind the legislation and not in a manner which frustrates the object.
S. 10BA of the Income-tax Act, 1961 — Amount of credit on
account of DEPB/Duty Drawback (DDB) has to be included as profits of the
business of the undertaking for the purpose of S. 10BA(4) and the said amount of
credit of DEPB or DDB will not enter into the total turnover or export turnover
of the undertaking for the purpose of calculating profits derived from the
business of the undertaking of the assessee within the meaning of Ss.(4).
For the relevant assessment year, the Assessing Officer
rejected the assessee’s claim for deduction of DEPB and DDB u/s.10BA. The
CIT(A), however, allowed the claim for deduction.
The Tribunal upheld the CIT(A)’s order and allowed the
deduction u/s.10BA. In arriving at this decision the Tribunal relied upon the
decisions in the case of B. Desraj v. CIT, (2008) 7 DTR (SC) 54 and
Kerala State Co-op. Marketing Federation Ltd. & Ors. v. CIT, (1998) 147 CTR
(SC) 29/231 ITR 814 (SC).
The Tribunal noted as under :
(a) By the use of expression ‘subject to’ in Ss.(1) of S.
10BA, it is clear that the provision contained U/ss.(4) shall override the
provisions of Ss.(1) of S. 10BA.
(b) Once the assessing authority has found the assessee
eligible for deduction u/s.10BA(1), then the only scope available to the
assessing authority was to find out the quantum of the deduction as per
prescription of Ss.(4) of S. 10BA and no other method or manner could be used,
as the answer is available from the scheme contained in the special provision
of S. 10BA itself, where allowability of deduction was by mandate subjected to
such provisions contained therein.
(c) When the profits are derived from manufacture and
export of eligible articles, the solitary business activity of the
undertaking, then the incentive such as DEPB/DDB irrespective of its real
character or source has to be taken into account and has to be included as
profits of the business of the undertaking, in particular when the expression
used in Ss.(4) of S. 10BA is the ‘profits of the business of undertaking’.
(d) The Legislature in its wisdom did not use the
expression ‘profit’ in singular, but used it as ‘profits’ in plural. Thus,
there can be profits not only by exporting the eligible articles or things,
but also can be those profits which are related to export of such articles or
things, which in the present case are DEPB and DDB determined with relation to
export sales effected by these assessees.
S. 234D of the Income-tax Act, 1961 — S. 234D, inserted
w.e.f. 1-6-2003, being substantive in nature has no retrospective effect — It is
applicable only from A.Y. 2004-05 and cannot be charged for earlier assessment
years even though assessments are pending as on 1-6-2003.
A Special Bench was constituted to answer the following
question :
“Whether, in the facts and circumstances of the case,
interest u/s.234D should be charged from A.Y. 2004-05 or with reference to
regular assessment framed after 1-6-2003, irrespective of the assessment years
involved or irrespective of the date when refund was granted ?”
The Special Bench, relying on the decisions in the following
cases, held that the provisions of S. 234D are substantive and they cannot be
retrospective :
(a) J. K. Synthetics Ltd. v. CTO, (1994) 119 CTR
(SC) 222
(b) Padmasundara Rao (Decd.) & Ors. v. State of Tamil
Nadu & Ors., (2002) 176 CTR (SC) 104; (2002) 255 ITR 147 (SC)
(a) The argument that Legislature has brought this
provision just to fill the lacuna in the law and, therefore, these provisions
should be construed retrospective cannot be accepted, more particularly when
these provisions have been inserted on the statute w.e.f. 1-6-2003 and not
with retrospective effect.
(b) The Legislature has specifically mentioned the date of
applicability i.e., 1-6-2003 and the Legislature was not incompetent to
make retrospective provision, if it was so intended.
(c) In a fiscal legislation, if a provision is brought for
imposing any liability, the normal presumption will be that it has no
retrospective operation and it is a cardinal principle of tax law that law to
be applied is the law which is in force in the assessment year, unless
otherwise provided expressly or by necessary implication.
(d) The provisions regarding levy and collection of
interest even if construed as forming part of the machinery provisions are
substantive law for the simple reason that in the absence of contract or
usage, interest can be levied under law and it cannot be recovered by way of
damages for wrongful detention of amount.
(e) Thus, the contention of the Revenue that the provision
of S. 234D being under Chapter XVII under the head ‘Collection and recovery’
should be construed to be a procedural or machinery section and, therefore,
should be applied retrospectively has to be rejected.
(f) If the provisions of S. 234D are substantive, then the
same cannot be held to be retrospective, unless specifically provided in the
statute itself.
(g) While applying Heydon’s Rule, (mischief rule of
purposive construction) a word of caution is necessary that text of statute is
not to be sacrificed and the Court cannot rewrite the statute on the
assumption that whatever furthers the purpose of the Act must have been
sanctioned and, therefore, the Court cannot add to the means enacted by the
Legislature for achieving the object of the Act. Moreover, the application of
Heydon’s Rule itself does not confirm retrospective operation of a provision
brought under that rule. This is irrespective of the fact that for application
of that rule it is a condition precedent to find out that there existed a
mischief. Mere fact that earlier there was no provision to charge interest on
the refund issued on processing of return cannot by itself be described as
‘mischief’ or ‘defect’.
S. 120, S. 124(3) and S. 148 of the Income-tax Act, 1961 —
Reassessment proceedings initiated by AO not having jurisdiction — Reassessment
completed in continuation of such initiation by AO having jurisdiction —
Reassessment was invalid.
For the relevant assessment year, notice u/s.148(1) was
issued by an Assessing Officer having no jurisdiction over the assessee. On
protest by the assessee within one month of such notice, the case was
transferred to the Assessing Officer having jurisdiction over the assessee and
this Assessing Officer finally passed the reassessment order. The assessee
contended before the CIT(A), inter alia, that the notice u/s.148(1) was
devoid of proper jurisdiction and, therefore, void ab initio.
The CIT(A), however, upheld the reassessment order.
The Tribunal, relying on the decisions in the following
cases, held that the reassessment was invalid :
(c) Anant Mills Ltd. (In Liquidation) v. CIT, (1993)
109 CTR (Guj.) 231; (1994) 206 ITR 582 (Guj.)
(d) P. A. Ahammed v. Chief CIT, (2006) 200 CTR
(Ker.) 378; (2006) 282 ITR 334 (Ker.)
(e) CIT v. Metal Goods Manufacturing Co. (P) Ltd.,
(1992) 197 ITR 230 (All)
(f) K. V. Kader Haji (Decd.) through LR v. CIT,
(2004) 189 CTR (Ker.) 313; (2004) 268 ITR 465 (Ker.)
(g) ITO v. Ashoke Glass Works, (1980) 125 ITR 491
(Cal.)
The Tribunal noted that the issuance of notice u/s. 148(1) by
the first Assessing Officer was without jurisdiction and, therefore, invalid.
The assessment framed on that basis by the jurisdictional Assessing Officer was
also invalid and, therefore, cancelled.
The Revenue’s stand for protection u/s.124 was also not
allowed by the Tribunal. It noted as follows :
(a) Invoking of S. 124(2) would arise if there was any
chance of validation of proceedings by virtue of S. 124(3) which is not
available to the Assessing Officer in the present case, either under clause
(a) or under clause (b) of S. 124(3).
(b) Protection of the proceedings and assessment thereafter
on account of failure of the assessee to object within the time allowed
u/s.124(3) is available to specific proceedings and not to every proceeding.
Erroneous assumption of jurisdiction cannot, in general, be validated. Such
validation is specific in S. 124(3).
S. 40A(3) — Cash payment exceeding prescribed limits — S.
40A(3) read with Rule 6DD — Purchases in cash towards supplies of carcass in
business of processing and export of meat and meat products — Allowable under
clause (l) of Rule 6DD — Also as per clause (f) of Rule 6DD and, therefore, no
disallowance could be made u/s.40A(3).
The assessee-company was engaged in the business of
processing and export of meat and meat products. The assessee had made all the
purchases in cash and had regularly withdrawn huge cash from bank and
ostensibly made payments for supplies of carcass. The Assessing Officer was of
the view that the payments made in cash would be hit by provisions of S.
40A(3). On appeal, the Commissioner (Appeals) opined that since the payments
had been made to agents in respect of purchases of carcass, there was no room
to interpret clause (f) of Rule 6DD in favour of the assessee. However, so far
as the assessee’s claim for exclusion under clause (l) of Rule 6DD was
concerned, the Commissioner (Appeals) held that payments in cash to agents for
purchases of products of animal husbandry could not be disallowed u/s.40A(3).
On the Revenue’s appeal, the ITAT held that :
(1) The AO had disallowed the claim of the assessee in
view of the decision of the Allahabad High Court in the case of CIT v.
Pehlaj Raj Daryanmal, (1991) 190 ITR 242. The decision by the Allahabad
High Court was rendered in 1991 whereas clause (l) was inserted by the IT
Amendment Rules in the year 1995. Therefore, the ratio of the decision of
the Allahabad High Court would not be applicable to the facts of the instant
case.
(2) The contention of the department, that there was no
agent, did not sound good because the AO himself had disallowed the payments
for the reason that they were not made directly to producers/cultivators but
through intermediaries or agents.
(3) Though the Commissioner (Appeals) had rejected the
claim under clause (f), yet, in view of Rule 27 of the Income-tax (Appellate
Tribunal) Rules, 1963, the claim of the assessee was allowable as per clause
(f) of Rule 6DD.
Accordingly, the order of the Commissioner (Appeals) was to
be confirmed.
S. 32 — Whether road is eligible for depreciation in
category of ‘building’ at rate applicable to buildings — Held, Yes.
The assessee-company was incorporated for construction,
development and maintenance of roads at various places in Tamil Nadu as per
the agreement entered into with the Government of Tamil Nadu. Its claim for
depreciation on roads at the rate of 25% (as plant and machinery), was
rejected by the Assessing Officer as road did not figure in the depreciation
schedule. He further observed that roads were not buildings, entitled to
depreciation. On appeal, the Commissioner (Appeals) upheld the Assessing
Officer’s view.
On second appeal by the assessee, the Tribunal held that :
(1) Merely because some optical fibre lines or connection
lines had been laid, the road could not get converted into a plant.
(2) The assessee-company was entitled to collect fixed
amount of toll per vehicle for which it could have created any kind of
barrier for collection of such toll. If the assessee had chosen to install
automated toll plaza, then mere construction of one toll plaza would not
change the nature of the asset which remained the road.
(3) After the A.Y. 1988-89, all the appendices,
prescribing the table of rates of depreciation had the note that building
would include road. Therefore, the assessee would become entitled to
depreciation on the road in the category of ‘building’.
In these circumstances, the order of the Commissioner
(Appeals) was set aside and the Assessing Officer was directed to allow
depreciation on the road at the rate applicable to the buildings.
Collection of tax at source u/s.206C — Collection of octroi
under Bombay Provincial Municipal Corporation Act, 1949 was neither for
parking lot nor at toll plaza nor for mining or quarrying nor it was for
purpose of business, and, therefore, collection of octroi by agent appointed
by assessee would not fall in S. 206C(1C).
The assessee-corporation had appointed an agent for
collection of octroi, as levied by the assessee under the Bombay Provincial
Municipal Corporation Act, 1949. The assessing authority held that the
assessee was to collect tax at source on the octroi which was in the nature of
‘Toll Plaza’ within meaning of S. 206C(1C). On appeal, the Commissioner
(Appeals) confirmed the order of the assessing authority.
On second appeal by the assessee :
(1) On a close reading of the legislation like the Bombay
Provincial Municipal Corporation Act, 1949, the Constitution, the Tolls Act,
1851 and the Supreme Court and the High Courts’ decisions and various
dictionary meanings, it could be said that ‘toll’ is a different thing than
‘octroi’. Octroi is normally a tax levied on entry of goods into local
areas, whereas ‘toll’ is a tax levied as compensation for the purpose of
temporary use of land or allowing passage of vehicles through the land.
(2) In the instant case, the contract of the
assessee-corporation with the agent for collecting octroi, was different
from clause (e) of the said section dealing with ‘toll’.
Accordingly, the orders of the Commissioner (Appeals) as
well as the Assessing Officer were to be vacated and the appeal of the
assessee was to be allowed.
Deductions u/s.80-IB — Conditions stipulated U/ss.(2) of S.
80-IB are to be fulfilled only if eligible assessee is an industrial
undertaking within meaning of Ss.(3) to Ss.(5) of said section — Where
assessee was engaged in business of carrying out scientific research and
development and was not an industrial undertaking and had been approved by
Government of India, for claiming benefit of deduction u/s.80-IB(8A),
conditions of Ss.(2) of S. 80-IB were not required to be fulfilled by it.
The assessee-company had been approved as an R&D company by
the department of scientific and industrial research. It claimed deduction
u/s.80-IB(8A). The Assessing Officer denied the deduction u/s.80-IB(8A) by
observing that :
(1) The assessee had not claimed deduction u/s.80-IB(8A)
in the initial year,
(2) Subsequent claim made by it in the relevant
assessment years could only lead to the surmise that its business was formed
by splitting up, or the reconstruction of a business already in existence;
(3) The certificate by the Chartered Accountant in Form
10CCB was not produced.
On appeal, the Commissioner (Appeals) held that the
assessee did not fulfill the conditions of S. 80-IB(2)(iii) as it was not
manufacturing or producing any article or thing, and, accordingly, upheld the
view of the Assessing Officer on a different count.
On second appeal by the assessee, the Tribunal held that :
(1) The four conditions stipulated U/ss.(2) of S. 80-IB
are to be fulfilled only if the eligible assessee is an industrial
undertaking within the meaning of S. (3) to S. (5) of said Section, as the
case may be.
(2) If the assessee is not an ‘industrial undertaking’
but is otherwise eligible for deduction under any of other sub-sections of
S. 80-IB, then there is no requirement for importing the conditions
stipulated in Ss.(2) of S. 80-IB which are applicable to industrial
undertakings.
(3) Since in the instant case, the assessee was engaged
in the business of carrying out scientific research and development and had
been approved by the Government of India, for claiming the benefit of
deduction u/s.80-IB(8A), the conditions of Ss.(2) of S. 80-IB were not
required to be fulfilled by it.
Based on the above observations, the Tribunal directed the
Assessing Officer to allow deduction as claimed by the assessee.
20. Provision of warranty created on accrual basis
is an allowable expenditure.
S. 263 — Assessing Officer adopted one of the
permissible view — Such order cannot be said to be erroneous.
Notional income cannot be considered for deduction
u/s.10B as the assessee is the same.
Facts:
The assessee created provision for warranty on
accrual basis on the last day of each quarter. The actual warranty-related
expenses were adjusted against the provision. The assessee claimed the provision
for warranty as expenditure in its computation of income. The Assessing Officer
allowed the assessee’s claim. The CIT invoked S. 263 and disallowed the
provision for warranty.
The main contention of the assessee was that
provision for warranty was made on the basis of past experience. It placed
reliance on the decision of Wipro-GE Medical Systems Ltd. v. DCIT, (81 TTJ 455)
(Bang.).
Held:
Following the decision of CIT v. Wipro GE Medical
Systems, (supra), the provision for warranty was held to be an allowable
expenditure.
The Tribunal further held that the Assessing
Officer had adopted one of the permissible views. An order is not erroneous or
prejudicial to the interest of Revenue, unless the view taken by the AO is
unsustainable in law.
Facts:
The assessee company had two units — SCS & TCM. SCS
unit’s income was exempt u/s.10B. The company maintains a common bank account
where the amounts received by both the units are deposited. As such no separate
balance sheets for both the units were prepared. The amounts received were
identified by the invoices in the name of respective units and necessary entries
passed in accounts maintained in SAP. Hence it was natural that the funds earned
by S. 10B unit were also utilised by non-10B unit. Based on the fund
utilisation, a monthly cross-charge interest at a suitable rate of interest was
made. Hence, the surplus funds which were available from the EOU have been used
by the other unit. The assessee booked a notional interest income in the account
of EOU unit and claimed expenditure u/s.10B for the said interest income.
Held:
The interest income booked by the assessee is only
a cross entry. As such the assessee has not earned any interest income. The
assessee is the same. There is no relationship of borrower or lender. Such
interest derived on notional basis cannot be considered for the purpose of
deduction u/s.10B.
Note : Though the judgment as regards second issue is
against the assessee, it discusses an important aspect of notional income which
cannot be taxed as the assessee remains the same.
19. Deeming fiction in S. 50C in respect of the
words ‘full value of consideration’ applicable only to S. 48 — Meaning of full
value of consideration in Explanation to S. 54F(1) not governed by S. 50C — For
S. 54F, sale deed value is the full value of consideration.
Facts :
The assessee had sold a plot of land for sale
consideration of Rs.10.81 lac and declared a long-term capital gain of Rs.5,558.
The AO invoked provisions of S. 50C and the full consideration was taken as
Rs.19,24,987 and reworked capital gain accordingly.
The assessee has purchased a flat within a period
of two years from the date of transfer of the plot. The assessee has made total
investment of Rs.21,14,986, out of which Rs.16.74 lac was paid before the date
of filing of return for concerned assessment year. Therefore, before the learned
CIT(A), the assessee contended that the assessee may be allowed relief u/s.54F
by considering the full value of the consideration as shown by the assessee in
the sale deed as compared to the full value of consideration adopted by the AO
in view of S. 50C of the Act. The learned CIT(A) rejected the claim of the
assessee by observing that the assessee had not claimed S. 54F deduction at the
time of filing of return of income or during the course of assessment
proceedings. Further, the learned CIT(A) held that the availability of deduction
u/s.54F is subject to fulfilment of various conditions and those conditions were
not fulfilled by the assessee.
Held :
The deeming fiction as provided in S. 50C in
respect of the words, ‘full value of consideration’ is to be applied only for S.
48 of the Income-tax Act. The words ‘full value of consideration’ as mentioned
in other provisions of the Act are not governed by the meaning as provided in S.
50C. For the meaning of full value of consideration as mentioned in different
provisions of the Act except in S. 48, one will have to consider the full value
of consideration as specified in the sale deed.
For claiming exemption u/s.54F, net consideration
received upon transfer of original asset is compared with the cost of the new
asset. In Explanation to S. 54F(1), it is mentioned that net consideration means
the full value of consideration received or accruing as a result of the transfer
of the capital asset as reduced by any expenditure incurred wholly and
exclusively in connection with such transfer. The meaning of full value of
consideration in Explanation to S. 54F(1) will not be governed by meaning of
words ‘full value of consideration’ as mentioned in S. 50C. In the instant case,
the cost of new asset is not less than the net consideration as per sale deed,
thus the whole of the capital gains will not be charged even if the capital
gains have been computed by adopting the value adopted by the stamp registration
authority.
The decision of Goetze (India) Ltd. v. CIT, (2006)
204 CTR (SC) 182 restricts the power of the AO to entertain the claim for
deduction otherwise than by revised return and did not impinge on the power of
the Tribunal u/s.254 of the Act. In the instant case, the assessee has claimed
the deduction u/s.54F before the learned CIT(A) and the learned CIT(A) has
entertained such claim. Therefore, the issue of claim can be considered.
18. Security deposit received from the licensee
with a view to secure due performance of its obligations under the
leave-and-licence agreement is in the nature of loan and is in the capital field
— Forfeiture of such security deposit upon premature termination of lease does
not partake the character of income as a capital receipt cannot be said to have
converted itself into a trading receipt on signing of the termination agreement.
Facts :
The assessee was into the business of warehousing,
property leasing, trading in chemical and textile auxiliaries. The assessee
entered into a leave-and-licence agreement with Concord Motors Ltd., a
subsidiary of Tata Motors Ltd. for a period of two terms of three years each. A
lock-in period of five years and six months was provided in the agreement. The
lease rent was treated as business income. During the assessment year under
consideration, the agreement was terminated prematurely by the licensee when 16
months were still remaining out of the lock-in period. On termination of the
lease, the assessee forfeited the interest-free security deposit received by it
from the licensee which was for an amount of Rs.1.50 crore under a separate
security deposit agreement and Rs.5 lakh under a leave-and-licence agreement.
Further, the assessee had received an amount of Rs.24,37,500 as damages for
premature termination from the licensee. This amount was paid on account of
hardship and inconvenience suffered by the assessee as damages. The assessee
treated entire receipt as capital receipt. The AO treated it as revenue receipts
and as taxable income. Upon further appeal, the CIT(A) upheld the order of the
AO.
Held :
A perusal of the terms of agreements clearly shows
that the security deposit is a capital receipt. The deposit is not in the nature
of advance for goods or services, nor could it be qualified as in relation to
the rental component. It is in the nature of loan and is in the capital field.
On a perusal of the termination agreement, it is clear that the forfeiture of
security deposit in question is not in lieu of rental payments and the assessee
is not in default. The forfeiture of security deposit does not partake the
character of income, because a capital receipt cannot be said to have converted
itself into a trading receipt on signing the agreement.
In a decision of Morely (Inspector of Taxes) v.
Tattersall, (1939) 7 ITR 316 (CA), it is clearly laid down that the quality and
nature of receipt for income-tax purpose are fixed once and for all when it is
received and that it does not change its character subsequently. This decision
has been followed in the case of K.M.S. Lakshmanier & Sons v. CIT, (1953) 23 ITR
202 (SC) and it has been observed that one of the conditions is that it is to be
adjusted against a claim arising out of a possible default of a depositor,
cannot alter the character of the transaction or the fact that the purpose for
which the deposit is made is to provide a security for the due performance of a
collateral contract, cannot invest the deposit with a different character. It
remains a loan of which the repayment in full is conditioned by the due
fulfilment of obligations under the collateral contract.
In a subsequent decision of CIT v. T.V. Sundaram
Iyengar & Sons Ltd., (1996) 222 ITR 344 (SC), the above decision of Morely
(Inspector of Taxes) v. Tattersall was considered and held that if an amount is
received in the course of trading transaction, even though it is not taxable in
the year of receipt as being of revenue character, the amount changes its
character when the amount becomes the assessee’s own money because of limitation
or by any other statutory or contractual right. In the case on hand, the
original receipt was in the nature of a loan and never had a revenue character
as it was not at any time a trading receipt as in the case of T.V. Sundaram
Iyengar & Sons.
Further, in the case of Mahindra & Mahindra Ltd. v.
CIT, (2003) 261 ITR 501 (Bom.), it is held that subsequent waiver of principal
amount of loan was not assessable u/s.28(iv) of the Act.
Therefore, the forfeiture of security deposit
amounting to Rs.1.55 crore is not taxable. However, the payment of lump sum
consideration of Rs.24.37 lac is in lieu of the rents and is in the revenue
field unlike the remission of a loan liability. Therefore the same was rightly
taxed as such.
17. S. 80IB(10) — Merely because some flats are
larger than 1500 sq. feet, the assessee will not lose the benefit in its
entirety — Only with reference to the flats which have area more than the
prescribed area the assessee will lose the benefit — While computing the
built-up area of 1500 sq. feet for the purpose of deduction u/s.80IB(10), the
mezzanine floor and common areas are to be excluded.
Facts :
The assessee firm was engaged in the construction
and real estate business. In the return of income filed, the assessee claimed
deduction u/s.80IB(10) in respect of the projects developed and built by it. The
Assessing Officer (AO) in a survey action found that some of the flats in the
project undertaken by the assessee, in respect of which deduction u/s.80IB(10)
was claimed were more than 1500 sq. feet. He held that the assessee was not
entitled to the benefit of S. 80IB(10).
Aggrieved, the assessee preferred an appeal to
CIT(A) who confirmed the disallowance made by the AO.
Aggrieved, the assessee preferred an appeal to the
Tribunal.
Held :
The Tribunal held that the assessee is entitled to
deduction u/s.80IB(10) to the extent of flats the built-up area of which is not
more than 1500 sq. feet. In respect of penthouses, the built-up area of which
was more than 1500 sq. feet, the Tribunal held that they may be excluded for
exemption. The Tribunal held that in the light of the decision of the Special
Bench in the case of Brahma Associates, merely because some flats are larger
than 1500 sq. feet the assessee will not lose the benefit in its entirety. It
held that the assessee will lose the benefit only with reference to the flats
which have area more than the prescribed area. It also held that while
considering the built-up area of 1500 sq. feet for the purpose of exemption
u/s.80IB(10), the mezzanine floor and common areas are to be excluded. It
directed the AO accordingly.
16. S. 194C and S. 194I — Payment made by an
assessee for hiring vehicles for transportation of its employees qualifies for
TDS u/s.194C.
Facts :
The assessee entered into agreements with various
transport service providers. Under the agreements entered into, the service
provider was to provide transport service at particular locations for
transportation of the assessee’s employees to different destinations and
locations mentioned in the agreement. The transport service provider had to
provide vehicles along with the requisite staff and relevant facilities, full
maintenance and repairs of vehicles, etc.
The assessee deducted income-tax u/s.194C on
payments made under the above-referred agreements. The Assessing Officer was of
the view that the payments under the above-referred agreements were covered by
provisions of S. 194I. The AO held the assessee to be in default as per
provisions of S. 201(1) and also charged interest u/s.201(1A) for all the
assessment years.
Aggrieved, the assessee preferred an appeal to
CIT(A) who held the contract entered by the assessee with the transport service
provider to be covered by Explanation 3 to S. 194C. He held the assessee should
not be treated as an assessee in default u/s.201(1) as well as also not liable
for levy of interest u/s.201(1A).
Aggrieved, the Revenue preferred an appeal to the
Tribunal.
Held :
The Tribunal upon going through the agreements
entered by the assessee noted that the assessee was not required to provide
anything, but was availing the services of the transport for picking up and
dropping of its employees from its offices at different locations to the places
of its clients. It observed that though as per the agreements, the vehicles
provided for the requirements of the assessee were dedicated but it is not a
case of hiring of vehicles only without other facilities. It observed that in
the case of the assessee, all the facilities along with the vehicles were to be
provided by the transport service provider and he was under the obligation to
replace the vehicles as well as the driver and other staff after running certain
hours. It also noted that each vehicle was provided appropriate number of
drivers and time directives to enable the vehicle to be operated 24 hours a day
and 7 days per week. The service provider was responsible for ensuring all legal
and operational obligations. Thus, it was a kind of wet lease, wherein the
assessee was utilising the transport services provided by the service provider
without making any arrangement of its own, but all the arrangements were the
responsibility and obligation of the service provider.
The Tribunal noted that the CBDT has in para 8(ii)
of Circular No. 681, dated 8-3-1994 clarified that transport contract would be
in addition to contract for transportation of loading and unloading of goods;
also covers contracts for plying buses, ferried, etc. along with the staff. It
noted that the Board has also considered this issue in Circular No. 558, dated
28-3-1990 in paragraph 3. It also noted that in Circular No. 715, dated 8-8-1992
the CBDT has in answer to question no. 6 clarified that the provisions of S.
194C shall apply when a plane or a bus or any other mode of transport is
chartered by one of the entities mentioned in S. 194C of the Act. It held that
the classification of vehicles as Plant for the purposes of claiming
depreciation cannot be stretched to determine the nature of services provided
which is otherwise clear from the agreement between the parties. It noted the
observations of the Bombay High Court in the case of Indian National Ship Owners
Association and Others v CIT, (TDS).
Upon going through paragraphs 56.2 and 56.3 of
Circular No. 3 of 2008, dated 12-3-2007 dealing with Explanatory notes on
provisions of the Finance Act, 2007, it held that the provisions of S. 194I are
confined to payment for rent on hiring of land or building including factory
building, furniture or fittings, but not for transport vehicle and other mode of
transportation, particularly when the same is in the nature of providing and
availing transport services. It also held that the expression plant and
machinery used in explanation to S. 194I refers to only plant and machinery used
by the assessee in the business of hiring them, but not the hiring of transport
service.
Moonbeam Finvest Lease Ltd. v. ITO, Ward-5(4), New
Delhi
A.Y. : 1998-99. Dated : 31-1-2008
Reassessment u/s.147 — When the assessee has made full and
true disclosure of all the facts to the AO, the assessment cannot be reopened
on the same ground of failure to disclose all the material facts. Further,
once the assessee has disclosed all the material facts, the proviso to S. 147
cannot be applied and hence reopening is invalid beyond 4 years from the
relevant assessment year.
Facts :
The assessee’s return for A.Y. 1998-99 was processed
u/s.143(1)(a). In the course of assessment proceedings, the details of ‘Lease
Equalisation Account’ charges were asked for by the AO The assessee submitted
his reply and assessment was completed u/s.143(3). On 7-3-2005 the AO reopened
the assessment by issuing notice u/s.148 on the ground of failure on the part
of the assessee to disclose fully and truly all the material facts. The
assessee challenged the reopening of the assessment on the ground of mere
change of opinion as well as on the ground that it was barred by limitation as
notice was issued after 4 years from the end of relevant A.Y. The CIT(A)
confirmed the action of AO. On appeal to Tribunal, it held that the duty of
the assessee was to make full and true disclosure of all material facts and
the AO had to decide what inference can be drawn therefrom. If assessee had
disclosed all the material facts, reopening could not be justified as it would
amount to mere change of opinion on the part of the AO. Since, in the instant
case the AO was satisfied with the explanation of the assessee at the time of
original assessment, it was not allowed to him to reopen the assessment on the
same ground. Further, as there was no failure on the part of the assessee to
disclose all the facts, proviso to S. 147 could not be applied and notice
u/s.148 could not be validly issued beyond 4 years from the end of relevant
assessment year.
S. 50C — When the stamp valuation authority has accepted
the consideration declared by the assessee in the sale deed, there is no
question of once again referring the matter to Departmental Valuation Officer
(DVO) u/s.50C.
Facts :
The assessee had sold certain land at the rate of Rs.
220.81 per sq.yd. (total consideration Rs.16.34 lakhs) which rate was accepted
by stamp valuation authority. However, according to AO the value applicable to
the land as per Punjab State Rules, was at the rate of Rs.500 per sq.yd.
Hence, he referred the matter to DVO thus determining full value of
consideration at Rs.72 lakhs and capital gains at Rs.62.40 lakhs. On appeal to
CIT (A), it confirmed the order of the AO.
On appeal to Tribunal, it held that S. 50C comes into play
only when there is valuation at a higher value for stamp valuation purposes by
the State Authority than declared by assessee in sale deed. When there is such
difference noticed, valuation adopted by stamp valuation authority has to be
substituted with the sale consideration of such property mentioned in the sale
deed. In the instant case, the value of sale consideration was accepted by the
stamp valuation authority as the property was registered with the rate of
Rs.220.81 i.e. rate at which sale of land was made. When the stamp
valuation authority has accepted the consideration declared by the assessee in
the sale deed, there can not be any question of once again referring the
matter to Departmental Valuation Officer (DVO) u/s.50C.
Ashok Grih Udyog Kendra (P.) Ltd. v. ACIT-VI,
Kanpur
A.Y. : 2000-01. Dated : 11-4-2008
Penalty u/s.271(1)(c) — When the explanation offered by the
assessee was bona fide but assessee could not establish its case for deduction
in quantum proceedings that would not automatically become a case for levy of
penalty for concealment or furnishing of inaccurate particulars of income.
Facts :
The assessee company filed its return of income for A.Y.
2000-01 claiming an expenditure of Rs.2.37 lakhs as LTC paid to an employee
under the head travelling expenses. The AO disallowed the expenditure on the
ground that the expenditure had not been incurred for the purposes of
business. Further, it was also contended by the Department that if expenses
were incurred on account of travelling of the employee, no TDS had been
deducted and also that the employee was closely related to the director of the
company and hence the expenditure was disallowable u/s.40A(2)(b) as well. The
AO also imposed penalty u/s.271(1)(c) for claiming wrong deduction. The CIT(A)
confirmed the action of AO. On appeal to Tribunal regarding the allowability
of the expenditure, it confirmed the action of AO. Thereafter the assessee
preferred appeal for imposition of penalty u/s.271(1)(c). The Tribunal held
that there was only difference of opinion regarding the allowablility of
expenditure between assessee and department. Although, the disallowance of
expenditure has been upheld by the Tribunal, the department has never
challenged the genuineness of expenditure. It is well settled law that
findings in the assessment proceedings are relevant but not conclusive in
penalty proceedings because the considerations that arise in penalty
proceedings are different from those that arise in the assessment proceedings.
In the instant case, the assessee had disclosed all the material facts
necessary for assessment. Consequently, although the expenditure is
disallowed, the penalty u/s. 271(1)(c) for concealment or furnishing of
inaccurate particulars of income cannot be imposed.
S. 80-I r/w S. 80-IA — Whether where an old business is
carried on by the assessee and commensurate with the growth of the business, new
units are established, benefit of S. 80-I/80-IA will be available to a unit or
new unit, if said unit is in the nature of ‘undertaking’ — Held, Yes; Whether a
unit qualifies to be called an industrial undertaking when it undertakes
production or manufacture of articles or things in its own right and produces
such articles or things by itself as a separate and independent unit — Held,
Yes.
Facts :
The assessee had been engaged in the business of production
of empty hard gelatine capsules and their sale to pharmaceutical companies. The
manufacturing activities were carried out by the assessee with the help of
capsule manufacturing machines. In the relevant assessment year, the assessee
had seventeen capsule manufacturing machines installed in four separate
undertakings. It claimed deduction u/s.80-I and u/s.80-IA in respect of its
undertakings.
The AO noticed that the departmental authorities in a survey
u/s.133A at the factory premises of the assessee-company had found that all the
four undertakings were located in the same premises of the factory and all of
them were involved in the production of capsules; that the source of power for
all the units was one, inasmuch as there was one electricity bill for the
factory; that air-conditioning plant for all the units was common; and that
certain ancillary activities, pre and post-manufacturing were common. He held
that all the four undertakings, which were claimed by the assessee to be
separate and independent of each other were essentially one undertaking. He
therefore concluded that undertakings in question could not be regarded as
separate and independent for the purpose of deduction u/s.80-I and u/s.80-IA
and, accordingly, denied the deduction claimed by the assessee.
On appeal, the CIT(A) held that though all the machines and
undertakings involved in the manufacturing of the same article, i.e.,
capsules, were located in the same premises, yet the area of each of the four
undertakings was clearly demarcated and separated from each other; that though
the main source of power in the entire factory was common, yet the power
consumed by each machine was clearly and separately recorded; that though
centralised air-conditioning was provided to all the undertakings, it could be
shutoff for any undertaking without affecting the others; the supply of raw
materials was monitored machinewise and under-takingwise; in a nutshell, each of
the undertaking was working independently of the others. He, therefore, held
each of the undertaking to be separate and independent, and to be producing
capsules in its own right. He, therefore, allowed assessee’s claim for deduction
u/s.80-I and u/s.80-IA.
On Revenue’s appeal, the Tribunal made the following
observations :
1. A perusal of S. 80-I and S. 80-IA establishes that the
notion of ‘undertaking’ is a core jurisdictional element for the application
of S. 80-I and S. 80-IA. The other conditions stipulated can be satisfied only
when there is an ‘undertaking’. The undertaking should be new, in the sense
that it should have begun to manufacture or produce specified articles or
things after the prescribed time schedule.
2. Application of S. 80-I/S. 80-IA to new industrial
undertakings started for the first time by the assessee is usually devoid of
any difficulties. Controversies arise where the old business is being carried
out by the assessee and the new activity is launched by him establishing new
plants and machinery by investing substantial funds to produce the articles or
things which are the same as those from of the old business or to produce some
distinct marketable products
which may feed the old business. It is the general contention of the Revenue
in these cases that establishment of a new undertaking manufacturing the same
product is not a new undertaking eligible for tax incentives. Benefit under
the said Sections is available to a unit or a new unit only if it is in the
nature of an ‘undertaking’.
3. The term ‘undertaking’ has not been statutorily defined
in the Income-tax Act, and the crucial question of whether a unit is to be
considered as an undertaking is left to be decided by the Tribunals/Courts.
The Tribunal further observed that a unit qualifies to be an undertaking when
it undertakes production or manufacture of articles or things in its own right
and produces such articles or things by itself as a separate or independent
unit.
4. The CIT(A) on examination of the material on record had
held that the units in question were well-integrated units producing capsules
on their own, and had a separate and distinct identity of their own, which had
not been shown to be incorrect or based on no material. The Department had
also not rebutted the assessee’s claim that it had treated each undertaking as
separate and independent in its accounts. It was also not the case of the
Department that any of the negative tests laid down in S. 80I(2) was attracted
in this case. Therefore, the CIT(A) had decided the issue correctly.
Therefore, the appeal filed by the Revenue was liable to be dismissed.
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By implementing CAATs, you avoid the latency, cost and
project management challenges associated with a traditional BI deployment, and
enjoy unparalleled speed to benefits.
CAATs transform business intelligence from being a ‘Decision
Support System’ to a ‘Decision-Making System’. CAATs make business intelligence
pervasive across the retail business by impacting the top line and bottom line
performance of the business.
CAATs take on a whole new revolutionary role in retail
analytics where the tool is used for continuous monitoring by process owners
rather than the erstwhile traditional continuous auditing by Internal Auditors.
The significance of the CAAT is greatly accentuated by the understanding of the
underlying business process by the process owner.
Retail analytics can deliver immeasurable business benefits :
Merchandising & Assortment :
It’s a well known fact that shoppers prefer to visit places
that offer them the maximum options, deals and not to forget a good shopping
experience.
As a retailer, one does everything to retain their customers
— providing excellent customer service, providing variety, running regular
promotions, ensuring products have been priced appropriately and not to forget
ensuring customers are satisfied. While one aims at providing a range of
products, it is not possible to offer everything.
Here is where merchandise and assortment planning comes in.
CAATs provide merchandisers an analytic framework to plan and analyse business
activities related to merchandise and assortment planning.
Compare historical, planned or forecasted data against actual data to define
and optimise merchandise plans
Analyse merchandise hierarchy across departments, categories, product lines
and Stock Keeping Units (SKUs)
Increase customer loyalty by providing merchandise that caters to their
requirements
Provide a range of optimally priced products, including private labels
Analyse performance of new products and their impact on similar products in
the same category
Determine seasonal and store-specific product assortments.
Loss prevention :
In the retail industry, it is well known that losses due to
fraudulent transactions, theft, pilferage, excessive stocking, wastage,
shoplifting, internal theft, refunds, exchanges and excessive discounting are
inevitable. While one can’t do away with these problems, retailers are always on
the look-out for ways to minimise losses while keeping costs minimum.
Loss prevention analytics help you diagnose the root cause of
the problem, identify exceptions, take corrective measures. CAATs substantiate
its analyses with historical, geographic, and demographic trends.
Incorrect or fraudulent refunds
Spoilage, damage and write-offs
Price overrides and improper discounting
Supplier or warehouse issues
Administrative errors
Fraudulent sales to customers with dubious shopping records
Erroneous entries for product returns.
Supplier performance :
Being able to forecast optimal levels of inventory, optimise
lead time, manage orders, improve fill rates, negotiate trade promotions, manage
risks and improve supply chain efficiency — these are just a few challenges
faced by retailers when it comes to managing supplier performance.
While supplier performance management is an area that tends
to get neglected, focussing on this area can help you bring down operation costs
drastically.
CAATs provide a decision-making framework that enables you to
identify new areas of synergy and avenues for bringing about operational
excellence.
Optimally manage inventory by tracking slow and fast moving goods, measuring loss due to out of stock situations and optimising lead time for a product
Manage vendors more effectively by tracking lead time, fill rate, service levels, customer satisfaction levels and product returns per vendor
Reward performing vendors, improve performance of, or replace non-performing vendors
Negotiate trade promotions to get better deals, longer credit periods and shorter delivery cycles
Fraudulent sales to customers with dubious shopping records
Identify ways and opportunities to streamline operations, reducing operation costs
Manage supply-related risks and take corrective measures proactively.
Store productivity and benchmarking?:
To survive in today’s ever-changing retail world, it is essential for retailers to understand their business, know their customers, recognise their edge over competition, identify potential for growth, and realise their weaknesses. In an endeavor to stay ahead, retailers are proactively gathering data about how they are performing vis-à-vis market trends and analysing ways to improve and optimise store productivity.
CAATs provide retail operation managers a framework to analyse store performance and productivity.
Reclassify stores by local demographics, competitive density, store locations, size and age
Reclassify merchandising categories based on the relationship between the customer, product and store
Analyse group peer and merchandising assortment
Measure contribution and competence of store employees by monitoring their contribution to total sales
Benchmark, compare and rank peer groups based on metrics like yield per square area and average price per item sold.
Customers?:
Customer data has long been touted as a key determinant in better merchandising decisions; however it is an asset most retailers have struggled to use to its maximum potential. CAATs provide you with the critical platform you need to leverage customer loyalty data, sales transaction data, and store data to improve merchandise planning and tactics.
CAATs unveil hidden relationships between your customer, product and store data sets. These deep and significant insights help you implement key emerging practices such as consumer-centric merchandising, store-specific assortments and micro-merchandising.
Promotion performance : Analyses plan v. achievement across key metrics in pre-promotion, during and post-promotion periods.
Campaign effectiveness : Once a campaign is launched, then its effectiveness can be studied across different media and in terms of costs and benefits.
Loyalty analysis : Provides insights on retention, churn and acquisition of trends across segments. RFM scoring : Identifies your company’s best customers based on recency, frequency and monetary value. Product affinity and market basket : Product affinity and market basket analysis involves leveraging point -of-sale data to improve business strategies and uncover hidden relationships between products. Point- of-sale data provides insight into the types of products customers typically buy together, the time of year sales for a combination of products go up, destination items that pull customers to the store, and reasons for boost in product sales.
CAATs provide an analytic framework for identifying patterns in customer product purchases and store visits, improving the effectiveness of marketing, sales and merchandising strategies, and understanding links between tactical initiatives like allocation, shelf presentation, promotions, price changes and purchase determinants.
Understand product affinity i.e., identifying products that are likely purchased together
Identify and manage destination items i.e., items that cause a customer to visit your store
Identify seasonal sales trends for items i.e., time of the year when sales for a particular item go up or down
Analyse customer purchase behaviour to understand the role a product plays in a basket i.e., an impulse item or a destination item
Analyse trips by purchase patterns and classifying shopping trips into categories like weekly grocery trips or special occasions
Analyse the impact of promoted products on the overall basket with emphasis on parameters like cross-selling and cannibalisation
Analyse brand affinity, penetration, switching and private label impact
Define baskets that allow you to up-sell and cross-sell
Correlate store performance with overall market performance.
Conclusion : CAATs create an environment where the process owners can make informed decisions real-time on :
Which customer segments are the most profitable ?
Which prospects should my campaign target ? When should I communicate with a customer, and how ?
Which customers should I spend money on retaining ?
To which customers should I cross-sell, and what products ?
We are at the dawn of mature retail analytics for the discerning retail customer.
Dhruva is a Practice Director — Data Analytics with M/s.
Assurance & Associates. M/s. Assurance & Associates are Practice leaders in the
field of governance, risk management and control analytics for the last 5 years.
In a short span of 5 years this dynamic firm had managed to establish a
footprint in the accounting and finance segment which was the erstwhile arena
for large accounting and audit majors. This fast-paced growth was fuelled by a
small group of ‘razor sharp’ smart professionals who delivered consistent value
propositions to all their clients by riding on the backbone of contemporary
audit technology.
M/s. Assurance & Associates leveraged audit technology like
general audit softwares, audit administration tools and enterprise risk
management applications to deliver above-the-board, high-return results to all
the clients from retail to manufacturing, to logistics and healthcare.
Dhruva was solely responsible for overseeing all data
analytic projects, assignments and academic ventures for the firm.
In a recent meet of mid-rung audit firms, Dhruva was
presenting on the role of ‘The Power of Analytics’ and ‘Analytics made Simple’.
Dhruva spoke firmly, confidently and charismatically about his association with
general audit tools and the outstanding benefits which accrued to him and the
firm over the last 5 years through the power of analytics. There was a twinkle
in his eye as he drew a colorful picture about his journey with general audit
softwares. His oration captivated the audience and laid the foundations for
prolific use of CAATs by all audit firms in the days to come.
Dhruva presented on general audit softwares and their lineage with
manufacturing entities :
Manufacturing companies have many of the standard ledgers;
purchasing and payroll can be key concerns. However, the main business area is
inventories.
Inventories (stocks) and work-in-progress :
There is normally a master or balances file that contains
details of inventory holdings at a particular date. Costs may be held in a
separate file. Transaction history can be particularly useful although file
sizes are often quite large. Selling prices normally have to be picked up from a
separate file.
Tests conducted included, but were not limited to :
Analysis :
Age stock by date of receipt
Compute the number of month’s stock of each item held, based on either sales
or purchases. Produce a summary of this information
Stratify balances by value bands
Statistically analyse usage and ordering to improve turnover
Summarise products by group, location, type, etc.
Report of products in order of profitability
Reconcile physical counts to computed amounts
Calculations :
Total the file, providing sub-totals of the categories of inventory
Re-perform any calculations involved in arriving at the final stock quantities
and values
Re-perform material and labour cost calculations on assembled items
Exception tests :
Identify and total stock held in excess of maximum and minimum stock levels
Identify and total obsolete or damaged stock
Identify any items with excessive or negligible selling or cost prices
Identify differences arising from physical stock counts
Test for movements with dates or reference numbers not in the correct period
(cut-off)
Identify balances which include unusual items (e.g., adjustments)
Identify work in progress which has been open for an unreasonable period
Identify stocks acquired from group companies
Isolate products with cost greater than retail price, with zero quantities or
with zero prices
Gaps and duplicates:
Test for missing stock ticket numbers
Test for missing transaction numbers
Identify duplicate stock items
Matching and comparing:
Compare files at two dates to identify new or deleted stock lines or to identify significant fluctuations in cost or selling price
Compare cost and selling price and identify items where cost exceeds net realisable value
Compare value of physical counts to generate ledger amounts
Check work orders for accuracy against original sales orders
Other typical areas of tests include: Cash disbursements:
Reconcile intercompany transfers
Summarise cash disbursements by account, bank, group, vendor, etc.
Generate vendor cash activity summary for contract negotiations
Purchase orders :
Extract pricing and receipt quantity variations by vendor and purchase order
Track scheduled receipt dates versus actual receipt dates
Identify duplicate purchase orders or receipts without purchase orders
Reduce inventory by comparing projected receipts to available stock
Analyse late shipments for impact on jobs, projects or sales orders due
Reconcile receipts by comparing accrued payable to received items
Work-in progress:
Use net demand analysis against inventory and purchase orders to generate a quick material requirement planning report
Check work orders, by size, priority, for lease to shop floor
Produce shop floor activity report by any item
Generate comparison of planned versus actual labour, materials and time
Reconcile job tickets or time cards to work order line items
Dhruva glorified general audit software and its power in working analysis with retail entities:
Retailers often have point-of-sale systems which collect large volumes of useful data which audit tools can analyse. The main tests on inventories are similar to manufacturing companies with perhaps more emphasis on movement, margins and shrink-age. Additional tests include:
Gross profit analyses
Items past their shelf life
Comparisons between stores on holdings and inventory turnover per product line
Price adjustment transactions
Other typical areas of tests include: Cash disbursements:
Monitor cash disbursements for stores
Track cash disbursements for contractor and vendor services
Summarise cash disbursements by account, bank, group, vendor, etc.
Loss prevention:
Compare ‘No Sale’ transactions to cash voided transactions by associate
Identify stores with significant allowances
Isolate duplicate return transactions
Identify incomplete exchange transactions
Look for check purchases and refunds within 15 days
Find credit card purchases and refunds to different credit cards (same day)
Identify potential fraudulent or improper transactions through selling price differences between stores
Purchase order management:
Reconcile order received to purchase order to identify shipments not ordered
Extract pricing receipt quantity variations by vendor and purchase order
Track scheduled receipt dates versus actual receipt dates
Compare vendor performance by summarising item delivery and quality
Compare accrued payable to received items to reconcile to general ledger Distribution and Service:
Typical areas of tests include:
Sales analysis:
Generate sales/profitability reports by sales representative, product, customer
Recap product sales by region, customer, category, etc.
Identify high volumes by region, customer, category, etc.
Extract all sales data for audit by customer, product, region, etc.
Compare ratios of current sales to open receivable (high-low; low-high)
Summarise shipments by warehouse for product distribution analysis
Sales order control:
Report on correlation between items shipped and items ordered
Analyse open orders and open invoices by customer for credit control
Isolate detail and average backlog by customer, item, location, etc.
Reconcile booked items to inventory reserved (on hold) items
Control profits by calculating line item margins before shipment
Analyse product demand by summarising products ordered by due date
Service management:
Create real-time service tracking reports in any format to manage fieldwork
Co-ordinate multiple service personnel to maxi-mise performance in real time
Quickly recap routes and times of service calls by employee, area, etc.
Compare arrival and service times for field service representatives
Calculate cost of service by call for labour, materials and transportation
Compare service report time to time-sheet hours from payroll
Dhruva exemplified general audit software and their relevance to the healthcare segment:
Typical areas of tests include:
Accounts receivable, Patient billing and Managed care:
Calculate average days from discharge to bill, bill to payment, by payer or department
Determine appropriate level of contractual allowance and doubtful accounts reserves
Age receivables on date of service rather than invoice date to recalculate cash flow
Analyse rejected payments by financial class, procedure code, cost centre
Evaluate managed care payer performance
Identify underpaid managed care accounts
Determine profit margin by physician, financial class, etc.
Charges:
Identify late charges by department, by month, etc.
Look for invalid, high dollar or duplicate charges on patient bills
Look for lost charges by matching supplies used to supplies billed
Check procedure codes and billed charges to identify inappropriately billed charges
Clinical subsystems:
Compare patient visit data on clinical sub-systems to patient master
Identify interface failures
Identify pricing discrepancies between sub-systems and master
Marketing:
Develop patient statistics by post codes or other demographic data
Look for incomplete or miscoded patient demographic information
Identify profitable segments of patient population
Materials management:
Analyse usage and ordering to improve inventory reordering
Report on stock and high-value balances using any selection criteria
Identify obsolete inventory by turnover analysis
Compare speed and accuracy of delivery by product and vendor
Profile supply usage by month, by department, etc.
Medical claims :
Analyse timeliness of claims payments by comparing claim date, date claim received, and date claim paid
Look for duplicate billings and claim payments based on patient, provider, date of service and amount
Medical records :
Identify duplicate medical records for same patient
Track diagnosis coding deficiencies, incomplete records, etc.
List incomplete records and incompatible coding
Report on procedure codes by physician, department or patient
Specialists:
Determine specialist! doctor contract compliance
Evaluate specialist! doctor practice history by patient type, payer, etc.
Report on incomplete specialist! doctor profiling information
Purchase order management:
Report on purchasing performance by location
Identify pricing and receipt quantity variations by vendor and purchase order
Identify duplicate purchase orders and receipts without purchase orders
Reconcile receipts by comparing accrued payables to received items
Compare vendor performance by summarising item delivery and quality
Brilliant ending:
Dhruva received a standing ovation from the group. He ended his presentation in all humility by citing that General Audit Tools are time-tested, stable, robust, powerful, internationally acclaimed and user-friendly applications. He added that no Tool is a ready substitute for the auditor’s acumen and judgment, but is a powerful, cost-effective facilitator. He encouraged all the members present to embrace Tools and reap the benefits of an idea whose time has come.
Land laws are a species in themselves. Even within land laws,
laws relating to agricultural land can be classified as a separate class. One
comes across numerous terms and concepts while dealing with agricultural land,
e.g., NA Land, Land Ceiling, Land used for bona fide industrial use, etc. It is
quite common for agricultural land to be converted into non-agricultural land
and being used for industrial purposes or being used for real estate
development. However, it is very important that the correct process is followed
while dealing with agricultural land or else there is a risk of land being
acquired by the Government. Several real estate developers have suffered because
the correct process was not followed. Through a series of articles over the next
few months, I propose to explain the important concepts under some of the key
laws relating to agricultural land.
Agricultural land in Maharashtra is governed by several Acts,
the prominent amongst them being the following :
(a) Maharashtra Land Revenue Code, 1966 applicable to the
State of Maharashtra.
(b) Bombay Tenancy and Agricultural Lands Act, 1948 —
applicable to the Bombay Area of the State of Maharashtra and State of
Gujarat, i.e., the whole of Maharashtra and Gujarat except Marathwada (Latur,
Nanded, Aurangabad) and Vidarbha (Nagpur, Akola, etc.) regions.
(c) Maharashtra Agricultural Lands (Ceiling on Holdings)
Act, 1961.
In this Article, we will look at the Maharashtra Land
Revenue Code, 1966 (‘Code’) which deals with the law relating to
agricultural land and land revenue in the State. Land revenue is an important
source of revenue for State Governments.
2. Revenue areas and officers :
2.1 For ease of administration, the Government has u/s.4 of
the Code divided the State into various revenue areas.
2.2 Under the Act, the State is divided into divisions,
e.g., the city of Mumbai along with its suburbs constitutes one division.
Similarly, there is the Aurangabad Division, Pune Division, Nagpur Division,
etc.
Each division consists of one or more districts,
including the City of Mumbai. Each district may consist of one or more
sub-divisions.
Each sub-division may consist of one or more talukas.
Each taluka consists of certain villages. A
village includes a town or city and all land belonging to a village, town or a
city.
A group of villages in a taluka constitutes a saza.
The saza may consist of up to eight and in some cases 15 villages. It is a
function of administrative convenience, population, etc.
2.3 Accordingly, the Government has created the following
revenue areas :
(a) Divisions
(b) Districts
(c) Sub-Divisions
(d) Talukas
(e) Sazas
(f) Revenue Circles
2.4 Based on the revenue areas, the Government has created a
hierarchy of various revenue officers for the administration of various matters,
for the assessment and collection of land revenue, for conducting surveys,
maintaining accounts, records, etc. The hierarchy of officers is as follows :
District Collector/Additional/Deputy Collector which are appointed for
each district and who is in charge of the revenue administration of a
district.
Taluka Tahsildar/Naib-Tahsildar/Additional Tahsildar in charge of each
taluka and who is the chief officer entrusted with the revenue administration
of a taluka.
Circle Officers/Inspectors for each Circle
Talathis for each saza
Kotwals for each village or group of villages
The Code lays down the powers and functions of each type of
revenue officer.
3. Title of lands :
3.1 U/s.20, all public property, e.g., roads, bridges, etc.,
and land which is not the property of persons legally capable of holding
property is declared to be the property of the State Government and
vests in it. Hence, any land which, under law, is not owned by any person, who
under law can own such property, would be the subject-matter of this Section.
The Collector is empowered to deal with and dispose of all such land in any
manner as he deems fit, subject to the Commissioner’s orders. Thus, any land
held by a person who, by virtue of any statute is capable of holding property in
its own name, e.g., by companies, major individuals, etc., would be excluded
from the operation of this Section. Thus, any land which is not the property of
others would vest in the State Government.
3.2 The Collector may by issuing a notice and following the
due process claim any property by or on behalf of the Government. This order is
subject to one appeal and revision under the Code.
4. Types of land and holders :
4.1 Land can be classified into two types :
(a) Alienated — means that which is revenue-free and
is owned by any person. Thus, no revenue is payable to the Government. This
would include land such as imans and watans.
(b) Unalienated — land other than alienated land.
This is the regular land which is subject to land revenue assessment.
4.2 The land holders can be classified as given in Table
below.
5. Land records: 5.1 One of the important provisions dealt with by the Code is the maintenance of the Land Records in respect of various lands.
Table 1: Types of land holders
Type
Govt. Lessee
Tenant
Holder
Occupant
Meaning
Unalienated
land leased by
Lessee
of land includes
Person
holding
Person
holding
the Collector to any person
a mortgagee of tenant’s
alienated land
unalienated land and
on such terms as deemed fit
rights with possession,
excludes a tenant or
by the Collector
but not a lessee holding
a Government lessee
directly under the State
Government
Classes
Could
be classified
—
—
Occupants
are
as Class III
further divided into
Class I and Class
II depending upon
since when they are
holding the land
or the restrictions
placed upon their
holding
Whether-
Under
general law, a lease
No
express provision.
Yes,
since he is an
Yes,
S. 36 of the
Heritable
is inheritable. However, if
However, in Shriman-
absolute holder
Code provides for
the terms and conditions
tibai Nargude v. Bhimrao
the same
provide otherwise, then
Nargude, 2009 (1) Bom
the same would prevail
CR 265 it was held that it
is inheritable
5.2 Record of rights:
For every village a record of rights would be maintained which would contain the following particulars: (a) Names of all persons who are holders, occupants, owners, tenants, owners, mortagees of the land or assignees of the rent or revenue from it (b) Names of all Government lessees or tenants (c) Nature and extent of respective interest of such persons and the conditions or liabilities, if any (d) Revenue or rent payable by such persons
Thus, all rights, interests and liabilities qua a piece of land are recorded in one document. These records are maintained by the Talathi of each village.
5.3 If any person acquires any right by virtue of succession, survivorship, inheritance, purchase, partition, mortgage, gift, lease, etc., in any land, then he must give a notice of the same to the Talathi within three months of such event.
The Talathi would then enter such changes in a Register of Mutations which would alter the original record of rights.
5.4 Any person buying land especially in a rural or semi-urban area would be well advised to do a thorough title search by checking the Record of Rights, Register of Mutations, etc., which would show whether or not the land in question is an agricultural land, who is the owner, what important developments have taken place in respect of the land, etc.
5.5 In the next Article we shall look at the process for converting an agricultural land into a non-agricultural land.
We as accountants always deal with ‘accounting for business’.
In other words, we act as book-keepers of economic activity and at the end of a
given period draw up a ‘profit and loss’ account which exhibits the operational
results for a given period and a balance sheet on a given date — which exhibits
the assets and liabilities of the entity.
The questions which I have for all of us and
myself are :
– Do we apply the same principles to our own life ?
– Do we prepare a profit and loss account and a balance sheet of our life ?
In other words, do we do ‘accounting for life’ ? It
means do we pause to introspect. I believe that for the purposes of preparing a
profit and loss account and the balance sheet of our life, we need a generous
use of ‘introspection’. To go through our memory lane with ‘truthfulness’ to
give a ‘true and fair’ view of ourselves to ourselves.
What is required to do this ? I think and believe we need to
:
1. take stock of our relationships. How have we handled our
relationship with our parents, spouse, children, friends, acquaintances and
clients. We have to ask ourselves :
– have we discharged our duties simply or with care.
– have we ignored our obligations.
– have we treated every relationship as a transaction.
– do we feel obligated.
2. take stock of our response to the needs of society. How
have we responded to our social obligations. It is a debt we owe.
Let us remember that :
– Our relationships, whether at home, at our work place or otherwise, are
both our capital and assets and need constant care.
– What we take and receive is a debt we incur which has to be repaid : for
example,
– the love we receive from our parents, children and friends.
– the support we receive from our clients, and
– the resources of society we use.
Friends, let us take out time to prepare our own profit and
loss account and balance sheet. Let us do this ‘accounting for life’. This
accounting like all accounting will enlighten us. It will help us to forget and
forgive and at the same time remind us to be grateful and enable us to live our
life in a sense of ‘gratitude’. It is an exercise to improve ‘myself’.
The question is : have I done this ‘accounting for
life’ ? Yes, I have attempted it and the result is that I am in ‘deficit’.
Despite being in ‘deficit’ the one account that I have settled is seek
forgiveness of those who have felt hurt by my words or actions, by forgiving
those by whose words or actions I have felt hurt. I accept I have received more
than I have given. I have been singularly fortunate in most of my relationships
— my god, guru, relatives, friends and clients. I am grateful to my
‘preceptor’. In short, I owe a huge debt of gratitude. I conclude by quoting
‘Mereez’
Mayur Nayak in two excellent articles taught us that ‘Prayer Makes One Complete’. I would like to share a few thoughts on the subject of Praying.
What is a prayer ?
Let us understand what a ‘prayer’ really is and what it is not. Prayer is conversation with God. It is when we open our heart and talk. It is not raising a charter of demands or submitting a list of wishes to God. In a prayer one does not go to God with a begging bowl. Prayer is essentially an expression of our gratitude to God Almighty.
When does one pray ?
In my younger days, I came across this couplet which has left a lasting impression on my mind :
How true ! Only when we face difficulties in our lives we look up to God and remember Him. Never when we are happy.
Personally I have remembered Him in my happy days, and that has really rewarded me with ‘mental peace’.
Kahlil Gibran says,
“You pray in your distress and your need,
would that there might pray also in the fullness of your joy and in your days of abundance.”
The right time to pray then is now, whether you be happy or unhappy.
When to start praying ?
A question may arise as to what is the age when one starts praying. Is it only meant for old and aged people ?
Adi Shankaracharya laments in ‘Bhaj Govindam’ that,
“In the boyhood one is attached to play; in youth to sense objects, in old age one is obsessed with anxiety. At no age one is attached to the Supreme.”
Hence I believe : the right time to pray is now, whether one be happy or unhappy, young or old. Whatever be our age we must pray. Tomorrow might be too late.
How should one pray ?
Our prayer must be with faith, trust, and confidence in God that He will look after us. He will do what is best for us. There is a bhajan, a favourite of Mahatma Gandhi, which very lucidly express this :
We must give over the reins of our lives in the hands of God, and know that He will do what is best for us. We must pray with full faith in Him. We must understand what faith means.
In words of St. Augustine
“Faith is to believe what you do not yet see; the reward for that faith is to see what you believe.”
As Wayne Dyer puts it “You will see it when you believe it.” Where does one pray ?
And where does one pray to God ? Where does one find Him ? We confine our prayers to temples and mosques, churches and gurudwaras, as if God stays only there ! Gurudev Tagore answers it beautifully as under :
“Leave this chanting and singing and telling of beads! Whom dost thou worship in this lonely dark corner of a temple with doors all shut ? Open thine eyes and see thy God is not before thee !
He is there where the tiller is tilling the hard ground and where the path maker is breaking stones. He is with them in sun and in shower, and his garment is covered with dust.”
The lines of the song from Yatrik come to my mind :
So let us look for Him within and find Him in our hearts. He is very much there within all of us.
Let us then start praying right now in the right manner and at the right place. We must always continue to pray and thereby attain eternal peace.
All of us have wonderful thoughts and grand dreams of what we
wish to do. The sad part is that we are somehow unable to put our thoughts into
action and our dreams remain unfulfilled. We are unable to translate our ideas,
our pious intentions, our noble plans into action. Hence, wishes remain only
wishes, they just remain unfulfilled dreams. While there could be justification
in case of people who die young and who did not get time to act on their
thoughts, for most of us who live up to ripe old age there is no justification
whatsoever.
Some of the possible reasons for our not taking action are :
we always believe that there is ‘a tomorrow’ which unfortunately never comes. We
procrastinate.
we are shy of stepping out from our comfort zone.
we are scared of the unknown.
It is true that when we act we may fail, but fear of failure
should never be the reason not to act. There are two kinds of failures — those
who thought and never acted — and those who acted but failed. One would rather
be the second type of failure than the first. I am reminded of what Shakespeare
said :
“It is better to have loved and lost rather than not to
have loved at all.”
When one looks back at life, one finds that most of our
regrets are for actions not taken. Brilliant thought, noble intentions, grand
plans and magnificent goals all remain within us, like buds which never
blossomed into flowers. It takes a lifetime for us to understand that the
smallest of action is always better than the noblest of intentions. We have to
make a start, convert our dreams into goals, and take action to fulfil our goals. Without action,
dreams are useless. Nothing can be achieved by merely having wishes and good
thoughts. There is a well-known subhashit which is as under :
“Goals can only be achieved by action, not merely by
having grand ambition. Even the deer do not enter the mouth of a sleeping lion.“
There is a story of a person who every day went to the temple
of Hanuman, and asked for rupees ten lakhs. This went on for quite some time,
till Hanuman lost his patience. He appeared and gave the devotee a hard
resounding slap and said :
“If you want ten lakhs, at least buy a lottery ticket ! Do
not expect me to do that for you !”
We have to wake up and be bold, learn to take risks and act
to realise our dreams and achieve our goals. We have to act. A ship would be
very safe in the harbour, but that is not what it is meant for. As Andre Gide
has expressed it :
“Man cannot discover new oceans unless he has the courage
to lose sight of the shore.”
Putting it in a language we accountants can easily relate to,
there is a wide gap between what we are capable of and what we actually attain.
I have always felt that in our case our actual ’production’ is far less than our
installed capacity. I would dare say that our actual production seldom exceeds
20% of our installed capacity. If we take the right action and raise this even
to 30%, our world would be a much better place to live in than it is today. By
taking action on our dreams we have the capacity to bring heaven on earth. Hence
let us act. I would conclude by quoting Vivekananda :
“Arise ! Awake ! And stop not till the goal is reached.”
Co-operative societies and co-operative banks have made invaluable contribution to the socio-economic development of our country, particularly in rural area. This form of organisation is typically suited for the not-so-educated masses of our country. Agriculture, sugar, dairy and even in the credit sector, the co-operative societies have performed well. These co-operative credit societies and banks are indispensable since commercial banks may not afford to cater to the tiny borrower. Admittedly, there are problems of lack of professionalism, political interventions, mismanagement and so on. But then the so-called urban corporate sector is also not immune to such menaces. Pandit Nehru had rightly said “Co-operation has failed, but co-operation must succeed.”
In the economy, losses and sickness are quite common. S. 72A was inserted in the Income-tax Act, 1961 way back in the year 1977. It was welcomed and since then it has encouraged amalgamations by protecting unabsorbed losses and depreciation. Further, S. 72AA was inserted in the year 2005 to make special provision for banking companies in ‘certain cases’, although the banking companies had been very much covered in S. 72A. Against this background, I wish to highlight the provision of S. 72AB introduced in the year 2008 in respect of co-operative banks.
2. The unfairness :
2.1 S. 72A provides that in the event of amalgamation of companies, the losses and unabsorbed depreciation of amalgamating company shall be treated as the losses and depreciation of the amalgamated company as if the same were the losses of the previous year in which the amalgamation took place. There is similar provision for banking companies in S. 72AA. The fresh carry forward begins from the year of amalgamation.
2.2 However, S. 72AB grants a restrictive benefit. Here, the carry forward of losses and depreciation of the predecessor bank is allowed as if amalgamation had not taken place. Thus, unlike in the case of companies, the carry forward would get restricted only to the unexpired period out of the eight years permitted u/s.72.
2.3 Further, Ss.(5) of S. 72AB states that the period commencing from the previous year and ending on the date immediately preceding date of business re-organisation and period from the date of business re-organisation to the end of previous year are to be considered as two previous years for the purpose of carry forward and set-off of loss and unabsorbed depreciation. No such provision appears in S. 72A or S. 72AA. The implication of this provision is that current year’s business loss up to the date of reorganisation cannot be set off by successor co-operative bank against income under other heads u/s.71. As against this, S. 72A and S. 72AA provide that the accumulated loss of predecessor is considered as current year’s loss of successor and hence benefit of S. 71 is available to successor in the year of succession even for the loss of the years prior to the year of succession. Thus, S. 72A and S. 72AA confer the benefit of S. 71 even to prior year’s loss, whereas S. 72 AB is taking away such benefit even for current year’s loss till the date of succession ! ! !
2.4 It needs to be appreciated that by taking over the liabilities of the loss-making bank, the successor co-operative bank renders a great social service by giving comfort to thousands of small depositors. If commercial banks and companies get the benefits of merger, co-operative banks deserve it all the more.
2.5 Hence, the law needs to be amended to bring the provisions for carry forwarded of loss and depreciation on par.
It is an admitted fact that
after the disintegration of joint families, we are becoming more and more
individualistic. Nevertheless, even today, although in a nuclear form, the
family system is still surviving. The social and legal systems still recognise
the concepts of family members, close relatives and particularly, the sanctity
of relationship between husband
and wife.
Even today, the family and
especially men feel a psychological comfort by having a residential house in
their wife’s name or at least, add her as a joint holder. It is a different
matter that such holding by the wife is often used for so-called tax-planning,
in a crude manner.
Even the provisions of the
Benami Transactions (Prohibition) Act, 1988, protect the holding of property in
a spouse’s name [refer S. 3(2)]. The Income-tax Act also expressly protects
certain transactions from taxability (e.g., S. 56 — gift from relative) or
indirectly recognises the importance of close relations (in a negative way) in
terms of S. 64, S. 27, S. 40A(2), etc. Needless to state that in
‘jurisprudence’, ‘custom’ is regarded as a primary source of law.
Against this background, it
is a matter of grave concern that the Income Tax Department is now denying
exemption u/s.54/54F merely on grounds that the new house is purchased in joint
name with the spouse !
The unfairness :
In a typical case, the asset
sold is in the single name of the husband. He invests the sale proceeds in a
residential house and in the agreement to purchase, he adds his wife’s name as a
joint-purchaser.
The money flow of sale
proceeds and purchase price can easily be traced and established. The husband
shows the house in his balance sheet as his asset. He declares income from house
property, in his return of income only. No part of the house or income is
included in the return of wealth or income of the wife. Yet, the Income Tax
Department raises an objection that since a joint interest is created, the
condition that the ‘assessee should purchase a residential house’ is not
satisfied!
Not only this, but the
exemption is denied even for the purchase of a part of the house.
The relevant cases are
discussed in the succeeding paragraphs.
Case Law :
Readers may be aware that in
the past, the judiciary was very much favourable to assessees in this regard.
There are decisions that not only the joint name, but even purchase in the
exclusive name of the wife would also be eligible for exemption u/s.54 or
u/s.54F.
At the same time, the
extreme view that the purchase even in a stranger’s name would also be eligible
is difficult to digest. It is too legalistic an interpretation that the Section
merely says ‘purchases or constructs’; and is silent about the name in which it
should be acquired.
The Mumbai Tribunal has held
it against the assessee (case of ITO v. Shri Niranjan Singh Bajaj, ITA
No. 2040/Mum./2006). The Members have placed reliance on a Bombay High Court
decision in the case of Prakash s/o Timaji Dhanjode v. ITO, 312 ITR 40.
However, the facts in the
Bombay High Court decisions were materially different. There, an 86-year-old man
purchased the house in his major stepson’s name with an express intention of
giving the house to the son. This cannot be equated with a purchase of a house
in the joint name with wife. The reasons are obvious :
(i) In terms of S. 27(i),
the assessee (husband) alone is deemed to be the owner of the house.
(ii) The Department’s
objection that at the time of sale, wife’s signature will be required and she
will be entitled to a half share is also taken care of by S. 64. The capital
gains will be taxed in the hands of the husband only.
(iii) There are many other
judicial decisions granting exemption and approbating purchase in joint names.
And with respect, it can be seen that even the Bombay High Court decision (312
ITR 40) is also based on the particular facts of that case.
It would be unjust and
unfair to generalise the decision.
The Punjab & Haryana High
Court in the case of CIT v. Gurnam Singh, 327 ITR 278 has also taken a
favourable view recently.
In the following decisions
also, exemption has been allowed to the assessee for investment in the
sole/joint name with wife :
(1) CIT v. V. Natrajan,
287 ITR 271 (Mad.)
(2) ITO v. Smt. Saraswati
Ramanathan, 116 ITD 234 (Del.)
(3) JCIT v. Smt. Armeda K.
Bhaya, 95 ITD 313 (Mum.)
Suggestions :
In the context of S. 27, S.
64 and having regard to the social custom, and also considering the fact that
the Bombay High Court gave the decision in a different context, the exemption
u/s.54/54F should not be denied merely because the purchase is in joint name
with spouse. Law should be clarified or the CBDT should issue a Circular to
avoid unnecessary and avoidable litigation.
