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CBDT has notified that w.e.f 1st January 2013, no TDS would be deducted in the below mentioned payments made by a person to a Scheduled bank as per RBI Act (excluding a foreign bank:
• bank guarantee commission
• cash management service charges;
• depository charges on maintenance of DEMAT accounts;
• charges for warehousing services for commodities; • underwriting service charges; • clearing charges (MICR charges);
• credit card or debit card commission for transaction between the merchant establishment and acquirer bank.
The assessee claimed depreciation on UPS @ 80% on the ground that it is employed by it as an energy saving device. The claim of the revenue was that the same is not an energy saving device but an energy supply device.
Aggrieved, the assessee preferred an appeal to the Tribunal.
Held:
The Tribunal noted that the issue is covered by the decision of the Tribunal in assessee’s own case for A.Y. 2002-03 in ITA No. 2792/M/06; for AY 2003-04 in ITA No. 1071/M/2007; for AY 2004-05 in ITA No. 5569/M/2007 and for AY 2005-06 in ITA No. 6964/M/2008. The Tribunal noted the following observations in respect of AY 2002-03:
“13. We have heard the rival contentions. Short question is whether UPS is a `Automatic Voltage Controller’ falling within the heading of energy saving device in the Appendix to the Income-tax Rules, 1962 giving depreciation rates. Legislature in its wisdom has chosen to show an Automatic Voltage Controller as an electrical equipment eligible for 100% depreciation, falling under the broader head of energy saving devices. Once Legislature deemed that an `Automatic Voltage Controller’ is a specie falling within energy saving device, it is not for the Assessing Officer or Ld CIT(A) to further analyse whether such an item would (sic was) indeed be an energy saving device. In fact it is beyond their powers. Hence the only question to answer, in our opinion is whether an UPS is an `Automatic Voltage Controller’. It is mentioned in the product brochure (Paper Book Page 64) that the UPS automatically corrected low and high voltage conditions and stepped up low voltage to safe output levels. Thus in our opinion, there cannot be a quarrel that UPS was doing the job of voltage controlling automatically. Even when it was supplying electricity at the time of power voltage, the voltages remained controlled. Therefore in our opinion, a UPS would definitely fall under the head of `Automatic Voltage Controller’. We are fortified in taking this view by the decision of Jodhpur Bench in the case of Surface Finishing Equipment (supra). As for the decision of the Delhi Bench in the case of Nestle India (supra) referred by the Ld. DR, there the question was whether UPS could be considered as `computer’ for depreciation rate of 60%. There was no issue or question, whether it could be considered as an Automatic Voltage Controller and hence in our opinion that case would not help the Revenue here. Therefore, we are of the opinion that the assessee was eligible for claiming 100% depreciation on UPS. Disallowance of Rs. 6,82,443 therefore stands deleted. Ground number 3 is allowed.”
Following the above mentioned decision, the Tribunal decided the issue in favour of the assessee.
This ground was decided in favour of the assessee.
It is a moot point whether the severity of punishment has, and can, act as a deterrent against any crime if that punishment is deferred indefinitely. And given the debacles, stigma and inherent biases victims of rapes face in India, it is necessary to first ensure things like unfailing registration of complaints, and then a speedy investigation and conviction of the perpetrators. The abysmally low conviction rate on rapes is testimony to the fact that these drawbacks in the justice delivery system are most responsible for many perpetrators walking away scot free — even as most rape cases are never even reported because of stigma, pressures and plain coercion. The certainty of the law catching up, and swiftly, is what can deter such crimes more than the spectre of being hanged to death, for example.
While being commensurate with the severity of a crime, the law also needs to encompass all forms of molestation and sexual assault against women. The law, the justice delivery mechanisms, must be geared to protect, encourage and aid the victim in seeking and getting that justice, not further traumatise her, as is the case now. Care must also be taken that rape laws aren’t misused by, for example, parents who seek to control and punish their offspring for relationships they don’t approve of. In the broader perspective, rape is a crime of patriarchy; eliminating the various forms of the latter will be a wider, perhaps slower process. But the law can make a beginning; and its framing, now, must be a genuinely consultative process.
The left-leaning Columbia University economics professor and Nobel laureate Joseph Stiglitz said in an interview that it would be “very risky” to allow companies to own banks. It was not allowed in the US, he added, and correctly so; the conflicts of interest that it would open up were “sufficiently great” and regulators would “not be able to circumscribe them easily — or at all”. And the right-leaning economist Percy Mistry has also said allowing industrial houses to run banks would leave “massive scope for malfeasance”. Japan, he pointed out, is one country where banks and industries are enmeshed with each other, and it is still to emerge from a twodecade- old financial crisis.
The ministry has amended Form 18, the standard filing for details of the registered office or any change in it. Under the new form, the onus will be on the chartered accountant (CA), cost accountant or company secretary (CS) to physically verify the filing and check the existence of a firm.
Behind the massive show of religious devotion is a quiet secular machine that services the millions who pour into Allahabad for the Kumbh Melas. The details are mind boggling. The crowd on the main days is large enough to be visible from space satellites. Some 25,000 tonnes of foodgrains are sent to feed the pilgrims. About 700,000 tents are erected to house the visitors. Pipes have to be laid so that clean drinking water is available. A temporary super-specialty hospital has been built for anybody who falls seriously sick. Thirty-one police stations and 41 police check-posts have come up to maintain law and order. Massive television screens flash information about missing people. Thirty-six fire stations will get into the act in case there is a conflagration.
The entire effort is so unique that it has attracted the attention of Harvard University. Six of its departments are collaborating to understand the Kumbh Mela phenomenon: the Faculty of Arts and Sciences, Harvard Divinity School, Harvard Graduate School of Design, Harvard Business School, Harvard Medical School and the Harvard School of Public Health.
The South Asia Institute at Harvard notes on its website: “A temporary city is created every 12 years in Allahabad to house the Kumbh Mela’s many pilgrims. This city is laid out on a grid, constructed and deconstructed within a matter of weeks; within the grid, multiple aspects of contemporary urbanism come to fruition, including spatial zoning, an electricity grid, food and water distribution, physical infrastructure construction, mass vaccinations, public gathering spaces, and night-time social events.”
The megacity that magically pops up at Allahabad during the Kumbh Mela is as large as New York, London and Paris combined. The sheer scale of the effort shows that the Indian state machinery, usually a creaking mess, can be galvanized into action when there is the will to do something.
The biggest factors that propelled the growth and transformation of the US were technology, natural resources, manufacturing and private enterprise; a few men who dreamt big helped create the modern America.
All the five men were also great philanthropists who donated most of their wealth for the larger benefit of society. These were used to set up large universities, hospitals, museums, art and culture centres, libraries and charities. The universities also contributed as powerful research centres and acted as think tanks in areas of technology, material and space research, liberal arts and political science. Moreover, they helped develop political, business and other leaders. These created large employment opportunities and also spawned entrepreneurship.
America’s growth journey has some lessons for India. Both are large vibrant democracies with abundant natural resources. While America benefited from a large flow of immigrants in search of the American dream, India has a large population in the working age group. More importantly, like the US, India has people with entrepreneurial spirit who can visualise a new India and unleash its potential.
Five drivers – private enterprise, exploration of natural resources, development of manufacturing, tourism and simplification of regulatory and approval processes can be key to developing India as an all-round superpower.
There are at least three issues here. One, high royalty is iniquitous to minority shareholders. It is like a super dividend to the foreign shareholder. It reduces the net profit, and therefore causes the valuation of the Indian venture to fall. Also, since royalty is a commercial arrangement, minority shareholders have no say in it. They are seldom told the reason why it has been changed. Shareholder activists have, therefore, started demanding that royalty payments ought to be decided in the annual general meeting of shareholders, and any change must be cleared by 75 % of the shareholders. Two, the negotiations for royalty are often between the foreign promoter and the managers it has put in place. These managers have no incentive to drive a hard bargain; if they do, they could simply lose their jobs. It is, in that sense, a negotiation between non-equals. That’s perhaps the reason why multinational corporations have been able to extract favourable royalty terms from their Indian ventures. Three, royalty makes the government lose out on tax revenue.
The government ought to see the overall impact of its liberalised royalty regime, and then take corrective action. Royalty is paid for the use of the foreign partner’s technology, trademark or brand name. The government must scrutinise how real the technology transfer is and if the brand name of the foreign partner is indeed helping the Indian company charge a premium in the marketplace. Royalty has been a bone of contention between Indian business leaders and their overseas partners for a while. Several collaborations have fallen apart because of squabbles over royalty.
These numbers make clear that India’s tax administration is frequently pressing taxpayers to pay money that is not required under law, and which will not stand up to judicial scrutiny or review. Yet recovery norms are being tightened, often forcing taxpayers to pay arbitrarily demanded amounts in a month, even while a stay application is being disposed of in the courts. This penalises taxpayers for legal delays, allowing the government to take their money and sit on it even when it is unjustified in law — and given the dilatory nature of legal proceedings, for many it will seem like it has vanished forever. More, appeal is nearautomatic even if the government loses at one level; taxpayers are forced to fight cases all the way up the judicial ladder. And once they win their case, companies litigating for indirect taxes frequently discover that the government refuses to refund the money anyway, claiming it would unjustly enrich the companies’ coffers, when the company was merely indirectly collecting taxes from consumers of their products for the government.
Reform of this dysfunctional process is overdue. The judiciary, of course, must move to speed up tax cases and the tax department should initiate efforts to bring down the number of legally untenable orders its appellate officers are handing out. This can, perhaps, happen through direct penalties being levied on officers who hand out a disproportionate number of subsequently overturned orders. But, as importantly, the tradition of automatic appeal and confiscation of money in the interim needs to end — which will in and of itself alter the incentives for the revenue department. There are many ways to do this. One possibility is that, if the tax department wishes to appeal once it has lost at a particular judicial level, it should pay a punitive interest rate on the money it holds.
The government has discovered that broadening the tax net is not easy. The reason that there continues to be widespread evasion and distrust is rooted in the unreformed and red-tapist nature of the tax administration. The time has come to change that, and ensuring that delayed justice does not incentivise arbitrary confiscation is a good place to start.
(Full texts of the following Tribunal decisions are available at
the Society’s office on written request. For members desiring that the Society
mails a copy to them, Rs.30 per decision will be charged for photocopying and
postage.)
13 Rang Rasayan Agencies v.
ITO
ITAT ‘C’ Bench, Ahmedabad
Before Bhavnesh Saini (JM)
and
D. C. Agrawal (AM)
ITA No. 917/Ahd./2009
A.Y. : 2004-05. Decided on :
18-1-2011
Counsel for assessee/revenue
:
Ketan M. Bhatt/Ms. Anurag
Sharma
Income-tax Act, 1961, S.
250(6) — An order passed by CIT(A) without mentioning point of determination as
also without giving any reason for decision while dismissing the appeal is
violative of S. 250(6) of the Act and cannot be sustained in law.
Per Bhavnesh Saini :
Facts :
The assessee had preferred
an appeal to the CIT(A). Due to non-appearance by the counsel of the assessee
before the CIT(A), the CIT(A) dismissed the appeal of the assessee. In the order
passed by the CIT(A), he did not mention the point for determination and also
did not mention the reason for decision.
Aggrieved by the order of
CIT(A), the assessee preferred an appeal to the Tribunal.
Held :
The Tribunal noted that S.
250(6) requires the CIT(A) to mention the point of determination in the
Appellate order and also the reason for decision. Since the order passed by the
CIT(A) did not mention any point of determination in the Appellate order and
also did not give any reason for decision while dismissing the appeal of the
assessee, the Tribunal held the order of the CIT(A) to be violative of S. 250(6)
of the Act and consequently unsustainable in law. The Tribunal observed that the
act of the CIT(A) in merely noting the default committed by the counsel for the
assessee in not putting appearance before him and dismissing the appeal cannot
be sustained. Accordingly, the Tribunal set aside the impugned order and
restored the appeal of the assessee to the file of the CIT(A) with a direction
to re-adjudicate the appeal of the assessee on merit by giving reasons for
decision in the Appellate order.
The appeal filed by the
assessee was allowed.
Facts
For the relevant assessment year, the Assessing Officer taxed the entire amount of Rs. 154.67 lakh of donations received by the Trust on the grounds that:
a. None of the donation receipts were signed by the donors.
b. The donation receipts were self made evidence furnished in support of the corpus fund collected and
c. As per section 11(1) of the Income Tax Act, there must be a specific direction from the donors in respect of their donations that it should be for the purpose of the corpus.
The CIT(A) deleted the addition made by the Assessing Officer. Since there was a difference of opinion between the members of the Tribunal, the matter was referred to the Third Member u/s. 255(4).
Held
The Third Member, agreeing with the Judicial Member, held in favour of the assessee-trust. The Third Member noted as under :
The assessee has produced complete books of account along with original receipt book of corpus fund wherein complete names and addresses of the donors were recorded and the column “corpus fund” has been duly “ticked” and signed by the employees of the trust.
It was for the Assessing Officer to make or not to make further inquiry in the facts and circumstances of the case, with regard to the genuineness of the donation claimed by the assess-trust to have been received by it towards its “corpus fund”.
The Tribunal, as a second appellate authority, could not direct the Assessing Officer to make detailed inquiry for the reason that the issue of “inquiry” is not before the Tribunal.
The Assessing Officer has not made any detailed inquiry further and added the amount of corpus fund as income in the hands of the assessee on the plea that such receipts were prepared by the employees of the trust and in none of the receipts, signatures of the donors was available. This approach of the Assessing Officer in finalising the assessment of the assessee is not in accordance with law.
In view of the fact that the CIT(A) has accepted declarations from all the 60 donors of the corpus fund certifying that they have donated towards corpus fund of the assessee-society and the Revenue has not raised any ground of appeal against the admission of these declarations produced by the assessee before the CIT(A), the amount in question has to be held as constituting corpus fund of the assessee-society.
Aggrieved by the exparte order dated 31-12-2008 passed by the Assessing Officer (AO) u/s 144 of the Act the assessee filed an appeal to CIT(A). The memorandum of appeal was signed by CA, Shri S. U. Radhakrishnani, as authorised representative. Since the assessee neither submitted any valid power of attorney nor was there any explanation as to why the appeal was not signed by the assessee, CIT(A) vide order dated 11-10-2010 dismissed the appeal as invalid. Thereafter, the assessee filed a fresh appeal on 7-3-2011 along with application for condonation of delay. The CIT(A) in his order dated 22-12-2011 held that the appeal filed by the assessee against the assessment order had already been adjudicated by CIT(A) and dismissed. There was no provision for filing of an appeal when the first appeal had been dismissed. The appeal was also filed beyond the time limit. CIT(A) therefore dismissed the appeal in limine. Aggrieved, the assessee preferred an appeal to the Tribunal.
Held:
Once the appeal was treated as invalid, the same became non-est. The assessee had the right to file another appeal which of course has to be considered as delayed appeal and, in case delay is condoned, the appeal has to be decided on merit. The Tribunal held that the view taken by CIT(A) does not represent the correct view and therefore, has to be rejected. Once the appeal filed by the assessee is found to be legally invalid and dismissed as such, the assessee can file another appeal which has to be considered along with condonation application and, if admitted after due consideration of condonation application, it has to be decided on merit.
The Tribunal restored the matter to CIT(A) for deciding the same afresh after necessary examination in the light of observations made by the Tribunal.
As regards the first appeal which was not signed by the assessee, disposal by CIT(A) was considered as just and fair and the same was upheld.
13 Substantial Question of Law — Whether
reassessment made without issue of notice u/s.143(2) of the Act is invalid, is a
substantial question of law.
[L. N. Hota and Company v. CIT, (2008) 301 ITR 184
(SC)]
The Assessing Officer issued a notice on 3-12-1998 to the
assessee u/s.148 of the Act, requiring the assessee to file the return of its
income for the A.Y. 1997-98, which was served on 7-12-1998. The assessee filed
the return of income on 5-1-1999, whereafter the AO issued a notice u/s.142(1)
on 28-6-2000. The AO, vide his order dated 27-11-2000, completed the assessment
estimating the income of the assessee from the business by applying the
provisions of S. 145 of the Act. The assessee’s appeal was dismissed by the
Commissioner of Income-tax (Appeals) vide his order dated 4-1-2002 without
adjudicating the issue of legality of the assessment. An application u/s.154 was
also rejected by the Commissioner of Income-tax (Appeals) vide his order dated
25-2-2002. The Tribunal vide its order dated 13-4-2004, rejected the priority
prayer of the assessee that assessment made without issuance of notice
u/s.143(2) within a period of one year was invalid, but on the merits of the
case, remanded the matter to the AO. On appeal, the Orissa High Court in its
order dated 14-8-2006 dismissing the appeal held that as the assessment order
had not come about by way of scrutiny, the provisions of S. 143(2) would not be
applicable. On an appeal by way of special leave to the Supreme Court, it was
held that though the question of the applicability of S. 143(2) was specifically
raised throughout, prima facie, no finding based on law as it stood, had
been recorded. The Supreme Court therefore remitted the matter to the High Court
for a fresh decision in accordance with the law.
Reported :
49 MAT credit : Interest
u/s.234B and u/s.234C r/w S. 115JAA of Income-tax Act, 1961 : A.Y. 1999-00 : MAT
credit has to be given before charging interest u/s.234B and u/s.234C of the
Act.
[CIT v. Salora
International Ltd., 329 ITR 568 (Del.)]
For the A.Y. 1999-00, the
income of the assessee company was assessed u/s.115JA of the Income-tax Act,
1961. Interest u/s.234B and u/s.234C was charged without reducing the MAT credit
u/s. 115JAA. The assessee contended that the interest has to be computed after
allowing the MAT credit. The Tribunal accepted the assessee’s claim.
On appeal by the Revenue,
the Delhi High Court upheld the decision of the Tribunal and held as under :
“Before charging interest u/s.234B and
u/s.234C of the Income-tax Act, 1961, credit of minimum alternative tax was to
be first allowed to the assessee.”
Reported :
48 Income : Receipt without
consideration : Income u/s.56(2)(v) of Income-tax Act, 1961 : A.Y. 2006-07 :
Loan received without interest and repaid : Not a receipt within the meaning of
S. 56(2)(v) of the Act.
[CIT v. Saranapal Singh (HUF),
237 CTR 60 (P&H)]
The assessee had received
short-term loan without interest in the relevant year and the same was repaid.
The Assessing Officer added the said amount of loan to the total income treating
the same to be the receipt within the meaning of S. 56(2)(v) of the Income-tax
Act, 1961. The Tribunal deleted the addition and observed as under:
“(i) There is no dispute
regarding the nature and source of the impugned unsecured loans.
(ii) Merely because the
amount of loan has been raised without involving payment of interest, cannot
be seen to have vested the impugned amount with characteristics of an
income, within the meaning of S. 56(2)(v) of the Act.
(iii) The existence of
the expression ‘without considerstion’ in S. 56(2)(v) cannot distract from
the fact that in the impugned case, the sum of money received in question
carried a liability of its repayment and the same was not received by the
assessee with an absolute unfettered right of possession.”
On appeal by the Revenue,
the Punjab and Haryana High Court upheld the decision of the Tribunal and held
as under :
“(i) The amount
contemplated u/s.56(2)(v) of the Act cannot include loan which is shown to
have been repaid.
(ii) In the facts and
circumstances of the present case, a concurrent finding of fact has been
recorded that the amount received was a short-term loan which was duly
repaid. The said amount cannot be treated as income of the assessee
u/s.56(2)(v) of the Act. Thus, no substantial question of law arises.”
Compilers’ Note :
In the case of the above company, Statutory Audit Reports and
Limited Review Reports for the period June 2000 to September 2008 were issued by
the Statutory Auditors as required under the provisions of the Companies Act,
1956 and Clause 41 of the Listing Guidelines. In view of certain developments,
the said reports have been withdrawn by the Statutory Auditors by writing a
letter to the new Board of Directors and the Company Secretary with copies
marked to the ROC, SEBI, RBI, CBDT, BSE, NSE, NYSE. The said letter of the
Statutory Auditors is reproduced below.
Dear Sirs,
Re : Our audit of your financial statements
1. As statutory auditors, we performed audits of Satyam
Computer Services Limited (the ‘Company’) from the quarter ended June
2000 until the quarter ended September 30, 2008 (‘Audit Period’).
2. The above-referred financial statements were prepared by
the management of the Company.
3. We planned and performed the required audit procedures on
such financial statements, and examined the books and records of the Company
produced before us by the Company management. We placed reliance on management
controls over financial reporting, and the information and explanations provided
by the management, as also the verbal and written representations made to us
during the course of our audits.
4. As you are aware, vide a letter dated January 7, 2009 (“Chairman’s
Letter”) addressed to the erstwhile Board of Directors of the Company, the
former Chairman of the Company, Mr. Ramalinga Raju has stated that the financial
statements of the Company have been inaccurate for successive years. The
contents of the said letter, even if partially accurate, may have a material
effect (which effect is currently unknown and cannot be quantified without a
thorough investigation) on the veracity of the Company’s financial statements
presented to us during the Audit Period. Consequently, our opinions on the
financial statements may be rendered inaccurate and unreliable. A copy of the
Chairman’s Letter, extracted from the official website of the National Stock
Exchange is annexed hereto as Annexure A, for the sake of record. (not
reproduced here)
5. The ICAI has issued a guidance note on revision of audit
reports in January 2003 (‘Guidance Note’), which prescribes steps to be
followed by the auditor to prevent reliance on audit reports in such
circumstances. In view of the contents of the Chairman’s Letter, we hereby, in
accordance with the Guidance Note, state that our audit reports and opinions in
relation to the financial statements for the Audit Period should no longer be
relied upon.
6. Such a requirement is also prescribed under the generally
accepted accounting standards in the United States, where, as you are aware, the
American Depository Receipts of the Company are listed. We wish to inform you
that pursuant to Section 10A of the United States Securities and Exchange Act of
1934, the information contained in the Chairman’s Letter indicates that an
illegal act could have occurred. Accordingly, we advise that the Board of
Directors of the Company should promptly commence an independent investigation
pursuant to Section 10A of the United States Securities and Exchange Act of 1934
in order to determine whether such illegal acts occurred and, if so, the nature
and extent of such acts.
7. We hope to work with the Company and provide assistance to
the new Board of Directors to address any issues that arise in the course of
such investigation, to enable both the Company and us as your Statutory Auditors
to fulfil obligations under applicable law.
8. We wish to advise that the Company should promptly notify
any person or entity that is known to be relying upon or is unlikely to rely
upon our audit report that our audit opinion should no longer be relied upon.
9. Consequently, such notification should be made to at least
the Company’s shareholders, lenders, creditors, Indian regulatory authorities
and the United States Securities and Exchange Commission, and indeed to all the
stock exchanges, whether in India or abroad, where such securities of the
company are listed. We expect such notification would be made promptly and
request that the Company advise us as soon as the notification has been made.
Since we are required under the Guidance Note to mark a copy of this letter to
the relevant regulatory authorities, we have done so.
From Notes to Accounts :
3. Legal proceeding by and/or against the company
3.1 Share capital includes 11,624,472 equity shares of Rs.10
each (issued at a premium of Rs.30 each) originally allotted to the three
investment companies of S. K. Modi Group (SKM). These shares were partly paid
and were treated as fully paid by adjusting the calls in arrears of Rs.333.18
million against assignment of security deposit of Rs.360 million by Agache
Associates Limited (belonging to SKM) in favour of the said investment
companies. The Security deposit of Rs.360 million was shown payable to Agache
Associates Limited, under a purported lease agreement dated September 11, 1995,
which was to be effective from April 1, 1996 for a property situated at
Calcutta, West Bengal. Subsequently, the Delhi High Court has passed an order on
July 15, 2005 appointing Receivers to sell shares belonging to SKM’s group
companies and deposit the proceeds with the Court. The manner of receipt of
these sale proceeds by the Company shall be decided by the Court in the pending
proceedings. The Company had also filed a criminal complaint in the Court of
Chief Metropolitan Magistrate, New Delhi against some of the erstwhile promoter
directors and ex-employees of the Company for executing the above transaction.
3.3 In respect of ICDs aggregating Rs.100 million, the
Company has not accrued interest payable amounting to Rs.240.95 million up to
March 31, 2008 (previous year Rs.222.15 million), computed based on interest
rates as per original contract terms for reasons explained below :
l
ICD of Rs.50 million in the name of Agache Associates Limited (affiliated to
SKM) being a party to the fraudulent transactions (Refer Note 3.1 above).
l
In a suit filed by one of the ICD lenders (petitioners), the Company had
deposited a sum of Rs.50 million with the Bombay High Court and the Hon’ble
Bombay High Court later allowed the petitioner to withdraw the said amount
upon furnishing an undertaking that the petitioner will restitute the said sum
or such part thereof, with 9% interest, to the Company, if and as directed by
the Court at the time of the final decision of the suit filed by the
petitioner. Accordingly, pending finality of the matter, both the ICD and
deposit with the High Court have been disclosed under the unsecured loans and
advances, respectively.
3.5 The Company has in its possession the bank-statement of
ICICI Bank, New Delhi, which shows a deposit of Rs.34.29 million on account of
refunds from the Income-tax Department on November 6, 2000 and July 2, 2001 and
subsequent withdrawals (details of amounts appropriated not available with the
Company) on various dates aggregating to Rs.34.29 million against cheques/drafts
issued to several parties, including group companies of SKM, by erstwhile
Director(s) and/or some ex-employees of the Company, which amount to fraudulent
preference under Section 531 of the Companies Act, 1956, which was brought to
the notice of the Hon’ble Court vide CA 606of 2003 and CA797 of 2000. The
difference of Rs.34.29 million between balance as per books (since no accounting
entry has been recorded for unauthorised withdrawals) and that confirmed by the
bankers, is being carried as recoverable under Loans and Advances and is pending
appropriate adjustment on outcome of the ongoing cases and has not been provided
for in the accounts.
3.7 The Company has in its possession the bank statement of
Standard Chartered Grindlays Bank, Mumbai, which shows deposits of Rs.14.20
million and withdrawals of Rs.16.01 million through various transactions made
during the period March 1999 to March 2002. However, in the absence of complete
details of these transactions, appropriate accounting entries could not be
recorded in the books in respect of these transactions. The difference of
Rs.1.81 million between the balance as per books and that confirmed by the bank,
is carried as recoverable under ‘Loans and Advances’ and is pending appropriate
adjustment on the outcome of the ongoing litigations with SKM and entities in
which they are interested.
5. The Management and Board of Directors of the Company are
looking at various steps to improve financial performance of the Company by
rationalising network, improve yield and lower non-fuel costs as a result of
industrywide efforts. Steps are also being taken to evaluate various
alternatives for raising funds for which a merchant banker has been appointed.
The Board of Directors expects improvement in the business results in the
forthcoming years. Accordingly, the financial statements have been prepared on
going concern basis.
From Auditors’ Report :
4. Without qualifying our opinion, we draw attention to Note 5in Schedule XVII to the financial statements which indicate that the Company has suffered recurring losses from operations with net loss for the year ended March 31, 2008, without considering the impact of the matters mentioned in paragraph 5 below, amounting to Rs.1,335.07 million, and as of that date, the Company’s accumulated losses amounted to Rs.5,074.52 million, as against the Company’s share capital and reserves of Rs.5,354.33 million. Also, as discussed in Note 3 in Schedule XVII to the financial statements, realisation of the carrying amount of certain receivable amounting to Rs.68.82 million and dismissal of interest liability amounting to Rs.240.95 million is dependent upon success of the claims filed by the Company against some of the erstwhile directors and employees. These conditions raise significant doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 5. The accompanying financial statements do not include any adjustments that might result from the outcome of these uncertainties and also do not include any adjustments relating to the recoverability and classification of asset carrying amount or the amount and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
5. We report that:
(a) As more fully explained in the Note 3.1 of Schedule XVII to the financial statements, an amount of Rs.360 million, given as security deposit towards lease of a property, is carried as recoverable under the head Loans and Advances, of which an amount of Rs.26.82 million appears to be doubtful for recovery. The Company has not made provision for this doubtful amount in the financial statements.
(b) As more fully explained in the Note 3.3 of Schedule XVII to the financial statements, the Company has not accrued interest in respect of outstanding inter-corporate deposits of Rs.10 million, which as at March 31, 2008 amounts to Rs.240.95 million.
6. (e) Subject to our comments in paragraph 5 above, ….
1. Background information
The IASB has undertaken a project to replace the existing IAS
39 on Financial
Instruments: Recognition and Measurement
in order to improve the usefulness of financial statements for users by
simplifying the classification and measurement requirements for financial
instruments. The accounting standard on financial instruments is large and
complex; hence the International Accounting Standard Board (‘IASB’ or ‘the
Board’) has decided to replace the IAS 39 in three phases:
Classification and
measurement of financial instruments:
IFRS 9 was published in November 2009. This standard is currently applicable
for financial assets only. The Exposure draft (ED) on financial liabilities is
expected in 2010.
Impairment of
financial assets:
The IASB has issued an ED in November 2009
Hedge Accounting:
An ED is expected in the first quarter of 2010
Apart from the above, the IASB has also issued an exposure
draft relating to Derecognition and Fair Value Measurements that would either be
part of, or relevant to, accounting for financial instruments.
IFRS 9 currently is applicable only to financial assets
(accordingly, this article covers only financial assets within the scope of IFRS
9). Financial liabilities are currently removed from the scope of IFRS 9 due to
concerns raised on entity’s own credit risk in liability measurement. IASB needs
more time for deliberation and exploring alternative approaches to account for
financial liabilities.
2. Scope and recognition principle for financial assets
The objective of IFRS 9 is not to dramatically change the
accounting for financial instruments, but to simplify the accounting. Hence, the
standard has not modified the scope of financial assets under IAS 39.
3. Measurement principle for financial assets
3.1. Initial measurement
Like IAS 39, all financial assets under IFRS 9 shall be
initially recorded at fair value plus, in case of assets not classified as ‘fair
value through profit or loss’ (FVTPL), transaction costs directly attributable
to its acquisition.
3.2. Subsequent measurement
Like IAS 39, IFRS 9 has retained the ‘mixed model approach’
whereby, at inception, the financial assets are categorized into those that will
be subsequently remeasured at (a) amortised cost or (b) fair value. Thus IFRS 9
has eliminated the three categories of financial assets viz loans and
receivables, held to maturity (HTM) and available for sale, while the FVTPL
category is retained.
4. Principles for classification of financial assets
4.1. Classification criterion
An entity shall classify financial assets (as subsequently
measured) at either amortised cost or fair value on the basis of both (a) the
entity’s business model for managing the financial assets; and (b) the
contractual cash flow characteristics of the financial asset. The standard aims
at aligning the accounting in line with how management deploys assets in its
business, while also considering its characteristics.
4.2. Amortised Cost
Unlike IAS 39, the revised standard has laid down specific
criteria for classification of financial assets at amortised cost. A financial
asset shall be measured at amortised cost if the following two conditions are
met:
(a) the asset is held within a business model whose objective
is to hold assets in order to collect contractual cash flows.
(b) the contractual terms of the financial asset give rise on
specified dates to cash flows that are solely payments of principal and interest
on the principal amount outstanding.
If both the above criteria for amortised cost accounting are
not met, then it is measured at fair value.
4.3. Business Model
The Board clarified that an entity’s business model does not
relate to a choice (i.e. it is not a voluntary designation) but rather, it is a
matter of fact that can be observed by the way an entity is managed and
information is provided to its management. IFRS 9 requires the key managerial
personnel (as defined in IAS 24 on Related Party Disclosures) to determine the
objective of the business model. The entity’s business model is not determined
at the level of every instrument, but is determined at a higher level. An entity
may also have more than one business model for managing financial assets. For
example, a bank’s retail banking division may hold its loan assets and manage
the same in order to collect contractual cash flows while its investment banking
business has the objective to realise fair value changes through the sale of
loan assets prior to their maturity.
4.4. Cash flow characteristics
For amortised cost measurement, the cash flows from financial asset should represent solely payments of principal and interest on the principal amount outstanding on specified dates. Interest here means the consideration for the time value of money and for the credit risk associated with the principal amount outstanding during a particular period of time.
Leverage is not consistent with the ‘solely payments of principal and interest’ criterion. Leverage is described as increasing the variability of the contractual cash flows such that they do not have the economic characteristics of interest. The standard lists
freestanding swaps, options and forwards as instruments that contain leverage.
Examples
The following are examples when both the above conditions are met and hence the financial asset is subsequently remeasured at amortised cost:
A bond with variable interest rate and an interest cap;
A fixed interest rate loan;
Zero coupon bond;
Variable interest loans including an element of fixed credit spread which is determined at inception e.g. LIBOR + 300 bps;
Purchase of impaired / discounted loans which are then held to collect the contractual cash flows.
On the other hand, an investment in a convertible loan note would not qualify for amortised cost measurement because of the inclusion of the conversion option which is not deemed to represent payment of principal and interest. Similarly, an inverse floating interest loan which has an inverse relationship to market rates does not represent consideration for the time value of money and credit risk.
4.5. Impact of sale of financial assets on business model
Under IAS 39, subject to certain exemptions, if the entity sells / reclassifies held-to-maturity assets before maturity, tainting provisions under paragraph 9 to IAS 39 shall apply. Under IFRS 9, not all of the assets in a portfolio have to be held to maturity in order for the objective of the business model to qualify as holding assets to collect contractual cash flows. A sale of financial asset may not preclude subse-quent measurement at amortised cost if, for example, a financial asset is sold as per entity’s investment policy when the credit rating of the financial asset declined below certain threshold or a financial asset is sold to fund capital expenditures. The standard does not give any bright line or indicator as to what frequency of anticipated sales would preclude an amortised cost classification.
IAS 39 prescribed very limited circumstances under which sale of financial assets within HTM category were permitted without attracting tainting provisions. Under IFRS 9, portfolio of financial assets continue to be measured at amortised cost as long as the sale of financial assets is infrequent in number. Thus the scope for permitted sales of financial assets is much wider for the reporting entities.
4.6. Contractually linked instruments especially for securitisation transactions
An entity may have prioritised payments to holders of multiple ‘contractually linked’ instruments that create concentrations of risk e.g. the tranches of securitised debt. The complexity arises because the junior tranches provide credit protection to the more senior tranches and the characteristics of the tranches depend on the underlying instruments held. The holder should ‘look through’ the structure until the underlying pool of instruments that are creating (rather than passing through) the cash flows are identified for assessment for solely pay-ments of principal and interest, instruments which reduce cash flow variability and exposure to credit risk. Determining whether a tranche has a lower credit risk than that of the underlying instruments should, in many cases, be straightforward. The most senior tranches will qualify, while the most junior tranches will not. For the tranches in between, the entity may have to evalu-ate on a quantitative basis. E.g. Tranches with underlying instruments where the interest rate is linked to a commodity index would not have contractual cash flows that are solely payments of principal and interest.
When it is impracticable to assess the underlying pool of instruments, the test is deemed to fail and the tranche must be measured at FVTPL.
In practice, significant management judgement shall be required for classifying a financial asset where sale of some of these assets is anticipated. In such cases, management needs to determine whether the particular activity involves one business model with some infrequent sale of assets, or whether there are two business models where one is held for collecting contractual cash flows while the other could be sold in future. However, an entity that actively manages a portfolio in order to realise fair value changes, or a portfolio that is managed and whose performance is evaluated on a fair value basis, does not hold the asset under a business model to collect contrac-tual cash flows. Such instruments would not qualify for amortised cost measurement; hence the portfolio would be subsequently remeasured at fair value every reporting date.
5. Option to designate financial asset at FVTPL
Like IAS 39, an entity can choose to designate a financial asset which otherwise would qualify for amortised cost accounting as measured at FVTPL only if it eliminates or significantly reduces a recognition or measurement inconsistency that otherwise would arise from measuring financial assets or liabilities, or recognising gains or losses on them, on a different basis. The election is available only on initial recognition of the asset and is irrevocable.
For instance, an entity may have issued foreign currency convertible bonds (FCCB) that is measured at fair value in entirety. These funds were utilised in investment of fixed rate bonds and met the amortised cost criteria in accordance with IFRS 9. This would lead to accounting mismatch as the liability is mea-sured at fair value while the asset is measured at amortised cost. This accounting mismatch can be significantly reduced by designating the financial asset at fair value through profit or loss as per IFRS 9.
IAS 39 also permitted an entity to designate a financial asset at FVTPL in two other scenarios.
IAS 39 permitted designating financial asset at FVTPL if the portfolio consists assets managed on a fair value basis. For instance, an entity may hold a portfolio of debt securities. The entity manages the portfolio to maximise its returns (i.e. interest and fair value changes) and evaluates its performance on that basis. In such a case, IAS 39 permitted the entity to designate the portfolio as FVTPL.
As discussed above, these assets cannot qualify for amortised cost measurement under IFRS 9 and therefore are required to be measured at fair value.
a) IAS 39 permitted hybrid instruments (containing an embedded derivative and the host contract) to be designated as FVTPL. Under IFRS 9, hybrid instrument as a whole is assessed for classification as amortised cost or FVTPL. If not classified as at amortised cost, entire instrument is measured at fair value through profit or loss. Point 9.4 below explains the difference in the accounting treatment under IAS 39 and IFRS 9 with an example.
Option to designate investment in equity shares at fair value through other comprehensive income (FVOCI)
6.1. Initial designation
The standard allows an entity, at initial recognition only, to elect to present changes in fair value of an investment in an equity instrument (not held for trading) in ‘Other comprehensive income’ (‘OCI’). The election is irrevocable and can be made on an instrument-by-instrument basis. However, investments in associates and joint ventures for venture capital organizations, mutual funds, unit trusts are not permitted such an option on account of equity accounting or proportional consolidation.
6.2. Subsequent measurement of equity instruments
IFRS 9 requires all investments in equity instruments (including unquoted equity instruments) to be measured at fair value. IFRS 9 permits cost to be an appropriate estimate of fair value of unquoted equity instruments in very limited circumstances.
6.3. Accounting implications on profit or loss
The amounts recognised in OCI are not recycled to profit or loss on disposal of the investment. However, dividend income on these investments continues to be recogn-ised in profit or loss, unless the dividend clearly represents a repayment of part of cost of the investment. Under IFRS 9, no separate impairment loss is to be recognised in profit or loss even if the equity invest-ment is designated as FVOCI.
7. Reclassifications
7.1. Change in business model
Classification of financial instruments is determined on initial recognition. Subsequent reclassification is prohibited. However, when an entity changes its business model in a way that is significant to its operations, a re-assessment is required of whether the initial classification remains appropriate. The standard expects such changes to be very infrequent and demonstrable to external parties.
7.2. New carrying value
If a financial asset is reclassified from fair value measurement to amortised cost measurement, then the fair value at the reclassification date becomes the new carrying amount. Conversely, if a financial asset is reclassified from amortised cost measurement to fair value measurement, then the fair value at the reclassification date becomes the new carrying amount and the difference between amortised cost and fair value is recognised in profit or loss.
7.3. Reclassification date
The reclassification date is the first day of the next reporting period. The reason that the reclassification date is different from the actual date of change in business model is that the IASB did not want to allow entities to choose a reclassification date to achieve an accounting result. Thus, from the date of change in business model until the reclassification date, financial assets continue to be accounted as if the business model has not changed.
8. Embedded derivatives
8.1. Embedded derivatives on financial asset host
Under IAS 39, embedded derivatives on financial assets hosts are assessed whether they need to be accounted separately. If the embedded derivative is separated from the host contract, the embedded derivative is measured at fair value while the host could be measured at amortised cost. IFRS 9 requires an entity to assess whether the hybrid instrument (i.e. host with embedded derivative) being a financial asset within the scope of the standard meets the criteria provided in the standard for amortised cost measurement. If the amortised cost measurement criteria are fulfilled, the entire hybrid instrument is measured at amortised cost (Refer 9.4 below). Else, the entire hybrid instrument is measured at fair value (Refer 9.3 below). However, in both cases, the embedded derivative is not separated.
8.2. Embedded derivatives on non-financial asset host
IFRS 9 does not change the accounting prescribed under IAS 39 for embedded derivatives with host contracts that are not financial assets within the scope of the standard. E.g. rights under leases, insurance contacts, financial liabilities and other non-financial assets
9. Examples for classification under IFRS 9 and IAS 39
9.1. Investment in quoted as well as unquoted equity instruments
Under IAS 39, the investments shall be classified as Available-for-sale (AFS), unless held for trading, and measured at fair value every reporting date. The fair value changes shall be recognised in OCI. The entity may also have recorded the unquoted equity instrument at cost based on the exemption given in IAS 39.
Under IFRS 9, the investment does not meet the criteria for amortised cost measurement. Hence they will be measured at fair value at every reporting date. The fair value changes shall be recognised in profit or loss, unless the entity elects to recognise the same in OCI.
9.2. Investment in quoted debt securities
Under IAS 39, an investment in a debt instrument quoted in active market is not permitted to be classified as loans and receivable category. Hence, these investments shall be classified as Available for sale unless there is a stated intent and ability to hold the instrument to maturity (in which case, the instrument would be classified as Held to Maturity and measured at amortised cost)
Under IFRS 9, if the objective of the business model is to collect solely principal and interest on the principal, then the instrument shall be subsequently measured at amortised cost. Thus, the fact that the debt instrument is quoted in active market has no impact on classification of financial asset.
9.3. Investment in Convertible bonds (at the option of investor)
Under IAS 39, the presence of the con-version feature that is exercisable by the investor precludes classification as HTM category. Such convertible bonds are clas-sified as AFS by the investor. Further, the embedded conversion option shall have to be separately accounted for.
Under IFRS 9, the conversion option shall preclude the amortised cost measurement as the investment shall not be considered to collect solely principal and interest. The entire instrument shall be classified at fair value through profit or loss (FVTPL) with fair value changes reported in income state-ment.
9.4. Prepayment options with reasonable additional compensation for early termination
Under IAS 39, if a debt instrument has a prepayment option that permits the holder to redeem the debt instrument for an amount that is approximately equal on each exercise date to the amortised cost of the debt instrument, such option is deemed to be closely related to the host and does not require separation.
IFRS 9 does not preclude amortised cost classification for a financial asset with a prepayment option when the prepayment amount substantially represents unpaid amounts of principal and interest, including reasonable additional compensation for early termination. Thus, in some cases, amortised cost accounting may be possible for the entire hybrid contract under IFRS 9, while separation of prepayment option may be required under IAS 39.
9.5. Term extending options
Under IAS 39, term extending option is an embedded derivative. The embedded derivative does not require separation if the rate of interest for the extended period approximates to the market rate of interest at the time of obtaining extension. Else, the derivative would require separation.
Under IFRS 9, amortised cost classification
for a term extension option is not precluded if the instrument is held under a business model whose objective is to collect contractual cash flows. Thus in such cases, the entire hybrid instrument shall be carried at amortised cost.
Summary of key differences between IAS 39 and IFRS 9
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Particulars |
IAS 39 |
IFRS 9 |
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Categories of |
There are four categories of financial |
There are two categories of |
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financial assets |
assets: |
(a) Fair value through profit or loss and |
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and |
(b) |
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(d) Fair value through profit or loss. |
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2. |
Embedded |
Under |
Under |
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rivatives |
is |
be assessed for amortised |
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financial asset |
to the |
in its |
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the |
sification criteria are met, the entire instru– |
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separately |
ment is |
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fair |
the |
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at fair |
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3. |
Equity |
All |
All instruments, other than those classified |
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ments |
fied as AFS securities are subsequently |
as |
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measured |
FVTPL. |
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recognised |
equity |
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AFS |
to |
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recognised |
as |
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income |
changes |
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these |
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to the |
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4. |
Designation |
Apart |
IFRS 9 |
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financial assets |
39 permits designating financial assets |
financial asset at FVTPL only to eliminate |
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as |
as at |
or |
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the portfolio |
match. As discussed above, the classifica– |
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a fair |
tion in case of a portfolio of financial |
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evaluated |
managed |
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hybrid |
instrument |
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financial asset) shall be |
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(without |
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The standard is effective for annual periods beginning on or after 1 January 2013. Early application is permitted.
The standard has given certain transitionary provisions which provide guidance on how companies who are currently following IAS 39 principles can transition to IFRS 9 within the period when the standard is issued and the effective date of application referred above.
The transitionary provision also provides guidance on classification and measurement of financial as-sets existing on the date of initial application of IFRS 9.
IFRS – Is it a smooth drive for auto companies?
Notwithstanding the recent representation by a leading
industry body to defer the implementation of IFRS in India, the automotive
industry is watching closely, as the events unfold on the roadmap for IFRS
transition in India. Several phase 1 auto companies that are in the advanced
stage of IFRS transition realise that some of the IFRS related changes could
have a significant impact on the financial and business parameters. This article
attempts to highlight some of the key IFRS impact areas for the auto industry in
relation to (a) Revenue recognition; (b) Property, plant and equipment, (c)
capital structure and (d) group structure.
Revenue recognition
Timing of recognition of revenues
Currently under Indian GAAP (hereafter referred to as IGAAP),
many auto companies recognise revenues on dispatch of the product for sale from
the production unit, which coincides with transfer of legal title of goods.
However, as per IFRS, revenue can be recognised only when significant risk and
rewards are transferred to the buyer and the seller does not retain managerial
involvement or effective control over the goods sold.
For example, for domestic sales, if the company bears the
risk of damage/loss to vehicles before it reaches the dealer/customer, then
revenue recognition may need to be deferred till delivery.
In the auto sector, a significant proportion of revenue comes
from month-end billings. There is a possibility that revenues from such
month-end billing may get deferred to the next quarter or fiscal year when the
revenue recognition criteria are met. This may result in a one-time impact (but
will be balanced out on an ongoing basis) on the company’s financials due to the
IFRS transition. Companies may have to align their internal processes so that
they can fulfill the revenue recognition criteria as prescribed under IFRS.
Customer incentives and discounts
Auto companies offer a range of dealer discounts and
incentives (including free service coupons to ultimate customers) to boost their
sales. Under IGAAP, the majority of such discounts and incentives are recognised
as sales promotion expenses, while the sales are reported gross of such
incentives. Under IFRS, all forms of discounts and incentives to the dealers are
recognised as a reduction of revenue. As such, revenues are presented net of
related discounts/incentives. Though such IFRS adjustment may not have an impact
on the profits for the year, they do impact the revenues and key ratios related
to revenue (for example, gross profit margins).
Warranties
Auto companies usually offer two types of warranties (i)
initial warranty that is bundled along with every vehicle sold without any
additional cost and (ii) extended warranty (commencing after expiry of initial
warranty) that is offered to the customer as per their choice and for a price.
Under IGAAP, as the initial warranty is not identified as a
separate element of the contract, sales are recorded for the full amount at the
time of the delivery of the vehicle. Correspondingly, a provision (calculated at
the amount of expected undiscounted cost to be incurred on meeting the warranty
obligation) is recognised upfront. Under IFRS, similar accounting treatment is
required for ‘normal’ warranties, except that the provision is required to be
discounted.
In case of ‘extended’ warranties, the contract contains
multiple elements i.e. sale of vehicles and sale of extended warranty. Under
IGAAP, there is no specific guidance on accounting for multiple elements in a
contract, and practice varies. Under IFRS, the price attributable to the
extended warranty is required to be deferred and recognised in income statement
over the extended warranty period.
The revenue attributable to the extended warranty may be
calculated based on the relative fair value method (relative fair values of sale
of vehicle and the extended warranty) or the residual fair value method (the
fair value of extended warranty is deferred).
Property, plant and equipment
Component approach for depreciation
Currently, most companies apply schedule XIV rates for
providing depreciation on assets. As such, the entire depreciable amount (i.e.
cost less residual value) is depreciated over the useful life estimated under
Schedule XIV to the Companies Act, 1956. Any replacement of significant
component is generally charged to profits as repairs cost.
Under IFRS, companies would be required to depreciate an
asset over its useful life, which may be different from industry benchmarks.
Further, if the asset includes a component, that can be readily identifiable; is
of significant value in relation to the asset; and has a significantly different
useful life; IFRS requires to treat such components as akin to separate assets.
Such components are depreciated over the component’s useful life and the
replacement of such a component is treated as akin to replacement of an asset
(i.e. disposal and fresh purchase).
As depreciation under IFRS may undergo a change, a
corresponding impact may also arise on valuation of inventories.
Contracts with suppliers
Automobile companies maintain vendor parks where suppliers
are in close proximity to the main plant to supply components used in the
manufacture of vehicles. Most of these vendors exclusively serve the plant, and
the automobile company enters into take-or-pay arrangements (such as a minimum
procurement guarantee or a per unit fee along with a fixed annual fee), whereby
the vendor will recover their capital costs irrespective of the actual off-take
from the company. In substance, under IFRS, maintaining exclusive assets against
fixed recoveries of capital costs make it a lease arrangement where the auto
companies are deemed to have taken the vendor’s assets on lease. Under IGAAP,
such contracts are not construed as a lease. Once the arrangement is classified
as a lease, it is further classified as an operating or financial lease
depending on the terms.
If the arrangement contains a financial lease, the fair value
of the asset is recognised on the automobile company’s balance sheet, increasing
its asset base and debt levels, while the impact on the income statement will be
in the form of depreciation on the leased asset and interest payment for the
lease. Under IGAAP, such expenditure would be recognised as part of operating
expenses. This treatment would have a positive impact on the EBITDA of the
company.
From the perspective of inventory valuation for the auto company, the entire payments may be construed as the cost of inventories under IGAAP. However, under IFRS, as charge to the income statement over a period of time would be in the form of depreciation on the leased assets and interest on lease obligation, the interest component may not be considered as cost of inventories.
Intangibles with indefinite useful lives
IGAAP requires all intangibles to be amortised over their useful life, though there is a rebuttable presumption that the useful life of an intangible asset will not be greater than ten years. Under IFRS, there is an additional category of intangible asset i.e. intangible assets with indefinite useful life. The term ‘indefinite’ here does not denote ‘infinite’; instead it denotes a useful life that is relatively long and is not certain eg: brands if they meet certain conditions as detailed in the standard. Such intangible assets are not amortised; rather they are tested for impairment atleast once annually.
Capital structure and borrowing costs
Sales tax deferral loan
Auto companies that have set up plants in certain notified areas are eligible to collect sales tax from customers and are required to pay the same after a few years without any interest charge, based on their total investment in the region. Under IGAAP, such interest-free loans are recognised at the amount collected throughout the tenure of the loan.
Under IFRS, such loans would be considered as financial liabilities and hence recognised at the present value of future cash flows. The difference between the nominal value (i.e., the amount collected from customers) and the present value of the loan would be recognised as a deferred government grant. The difference between the present value and the nominal value of the loan would be recognised as reduction in the value of the underlying fixed assets, or as a deferred income over the depreciable life of the underlying asset.
Borrowing costs
The borrowing costs under IGAAP are primarily determined based on the coupon rates on the financial instrument. As such, the borrowing costs in most cases represent an actual and separately earmarked cash outflow.
Under IFRS, the borrowing cost also includes the effects of routine non-lending transactions that also comprise a financing element. Consider, for instance, the above mentioned sales tax deferral loan. As stated above, the loan liability, which is initially calculated at the present value of future cash flows, shall subsequently be measured at amortised cost and the effects of unwinding of the discount would be recognised as borrowing costs.
Further, if the borrowing cost is attributable to the construction of a qualifying asset as defined under IAS 23, then such effects of unwinding of the loan liability shall also be capitalised to the carrying value of qualifying asset though there is no separate payment of interest made on the loan.
Securitisations
Stringent conditions for securitisation of loans will impact the financing arms of auto companies. Under IGAAP, an entity may de-recognise its assignments of loans and advances with credit enhancements as a ‘sale’ transaction.
Under IFRS, the assessment of retention or transfer of risks and rewards is a critical criterion to determine if de-recognition is appropriate. Legal transfer is not sufficient criteria to achieve ‘sale’ accounting.
Qualitative factors such as credit enhancement facilities provided by the originator to the special purpose trust or to a counterparty in the case of a direct assignment will also have to be evaluated to assess if the de-recognition criteria is met.
This may result in grossing-up of the balance sheet for ‘sold’ assets and related debt (sale proceeds). This, in turn, may impact debt equity ratios.
Group structure
Joint arrangements Under IFRS, consolidation is based on the control (both direct and indirect) over the entity rather than ownership. This may result in consolidation of some current JVs and associates and de-consolidation of certain JVs and subsidiaries based on contractual arrangements.
In the auto industry, the partnerships between Indian and foreign auto companies, where the Indian company may hold a majority stake but has shared control with the foreign company, may be impacted under IFRS eg: veto power with the foreign partner for approval of annual budgets and operating plans etc.
Based on the above guidance, if the consolidated entity is classified as an associate or a joint venture, the company would not be able to disclose the entire revenue of the investee in its consolidated financial statements.
Special Purpose Entity (SPE)
IFRS provides indicators to determine whether an entity controls an SPE, including an assessment of an entity’s exposure to the majority of risks and rewards of ownership of the SPE. Therefore, if the ‘control’ criteria over the SPE are met, the entity will be required to consolidate the SPE in its financial statements, even though it may have no legal ownership of the equity shares of the SPE.
In the automotive sector, the entity operates through a wide network of auto component manufacturers that work on an auto-pilot mechanism or are funded by the automotive company. Such arrangements need to be assessed for SPEs. If such entities are classified as SPEs and meet certain criterias, the SPEs are consolidated with the entity. Thus, all the assets and liabilities of these SPEs are recognised in the entity’s consolidated financial statements, thereby affecting key ratios of the entity. IGAAP does not provide for such guidance.
The financial and non-financial aspects relating to IFRS convergence need to be planned and tested in advance of the implementation date. Global experience has shown that the early adopters are generally more successful in managing the overall IFRS transition. The early-mover advantage not only provides adequate time to carry out required changes, but protects critical decisions being taken within the constraints of time and resources.
17 Purchase of immovable property by Central Government —
Lease for 9 years renewable at option of lessee for a further period of 9 years
would be covered by Explanation to S. 269UA(f)(i) attracting the provisions of
Chapter XX-C.
[Govind Impex P. Ltd. & Ors. v. Appropriate Authority,
Income-tax Department, (2011) 330 ITR 10 (SC)]
The appellants, the owners of property bearing No. B-68,
Greater Kailash, Part-I, New Delhi had let out the same at monthly rental of
Rs.2,50,000 with effect from June 1, 1991 for a period of nine years renewable
for a further period of nine years. The Appropriate Authority of the Income-tax
Department, issued show-cause notice to the appellant dated December 4, 1995,
inter alia, alleging that since the lease is for a period of nine years
extendable for a further period of nine years, it was lease for a period of more
than 12 years and hence the provisions of Chapter XX-C of the Income-tax Act
would be attracted and the lessor and the lessee were obliged to submit Form
37-I within 15 days of the draft agreement. The appellants submitted their
show-cause on January 12, 1996, inter alia, contending that the lessee had an
option to renew the lease by giving three months’ notice prior to the expiry of
the lease and further a fresh lease deed was required to be executed and
registered, hence the provisions of Chapter XX-C of the Act would not be
attracted. The show cause filed by the appellants was considered and finding no
merit, the Appropriate Authority rejected the same by order dated April 24, 2001
holding the appellants guilty of not complying with the provisions of S. 269UC
of the Act. Accordingly, a complaint was made on April 30, 2001 u/s.276AB read
with S. 278B of the Act before the Additional Chief Metropolitan Magistrate,
alleging contravention of S. 269UC of the Act. The learned Magistrate by its
order dated April 30, 2001 took cognizance of the offence and issued process
against the appellants.
The appellants filed writ petition before the High Court for
quashing the aforesaid order dated April 24, 2001 of the Appropriate Authority
rejecting their show cause and deciding to file criminal complaint. However,
since the prosecution had already been launched against the appellants, the
Division Bench of the High Court directed for treating the writ petition as an
application u/s.482 of the Code of Criminal Procedure. Ultimately, the learned
Single Judge by order dated October 10, 2002 dismissed the same.
Aggrieved by the same the appellant have preferred an appeal
with the leave of the Supreme Court.
The Supreme Court observed that there was no serious dispute
in regard to the interpretation of the Explanation to S. 269UA(f) of the Act and
in fact, it proceeded on an assumption that it would cover only such cases where
there existed a provision for extension in the lease deed. According to the
Supreme Court, therefore, what it was required to consider was the terms and
conditions of lease. The Supreme Court observed that the terms of lease are not
to be interpreted following strict rules of construction. One term of the lease
cannot be taken into consideration in isolation. The entire document in totality
has to be seen to decipher the terms and conditions of lease. In the present
case, clause 1 in no uncertain term provided for extension of the period of
lease for a further period of nine years and clause 12 thereof provided for
renewal on fulfilment of certain terms and conditions. Therefore, when the
document was construed as a whole, it was apparent that it provided for the
extension of the term. If that was taken into account the lease was for a period
of not less than twelve years. Once it was held so the Explanation to S.
269UA(f)(i) was clearly attracted. The Supreme Court was of the opinion that the
High Court was right in observing that “on a conjoint reading of paragraphs 1
and 12 of the lease deed, the lessor intended the lease to last for 18 years”
and further the lessor could not have refused to renew/extend the lease after
the first term if the lessee complied with the conditions.
As the matter was pending since long, the Supreme Court
directed the Magistrate in seisin of the case to conclude the trial within six
months from the date of appearance of the appellants. It further directed the
appellants to appear before the Court in seisin of the case within six weeks
from date of the order.
16 High Court — Appeal lies only when substantial question of
law is involved — Cash credits — Where any sum is found credited in the books of
the assessee for any previous year, the same may be charged to income-tax as
income of the assessee of that previous year, if the explanation offered by the
assessee about the nature and source thereof is in the opinion of the Assessing
Officer, not satisfactory.
[Vijay Kumar Talwar v. CIT, (2011) 330 ITR 1 (SC)]
The assessee was a partner in a firm, named and styled as
M/s. Des Raj Tilak Raj, having its business at Delhi, with a branch at Calcutta.
The said partnership firm was dissolved with effect from April 1, 1982. As per
dissolution deed, the assessee took over the business of the Calcutta branch of
the erstwhile firm. Thereafter, from October 21, 1982, the assessee started a
proprietary concern by the name of M/s. Des Raj Vijay Kumar.
On May 27, 1983, a search took place at the assessee’s
premises during which certain incriminating documents were recovered and seized.
During the course of assessment proceedings for the A.Y. 1983-84, for which the
previous year ended on March 31, 1983, the Assessing Officer examined the seized
record. One of the registers so examined, revealed cash receipts of Rs.3,49,991
in the name of 15 persons, most of which were purportedly received during the
period of April, 1982 to October, 1982. When the Assessing Officer sought an
explanation from the assessee with regard to the said cash credits in the
register, the assessee merely stated that the cash receipts were in the nature
of realisations from the past debtors of the erstwhile firm. In order to
appreciate the said stand, the Assessing Officer called for the account books of
the Calcutta branch of the erstwhile firm for the relevant period, but the
assessee failed to produce them. The Assessing Officer also examined the
assessee’s brother, a partner in the erstwhile firm, who also stated that the
account books were not available.
Having noted that the outstanding realisations of the
Calcutta branch in the preceding years varied from Rs.25,000 to Rs.30,000, the
Assessing Officer held that the assessee’s submission that cash receipts of
Rs.3,49,991 related to earlier years was untenable. Therefore, the Assessing
Officer added a sum of Rs.3,49,991 as the assessee’s income under the head
‘unexplained cash receipts’.
Aggrieved, the assessee appealed to the Commissioner of
Income-tax (Appeals) who dismissed the same and confirmed the addition made by
the Assessing Officer.
Being still aggrieved, the assessee carried the matter in
appeal before the Tribunal. The Tribunal remitted the matter back to the
Assessing Officer for de novo adjudication. The Tribunal inter alia observed
that some of the entries pertained to the period when the erstwhile firm was in
existence, whereas the assessee did not conduct business at Calcutta in a
proprietary capacity but was only a partner in the erstwhile firm.
Pursuant to the Tribunal’s order, the Assessing Officer asked
the assessee to file confirmations of the 15 parties in whose names cash credit
entries appeared in the register seized. In reply, the assessee filed
confirmations of seven parties with address of other six parties. The Assessing
Officer considered the two remaining parties as non-existent. The Assessing
Officer did not accept the confirmation filed because they were identical and it
did not contain GIR No. Also, when the letters were sent to those parties, four
letters were returned unserved, and one of the parties denied any relationship
with the firm. Out of the letter sent to six parties whose addresses had been
supplied, three did not respond, while two others denied any relationship with
the firm and remaining one letter was returned unserved. The Assessing Officer
therefore confirmed the original assessment. The assessee preferred an appeal
before the Commissioner of Income-tax (Appeals), which was dismissed. Still not
being satisfied, the assessee carried the matter in appeal before the Tribunal.
The Tribunal, held that the addition of Rs.3,49,991 was correct.
The assessee moved an application u/s.254(2) of the Act
before the Tribunal for rectification of mistakes in the order of the Tribunal,
which was rejected by the Tribunal.
The assessee preferred an appeal before the High Court
u/s.260A of the Act, which was dismissed holding that the findings recorded by
the Commissioner of Income-tax (Appeals) and the Tribunal were findings of fact
and no substantial question of law arose for consideration.
On further appeal, the Supreme Court held that it was
manifest from a bare reading of the Section that an appeal to the High Court
from a decision of the Tribunal lies only when a substantial question of law is
involved, and where the High Court comes to the conclusion that a substantial
question of law arises from the said order, it is mandatory that such questions
must be formulated. The expression ‘substantial question of law’ is not defined
in the Act. Nevertheless, it has acquired a definite connotation through various
judicial pronouncements. The Supreme Court referred to its decisions in Sir
Chunilal V. Mehta and Sons Ltd. v. Century Spinning and Manufacturing Co. Ltd.,
AIR 1962 SC 1311, Santosh Hazari v. Purushottam Tiwari, (2001) 3 SCC 179,
Hero Vinoth. (Minor) v. Seshammal, (2006) 5 SCC 545, Madan Lal v. Mst.
Gopi, (1980) 4 SCC 255 and Ors., in this regard.
Examining on the touch-stone of the principles laid down in the aforesaid decisions, the Supreme Court was of the opinion that in the instant case the High Court had correctly concluded that no substantial question of law arose from the order of the Tribunal. The Supreme Court observed that all the authorities below, in particular the Tribunal, had observed in unison that the assessee did not produce any evidence to rebut the presumption drawn against him u/s.68 of the Act, by producing the parties in whose name the amounts in question had been credited by the assessee in his books of account. In the absence of any evidence, a bald explanation furnished by the assessee about the source of the credits in question viz. realisation from the debtors of the erstwhile firm, in the opinion of the Assessing Officer, was not satisfactory. The Supreme Court held that it was well settled that in view of S. 68 of the Act, where any sum is found credited in the books of the assessee for any previous year, the same may be charged to income-tax as the income of the assessee of that previous year, if the explanation offered by the assessee about the nature and source thereof is in the opinion of the Assessing Officer, not satisfactory. The Supreme Court was of the opinion that on a conspectus of the factual scenario, the conclusion of the Tribunal to the effect that the assessee had failed to prove the source of the cash credits could not be said to be perverse, giving rise to a substantial question of law. The Tribunal being the final fact finding authority, in the absence of demonstrated perversity in its finding, interference therewith by the Supreme Court was not warranted.
[Note : The decisions referred to in the judgment explains as to what is a substantial question of law and when findings of fact gives rise to question of law.]
25 Capital or revenue expenditure – Replacement of machinery
in a spinning mill is not revenue expenditure.
[A]
CIT vs. Sri Mangayarkar
Mills P. Ltd. [2009] 315 ITR 114 (SC)
Entries in the book of accounts may not be determinative as
to the nature of expenditure but were indicative of what the assessee himself
thinks of the expenditure.
The respondent assessee was engaged in the manufacture and
sale of cotton yarn. During the assessment year 1995-96, the assessee claimed an
amount of
Rs.61, 28,150 as being expenditure incurred on replacement of
machinery as revenue expenditure. The assessee believed that such expenditure
was merely expenditure on replacement of spare parts in the spinning mill system
and, therefore, amounted to revenue expenditure. The Assessing Officer (AO) did
not, however, accept this view of the assessee. According to him, each machine
in a spinning mill performs a different function and the product from one
machine is taken and manually fed into another machine and the output obtained.
All the machines are thus not integrally connected. Based on this reasoning, the
Assessing Officer disallowed the above claim of the assessee and held the said
expenditure to be of a capital nature. The AO further held that the assessee had
treated the said expenditure as capital expenditure by capitalizing the assets
in the books of account and had, thus, shown profit in its profit and loss
account to third parties like bankers, financial institutions, creditors,
shareholders, etc. However, from the tax point of view, the respondent wanted to
reduce the net profit and the total taxable income by claiming such huge
expenditure in the statement of total income computation for acquisition of
fixed assets as revenue expenditure. The AO further held that the assessee could
claim depreciation on the said assets as per Income-tax Rules.
On an appeal, the Commissioner of Income Tax (Appeals)
allowed the appeal of the assessee, inter alia, holding that the replacement of
machinery by the assessee in this case constituted revenue expenditure.
On appeal by the Revenue, the Tribunal followed the decision
of the Madras High Court wherein it was decided that replacement of the ring
frame constitutes only replacement of a part of the machinery in textile mills.
The Tribunal thus upheld the order of the Commissioner of Income-tax (Appeals)
and dismissed the appeal of the Revenue.
The High Court, relying on its own decision in CIT vs.
Janakiram Mills Ltd. [2005] 275 ITR 403 (Mad) and CIT vs. Loyal Textile Mills
Ltd. [2006] 284 ITR 658 (Mad), dismissed the appeal filed by the Revenue and
held that the expenditure on replacement of machinery was revenue in nature. The
High Court further held that the question whether the expenditure on replacement
of machinery was capital or revenue in nature was not determined by the
treatment given to it by the assessee in the books of account or in the
balance-sheet. The claim had to be determined only by relying on the provisions
of the Act and not by the accounting practice followed by the assessee.
On further appeal, the Supreme Court observed that the first
issue was whether each machine in a textile mill is an independent item or
merely a part of a complete spinning textile mill, which only together are
capable of manufacture — and there is no intermediate product produced.
According to the Supreme Court, this issue had been satisfactorily answered by
its decision in CIT vs. Saravana Spinning Mills P. Ltd. [2007] 293 ITR 21 (SC).
In that case, the court had held unambiguously that “each machine in a segment
of a textile mill has an independent role to play in the mill and the output of
each division is different from the other.” The Supreme Court thus held that
each machine in a textile mill should be treated independently as such and not
as a mere part of an entire composite machinery of the spinning mill. It can at
best be considered part of an integrated manufacture process employed in a
textile mill.
On the issue of “current repairs” under section 31 of the
Act, in CIT vs. Saravana Spinning Mills P. Ltd. (Supra), it has been laid down
that in order to determine whether a particular expenditure amounted to “current
repairs”, the test was “whether the
expenditure was incurred to preserve and maintain”, an already existing asset
and not to bring a new asset into existence or to obtain a new advantage. For
“current repairs” determination, whether the expenditure was “revenue or capital
was not the proper test”.
The Supreme Court held that replacement of such an old
machine with a new one would constitute the bringing into existence of a new
asset in place of the old one and not repair of the old and existing machine.
Thus, replacement of assets as in the instant case could not amount to “current
repairs”, and the expenditure made by the assessee could not be allowed as a
deduction under Section 31 of the Act.
The Supreme Court observed that given that Section 31 of the
Act was not applicable to the said expenditure of the assessee, the next issue
was whether it could be considered “revenue expenditure” of the nature envisaged
under Section 37 of the Act. The Saravana Mills’ case held that the expenditure
was deductible under Section 37 only if it: (a) was not deductible under Section
30-36, (b) was of a revenue nature, (c) was incurred during current accounting
year, and (d) was incurred wholly and exclusively for the purpose of the
business. According to the Supreme Court, the assessee’s expenditure satisfied
requirements (a), (c) and (d) as stated above. The dispute was with respect to
the nature of expenditure, that is, whether it was revenue or capital in nature.
The Supreme Court was of the opinion that the expenditure of the assessee in
this case was capital in nature.
Before concluding, the Supreme Court observed that it was
clear on record that the assessee had sought to treat the said expenditure
differently for the purpose of computing its profit and for the purpose of
payment of income-tax. The said expenditure had been treated as an addition to
existing assets in the former and as revenue expenditure in the latter. Though
accounting practices may not be the best guide in determining the nature of
expenditure, in this case they were indicative of what the assessee itself
thought of the expenditure it made on replacement of machinery, and that the
claim for deduction under the Act was made merely to diminish the tax burden,
and not under belief that it was actually revenue expenditure.
26 Co-operative Society – Deduction under Section 80P(2)(e):
An assessee-society engaged in distribution of controlled commodities on behalf
of the government under Public Distribution System and getting commission is not
entitled to deduction under section 80P(2)(e), as it earned its income from
business and not from letting of godowns or warehouses for the purpose of
storage, processing or facilitating the marketing of commodities.
[B]
Udaipur Sahakari
Upbhokta Thok Bhandar Ltd. vs. CIT [2009] 315 ITR 21 (SC)
The appellant, a co-operative society registered under the
Rajasthan Co-operative Societies Act, 1965, was running a consumer co-operative
store at Udaipur since 1963. It had 30 branches. The appellant was dealing in
non-controlled commodities through its branches. In addition, the appellant was
also doing the work of distribution of controlled commodities such as wheat,
sugar, rice and cloth on behalf of the government under the public distribution
scheme (PDS) for which it was getting commission. The distribution of the
controlled commodities was regulated by the District Supply Officer (DSO
–Authorized Officer) under the Rajasthan Foodgrains and other Essential Articles
(Regulation of Distribution) Order, 1976 (for short, “the 1976 Order”). The
appellant claimed to be stockist/distributor of controlled commodities. It took
delivery from the Food Corporation of India (FCI) and the Rajasthan Rajya
Upbhokta Sangh, as per the directives of the state government. The price,
quantity and the person from whom the delivery was to be taken was fixed by the
state government under the said 1976 Order. After taking the delivery, the
appellant stored these goods in its godowns, both owned and rented. The storage
godowns were open to checking by the concerned officers of the state government.
The stocks stored by the appellant were delivered to fair price shops
(FPS-retailers), as per the directives of the state government. The quantity
price and the FPS to whom the delivery was to be given, were fixed by the state
government. According to the appellant, therefore, the above modus operandi
indicated that the state government exercised total control over the stock of
controlled commodities stored in the godowns of the appellant-society. On
February 28, 1977, the appellant was granted licence for purchase/sale/storage
for sale of foodgrains under the Rajasthan Foodgrains Dealers Licensing Order,
1964.
On August 31, 1990, the appellant filed its returns for the
assessment year 1989-90, claiming deduction under section 80P(2)(e) of the 1961
Act on the income of commission received by it from the government for storage
of controlled commodities. The appellant later filed its returns of income for
the subsequent assessment years 1990-91, 1991-92, 1992-93, 1993-94, 1994-95,
1995-96, inter alia, claiming deduction on the income of commission received by
it from the state government for storage of controlled commodities. Vide order
dated March 26, 1992, the AO (Assessing Officer) disallowed the claim on the
ground that the appellant-society was a wholesaler of foodgrains and it was not
a mere stockist as claimed, and consequently, it was not entitled to deduction
under section 80P(2)(e) of the 1961 Act. This order was applied for the
assessment years in question. Aggrieved by the assessment order(s), the
appellant filed appeals before the Commissioner of Income-tax (Appeals). The
Commissioner of Income-tax (Appeals) held that the appellant was entitled to
deduction under section 80P(2)(e) of the 1961 Act on the income of commission
received from the state government for stocking the above foodgrains. This
decision was affirmed by the Tribunal, vide its decision dated October 20, 2000,
dismissing the department’s appeal by a common order holding that the appellant
was entitled to deduction under the said section. This view of the Tribunal,
however, was overruled by the decision dated November 2, 2006, of the Rajasthan
High Court which took the view that the appellant-society was storing the said
controlled commodities in its godowns as part of its own trading stocks; that
the appellant acted as a trader in the essential commodities in question and
consequently the appellant was not entitled to deduction under section 80P(2)(e)
of the 1961 Act. Against the impugned decision, the appellant went to the
Supreme Court by way of petition for special leave.
The Supreme Court, at the outset, noted that the appellant
had composite business. The appellant was a dealer in non-controlled commodities
and it was an authorization holder in respect of controlled commodities under
the 1976 Order. It owned godowns and it also hired godowns on rent. It earned
commission during the relevant assessment years at the rate of 2.25 per quintal
(e.g. for rice). Under clause 20 of the 1976 Order, every authorization holder
had to comply with general or special directions given in writing from time to
time by the Collector in regard to purchase, sale, storage for sale,
distribution and disposal of controlled commodities. The Supreme Court further
noted that the appellant earned commission on the principle of “netting”. In
other words, the appellant set off “issue price” against “sale price” and
retained commission fixed at Rs.2.25 per quintal.
The Supreme Court, referring to the rate fixation mechanism
indicated by one of the orders issued on 12th March, 1987, w.e.f. 1st May, 1987
and adverting to the working given therein, observed that the said working
indicated that Rs.247.82 (issue price) was treated by the appellant as expense
and it was set off against the sale price of Rs.251.07. In other words, the
working indicated cost plus mechanism, i.e. Rs.247.82 was the cost plus profit
margin which included Rs.2.25 as commission. Therefore, Rs.2.25 was part of the
profit margin. The Supreme Court, referring to the written submissions filed by
the appellant, observed that the appellant had taken into its books of account
the consolidated value of the closing stock. According to the Supreme Court, the
circumstances reinforced the finding of the High Court in its impugned judgement
that the appellant was storing the commodities in its godowns as a part of its
own trading stock.
The Supreme Court noted that Section 81(iv), followed by the
Section 14(3)(iv) in the 1922 Act (as amended) was a predecessor to Section
80P(2)(e) of the 1961 Act; and it had come up for consideration before the
Gujarat High Court in the case of Surat Venkar Sahakari Sangh Ltd. vs. CIT
[1971] 79 ITR 722. In that case, it was inter alia held that:
(i) On a plain natural construction of the language used in
section 81(iv) that what is exempted under that section is income derived from
the letting of godowns or warehouses, provided the letting is for any of the
three purposes, namely, ‘storage’, ‘processing’ or ‘facilitating the marketing
of commodities”.
ii) On a proper interpretation of Section 14(3) (iv) and Section 81(iv), separate exemption is not granted in respect of income from the letting of godowns or warehouses for storage, income from processing and income from facilitating the marketing of commodities. But the exemption is available only in respect of income derived from letting of godowns or warehouses where the purpose of letting is storage, processing or facilitating the marketing of commodities.
The Supreme Court approved the reasoning given by the Gujarat High Court on the interpretation of Section 81(iv) and Section 14(3)(iv) of the 1922 Act. The Supreme Court held that on reading the above judgement, it became clear that under Section 80P(2) of the 1961 Act, an assessee is entitled to claim special deduction from its gross total income to arrive at total taxable income. The burden is on the assessee to establish that exemption is available in respect of income derived from the letting of godowns or warehouses, only where the purpose of letting is storage, processing or facilitating the marketing of commodities.
According to the Supreme Court two points arose for its determination, namely, whether the appellant acted as an agent of the government in the subject transaction, and the real nature of the payment received by the said society under the head “commission”. In the view of the Supreme Court, both the points stood covered by the judgement of the Supreme Court in A. Venkata Subbarao vs. State of Andhra Pradesh, AIR 1965 SC 1773. In that case, it was inter alia held that the margin or difference in the purchase and sale price was necessary in order to induce any one to engage in this business, and it was of the essence of a control over procurement and distribution which utilized normal trade channels. It would, therefore, be a misnomer to call it ‘remuneration’ or ‘commission’ allowed to an agent; and so, really no argument could be built on it in favour of the relationship being that of principal and agent. Coming to the question of agency, it was held that the government can derive no advantage from the words “procurement agent” mentioned in the Procuring Order, 1946, from the agreement executed by such procuring agent. The court specifically dismissed the argument advanced on behalf of the government that A. Vernkata Subbarao (appellant) had acted as an “agent” on behalf of the government.
Applying its judgement in the case of A. Venkata Subbarao, the Supreme Court held that the High Court was right in coming to the conclusion that the assessee was storing the commodities in question in its godowns as part of its own trading stock, hence, it was not entitled to claim deduction for such margin under Section 80P(2)(e) of the 1961 Act.
15 Recovery of Tax — Strangers to the decree
are afforded protection by the Court because they are not connected with the
decree.
[Janatha Textiles & Ors. v. Tax Recovery Officer & Anr.,
(2008) 301 ITR 337 (SC)]
The appellant M/s. Janatha Textiles was a registered firm
with four partners, viz., Radhey Shyam Modi, Pawan Kumar Modi, Padmadevi
Modi and Indira Chirmar. The firm and its partners were in arrears of tax for
the A.Ys. 1985-86, 1986-87, 1987-88, 1989-90. All the demands pertaining to the
A.Ys. 1986-87 to 1989-90 had been stayed by various income-tax authorities and
these demands were never enforced for collection. The demand pertaining to the
A.Y. 1985-86 was alone enforced.
The agricultural lands owned by the partners of the
appellant-firm at Bodametlapalem had been attached and sold in public auction on
August 5, 1996, after following the entire procedure laid down under the Second
Schedule to the Income-tax Act, 1961. Nine people participated in the public
auction held on August 5, 1996. The sale was confirmed in favour of L. Krishna
Prasad who offered the highest price. No procedural irregularity or illegality
in public auction process was alleged by the appellant.
Even after issuance of sale proclamation, the
respondent-Department issued communication in SR No. 2/94 dated July 15, 1996,
informing the appellants that a sum of Rs.5,68,913 was due as on that date
towards tax, interest and penalty under the 1961 Act. The said amount, however,
does not include interest payable u/s.220(2) of the 1961 Act. The appellant-firm
acknowledged receipt of the letter on July 17, 1996, and had not contradicted
the quantum of tax and interest as mentioned in the said letter. It was made
clear that the demand for the A.Y. 1985-86 alone was being enforced.
In an SLP, learned counsel for the appellants contended that
even though they had filed objections at various stages of the notice issued for
the auction sale, the respondent-Department without disposing of the said
objections proceeded with the sale and, therefore, on that ground the sale
conducted by the respondent-Department was illegal and unsustainable. The
appellants further submitted that with reference to the A.Y. 1985-86, the
application for waiver of interest was pending before the authorities and
further the stay application filed before the Commissioner was not disposed of.
Even on that count also the sale conducted by the respondent-Department on
August 5, 1996, was illegal and unsustainable. The appellant contended that the
High Court had failed to notice that the nature of the lands in the auction
notice was wrongly mentioned as dry lands. In fact the said lands were a mango
orchard and building structure and of much higher value. The auction ought to be
vitiated on this ground alone.
The appellant also submitted that the appellants had received
the notice of demand as defaulters in their individual capacity and also as the
partners of the firm. However, the respondent-Department had failed to give
notice of demand to the appellants qua their shares. They did not receive
notices indicating their respective shares. It was asserted on behalf of the
respondent-Department that the amount fetched in the public auction was more
than reasonable.
The Supreme Court observed that the appellant had never
complained about fixing of the reserve price before holding of auction, though
they were intimated of the same through sale proclamation. In pursuance of the
notice issued by the Supreme Court, the respondent-Department had filed the
counter-affidavit. Respondent No. 2 (auction purchaser) also had filed a
separate counter-affidavit. Respondent No. 2 in the counter-affidavit stated
that it was totally incorrect to suggest that the auction sale did not fetch the
actual market value of the property. Respondent No. 2 also mentioned in the
counter-affidavit that the said lands were agricultural dry lands and there were
no mango gardens as alleged by the appellant. There were, however, a few mango
trees scattered all over the land.
The respondent-Department in the counter-affidavit stated
that the appellant-firm had alternative efficacious remedy by way of filing a
petition under Rules 60 and 61 of the Second Schedule to the 1961 Act. The
appellant ought to have availed of the statutory remedy for ventilating its
grievances instead of filing a petition before the High Court.
The Supreme Court further observed that there was another
very significant aspect of this case, which pertained to the rights of the
bona fide purchaser for value. The Supreme Court held that the law makes a
clear distinction between a stranger who is a bona fide purchaser of the
property at an auction sale and a decree-holder purchaser at a court auction.
Strangers to the decree are afforded protection by the Court, because they are
not connected with the decree. Unless the protection is extended to them court
sales would not fetch the market value or fair price of the property. The
Supreme Court held that the appeal was devoid of any merit and was accordingly
dismissed.
14 Export — Deduction u/s.80HHC — Duty
drawback and cash compensatory allowance received in the year other than the
year of exports is eligible for deduction u/s.80HHC of the Act in the year of
receipt, in a case where assessee is following the cash system of accounting.
[B. Desraj v. CIT, (2008) 301 ITR 439 (SC)]
The appellant was a sole proprietor of M/s. D. R. Enterprises
engaged in the business of export of textiles/fabrics. Consequent upon exports
made by him, inward remittance came into India in foreign exchange during the
accounting year ending 31-3-1991 (A.Y. 1990-91). However, the appellant
recovered cash compensatory allowance of Rs.7,74,785 and duty drawback of
Rs.35,565 in the next accounting year ending on 31-3-1992 (A.Y. 19991-92). The
appellant, who was following cash system of accounting, claimed deduction
u/s.80HHC on the aforesaid amounts in A.Y. 1991-92, that is, in the year of
receipt.
According to the AO, admittedly, the appellant had not made
export sales during A.Y. 1991-92 and therefore, the said duty drawback and cash
compensatory allowance did not constitute eligible income deductible from the
gross total income u/s. 80HHC. On appeal, the Commissioner of Income-tax
(Appeals) took the view that the above amounts were admittedly relatable to the
sales made during the earlier year and consequently, the Assessing Officer had
wrongly rejected the appellant’s claim for deduction u/s.80HHC. The Tribunal
upheld the decision of the Commissioner of Income-tax (Appeals).
On an appeal by the Department, the Madras High Court
overruled the decision of the Tribunal on the ground that during the A.Y.
1991-92, the assessee had received cash compensatory support and duty drawback
for the exports made in the earlier year and that there were no exports made in
that year and therefore, the said amounts did not constitute eligible income for
deduction u/s.80HHC.
On an appeal by the appellant, the Supreme Court
observed that by the Finance Act, 1990 it was clarified that cash compensatory
support and duty drawback would be taxable u/s.28(iiib) and in a Circular issued
by the CBDT it was clarified that export incentives, namely, cash compensatory
support and duty drawback have to be included in the profits of the business for
computing the deduction u/s.80HHC. According to the Supreme Court, with the
issuance of the said Circular, the point was no more res integra.
The Supreme Court after noting the formula for the purpose of computing
deduction u/s.80HHC observed that the business profits included export
incentives. The Supreme Court, therefore, held that the words ‘business profits’
in the formula u/s. 80HHC(3) would include cash compensatory allowance and duty
drawback, and the AO was directed to work out the deduction in accordance with
the law as it stood during the relevant A.Y. 1991-92.
Unreported :
41 Industrial undertaking: Deduction u/s. 80IB of I. T. Act,
1961: A Y 2002-03: Deduction allowable in respect of exchange rate difference:
CIT Vs. M/s. Rachna Udyog (Bom); ITA No. 2394 of 2009 dated
13/01/2010:
The assessee’s industrial undertaking was entitled to
deduction u/s. 80IB of the Income-tax Act, 1961. The Tribunal had allowed the
deduction in respect of (1) Duty drawback; (2) Export entitlement; (3) DEPB
licence, and (4) Exchange rate difference.
In an appeal by the Revenue, the Bombay High Court set aside
the order of the Tribunal as regards the first three items, in view of the
judgment of the Supreme Court in Liberty India Vs. CIT; (2009) 317 ITR 218 (SC).
And as regards the fourth item, the Bombay High Court held as below:
“i) In so far as the question of difference in the rate of
exchange is concerned, the submission of the assessee before the Assessing
Officer was that exchange rate fluctuation forms a part of the sale proceeds
eligible for deduction u/s. 80IB. According to the assessee, the receipt was
directly related to the process of carrying on the business of the industrial
undertaking. The export invoices were made in terms of US $. When the sale
proceeds of goods exported are received in India in convertible foreign
exchange, the rupee equivalent of the sale proceeds is liable to vary
consequent to the fluctuations in the rate of foreign exchange between the
date when the goods are exported and the date on which the sale proceeds are
received in India. In other words, it was the contention of the assessee that
the value of the goods exported remains the same but the rupee equivalent is
liable to vary due to fluctuation in the rate of foreign exchange.
Consequently, a book entry is made in order to ensure that the rupee
equivalent of the value of the goods exported out of India is correctly
reflected in the books of account, since the books are maintained in rupee
terms.
ii) We are of the view that the difference on account of
exchange rate fluctuation is liable to be allowed u/s. 80IB. The exchange rate
fluctuation arises out of and is directly related to the sale transaction
involving the export of goods of the industrial undertaking. The exchange rate
fluctuation between the rupee equivalent of the value of the goods exported
and the actual receipts which are realized arises on account of the sale
transaction. The difference arises purely as a result of a fluctuation in the
rate of exchange between the date of export and the date of receipt of
proceeds, since there is no variation in the sale price under the contract.
iii) In the circumstances, we would affirm the judgment of
the Tribunal in so far as the question of exchange rate fluctuation is
concerned.
Unreported :
39 Appeal to ITAT by undertaking owned by the government:
Approval from the Committee on Disputes not required:
M/s. Shivshahi Punarvasan Prakalp Ltd. Vs. UOI (Bom); W. P. No. 2270 of
2009 dated 05/01/2010:
The petitioner is an undertaking owned by the Government of
Maharashtra. The Income Tax Appellate Tribunal dismissed the appeal filed by the
petitioner on the ground that no approval was obtained of the Committee on
Disputes constituted in pursuance of the judgment of the Supreme Court in ONGC
Vs CCE (1992 Suppl (2) SCC 432).
The Bombay High Court allowed the writ petition filed by the
assessee petitioner and held as follows:
“i) The Counsel appearing on behalf of the Revenue has
stated before the court that it was not, and is not the contention of the
Revenue that the approval of the Committee on Disputes was required in order
to prefer an appeal before the Income Tax Appellate Tribunal in a matter
relating to an adjudication of dispute relating to exaction of revenue under
the Income-tax Act, 1961. The learned counsel appearing on behalf of the
assessee has also adopted the same contention. In that view of the matter, the
basis on which the Tribunal dismissed the appeal, namely, on the footing that
approval had to be obtained from the Committee on Disputes appears to be
fallacious.
ii) During the course of this proceeding, we have requested
the Additional Solicitor General to assist the court. The Additional Solicitor
General states that the Union of India would be ready and willing to
constitute a committee to look into a dispute between the central government
and state government entities, on a case to case basis, if so directed by the
court; but this would not be necessary in a matter such as the present which
relates to the adjudication of a dispute under the Income-tax Act, 1961.
iii) Since we have come to the conclusion that the basis on
which the appeal was dismissed by the Tribunal was erroneous, it would be only
appropriate and proper to set aside the order of the Tribunal in order to
facilitate adjudication on merits. In the circumstances, the order of the
Tribunal is restored to the file of the Tribunal for a decision on its
merits.”
In The High Courts
K. B. Bhujle
Advocate
Unreported :
40 Capital gain or business income: Rule of consistency:
Profit on sale of shares taken as capital gain in past: Assessment of such
profit as business income in the relevant year as business income: Not just:
CIT Vs. Gopal Purohit (Bom); ITA No. 1121 of 2009 dated
06/01/2010:
In an appeal u/s. 260A of the Income-tax Act, 1961 by the
Revenue before the Bombay High Court, the following two queries were raised:
"a) Whether, on the facts and circumstances of the case
and in law, the Hon’ble ITAT was justified in treating the income from sale
of 7,59,003 shares for Rs. 5,00,12,879/- as an income from short-term
capital gain, and the sale of 3,88,797 shares for Rs. 6,65,02,340/- as
long-term capital gain, as against the "Income from business" assessed by
the A.O.
b) Whether, on the facts and circumstances of the case
and in law, the Hon’ble ITAT was justified in holding that the principles of
consistency must be applied here as the authorities did not treat the
assessee as a share trader in preceding year, in spite of existence of a
similar transaction, which cannot in any way operate as res judica to
preclude the authorities from holding such transactions as business
activities in current year
The Bombay High Court held as hereunder:
"i) The Tribunal has achieved a pure finding of fact that
the assessee was engaged in two different types of transactions. The first
set of transactions involved investment in shares. The second set of
transactions involved dealing in shares for the purpose of business. The
tribunal has correctly applied the principle of law in accepting the
position that it is open to an assessee maintaining two separate portfolios:
one relating to investment in shares and another relating to business
activities involving dealing in shares. The tribunal held that delivery
based transactions in the present case should be treated as those in the
nature of investment transactions, and the profit received thereof should be
treated either as short-term or, as the case may be, long-term capital gain,
depending on the period of holding. A finding of fact has been arrived at by
the Tribunal as regards the existence of two distinct types of transactions,
namely, those by way of investment on the one hand, and those for the
purposes of business on the other hand. Query (a) above, does not raise any
substantial question of law.
ii) In so far as query (b) is concerned, the Tribunal has
observed in paragraph 8.1 of its judgment that the assessee has followed a
consistent practice with regard to the nature of the activities, the manner
of keeping records and the presentation of shares as investment at the end
of the year, in all the years. The Revenue submitted that a different view
should be taken for the year under consideration, since the principle of res
judicata is not applicable to assessment proceedings. The Tribunal correctly
accepted the position that the principle of res judicata is not attracted
since each assessment year is separate in itself. The Tribunal held that
there ought to be uniformity in treatment and consistency when the facts and
circumstances are identical, particularly in the case of the assessee. This
approach of the Tribunal cannot be faulted. The Revenue did not furnish any
justification for adopting a divergent approach for the assessment year in
question. Query (b), therefore, does not also raise any substantial
question."
55 TDS : Liability of Trust : S. 194A of
Income-tax Act, 1961 : A.Ys. 2002-03 to 2005-06 : Assessee Corporation, a
provident fund trust of employees : Assessable in the status of individual : Not
liable to deduct tax at source u/s.194A.
[CIT v. Food Corporation of India Contributory Provident
Fund Trust, 218 CTR 625 (Del.)]
The assessee is a provident fund trust of the employees.
The Assessing Officer found that the amounts being credited to the account of
the ex-employees after cessation of employment, had the character of interest.
The AO held the assessee was required to deduct tax at source u/s.194A of the
Income-tax Act, 1961 on the interest so credited. The assessee having failed
to do so was treated as being in default and demands were raised u/s.201(1) &
201(1A) of the Act. The Tribunal held that the assessee being assessed to tax
in the status of an individual, was not liable to deduct tax at source
u/s.194A and accordingly deleted the demands.
On appeal by the Revenue, the Delhi Court upheld the
decision of the Tribunal and held as under :
“Assessee corporation, a provident fund trust of employees
created after seeking exemption u/s. 16 of the Employees Provident Fund Act,
1952, being assessable in the status of individual, was not liable to deduct
tax at source u/s.194A while crediting amounts to the account of
ex-employees.”
Reported :
47 Charitable purpose :
Exemption u/s.11 of Income-tax Act, 1961 : A.Y. 2005-06 : Determination of
the percentage of funds to be applied for the purposes of trust depreciation
allowable should be taken into account.
[CIT v. Market
Committee, Pipli, 330 ITR 16 (P&H)]
The assessee is a
charitable trust eligible for exemption u/s.11 of the Income-tax Act, 1961.
For the A.Y. 2005-06, for the purpose of ascertaining whether 85% of the
funds were applied for purposes of trust, the AO disallowed the depreciation
on the ground that since the income of the assessee was exempt u/s.11,
allowing depreciation would amount to conferring double benefit. The
Tribunal allowed the assessee’s claim.
On appeal by the
Revenue, the Punjab and Haryana High Court upheld the decision of the
Tribunal and held as under :
“The income of the
assessee being exempt, the assessee was only claiming that depreciation
should be reduced from the income for determining the percentage of funds
which had to be applied for the purposes of the trust. There was no double
deduction claimed by the assessee. It could not be held that double benefit
was given in allowing the claim for depreciation for computing income for
purposes of S. 11.”
(iv) In the instant
case, the consideration for selling 52% of the site was four flats
representing 48%. All the four flats were situated in a residential
building. Those four residential flats constituted ‘a residential house’ for
the purpose of S. 54. Profit on sale of property was used for residence. The
four residential flats could not be construed as four residential houses for
the purpose of S. 54. They had to be construed only as ‘a residential house’
and the assessee was entitled to the benefit accordingly.
(v) In that view of the
matter, the Tribunal as well as the Appellate Authority were justified in
holding that there was no liability to pay capital gain tax as the case
squarely fell u/s. 54.”
Reported :
46 Capital gains : Exemption
u/s.54 of Income-tax Act, 1961 : A.Y. 2004-05 : Joint development agreement for
development of assessee’s residential property into 8 residential units :
Assessee to get 4 flats as her share : Assessee was entitled to benefit u/s.54
in respect of entire value of four flats.
[CIT v. Smt. K. G.
Rukminiamma, 196 Taxman 87 (Kar.)]
The assessee had a
residential property on certain land. Under a joint development agreement, she
gave that property to a builder for putting up flats. The builder agreed to
construct residential apartments and agreed to deliver 48% of the super-built
area to the assessee in the form of residential apartments. The entire cost of
construction and other expenses were to be borne by the builder. Accordingly,
the builder constructed eight flats and handed over four flats to the assessee.
The assessee claimed benefit of S. 54F and, therefore, she declared capital gain
as ‘Nil’. The Assessing Officer disallowed the assessee’s claim and computed
capital gain by taking cost of construction of four flats as sale consideration
for transfer of property. The Commissioner (Appeals) held that the assessee was
entitled to deduction u/s.54 and not u/s.54F. The Tribunal dismissed the
Revenue’s appeal.
On appeal to the High Court,
the Revenue contended that u/s.54, the expression used is ‘a residential house’,
which would mean that if more than one residential house is acquired as in the
instant case, the benefit can be extended only in respect of one residential
flat.
The Karnataka High Court
held as under :
“(i) A reading of S. 54
makes it very clear that the property sold is referred to as original asset
in the Section. That original asset is described as buildings or lands
appurtenant thereto and being a residential house. Therefore, it is not
merely ‘a residential house’. The residential house may include buildings or
lands appurtenant thereto. The stress is on the use to which the property is
put to. Only when that asset is used as a residential house, which may
consist of buildings or lands appurtenant thereto, the income derived from
the sale of such a residential house is chargeable under the head ‘income
from house property.’
(ii) If the assessee
has, within a period of one year before or two years after the date on which
the transfer took place, purchased or has within a period of three years
after that date, constructed a residential house, then instead of the
capital gain being charged to income-tax as income of the previous year in
which the transfer took place, it shall be dealt with in accordance with the
aforesaid provisions. In this part of the Section also, the expression ‘a
residential house’ is again used. The said residential house necessarily has
to include buildings or lands appurtenant thereto. It cannot be construed as
one residential house.
(iii) The context in
which the expression ‘a residential house’ is used in S. 54 makes it clear
that it was not the intention of the legislation to convey the meaning that
it refers to a single residential house. If that was the intention, they
would have used the word ‘one’. As in the earlier part, the words used are
buildings or lands which are plural in number and that is referred to as ‘a
residential house’, the original asset, an asset newly acquired after the
sale of the original asset also can be buildings or lands appurtenant
thereto, which also should be ‘a residential house’. Therefore, the letter
‘a’ in the context it is used should not be construed as meaning ‘singular’.
But, being an indefinite article, the said expression should be read in
consonance with the other words ‘buildings’ and ‘lands’ and, therefore, the
singular ‘a residential house’ also permits use of plural by virtue of S.
13(2) of the General Clauses Act.
(iv) In the instant
case, the consideration for selling 52% of the site was four flats
representing 48%. All the four flats were situated in a residential
building. Those four residential flats constituted ‘a residential house’ for
the purpose of S. 54. Profit on sale of property was used for residence. The
four residential flats could not be construed as four residential houses for
the purpose of S. 54. They had to be construed only as ‘a residential house’
and the assessee was entitled to the benefit accordingly.
(v) In that view of the
matter, the Tribunal as well as the Appellate Authority were justified in
holding that there was no liability to pay capital gain tax as the case
squarely fell u/s. 54.”
Reported :
45 Business income : Benefit
or perquisite from business or profession : S. 28(iv) of Income-tax Act, 1961 :
A.Y. 2001-02 : S. 28(iv) has no application to any transaction involving money :
Assessee had obtained a bank loan for acquiring capital assets : Paid part of
principal amount : One-time settlement : Bank waived outstanding due of
principal amount and interest : Transaction being a loan transaction, S. 28(iv)
would not apply : Amount of waiver could not be termed as income u/s.2(24).
[Iskraemeco Regent Ltd.
v. CIT, 196 Taxman 103 (Mad.)]
The assessee was engaged in
the business of development, manufacturing and marketing of electro-mechanical
and static energy meters. It had taken a loan from the bank for purchase of
capital assets. In view of loss suffered, the assessee went before the BIFR. In
terms of the scheme of rehabilitation sanctioned by the BIFR, a one-time
settlement was arrived at between the assessee and the bank, under which the
bank waived the outstanding due of principal amount and interest. The assessee
credited the waiver of principal amount to the ‘capital reserve account’ in the
balance sheet treating it as capital in nature. The Assessing Officer treated
the said amount as ‘income’ u/s.28(iv), read with S. 2(24). The Tribunal upheld
the addition.
On appeal by the assessee,
the Madras High
Court reversed the decision of the Tribunal and held as under :
(i) S. 28(iv) speaks
about the benefit or perquisite received in kind. Such a benefit or
perquisite received in kind other than in cash would be an income as defined
u/s.2(24). In other words, to any transaction which involves money, S.
28(iv) has got no application.
(ii) Therefore, the
transaction in the instant case being a loan transaction having no
application with respect to S. 28(iv), the same could not be termed as an
income within the purview of S. 2(24). In other words, inasmuch as S. 28(iv)
was not applicable to the transaction on hand, it could not be termed as
income which could be made taxable as receipt.
(iii) Hence, such a
receipt which did not have any character of an income being that of a loan
could not be made exigible to tax.
(iv) Similarly, S.
41(1)(a) also could not have any application inasmuch as the said provision
would be applicable only to a trading liability. Accordingly, a loan
received for the purpose of capital asset would not constitute a trading
liability and, hence, S. 41(1) had no application.
(v) The Revenue
submitted that the facts involved in the instant case would come under the
purview of S. 28(i). The said contention could not be accepted for the
simple reason that it was not the case of the Assessing Officer as well as
the other authorities that the instant case would come under the purview of
S. 28(i).
(vi) The authorities
proceeded only on the footing that S. 28(iv) would be applicable. Further,
S. 2(24) defines ‘income’. While defining ‘profit and gains’, it refers to
the transactions involved u/s.28(iv). Therefore, inasmuch as the provision
contained u/s.28(i) having been not defined as income u/s.2(24), the same
would not partake the character of the income and, therefore, it is not
assessable to tax.
(vii) In other words,
only an income as defined u/s.2(24) can be made assessable to tax. It is a
well-established principle of law that all receipts are not income and,
therefore, liable to be taxed.
(viii) Insofar as the
reference made u/s.36(1)(iii) was concerned, said Section speaks about other
deductions. The said provision deals with the amount of interest paid in
respect of capital borrowal for the purpose of business. Therefore, it had
no relevance to the instant case.
(ix) Accordingly, the
assessee’s appeal was to be allowed by setting aside the orders passed by
the authorities below.”
Reported :
43 Block assessment :
Proceedings u/s.158BD of Income-tax Act, 1961 : Proceedings u/s. 158BD initiated
on the basis of statement recorded during search and not on any books of account
or asset : Proceedings u/s.158BD not legal.
[CIT v. Late Raj Pal
Bhatia, 237 CTR 1 (Del.)]
Search was carried out at
the premises of one C. No books of account or other documents or assets pertaining to assessee were found or seized during the search. The
Assessing Officer initiated proceedings u/s.158BD of the Income-tax Act, 1961
against the assessee on the basis of the statement of C recorded during the said
search operation. The Tribunal held that the initiation of the proceedings
u/s.158BD against the assessee was illegal.
On appeal by the Revenue,
the Delhi High Court upheld the decision of the Tribunal and held
as under :
“(i) In the present
case, admittedly, during the search carried out at the premises of C, no
books of accounts or other documents or other assets pertaining to the
assesses herein were found or seized. The entire foundation of the block
assessment u/s.158BD, insofar as assesses are concerned, was the statement
of C recorded during the course of search. Admittedly, statement of C is
neither ‘books of accounts’ nor ‘assets’. Statement was not the document
which was found during search. In fact this was the document which came to
be created during the search as the statement was recorded at the time of
search. Therefore, it cannot be said that the statement was ‘seized’ during
the search, and thus, would not qualify the expression ‘document’ having
been seized during the search. In such a scenario, proper course of action
was reassessment u/s.147.
(ii) The Tribunal has
deleted the addition taking a view that the very provision of S. 158BD
invoked by the Assessing Officer and initiating block assessment proceedings
itself was illegal. Therefore, no substantial question of law arises and
accordingly these appeals are dismissed in limine.”
Reported :
44 Business expenditure :
Disallowance u/s. 40A(2) of Income-tax Act, 1961 : A.Y. 1985-86 : Assessee-company
purchased goods from its subsidiary company at higher rate in view of assurance
of supply of huge quantity of uniform quality : Assessee and subsidiary in same
tax bracket and paid same rate of tax : No disallowance could be made u/s.40A(2)
: Subsidiary company is not a ‘related person’ u/s.40A(2)(b) : S. 40A(2) not
attracted.
[CIT v. V. S. Dempo & Co.
(P) Ltd., 196 Taxman 193 (Bom.)]
The assessee-company was
engaged in the business of extraction and export of iron ore. During the
relevant assessment year, it purchased iron ore from its subsidiary company. The
Assessing Officer held that the prevailing rates of sale/purchase of the same
grade of iron ore in the State were lower than the rate at which the assessee
had purchased the ore from its subsidiary and, therefore, the provisions of S.
40A(2) were attracted. The Assessing Officer, accordingly, made certain
disallowance. On appeal, the Commissioner (Appeals) held that the rates at which
the iron ore was purchased by the assessee from its subsidiary were determined
under a contract, under which the assessee was assured a huge quantity and
quality of ore and, therefore, the assessee was justified in paying the higher
rate than the rate at which the ore was available during the relevant time on
non-contractual basis. The Commissioner (Appeals) further held that the assessee
was a company and the seller of the goods was also a company and, therefore, the
rate of tax applicable to both of them was identical, namely, the highest rate
of tax. Therefore, by buying ore at rate higher than the market rate, there was
no reduction in the amount of tax payable. The Commissioner (Appeals),
accordingly, deleted the addition. The Tribunal confirmed the order of the
Commissioner (Appeals).
“(i) In a business of export, consistency of supply as well as quality of supply is important. In order to assure a consistent supply of material of the same quality, the purchaser of a commodity may pay to a seller bound under a contract a little higher than the current rate. Furthermore, in case of yearly contracts by agreeing to buy goods at a specified rate, the exporter is insulated from vagaries of any seasonal rise in the market rate. Therefore, unless the rate agreed is so very much excessive or unreasonable as to doubt the objective behind the agreement, it cannot be said that the rate, a little higher than the seasonal market rate, is unjustified or amounts to diversion of profit. In that connection, the fact that the assessee as well as its subsidiary company, which was the seller, were in the same tax bracket and paid the same rate of tax assumed importance.
(ii) Admittedly, it was not a case of tax evasion inasmuch as if the rate would have been less, the assessee’s profit would have been more, but the profits of the seller would have been less and both being taxable at the same rate, there would be no difference in the aggregate tax payable by the assessee and its subsidiary.
(iii) Further, the object of S. 40A(2) is to prevent diversion of income. An assessee, who has large income and is liable to pay tax at the highest rate prescribed under the Act, often seeks to transfer a part of his income to a related person who is not liable to pay tax at all or liable to pay tax at a rate lower than the rate at which the assessee pays the tax. In order to curb such tendency of diversion of income and thereby reducing the tax liability by illegitimate means, S. 40A was added to the Act by an amendment made by the Finance Act, 1968.
(iv) Clause (b) of S. 40A(2) gives the list of related persons. It is only where the payment is made by the assessee to the related persons mentioned in clause (b) of S. 40A(2), that the Assessing Officer gets jurisdiction to disallow the expenditure or a part of the expenditure which he considers excessive or unreasonable. The Revenue submitted that the instant case fell under sub-clause (ii) or sub-clause (iv) of clause (b) of S. 40A(2). Sub-clause (ii) provides that where the assessee is a company, firm, AOP or HUF, any director of the company, partner of the firm, or member of the association or family, or any relative of such director, partner or member would be a related person. In the instant case, the assessee was a company and the seller was its subsidiary company. The seller, i.e., the subsidiary company did not fall in any of the categories mentioned under sub-clause (ii) of clause (b). Only a director of the company, partner of the firm, or member of the association or family or any relative of such director, partner or member is a related person under sub-clause (ii) of clause (b) of Ss.(2). Another company, even if it is a subsidiary of the assessee, is not a related person within the meaning of sub-clause (ii) of clause (b) of
S. 40A(2). Sub-clause (iv) of clause (b) of S. 40A(2) provides that in case of a company, firm, AOP or HUF having a substantial interest in the business or profession of the assessee or any director, partner or member of such company, firm, association or family, or any relative of such director, partner or member is a related person. Again a subsidiary company does not fall in any of the class of persons mentioned in sub-clause (iv) of clause (b) of S. 40A(2). In law, a holding company is a member of subsidiary company and holds more than 50 per cent equity share capital of the subsidiary company (except in cases where it controls the composition of the board of directors without holding majority of the shares). While the holding company is a member of its subsidiary company, the subsidiary company is not a member of the holding company. As the subsidiary company was not a member of the assessee, sub-clause (iv) of clause (b) of S. 40A(2) was also not attracted in the instant case.
(v) Therefore, there was no merit in the appeal and same was to be dismissed.”
Reported :
42 Appellate Tribunal :
Power u/s.254(2) of Income-tax Act, 1961 : A.Ys. 2000-01 to 2005-06 : Power to
recall order : No absolute prohibition : Prejudice caused to party by mistake to
be seen.
[Lachman Das Bhatia
Hingwala (P) Ltd. v. ACIT, 330 ITR 243 (Del.) (FB)]
Dealing with the scope of
power of the Tribunal u/s.254(2) of the Income-tax Act, 1961, in this case the
Full Bench of the Delhi High Court explained the decision of the Supreme Court
in Honda Siel Power Products Ltd. v. CIT, 295 ITR 466 (SC) and held as under :
“(i) In CIT v. Honda
Siel Power Products Ltd., 293 ITR 132 (Del.), the High Court considered the
contention that the recall of the Tribunal’s entire decision was prohibited
on the basis that in the garb of rectification, the order cannot be
recalled. The application for rectification was filed as the Tribunal had
not taken note of a binding precedent, though it was cited before the
Tribunal. In that factual background, the Supreme Court held that the power
of rectification has been conferred on the Tribunal to see that no prejudice
is caused to either of the parties appearing before it by its decision based
on a mistake apparent on record and that atonement to the wronged party by
the Court or the Tribunal for the wrong committed by it has nothing to do
with the inherent power to review. The Court took note of the fact that the
Tribunal committed a mistake in not considering material which was already
on record and the Tribunal acknowledged its mistake and accordingly
rectified its order.
(ii) The decision of the
Supreme Court in Honda Siel Power Products Ltd. v. CIT, 295 ITR 466 (SC) is
an authority for the proposition that the Tribunal in certain circumstances
can recall its own order and S. 254(2) of the Act does not totally prohibit
so. Decisions which lay down the principle that the Tribunal under no circumstances can recall its order in entirety do not lay down the correct statement of law.
(iii) The Tribunal,
while exercising the power of rectification u/s.254(2) of the Act, can
recall its order in entirety if it is satisfied that prejudice has resulted
to the party which is attributable to the Tribunal’s mistake, error or
omission and which error is a manifest error and it has nothing to do with
the doctrine or concept of inherent power of review.”
Unreported :
41 Business deductions :
Computation of the amount for deduction and the amount allowable as deduction :
Restriction u/s. 80IA(9) of Income-tax Act, 1961 : A.Y. 2003-04 : Restriction
u/s.80IA(9) applies for the total amount allowable as deduction and not for the
computation.
[Associated Capsules Pvt.
Ltd. v. Dy. CIT, (Bom.); ITA No. 3036 of 2010, dated 10-1-2011]
The following question was
considered by the Bombay High Court regarding the restriction u/s. 80IA(9) of
the Income-tax Act, 1961 :
“Whether the Tribunal was
justified in holding that S. 80IA(9) of the Income-tax Act, 1961 mandates that
the amount of profits allowed as deduction u/s.80IA(1) of the Act has to be
reduced from the profits of the business of the undertaking while computing
deduction under any other provisions under heading ‘C’ in Chapter VI-A of the
Income-tax Act, 1961.”
The High Court answered the
question in the negative, i.e., in favour of the assessee and held as under :
“(i) In our opinion, the
reasonable construction of S. 80IA(9) would be that where deduction is
allowed u/s.80IA(1), then the deduction computed under other provisions
under heading ‘C’ of Chapter VI-A has to be restricted to the profits of the
business that remains after excluding the profits allowed as deduction
u/s.80IA, so that the total deduction allowed under the heading ‘C’ of
Chapter VI-A does not exceed the profits of the business.
(ii) S. 80IA(9) does not
affect the computability of deduction under various provisions under heading
‘C’ of Chapter VI-A, but it affects the allowability of deductions computed
under various provisions under heading ‘C’ of Chapter VI-A, so that the
aggregate deduction u/s.80IA and other provisions under heading ‘C’ of
Chapter VI-A do not exceed 100% of the profits of the business of the
assessee.
(iii) Our above view is
also supported by the CBDT Circular No. 772, dated 23-12-1998, wherein it is
stated that S. 80IA(9) has been introduced with a view to prevent the
tax-payers from claiming repeated deductions in respect of the same amount
of eligible income and that too in excess of the eligible profits.
(iv) Thus, the object of
S. 80IA(9) being not to curtail the deductions computable under various
provisions under heading ‘C’ of Chapter, it is reasonable to hold that S.
80IA(9) affects allowability of deduction and not computation of deduction.
(v) To illustrate, if
Rs.100 is the profit of the business of the undertaking, Rs.30 is the
profits allowed as deduction u/s.80IA and the deduction computed as per S.
80HHC is Rs.80, then, in view of S. 80IA(9), the deduction u/s.80HHC would
be restricted to Rs.70, so that the aggregate deduction does not exceed the
profits of the business.”
Reported:
47 Transfer of case: S. 127 of I. T. Act, 1961: Before
transfer, assessee should be given reasonable opportunity of hearing:
Reasons must be recorded and must be part of the order of
transfer:
Deep Malhotra Vs. Chief CIT; 185 Taxman 290 (P&H):
Allowing the writ petition challenging the transfer of case
u/s. 127 of the Income-tax Act, 1961, the Punjab & Haryana High Court held as
under:
“i) The legislature has provided by Section 127(2) that
before transferring any case from one
Assessing Officer, subordinate to him, to another Assessing Officer, the
assessee is required to be given reasonable opportunity of hearing and the
reasons are to be recorded for passing such an order.
ii) The provisions of section 127(2), in substance, provide
for hearing, besides requiring an agreement between the Chief Commissioner and
Commissioner of transferring the place where the cases are to be transferred.
Further, the agreements between both the Commissioners cannot be withheld from
the assessee and a copy thereof also has to be furnished to the assessee.
iii) The argument of the Revenue that the reasons had been
recorded in a separate order would not satisfy the requirement of section 127;
because the reasons have to be part of the order and recording of separate
reasons on file without communicating the same to the assessee, has been
considered as unfair and unwarranted. Therefore, the aforesaid argument was to
be rejected.
iv) For the reasons aforementioned, the impugned order was
to be set aside.”
Reported:
48 Unexplained investment: S. 69 of I. T. Act, 1961:
Assessee explained source of disputed jewellery and also offered 20% thereof
to buy peace: AO rejected explanation and made full addition: Tribunal
accepted the explanation but retained the offered 20%: Not justified: No
addition can be sustained:
Sonia Magu Vs. CIT; 185 Taxman 402(Del):
In a search and seizure operation, certain jewellery was recovered from the assessee. The assessee explained the source of the said jewellery. Notwithstanding the
explanation, she also offered 20% of the disputed jewellery and was ready to
pay tax thereupon in order to buy peace and to avoid litigation. The Assessing
Officer did not accept the explanation and the offer and accordingly added the
full value of jewellery as undisclosed income. The Commissioner (Appeals)
accepted that the assessee had satisfactorily explained the source of
purchase/acquisition of the disputed jewellery. However, he gave only partial
relief to the assessee in view of the voluntary offer of the assessee whereby
20% of the disputed jewellery amount was offered to tax and retained the
addition of the 20% amount. The Tribunal upheld the decision of the
Commissioner (Appeals) on the ground that it was the amount offered by the
assessee herself.
On appeal filed by the assessee, the Delhi High Court
allowed the assessee’s claim and held as under:
“i) The assessee maintained her stand that she had been
accounting for the entire jewellery including the source thereof.
Notwithstanding the same, only with a desire to buy peace and to avoid
litigation, she had offered 20% of the excess jewellery. That offer was,
thus, conditional. She would have paid the tax on the aforesaid amount, had
the Assessing Officer accepted the offer, thereby giving a quietus to the
matter. Instead, the Assessing Officer ignored that offer and proceeded to
deal with the matter on merits and fastened the liability of much higher
amount upon the assessee. In those circumstances, the assessee was
constrained to take up the matter in detail. She maintained her stand that
she had proper explanation for the purchase of the aforesaid jewellery. Her
stand was vindicated inasmuch as the Commissioner (Appeals) accepted her
explanation in respect of the entire jewellery. Once the assessee was able
to duly explain the source of purchase of the entire disputed jewellery, the
Commissioner (Appeals) committed an error in falling back on the conditional
offer made by the assessee before the Assessing Officer along with the
return in Form 2B.
ii) From the language of the offer made, it was clear
that it was an offer without prejudice and was not in the nature of
‘admission on the basis of which she could be fastened with the liability
which otherwise did not exceed’. Provision of section 23 of the Indian
Evidence Act would clearly be applicable to such a case. That apart, it is
trite law that the principle of estoppel has no application in the Act.
iii) The matter can be looked into from another angle as
well. Once the assessee has given a satisfactory explanation regarding the
purchase/acquisition of the disputed jewellery, the necessary consequence
would be that there was no unexplained asset in the hands of the assessee.
In such a situation, it is neither proper nor legally permissible for the
revenue to still fasten the assessee with the liability of tax. It would be
a clear ground of illegal extraction of tax from the assessee. Therefore,
the addition as an unexplained investment in jewellery was to be deleted and
the appeals were to be allowed.”
Reported:
46 Review: Appeal to High Court: S. 260A of I. T. Act, 1961:
There is no power of substantive review:
CIT Vs. West Coast Paper Mills Ltd.; 319 ITR 390 (Bom):
Dismissing the review petition filed by the Revenue against
the order in a Notice of Motion, the Bombay High Court held as under:
“i) There is distinction between substantive review and
procedural review. Substantive review must be conferred, whereas procedural
review is inherent in every court or Tribunal.
ii) Relying in the provisions of Section 260A(7) of the
Income-tax Act, 1961, it is submitted that once the provisions of the Code of
Civil Procedure pertaining to appeals is made applicable to appeal, the power
of review which is conferred by the Civil Procedure must also be so read. The
Code of Civil Procedure has distinct provisions in so far as appeals and
review are concerned. Similarly, section 96 is the provision pertaining to
first appeals. Section 100 pertains to second appeals and section 114 is a
power of review. Order 41 provides for first appeal. Order 47 provides for
review. In other words, there are distinct provisions in the Code of Civil
Procedure pertaining to appeals and review. In that context, Section 260A(7)
has to be read to mean the provisions pertaining to appeals and not provisions
pertaining to review.
iii) The power of substantive review having not been
conferred under the Income-tax Act, 1961, the review petition, as filed, was
not maintainable.”
Reported:
44 ITAT: Powers: A Y 1993-94 and 1994-95: Power to set aside
and issue directions: No power to place restrictions on power of AO to determine
income: Direction not to assess income at a figure less than that declared in
the return or more than the figure as assessed u/s. 144: Direction beyond powers
of Tribunal:
CIT Vs. H. P. State Forest Corporation Ltd.; 320 ITR 54 (HP):
The assessee is a state government corporation. The accounts
of the assessee were not audited by the office of the Controller and Auditor
General. Therefore, the Assessing Officer treated the assessee’s returns for the
A Ys. 1993-94 and 1994-95 as non est and passed an assessment order u/s. 144 of
the Income-tax Act, 1961. The Tribunal set aside the assessment and directed the
assessment afresh with the audited accounts submitted by the assessee, with a
further direction that the income to be assessed was not to be at a figure less
than that declared by the assessee in its return. On a rectification application
by the assessee, the Tribunal allowed the application, but directed that the
income should not be assessed at a figure more than that assessed by the
Assessing Officer u/s. 144.
On appeal by the Revenue, the Himachal Pradesh High Court
held as under:
“i) Once the returns are treated as non est, such returns
could not be used even against the assessee.
ii) When the Tribunal was directing assessment de novo, no
fetters as to the upper or lower limit of income to be assessed could have
been placed by the Tribunal on the Assessing Officer. He had to go through the
audited accounts, apply his mind and frame the assessments afresh in
accordance with the duly audited accounts placed on record. The Tribunal’s
directions to firstly, assess the income at a figure not less than that
declared in the assessee’s returns; and, secondly, upon the rectification
application, to assess the income at a figure not higher than that assessed
u/s. 144, were unsustainable.”
Reported:
45 Rectification: Limitation: S. 154 of I. T. Act, 1961:
Assessment order appealed against: Limitation to begin from the date of the
order giving effect to the appellate order:
CIT Vs. Tony Electronics Ltd.; 185 Taxman 121 (Del):
In the case of the assessee, the assessment order was passed
u/s. 143(3) of the Income-tax Act, 1961, on 24/11/1998, making various
additions. The Commissioner (Appeals) gave partial relief to the assessee. The
matter had gone to the Commissioner (Appeals) again. Therefore, orders recording
appeal’s effects had to be passed three times. On 30/01/2006, the Assessing
Officer issued a show cause notice u/s. 154, and passed a rectification order
u/s. 154 on 26/04/2006, withdrawing certain deductions which were allowed in the
assessment order dated 24/11/1998. The Tribunal quashed the rectification order
on the ground that the same was barred by limitation.
On appeal by the Revenue, the Delhi High Court reversed the
decision of the Tribunal and held as under:
“i) The legal position with which there cannot be any
quarrel, is that once an appeal against an order passed by an authority is
preferred and is decided by the appellate authority, the order of the said
authority merges with the order of the appellate authority. With this merger,
the order of the original authority ceases to exist and the order of the
appellate authority prevails with which the order of the original authority is
merged. To all intents and purposes, it is the order of the appellate
authority that would be seen.
ii) Once the doctrine of merger is understood in its true
sense as explained in a number of judgments, and relying on the interpretation
given to the word “any” or “order” given to sub-section (7) of section 154 by
the Apex Court, the inescapable conclusion would be that the original order of
assessment had ceased to operate on the decision given by the Commissioner
(Appeals), and had merged with the orders of the appellate authority. The
final order, passed by the appellate authority was dated 28/06/2004, and
acting thereupon, the Assessing Officer passed an assessment order, giving the
appeal effect thereto, on 23/07/2004. Thus, it was the order dated 28/06/2004,
passed by the Commissioner (Appeals) which remained on record to all intents
and purposes, as the original order of assessment had been merged.
iii) Once the matter was viewed from that angle, it was no
explanation that the error sought to be rectified occurred in the original
assessment order and was not the subject-matter of the appeal. Obviously, it
was an error of calculation which could not have been the subject-matter of
the appeal.
iv) The Tribunal misdirected itself in law by calculating
limitation u/s. 154(7) with reference to the date of the original order of
assessment. As a consequence, the order of the Tribunal was to be set aside
and the rectification order passed by the Assessing Officer was to be upheld
and restored.”
Reported:
43 Charitable trust: Exemption u/s. 11 of I. T. Act, 1961: A
Ys. 1990-91 and 1991-92: Educational trust: Trust deed empowering trust to start
educational agencies for earning income to achieve objectives of trust:
Educational agencies earning income: Section 11(4A) not applicable: Trust is
entitled to exemption u/s. 11:
CIT Vs Brihdaranyak Mandal (Trust): 319 ITR 363 (All):
The assessee is a trust with the objectives to educate the
general masses about the ancient glory and cultural heritage of the country; to
acquaint them with nature and environment; to impart Vedic education; and to
work in order to spiritually uplift the masses in general, leading them to
involve in social welfare activities. The author was unable to get funds by way
of donations. Clause (4) of the trust deed empowered the trust to start
educational agencies for earning income to achieve the aims and objectives of
the trust. Thus, the author started educational agencies and raised funds. For
the A Y 1990-91, the Assessing Officer held that the trust is not valid on the
ground that the author in his individual capacity earned funds and, hence, the
provisions of section 11(4A) were applicable. The Commissioner (Appeals) held
that the trust was valid but its income could not be exempted u/s. 11 because it
was hit by sub-section (4) of section 11. For the AY 1991-92, the Assessing
Officer made a protective assessment. The Commissioner (Appeals) accepted the
trust as a valid one and that its income was from business; and, hence, the
provisions of section 11(4A) were not applicable. The Tribunal held that the
trust was valid and was entitled to exemption u/s. 11.
On appeal by the Revenue, the Delhi High Court upheld the
decision of the Tribunal and held as under:
“The Revenue had not sought reference in questioning the
validity of the findings recorded by the Tribunal. The Tribunal had found that
the activities of the educational agency were carried out by the trust as clause
(4) of the trust deed empowered the trust to start educational agencies for
earning income to achieve the aims and objectives of the trust. The Tribunal had
further found that the surplus was transferred to the trust and utilized in the
purchase of land and construction of a sabha bhavan. Thus section 11(4A) was not
applicable.”
Reported:
42 Bad debts: S. 36(1)(vii), (2) of I. T. Act, 1961: A. Y.
2001-02: Assessee share broker purchasing shares for clients and paying money:
Money not recoverable from client: Deduction allowable as bad debt:
CIT vs. Bonanza Portfolio Ltd.; 320 ITR 178 (Del):
The assessee was in the business of share broking. In the
course of its business, the assessee purchased shares on behalf of its clients
and paid the purchase money. The brokerage received by the assessee was shown as
income in its books of account of the immediate previous year. Since the balance
amount of Rs. 50,30,491/- could not be recovered from the client, the assessee
wrote-off the amount as bad debt. The assessee claimed the deduction of the said
amount as bad debt. The Assessing Officer disallowed the claim on the ground
that the conditions for allowing the amount as bad debt, as stipulated in
section 36(1)(vii) and read with sub-section (2), were not satisfied. The
Tribunal held that the conditions are satisfied and allowed the claim.
On appeal by the Revenue, the Delhi High Court upheld the
decision of the Tribunal and held as hereunder:
“i) The money receivable from the client had to be treated
as bad, and since it became bad, it was rightly considered as bad debt and
claimed as such by the assessee in the books of account.
ii) Since the brokerage payable by the client was a part of
the debt and that debt had been taken into account in the computation of the
income, the conditions stipulated in section 36(1)(vii) and (2) stood
satisfied.”
A recent news report of a fraud of Rs. 11 crores committed by
issuance of bogus income tax refunds by the electronic mode comes as no surprise
to most of us. The fraud seems to have been facilitated by obtaining the
password of certain officials authorised to issue refunds. Such a fraud was
inevitable, given the lax systems and procedures followed by the Income Tax
Department.
The entire computerisation efforts have been pushed through
in a hurry, without creating the necessary environment for a robust, secure and
efficient system. Computerisation can be successful only if the personnel
involved are properly trained in the use of the systems as well as on the need
for security measures associated with the systems. Anyone who has visited an
income tax office is aware of the lack of security consciousness on the part of
the personnel of the Income Tax Department, particularly given the confidential
nature of the documents that they are dealing with. There have been instances
galore of details of income tax returns of various individuals and entities
being surreptitiously obtained from the Income Tax Department’s records by
rivals or enemies, though such information is being refused to be parted with
under the Right to Information Act. A proper retraining of the departmental
staff on the need for security and secrecy is, therefore, absolutely essential
to prevent future frauds.
The tragedy is that while such bogus refunds have been
siphoned off from the system, genuine refunds due to taxpayers are still pending
for more than a year; though it was promised that post-computerisation, such
refunds would be issued within four months of filing of the income tax returns.
While there is a significant improvement from the position that prevailed five
years ago, where one had to wait for almost three years for a tax refund, there
definitely is scope for improvement in the speed of processing of tax returns,
given the fact that such processing is now fully computerised. The only reason
that one can think of for not granting the tax refunds in time is the need for
tax authorities to show higher tax collections, to meet projected targets. One
only hopes that the pretext of the tax refund fraud is not used to further delay
the process of issuance of legitimate refunds due to taxpayers.
The system of unrealistic tax collection targets and the
pressure to meet these targets at all costs is detrimental to a taxpayer
friendly service. Such pressures result in large additions made during the
course of scrutiny assessment, whether justified or not, delays in clearance of
rectification applications, delays in passing orders to give effect to appellate
orders of the Tribunal and Commissioner (Appeals), besides delays in the
issuance of legitimate refunds. A large part of taxpayer grievances are on
account of the actions of tax authorities trying desperately, in whatever way
possible, to meet unrealistic targets set for them. Unless this problem is
tackled at the root itself, taxpayers would continue to suffer.
The enforcement of recovery of recently raised demands has
already begun in full swing, even while the appeals are being filed. All
demands, whether based on justifiable additions to income or not, are being
sought to be recovered. The CBDT has also recently clarified that recovery of
high-pitched demands should not be stayed merely because the addition is
substantial (see Spotlight on page xxx), and that instruction number 1914 would
apply to all recovery proceedings. One only hopes that a balanced view is taken
by the tax authorities while seeking to enforce recovery of demands. In the
pressure to meet collection targets, taxpayers should not be pressurised so much
that their business suffers on account of recovery of unjustified tax demands.
The government is seeking to stimulate the economy by reducing tax rates. Tax
authorities should not defeat that purpose of encouraging growth of business by
putting unwarranted financial pressure on businesses, just to try and meet
unachievable tax targets.
Tax authorities also need to keep in mind that instruction
number 1914 clarifies that appeal effects have to be given within two weeks from
the receipt of the appellate order and rectification applications should also be
decided within two weeks of the receipt of such applications. According to the
CBDT, undue delay in giving effect to appellate orders or in deciding
rectification applications should be dealt with very strictly by the Chief
Commissioners or Commissioners. One hopes that these instructions would also be
followed by the tax authorities. After all, recovery and refund are two sides of
the same coin!
Gautam Nayak
“It is true that the government
that governs best governs least. Unfortunately, the same is true of the
government that governs worst” – Jane Auer.
This quote aptly describes the
current state of the Government of India. As I write this editorial, the media
is filled with reactions regarding an additional collector who sought to expose
the oil mafia being roasted alive. While one is shell-shocked by such gruesome
lawlessness in one of the country’s progressive states, it is even more
distressing to note that a majority of the people believe that things will not
improve. Governments both at the Centre and in the States have failed in their
primary duty to govern.
One remembers that, in the year
1991-92, a bold and pragmatic Finance Minister Mr. Manmohan Singh freeing the
economy from controls, regulations and what was known as license raj. He took
path breaking decisions which gave the much needed growth stimulus to the
economy. Our citizens responded magnificently and today India is a country that
the world looks at with respect in various fora. When he took over as the Prime
Minister, he was regarded as `a lotus in the muck’.
In two decades, he seems to
have come full circle. It is as if Manmohan Singh the Finance minister and
Manmohan Singh the Prime Minister are two different men. While as Finance
Minister he refrained from unnecessary governance, as head of the government
there seems to be lack of willingness, if not ability to govern. There may be a
number of reasons for this, but this is a perception many share, and not without
reason. Those who discharge their responsibility to govern enjoy the support of
the people. The states of Gujarat and Bihar should vindicate this statement.
The year 2010 concluded with a
number of scams. We had the Commonwealth Games expose, the 2G Spectrum allotment
scandal, at the Centre. In Maharashtra, we had the Adarsh scam, and
irregularities in Lavasa are being investigated now. The country, today, has a
Central Vigilance Commissioner with a charge sheet pending against him.
Corruption has always been there in public life; now, may be it has become a
norm.
What is of grave concern is
that all these scams have been exposed by diligent citizens, whistleblowers, and
media and are not, the result of investigation or verification by statutory
authorities. The govern-ment is seen to be reacting to these matters subsequent
to their surfacing, often only as a result of public interest litigation and is
not proactive in preventing such events from occurring. Often, the reaction
appears more towards shielding, rather than, punishing the guilty.
It is this lack of governance
that is disturbing. The CWG facilities were being created for for a period of
three to four years. The Adarsh building was being constructed for over seven to
eight years and Lavasa was conceptualised a decade ago. Why did the government
have to wait for the project to get completed, the illegalities and corrupt
practices brought out into the open and then think of remedial measures ?
The proactive aspect of
governance seems to be missing from all walks of life. Let us look at
legislation as such. The power of the legislature to enact laws that reflect its
intentions is well established. Yet, when the judicial authorities interpret the
law differently from its purported legislative intent, the government waits for
two decades, for the interpretation to attain finality and then, amends the law,
retrospectively. Apart from not respecting the judiciary in the true sense of
the term, it causes great hardship to the ordinary citizen. The need of the hour
is that government should not only be in control but also seen to be in control.
As a profession, we also need
to rediscover ourselves. When financial scams surface, the auditor is
responsible in the public eye. We all know the limitations within which a
statutory auditor functions. The report that a statutory auditor submits is a
post mortem. It only states what has gone by. It is like the CAG report where
the damage has been done and one is only to carry out a reporting job and fix
accountability . This is not to undermine the utility of statutory audit. A
statutory auditor definitely has a role to play which but it needs to be more
precisely defined.
If adherence to procedures,
processes etc. is ensured, when a project is being executed, it will give early
warning signals and reduce if not eliminate the cost of rectification. This is
one of the many roles that an internal auditor plays. In our profession,
internal audit has not received the attention it deserves. One hopes that this
will change. This issue of the Journal focuses on internal audit and its various
facets.
Internal audit is something
that the various organs of government must also lay emphasis on. If the
stakeholders are informed of non-adherence to regulations and norms, during the
progress of a project, or when an activity is being carried on, corrective
action can be taken quickly and effectively.
The Central Government is
headed by an honest and wise prime minister. One hopes that he will take back
the reins in his hands confidently and crack the whip. Things should then change
for the better. After all, hope and change are the only permanent aspects of
life!
Anil J. Sathe
Joint Editor
The Satyam fraud has rocked not just the entire Indian
corporate world, but has had its echoes worldwide. It has raised various issues
regarding the role of independent directors and auditors. Our profession, so far
seen as having a low profile, is the subject matter of heated discussion in the
media as well as in the corporate world. In the public perception, the rating of
our profession has touched new lows. Though all the facts relating to the fraud
are not yet fully out in the open (and the trial by the media does seem
premature), the fundamental issues raised by the very revelation of the fraud
cannot be swept under the carpet, and must be tackled head-on by our profession.
We need to do a significant amount of soul-searching, if we desire the
profession to retain the esteem that it has justifiably been held in so far.
Did the auditors follow the prescribed auditing and assurance
standards ? If so, are the auditing and assurance standards in need of
revision ? Advances in computer imaging technology have facilitated forgery. In
that light, do our auditing procedures need any change ? Are we laying too much
stress on adherence to standard procedures leaving no room for exercise of
judgment ? Are the auditing and assurance standards in existence only on paper
or are they being generally adhered to by the profession ?
If the auditing and assurance standards were not followed,
the concerned chartered accountants should certainly be taken to task. Given the
magnitude of this fraud, and its worldwide implications, it was imperative that
not only should action have been taken but that it should be seen to have been
taken swiftly and after a thorough enquiry. It appears that the Institute is
restrained from acting swiftly by its rules and regulations. Further, it seems
that the Institute, which grants the right to use a firm name, does not have the
powers to bring to task an errant firm, if its partners act in a manner contrary
to the prescribed procedures. The Institute is bound by the laws and rules and
regulations framed by the Government. Should the Government not remove the
fetters of the Institute by amending the laws and regulations governing it, so
that it can function more efficiently and effectively ?
The public expectations from an audit that it should be
capable of detecting any significant fraud, should provide warning signs of
collapse, etc., are quite different from what a statutory audit can really do on
account of the fact that there are inherent limitations in an audit. Have public
expectations from audit been raised to an unduly high level, to justify the
higher audit fees being charged ? If so, is the profession itself guilty of
misselling its services ?
Is it that the system of declaration of quarterly results by
listed companies, within one month of the end of the quarter, does not provide
enough time to carry out a proper and meaningful audit following all audit
procedures ? The audit of Satyam’s annual accounts was completed within 21 days
of the year end. Are we capable of resisting management pressures to declare
audited results within a short time span of the end of the accounting period ?
Are unethical practices seeping in our profession,
threatening the very existence of the profession ? If so, is our profession
taking any significant or meaningful measures to arrest such practices ? Is our
disciplinary mechanism strong and fast enough to act as a deterrent to corrupt
practices ? What other measures should be taken to tackle corrupt practices by
members ?
Is it that the auditors are being made a scapegoat for acts
done by the promoter in connivance with politicians, by twisting the facts in a
so-called confession ? If so, should attempts not be made by the profession to
bring the true facts out in the open at the earliest, so as to expose the
businessman-politician nexus ?
Is independence of auditors impaired by the fact that their
appointment and remuneration are de facto controlled by the management ? Should
appointment and fixation of remuneration of auditors be done by an independent
body ? Does consulting for an auditee affect the independence of an auditor ?
Should there be rotation of auditors every three years or every five years ? Or
should there be compulsory rotation of audit partners ? Should all companies
above a particular size have joint auditors ?
All these and many more issues can no longer be ignored or
brushed aside if we wish to continue to be members of a respected profession.
The Satyam episode should act as a warning to all of us that as a profession, we
have to act and act quickly, decisively and dispassionately in addressing all
these issues. While doing so, the public also needs to be made aware of such
measures taken, so that the confidence of the public, on which the very
existence of our profession is based, is restored and retained.
Gautam Nayak
54 Search and seizure : Penalty
u/s.158BFA(2) of Income-tax Act, 1961 : Is directory and not mandatory : AO has
discretion to levy or not to levy penalty.
[CIT v. Dodsal Ltd., 218 CTR 430 (Bom.)]
In this case penalty imposed by the Assessing Officer
u/s.158BFA(2) of the Income-tax Act, 1961 was deleted by the CIT(A) and the
order of the CIT(A) was upheld by the Tribunal. In appeal filed by the Revenue
before the Bombay High Court the following questions were raised :
“(i) Whether on the facts and in the circumstances of the
case and in law, the Tribunal is correct in deleting the penalty levied
u/s.158BFA(2) of the Income-tax Act, 1961 without appreciating the fact that the
assessee has failed to comply with the conditions stipulated in the 1st proviso
to S. 158BFA(2) of the Income-tax Act, 1961 ?
(ii) Whether on the facts and in the circumstances of the
case and in law, the Hon’ble Tribunal is correct in interpreting the condition
stipulated in the 1st proviso to S. 158BFA(2) of the Income-tax Act, 1961 as
directory and not mandatory ?”
The Bombay High Court upheld the decision of the Tribunal and
held as under :
“(i) The terminology of S. 158BFA(2) makes it clear that
there is a discretion in the Assessing Officer to direct payment of penalty.
The proviso supports this interpretation. Only if the authority decides to
impose penalty, then it will not be less than the tax leviable, but shall not
exceed three times the tax so leviable.
(ii) It is therefore, not possible to accept the submission
on behalf of the Revenue that once the Assessing Officer comes to the
conclusion that there is breach of the mandate of S. 158BFA(1), then the
penalty should be imposed. Merely because the expression used is “shall not be
less than the amount of tax leviable or not exceeding three times the tax”,
does not result in reading the first part of the Section as mandatory. The
proviso to the sub-section makes it clear that there is discretion conferred
on the CIT(A) for the reasons which are set out therein.
(iii) In the instant case, both the CIT(A) and the Tribunal
have recorded reasons for exercise of their discretion. The Revenue has not
challenged the said finding of fact as to the exercise of discretionary power.
Therefore, the view taken by the Tribunal that the Section is directory and
not mandatory is upheld.”
52 Reassessment : S. 147 and S. 148 of
Income-tax Act, 1961 : A.Ys. 1990-91 and 1991-92 : Reason to believe : AO
recording reasons and AO issuing notice u/s.148 different : Notice u/s.148 not
valid.
[Hynoup Food and Oil Industries Ltd. v. ACIT, 307
ITR 115 (Guj.)]
For the A.Ys. 1990-91 and 1991-92 the Assessing Officer
issued notices u/s.148 for reopening the assessments. But the Assessing
Officer who had issued the notice was different from the officer who had
recorded the reasons.
On a writ petition filed by the assessee challenging the
validity of the notice u/s.148, the Gujarat High Court quashed the notice and
held as under :
“(i) The opening portion of S. 147 of the Income-tax Act,
1961, stipulates that action may be initiated if the Assessing Officer has
reason to believe that any income chargeable to tax has escaped assessment
for any assessment year. This provision must be read in conjunction with S.
148(2) of the Act which mandates that the Assessing Officer shall, before
issuing any notice u/s.148 of the Act, record his reasons for issuing the
notice. It is, therefore, clear that the officer recording the reasons
u/s.148(2) and the officer issuing notice u/s.148(1) has to be the same
person.
(ii) In the instant case, the officer who had issued the
notice u/s.148 was different from the officer who had recorded the reasons
and hence, the notices for both these years were invalid and deserved to be
quashed.”
53 Return of income : Signature : S. 139 and
S. 140 of Income-tax Act, 1961 : A.Y. 2003-04 : Return of income signed by
assessee was filed after his death. Not a valid return.
[CIT v. Moti Ram, 175 Taxman 27 (P&H)]
The assessee expired on 14-9-2003. Before death, the
assessee had signed the return of income for the A.Y. 2003-04. The return was
filed on 28-11-2003 i.e., after his death. The Assessing Officer
completed the assessment u/s.143(3) of the Income-tax Act, 1961 in spite of
contention raised by the legal heirs that the return filed by the assessee was
null and void. The CIT(A) cancelled the assessment holding that the return
filed in the name of the assessee after his death was null and void ab
initio, and hence any action taken on such a return was also null and
void. The Tribunal upheld the decision of the CIT(A).
On appeal by the Revenue, the Punjab and Haryana High Court
upheld the decision of the Tribunal and held as under :
“(i) In the instant case the return was filed on
28-11-2003. On that day, the assessee had already expired. The return filed
with the signatures of the assessee after his death cannot be taken as valid
return filed by the assessee himself. Undisputedly, the return was neither
signed, nor verified by the legal heirs of the deceased.
(ii) The return filed in this case was null and void. In
our opinion, no valid assessment could have been made on the basis of an
invalid and void return.”
51 Reassessment : Block assessment : S. 147,
S. 148 and Ch. XIV-B of Income-tax Act, 1961 : Block period ending on
24-11-1995 : There is no jurisdiction to reopen a block assessment by issuing
notice u/s.148.
[Cargo Clearing Agency (Gujarat) v. JCIT, 307 ITR 1 (Guj.);
218 CTR 541 (Guj.)]
Pursuant to a search on 24-11-1995 block assessment was made
u/s.158BD of the Income-tax Act, 1961 in the case of the petitioner.
Subsequently, a notice u/s.148 was issued by the Assessing Officer for reopening
the block assessment. The petitioner filed writ petition challenging the
jurisdiction to reopen the block assessment by issuing notice u/s.148 of the
Act.
The Gujarat High Court allowed the petition and held as
under :
“(i) When one considers the entire scheme relating to the
procedure for assessment/reassessment as laid down in the group of Sections
from S. 147 to S. 153 and compares with the special procedure for assessment
of search cases under Chapter XIV-B of the Act, it becomes apparent that the
normal procedure laid down by the Chapter XIV of the Act has been given a
go-by when Chapter XIV-B itself lays down that the said Chapter provides for a
special procedure for assessment of search cases. Clause (f) under Ss.(1) of
S. 158BB of the Act provides for reducing the aggregate of the total income
computed for the block period by the aggregate of the total income, in a case
where an assessment for undisclosed income had been made earlier under clause
(c) of S. 158BC, on the basis of such assessment. In other words, it only
means that where a previous assessment has been framed under Chapter XIV-B of
the Act, the aggregate of such total income assessed for the block period in
case of a search where the block period is a different block from the earlier
block period, has to be deducted for assessing for a subsequent block period.
(ii) When this provision is read in the context of S.
158BC, more particularly the first proviso thereunder, it becomes clear that
the Legislature does not intend to reopen a block assessment. Any such
interpretation would run counter to the legislative intent as noted from the
contemporaneous exposition through the memorandum explaining the Finance Bill
as well as the various circulars issued by the Central Board of Direct Taxes
explaining different amendments. In S. 158BA of the Act, there is a positive
mandate to the Assessing Officer to assess the undisclosed income in
accordance with the provisions of Chapter XIV-B of the Act, notwithstanding
anything contained in any other provisions of the Act. As against that, S.
158BH states that except as otherwise provided in Chapter XIV-B of the Act,
all other provisions of the Act, shall apply to assessment made under Chapter
XIV-B. Therefore, once the period of limitation has been prescribed u/s.158BE
of the Act, the time limit for completion of assessment of undisclosed income
has to be as provided under the said section.
(iii) The entire Chapter XIV-B of the Act relates to
assessment of search cases, viz., undisclosed income found as a result
of search. One cannot envisage escapement of undisclosed income once a search
has taken place and material recovered, on processing of which undisclosed
income is brought to tax. S. 147 of the Act itself indicates that it is in
relation to income escaping assessment and applies in a case where either
income chargeable to tax has escaped assessment by virtue of either
non-disclosure by way of non-filing of the return, or non-disclosure by way of
omission to disclose fully and truly all material facts for the purpose of
assessment, or processing of material already available on record, if it is
within the stipulated period of limitation. Therefore, to contend that the
undisclosed income has escaped assessment despite an assessment having been
framed under Chapter XIV-B of the Act by adopting the special procedure
prescribed by the said Chapter, is to contend what is inherently not possible.
(iv) It cannot be a case of non-filing of return
considering the provisions of S. 158BC of the Act. It cannot be a case of
non-disclosure of material facts considering the fact that everything which
was undisclosed has already been unearthed at the time of search and the
definition of ‘undisclosed income’ itself indicates that not only what has
been seized or recovered, but even income or property which has not been or
would not have been disclosed for the purpose of the Act has been roped in.
Further-more, S. 158BB of the Act also provides not only for acquisition of
books of account or other documents, but on the basis of evidence found as a
result of search and such other materials or information as are available with
the Assessing Officer, undisclosed income of block period shall be computed.
Therefore, even if assuming that some income has not been disclosed in the
return furnished u/s. 158BC of the Act, the AO is bound to assess all
undisclosed income after processing the entire material available with the AO.
The AO could not be heard to state that undisclosed income has escaped
assessment because the officer failed to apply his mind to the material
available on record, there being no lack of disclosure.
(v) The entire scheme under Chapter XIV of the Act, more
particularly from S. 147 to S. 153 of the Act, pertaining to reassessment and
the special procedure for assessing the undisclosed income of the block period
under Chapter XIV-B of the Act are not only separate and distinct from each
other, but if an effort is made to incorporate the scheme under Chapter XIV of
the Act, for the purpose of assessment of block period there is a conflict
between the provisions which becomes apparent on a plain reading. In the
circumstances, by the established rules of interpretation, unless and until a
plain reading of the two streams of assessment procedure does not result in
the procedures being independently workable, the question of resolving the
conflict would not arise. But in the light of the provisions of S. 158BH of
the Act, once there is a conflict between the two streams of procedure the
provisions of Chapter XIV-B of the Act shall prevail and have primacy. Once
assessment has been framed u/s.158BA of the Act in relation to undisclosed
income for the block period as a result of search, there is no question of the
AO issuing notice u/s.148 of the Act for reopening such assessment as the said
concept is repugnant to the special scheme of assessment of of undisclosed income for the block period. The first proviso u/s.158BC(a) of the Act specifically provides that no notice u/ s. 148 of the Act is required to be issued for the purpose of proceedings under Chapter XIV-B.”
49 Cash credits : S. 68 of Income-tax Act,
1961 : A.Y. 2001-02 : Company : Share application money : Department must show
that investment made by subscribers actually emanated from coffers of assessee
to be treated as undisclosed income of assessee.
[CIT v. Value Capital Services P. Ltd., 307 ITR 334
(Del.)]
The assessee had received an amount of Rs.51 lakhs as share
application money from 33 persons in the previous year relevant to A.Y.
2001-02. The Assessing Officer accepted the explanation and the statement
given by three of these persons, but found that the response from the others
was either not available or was inadequate. Therefore, he added an amount of
Rs.46 lakhs pertaining to 30 subscribers to the income of the assessee u/s.68
of the Income-tax Act, 1961. The CIT(A) confirmed the addition.
On appeal by the Revenue, the Delhi High Court upheld the
decision of the Tribunal and held as under :
“(i) The principle that has been laid down by the various
decisions rendered by this Court from time to time is that if the existence
of the applicant is proved, normally no further inquiry is necessary.
(ii) Learned counsel for the Revenue submits that the
creditworthiness of the applicant can nevertheless be examined by the
Assessing Officer. It is quite obvious that it is very difficult for the
assessee to show the creditworthiness of strangers. If the Revenue has any
doubt with regard to their ability to make the investment, their returns may
be reopened by the Department.
(iii) In any case, what is clinching is the additional
burden on the Revenue. It must show that even if the applicant does not have
the means to make the investment, the investment made by the applicant
actually emanated from the coffers of the assessee, so as to enable it to be
treated as the undisclosed income of the assessee. This has not been done
insofar as the present case is concerned and that has been noted by the
Tribunal also.”
50. Casual and non-recurring receipt :
Exemption u/s.10(3) of Income-tax Act, 1961 : A.Y. 1994-95 : Incentive prize
received on coupon given on the strength of NSC : Is not a lottery : Is casual
and non-recurring receipt exempt u/s.10(3).
[B. K. Suresh v. ITO, 221 CTR 80 (Kar.)]
The assessee, a professor in Engineering College, had
purchased National Saving Certificates (NSCs) in F.Y. 1992-93. The Director of
Small Savings, Government of Karnataka, as a measure to encourage small savings,
framed a scheme under which it offered different prizes to the persons who had
made investment in a small savings scheme, through a lucky draw. By virtue of
the purchase of NSCs, the assessee had become entitled for a coupon.
Accordingly, a coupon was issued to him. In a lucky draw he was adjudged as
prize winner, having bagged third prize. The prize was Indira Vikas Patra of
face value of Rs.5,00,000, the market value being Rs.3,50,000. The assessee
claimed exemption u/s.10(3) of the Income-tax Act, 1961 of the said amount of
Rs.3,50,000. The AO disallowed the same treating the same as a lottery and made
addition of Rs.3,50,000 in his order u/s.143(1)(a) of the Act. The Tribunal
confirmed the addition.
On appeal by the assessee, the following questions were
raised :
“1. Whether in the facts and in the circumstances of the
case, the Tribunal was right in law in holding that incentive award received
by the appellant-assessee constitutes lottery income on the facts and in the
circumstances of the case ?
2. Whether the Tribunal was right in law in holding that
the purchase of National Savings Certificates by the appellant-assessee
constitutes payment of consideration to participate in the lottery ?”
The Karnataka High Court concurred with the view of the
Madras High Court in CIT v. Dy. Direcor of Small Savings, (2004) 266 ITR
27 (Mad.) that giving of coupons against National Savings Certificates would not
fall within the definition of ‘lottery’. The Court allowed the assessee’s claim
and held as under :
“(i) The definition of ‘lottery’ inserted by the Finance
Act, 2001 is prospective and not retrospective.
(ii) We have no hesitation to hold that all the authorities
below committed an error in adding the prize money awarded to the assessee on
coupon and draw thereof to the income of the assessee. Thus the said orders
deserve to be set aside and quashed and are hereby set aside and quashed.”
48 Business expenditure : Disallowance u/s.
40(c) of Income-tax Act, 1961 : Remuneration to director : Where percentage of
commission is not fixed and varies depending on decision of Board of directors,
commission paid to directors would not be remuneration as contemplated
u/s.40(c).
[J. K. Synthetics Ltd. v. CIT, 175 Taxman 22 (Del.)]
The assessee-company paid different amounts to its directors
by way of commission. The Assessing Officer held that wherever payment was above
the ceiling limit of Rs.72,00,000, it was to be disallowed u/s.40(c) of the
Income-tax Act, 1961. Accordingly, he made the disallowance. The disallowance
was upheld by the Tribunal.
On appeal by the assessee, the Delhi High Court reversed the
decision of the Tribunal and held as under :
“(i) A perusal of the special resolution passed by the
assessee-company, in terms of which commission was paid to directors made it
clear that the quantum of commission was to be determined at the discretion of
its Board of directors. The commission, that had to be paid in terms of the
special resolution, was up to a maximum limit of 3% of the net profits of the
company. In other words, there was no fixed commission paid to any of the
directors and the amount of commission varied depending upon the decision of
the Board. The factors that the Board was required to take into consideration
had not been spelt out, but one had to proceed on the basis of the decision of
the Board, presuming that the commission payable to the directors was to be
determined on the basis of services
rendered by them or some similar requirements.
(ii) It was possible that the percentage might have a nexus
with the turnover achieved (which was also variable) or the amount of business
given by the director to the assessee (which was also variable). The factors
to be taken into conside-ration for determining the percentage of commission
had not been spelt out in the special resolution. So long as the percentage
was not fixed and was variable, it could not
partake the nature of salary and, therefore, could not partake the nature of
remuneration, which according to the Revenue, is similar to salary.
(iii) Consequently, the commission paid to the directors
could not be said to be remuneration as contemplated by S. 40(c).”
46 Business expenditure : Assessee bank :
Deduction of bad debt u/s.36(1)(vii) and provision for bad debt u/s.36(1)(viia)
of Income-tax Act, 1961 : A.Ys. 1993-94 and 1994-95 : Deduction u/s.36(1)(vii)
for bad debt is allowable independently and irrespective of deduction for
provision for bad and doubtful debts allowable u/s.36(1)(viia) subject to
limitation that amount should not be deducted twice.
[DCIT v. Karnataka Bank Ltd., 218 CTR 273 (Kar.)]
The assessee is a scheduled bank. For the A.Ys. 1993-94 and
1994-95 the assessee bank had claimed deduction of bad debts written off
u/s.36(1)(vii) and also deduction of provision for bad and doubtful debts
u/s.36(1)(viia) of the Income-tax Act, 1961. The Assessing Officer allowed the
claim for deduction of provision for bad and doubtful debts u/s. 36(1)(viia),
but disallowed the claim u/s.36(1)(vii) for bad debts written off. The CIT(A)
upheld the disallowance. The Tribunal allowed the assessee’s claim.
On appeal by the Revenue, the Karnataka High Court upheld the
decision of the Tribunal and held as under :
“The Tribunal was correct in holding that deduction
u/s.36(1)(vii) is allowable independently and irrespective of the provision
for bad and doubtful debts created by the assessee in relation to the advances
of the rural branches u/s.36(1)(viia), subject to the limitation that an
amount should not be deducted twice u/s.36(1)(vii) and u/s. 36(1)(viia)
simultaneously.”
47 Business expenditure : Bonus : S.
36(1)(ii) and S. 37(1) of Income-tax Act, 1961 : ‘Good work reward’ given by
assessee for good work done by employee : Amount having no relation to profit
earned : Does not amount to bonus : Amount not deductible u/s.36(1)(ii), but
deductible u/s.37(1).
[Shriram Pistons and Rings Ltd. v. CIT, 307 ITR 363
(Del.)]
The following question was raised before the High Court in a
reference filed by the Revenue :
“Whether the Tribunal was right in holding that the
payments made by the assessee to its employees under the nomenclature ‘Good
work reward’ did not constitute bonus within the meaning of S. 36(1)(ii) of
the Income-tax Act, 1961 and were allowable as normal business expenditure
u/s. 37 ?”
The Delhi High Court held as under :
“(i) The word ‘bonus’ has not been defined anywhere
including the Payment of Bonus Act, 1965. However, for the purpose of
industrial law, four types of bonus have been recognised : (a) production
bonus, (b) contractual bonus, (c) customary bonus usually associated with
festivals, and (d) profit-sharing bonus.
(ii) The ‘good work reward’ that was given by the assessee
to some employees on the recommendation of senior officers of the assessee did
not fall in any of the categories of bonus specified under the industrial law.
There was nothing to suggest that the good work reward given by the assessee
to its employees had any relation to the profits that the assessee may or may
not make.
(iii) The reward had relation to the good work done by the
employee during the course of his employment and at the end of the financial
year on recommendation of a senior officer of the assessee, the reward was
given to the employee. Consequently, the ‘good work reward’ could not fall
within the ambit of S. 36(1)(ii) of the Act.
(iv) The ‘good work reward’ was allowable as business
expenditure u/s.37(1) of the Act.”
45 Business expenditure : Bonus : S.
36(1)(ii) and S. 37(1) of Income-tax Act, 1961 : A.Y. 1993-94 : Ex gratia
payment over and above statutory limits prescribed under the Payment of Bonus
Act, 1965, is allowable as business expenditure.
[CIT v. Maina Ore Transport (P) Ltd., 218 CTR 653 (Bom.)]
In the A.Y. 1993-94 the assessee had made payment of ex
gratia in the sum of Rs.2,37,702 to its employees in excess of the limit of
8.33% prescribed under the Payment of Bonus Act. The assessee had claimed the
deduction of the said ex gratia payment as business expenditure. The AO
disallowed the claim on the ground that it is in excess of 8.33% maximum
statutory limit under the Act. The CIT(A) allowed the deduction holding that the
amount was paid to maintain healthy relations and industrial peace. The Tribunal
confirmed the decision of the CIT(A).
On reference by the Revenue, the Bombay High Court upheld the
decision of the Tribunal and held as under :
“Ex gratia payment in excess of the limits prescribed under
the Payment of Bonus Act, 1965, is allowable as business expenditure, although
the payment did not cover contractual payment or customary payment.”
44 Assessment : Limitation : S. 143, S. 144
and S. 154 of Income-tax Act, 1961 : A.Y. 1994-95 : Order giving effect to
Appellate order is order inherent in S. 143 and S. 144 : Not an order u/s.154 :
Limitation u/s.154(7) not applicable.
[Peninsula Land Ltd. v. CIT, 307 ITR 183 (Bom); 175
Taxman 58 (Bom)]
For the A.Y. 1994-95 the AO passed an order u/s.154 of the
Income-tax Act, 1961, on 9-6-2006 giving effect to the order of the Commissioner
(Appeals). In that order he allowed set-off of carried forward depreciation of
the preceding years. Subsequently, he passed another order u/s.154 dated
22-2-2007 withdrawing the earlier order u/s.154, dated 9-6-2006 claiming it to
be beyond the period of limitation as prescribed u/s.154(7). The Commissioner
rejected the revision application made u/s.264 of the Act.
The Bombay High Court allowed the writ petition filed by the
assessee and held as under :
“(i) It was clear from the order dated 9-6-2006, that the
set-off was granted in order to pass on to the assessee the benefit that it
had obtained under the order passed by the Appellate authority in the
statutory appeal. This order was not an order passed u/s.154 of the Act. The
power to pass such order was inherent in S. 143 or S. 144.
(ii) The power of the Income-tax Officer to amend the
assessment in consequence of decision in an appeal, revision, reference or by
a High Court or Supreme Court was not traceable to S. 154, but was inherent
and traceable to S. 143 and S. 144 of the Act. Therefore the limitation as
contained in S. 154(7) would not apply to the passing of such an order.
(iii) The finding that the order passed on 9-6-2006 was
beyond the period of limitation as prescribed u/s.154(7) was erroneous.”
23 Co-operative Housing Society – Builders have to execute
the conveyance: Consumer Protection Act:
Environ Emanual Co-op. Hsg. Soc. Ltd vs. The Environ
Enterprises INC, dated 19.9.2008; Consumer Complaint No. 91 /2008. (Consumer
Grievances Redressal Forum, Konkan Bhavan, Navi Mumbai)
The complainant society is a duly registered co-operative
housing society under the Maharashtra Co-op. Societies Act. In the year 2003,
the opponent builder handed over the possession of the flats to the members of
the society. But, the conveyance deed had not been executed to transfer the land
and building in favour of the society. The society visited the opponent a number
of times and placed their demand before them in writing. The complainant society
had filed this complaint as the opponent had provided defective service to the
complainant society. The complainant society further prayed that order may be
issued to provide occupation certificate, building completion certificate,
documents pertaining to ownership of building to the complainant society, and
also to register the conveyance deed in favour of the society.
The Consumer Forum held that as per the provisions of law, it
is the duty of the opponent builder to register the conveyance deed in favour of
the complainant society.
As the opponent builder had not registered the conveyance
deed in favour of the complainant society, the Consumer Forum was of the opinion
that as per the provisions of the Act, it was the responsibility of the builder
to take initiative to register the society of the flat owners. It was also the
responsibility of the builder to take initiative to register the conveyance deed
in favour of the society. Even though a period of three years has elapsed since,
the opponent has not registered the conveyance deed in favour of the society. As
per the Forum, this act of the opponent was not acceptable. As per Sec. 2(1)(g)
of Consumer Protection Act, this act of the opponent comes under the purview of
“defective services”. The opponent builder was directed to comply with all the
legal procedures to register the conveyance deed in favour of the society within
a period of two months from the date of the order.
22 Appellate Tribunal – Exparte order: Tribunal must
decide appeal on merits, if assessee files submissions in writing
Chemipol vs. UOI
(2009) 244 ELT 497 (Bom)
The appellant’s appeal before the CESTAT was dismissed for
non prosecution. The application filed by the appellant for setting aside the
order of dismissal for non prosecution was rejected by the Tribunal.
In a further appeal, the Hon’ble High Court observed that the
Tribunal has no power to dismiss an appeal for default on the part of an
appellant in making an appearance. Even if the appellant is absent, the Tribunal
is required to decide the appeal on the merits. The Tribunal presently has its
benches only in four or five places in India. An appellant, who on account of
his place or residence or business being far away from the place of sitting for
the Tribunal, may not, except at a high cost, be able to attend the hearing;
especially when we know that matters are usually adjourned for several times. In
such an event, if the appellant files on record his submissions in writing, the
Tribunal must decide the appeal on the merits and on the basis of the said
submissions. In that case, the Tribunal would not have a power to dismiss the
appeal; but where the appellant, in spite of notices, is persistently absent,
and the Tribunal, considering the facts of the case, is of the view that the
appellant is not interested in prosecuting the appeal, can, in the exercise of
its inherent power, dismiss the appeal for non prosecution. The conclusion of
the Tribunal that the appellant is not interested in prosecuting the appeal must
be arrived at based on the facts of each case, and not merely on account of the
absence of the appellant on a solitary occasion.
In the present case, the Tribunal had dismissed the appeal on
account of the absence of the appellant only on the occasion. The fact that the
appellant immediately thereafter applied for restoration of the appeal, shows
his intention: that he was interested in prosecuting the appeal, and maybe he
had a justifiable cause for his absence on one occasion. In the circumstances,
the Tribunal ought to have restored the appeal into the file.
Whether order passed by designated authority under section 106(2) of the Finance Act, dealing with VCES, 2013 is appealable? Held, Yes
Facts:
The applicant filed a writ petition against the order of the designated authority who rejected assessee’s application u/s. 106(2) of the Finance Act, 2013, as introduced vide the Finance Act, 2013 dealing with Voluntary Compliance Encouragement Scheme, 2013. The revenue contended that the circular dated 08-08-2013 issued by CBEC stated that such order passed u/s. 106(2) was not appealable and thus the writ was not maintainable.
Held:
Allowing the writ, the Hon. High Court held that all other provisions of the Act except to the extent specifically excluded would apply to the proceedings under the scheme and hence, the impugned order would necessarily be appealable u/s. 86 of the Indian Finance Act, 1994.
Li and Fung India (P.) Ltd. vs. CIT; [2013] 40 taxmann.com 300 (Delhi):
The assessee, ‘LFIL’, entered into an agreement with its associate enterprise (‘AE’) for rendering sourcing support services for the supply of high volume, time sensitive consumer goods, for which it was remunerated at cost plus mark-up of 5 %.; During the course of Transfer Pricing assessment, the assessee contended that such a transaction was at Arm’s Length Price (‘ALP’) on an application of the TNM method. The Transfer Pricing Officer (‘TPO’) observed that assessee was performing all critical functions, had assumed significant risks and it had used both tangible and unique intangibles developed by it over a period of time, which had given an advantage to the AE in form of low cost of product, quality and had enhanced the profitability of AE. Thus, it held that the compensation of cost plus mark up of 5 % was not at ALP and applied a mark-up of 5 % on the FOB value of exports made by the Indian manufacturer to overseas third party customers. Therefore, the Assessing Officer made addition on the basis of order passed by TPO, which was further affirmed by the Tribunal
On appeal by the assessee, the Delhi High Court reversed the decision of the Tribunal and held as under:
“i) The impugned order had not shown how and to what extent assessee bore significant risks, or that the AE enjoyed such location advantages, so as to justify rejection of the Transfer pricing exercise undertaken by assessee.
ii) Tax authorities should base their conclusions on specific facts, and not on vague generalities, such as ‘significant risk’, ‘functional risk’, ‘enterprise risk’, etc., without any material on record to establish such findings. If such findings are warranted, they should be supported by demonstrable reasons, based on facts and the relative evaluation of their weight and significance.
iii) Where all elements of a proper TNMM are detailed and disclosed in the assessee’s reports, care should be taken by the tax administrators and authorities to analyse them in details and then proceed to record reasons why some or all of them are unacceptable;?
iv) The impugned order, upholding the determination of certain margin over the FOB value of the AE’s contract, was an error in law. Therefore, the TPO’s addition of the cost plus 5 % markup on the FOB value of exports was without foundation and was to be deleted.”
1. To grant permission to listed companies to hedge the price risk in respect of any commodity (except gold, silver, platinum) in the international commodity exchanges/markets as specified under the delegated route.
2. To grant permission to unlisted companies to hedge price risk on import/export in respect of any commodity (except gold, silver, platinum) in the international commodity exchanges/markets subject to guidelines Annexed to this Circular.
In the ‘Guidance Note on Terms used in Financial Statements’ of ICAI, the expression ‘sales turnover’ has been defined as: “The aggregate amount for which sales are effected or services rendered by an enterprise.” The term ‘gross turnover’ and ‘net turnover’ (or ‘gross sale’ and ‘net sales’) are sometimes used to distinguish the sale aggregate before and after deduction of returns and trade discounts”
The Guide to Company Audit issued by the Institute while discussing ‘sales’, states as follows:
“Total turnover, that is, the aggregate amount for which sales
are effected by the Company, giving the amount of sales in respect of each class of goods dealt with by the company and indicating the quantities of such sale for each class separately.
The term ‘turnover’ would mean the total sales after deducting therefrom goods returned, price adjustments, trade discount and cancellation of bills for the period of audit, if any. Adjustments which do not relate to turnover should not be made e.g., writing off bad debts, royalty, etc. Where excise duty is included in turnover, the corresponding amount should be distinctly shown as a debit item in the profit and loss account.”
The ‘Statement on the Amendments to Schedule VI to the Companies Act, 1956’ issued by the ICAI while discussing the disclosure requirement relating to ‘turnover’ states as follows:
“As regards the value of turnover, a question which may arise is with reference to various extra and ancillary charges. The invoices may involve various extra and ancillary charges such as those relating to packing, freight, forwarding, interest, commission, etc. It is suggested that ordinarily the value of turnover should be disclosed exclusive of such ancillary and extra charges, except in those cases where because of the accounting system followed by the company, separate demarcation of such charges is not possible from the accounts or where the company’s billing procedure involves a composite charge inclusive of various services rather than a separate charge for each service.
In the case of invoices containing composite charges, it would not ordinarily be proper to attempt a demarcation of ancillary charges on a proportionate or estimated basis. For example, if a company makes a composite charge to its customer, inclusive of freight and despatch, the charge so made should accordingly be treated as part of the turnover for purpose of this section. It would not be proper to reduce the value of the turnover with reference to the approximate value of the service relating to freight and despatch. On the other hand if the company makes a separate charge for freight and despatch and for other similar services, it would be quite proper to ignore such charges when computing the value of the turnover to be disclosed in the Profit and Loss Account. In other words, the disclosure may well be determined by reference to the company’s invoicing and accounting policy and may thereby vary from company to company. For reasons of consistency as far as possible, a company should adhere to the same basic policy from year to year and if there is any change in the policy the effect of that change may need to be disclosed if it is material, so that a comparison of the turnover figures from year to year does not become misleading.”
The Statement on the Companies (Auditors’ Report) Order 2003 issued by the Institute in April 2004, while discussing the term ‘turnover’ states as follows: The term ‘turnover’ has not been defined by the order. Part II of Schedule VI to the Act, however, defines the term ‘turnover’ as the aggregate amount for which sales are effected by the company. It may be noted that the ‘sales effected’ would include sale of goods as well as services rendered by the company. In an agency relationship, turnover is the amount of commission earned by the agent and not the aggregate amount for which sales are effected or services are rendered. The term ‘turnover’ is a commercial term and it should be construed in accordance with the method of accounting regularly employed by the company.
As per the ‘Guidance Note on Tax Audit’ — “The term turnover for the purposes of this clause may be interpreted to mean the aggregate amount for which sales are effected or services rendered by an enterprise. If sales tax and excise duty are included in the sale price, no adjustment in respect thereof should be made for considering the quantum of turnover. Trade discounts can be deducted from sales, but not the commission allowed to third parties. If, however the excise duty and/ or sales tax recovered are credited separately to excise duty or sales tax account (being separate accounts) and payments to the authority are debited in the same account, they would not be included in the turnover. However, sales of scrap shown separately under the heading ‘miscellaneous income’ will have to be included in turnover.”
As per explanation to paragraph 10 of AS-9 Revenue Recognition, “The amount of revenue from sales transactions (turnover) should be disclosed in the following manner on the face of the statement of profit and loss:
Turnover (Gross) XX
Less: Excise Duty XX
Turnover (Net) XX
The amount of excise duty to be deducted from the turnover should be the total excise duty for the year except the excise duty related to the difference between the closing stock and opening stock. The excise duty related to the difference between the closing stock and opening stock should be recognized separately in the statement of profit and loss, with an explanatory note in the notes to accounts to explain the nature of the two amounts of excise duty.” AS-9 clearly sets out the requirement with respect to presentation of revenue and excise duty.
With respect to VAT the Guidance Note on Value Added Tax issued by ICAI states that “VAT is collected from the customers on behalf of the VAT authorities and, therefore, its collection from the customers is not an economic benefit for the enterprise and it does not result in any increase in the equity of the enterprise”. Accordingly, VAT should not be recorded as revenue of the enterprise. Correspondingly, the payment of VAT is also not treated as an expense. The Guidance Note on VAT further states, “Where the enterprise has not charged VAT separately but has made a composite charge, it should segregate the portion of sales which is attributable to tax and should credit the same to ‘VAT Payable Account’ at periodic intervals”. Currently most companies follow this guidance, though some entities have presented revenue gross of VAT and correspondingly treated VAT as an expense.
With respect to sales tax and service tax, the Guidance Note on revised Schedule VI states that such taxes are generally collected from the customer on behalf of the Government in majority of the cases. However, it adds that this may not hold true in all cases and it is possible that a company may be acting as principal rather than as an agent in collecting these taxes. Whether revenue should be presented gross or net of taxes should depend on whether the company is acting as a principal and hence responsible for paying tax on its own account or, whether it is acting as an agent i.e., simply collecting and paying tax on behalf of Government authorities. In the former case, revenue should also be grossed up for the tax billed to the customer and the tax payable should be shown as an expense. However, in cases, where a company collects tax only as an intermediary, revenue should be presented net of taxes. Strangely under the Guidance Note on revised Schedule VI, this concept of principal and agent is to be applied only with respect to sales tax and service tax, but not on excise duty which is covered under AS-9 and VAT which is covered by the GN on VAT.
Author’s view
Sellers of goods and services may enter into different arrangements with respect to indirect taxes. Some contracts clearly require the customer to pay the seller whatever tax is finally paid to the Government; in other words the seller acts as an agent between the Government and the customer. In other cases, the seller charges one all inclusive lump-sum amount for the entire sale contract including taxes.
The seller then pays to the Government whatever taxes are due, shouldering the risks of changes in tax rate or tax legislations. The tax burden on the seller would be the amount paid to the Government less any amount of input credit that is available to him. The tax burden could vary significantly under different scenarios, and this would determine the ultimate profit the seller makes on the lump- sum contract. In such cases, it could be said that the seller acts as a principal with respect to these taxes and hence should present revenue on a gross basis and the indirect tax as an expenditure. This example highlights a quagmire that companies have to face due to conflicting literature. On the one hand the guidance note on VAT requires a net presentation; whereas the guidance note on revised Schedule VI with respect to sales tax and service tax requires an assessment of principal and agent relationship which in this example would translate into a gross presentation.
The end result is that “what is good for the goose is not good for the gander” and absent a uniform principle for presentation of revenue and indirect taxes significant disparity in the disclosures would continue to arise in the future.
In the author’s view, the ICAI should commission a project to deal comprehensively with the presentation of various indirect taxes paid in India. Whether these taxes are presented gross or net, would depend on the nature of the indirect tax and the contractual arrangements between the seller and the buyer. It may be noted that under International Financial Reporting Standards, the evaluation of gross v. net presentation is done on the basis of principal agent relationship.
Under fiscal laws, and more particularly under Sales Tax Laws, many a time an issue arises as to whether any taxable transaction has taken place or not? The tax under Sales Tax Laws can be levied only if there is a transaction of sale or purchase, as the case may be. It is possible that on the facts of the case the dealer may be contending that his transaction is not sale/purchase transaction and hence no tax should be levied on the same. Under the above circumstances, dispute arises as to on whom the burden lies to prove the taxable event. There are a number of judgments throwing light on the said issue. Reference can be made to the following important judgments.
Judgments:
(a) Haleema Zubair Tropical Traders v. State of Kerala, (19 VST 142) (SC)
The gist of the judgment is as under:
The assessee was the proprietor of two concerns: Tropical Traders and Poseidon Food Co. Tropical Traders was a dealer in tiles, and, the business of Poseidon Food Co. was to render services to various exporters in respect of inspection and certification of quality of the items sought to be exported.
The assessee declared taxable turnover of Rs.28,20,474, being sale of goods, for the purpose of sales tax under the Kerala General Sales Tax Act, 1963. However, receipt shown as commission amounting to Rs.45,80,168 from the business of Poseidon Food Co. was also sought to be assessed by the Department on the ground that it was not supported and proved by any documentary evidence. Before the Appellate Authority the assessee produced the income-tax returns and the assessment orders as well as copy of orders placed by exporters and the certificate granted by the Marine Products Export Development Authority. The first Appellate Authority held that the profes-sional services rendered by the assessee to the exporters involving skill and knowledge did not constitute any transfer of property and that the levy of sales tax on the sum of Rs.45,80,168 was not in order. The Sales Tax Appellate Tribunal, however, reversed the decision of the first Appellate Authority on the ground that the onus was on the assessee to prove that the receipts were not the result of sale. The High Court dismissed the revision petition of the assessee as well as a review application.
On appeal, the Supreme Court, setting aside the decision of the High Court and remitting the matter to the Assessing Authority, held that the Assessing Authority ought to consider the matter afresh on the basis of the materials placed by the assessee, viz., income-tax returns, assessment orders, certificate issued by the MPDEA, etc.
This shows that the authorities are under obligation to consider the material placed before it and prove the taxable event. They cannot put such burden upon an assessee.
(b) Girdharilal Nannelal (39 STC 30) (SC)
The facts of the case can be noted as under:
The Sales Tax Assessing Authority treated a cash-credit entry of Rs.10,000 (which was declared as undisclosed income for income-tax purpose) in the account books of the appellant-firm in the name of the wife of one of its partners as income of the appellant out of concealed sales and added Rs.1,00,000 to the turnover of the appellant on the basis that the sum of Rs.10,000 represented 10% of the profit. The explanation offered by the appellant that the sum of Rs.10,000 was given by the partner of the firm to his wife to obtain her consent for his second marriage and that the amount was lying with her and had been deposited by her with the appellant was not accepted by the sales tax authorities. The High Court also was not satisfied with the explanation and inferred that the amount reflected profits of the appellant’s business and those profits arose out of sales not shown in the account books.
On further appeal, the Supreme Court held that in order to impose liability upon the appellant for payment of sales tax by treating the amount of Rs.10,000 as profits arising out of undisclosed sales of the appellant, two things had to be established: (i) The amount was the income of the appellant and not of the partner or his wife. (ii) The amount represented profits from income realised as a result of transactions liable to sales tax and not from other sources. The onus to prove the above two ingredients was upon the Department. The fact that the appellant or its partner and his wife failed to adduce satisfactory or reasonable explanation with regard to the source of that amount would not in the absence of some further material had the effect of discharging that onus and proving both the ingredients. In such a case no presumption arose that the amount represented the income of the appellant and not of the partner or his wife. It was necessary to produce more material in order to connect that amount with the income of the appellant as a result of sales. In the absence of such material, mere absence of explanation regarding the source of the amount would not justify the conclusion that the amount represented profits of the appellant derived from undisclosed sales.
The above judgment also further reiterates the principle that the burden lies on the Sales Tax Department, if it wants to levy sales tax.
(c) Mittal & Co. (69 STC 42) (All.) The gist of the judgment is as under:
The assessee did not maintain manufacturing account and contended that no sale was effected inside the State during the assessment year and the Assessing Officer estimated the sale on the ground that the assessee, in past, had effected sale inside the State. In revision the Allahabad High Court held that though the initial onus to establish that no sale was made by the assessee is on the assessee, no evidence could be adduced for establishing a negative fact. When the assessee denies the factum of sale, the onus shifts to the
Revenue to disprove the contention of the assessee.
This judgment also clearly lays down that negative burden cannot be cast on the assessee. It is the Department who has to bring evidence for justifying levy of tax.
(d) M. Appukutty v. STO, (17 STC 380) (Ker.)
The Kerala High Court observed that principles of natural justice demand that there should be a fair determination of a question by quasi -judicial authorities. Arbitrariness will certainly not ensure fairness. If giving a mere opportunity to show cause, and to explain, would satisfy the principles of natural justice, the notice to show cause be-comes an empty formality signifying nothing, for, after issuing the notice to show cause, the authority can decide according to his whim and fancy. The judicial process does not end by making known to a person the proposal against him and giving him a chance to explain. It extends further to a judicial consideration of his representations and the materials and a fair determination of the question involved.
If the quasi-judicial authority dis-regards the materials available or if it refuses to apply its mind to the question and if it reaches a conclusion which bears no relation to the facts before it, to allow those decisions to stand would be violative of the principles of natural justice. Arbitrary decisions can also, therefore, result in violation of the principles of natural justice which is a fundamental concept of Indian jurisprudence. If a decision is allowed to be made as it likes, it may amount to even a mala fide decision.
In particular the High Court observed as under:
“The rejection of the account books does not give the Taxing Authority a right to make any assessment in any way it likes without any reference to the materials before him. The process of best judgment assessment, whether it be one relating to income-tax, agricultural income-tax or sales tax, is a quasi-judicial process, an honest and bona fide attempt in a judicial manner to determine the tax liability of a person. And such determination must be related to the materials before the authority.”
Therefore, even in the best judgment assessment, the authorities are under obligation to refer to the material on record and to arrive at just and proper conclusion. In one way this judgment also casts burden on the authorities to establish taxable event before levy of tax.
Conclusion:
From the above precedents, it can very well be said that for levying tax, it is the duty of the taxing authority to prove the taxable event. Even in cases where dealer fails to prove his case, it will not automatically entitle the authorities to levy tax. In such cases also they will be required to bring sufficient supporting evidence about taxable event before levy of tax.
Introduction :
1.1 S. 115JB was introduced by the Finance Act,
2000 with effect from A.Y. 2001-02, which, in substance, provides that if the
income-tax payable on Total Income is less than 7.5% of the ‘Book Profit’ of the
Company, then the ‘Book Profit’ shall be deemed to be the Total Income of the
assessee, on which tax is payable @ 7.5% (this rate is subsequently increased
from time to time and presently the same is 18% from A.Y. 2011-12). This
position emerges on account of subsequent amendment made in S. 115JB by the
Finance Act, 2002 with retrospective effect from A.Y. 2001-02. Accordingly, in
such cases, u/s.115JB Minimum Alternative Tax (MAT) is payable by the Company.
S. 115JB is the successor of S. 115JA, which was introduced by the Finance (No.
2) Act, 1996 with effect from 1997-98 and which continued up to A.Y. 2000-01.
Originally, for the purpose of levy of MAT, S. 115J was introduced by the
Finance Act, 1987 with effect from A.Y. 1988-89, which continued up to A.Y.
1990-91.
1.2 Basically, all the abovereferred three
provisions enacted for the purpose of levy of MAT are on similar line with one
major difference that u/s.115JB MAT liability is to be worked out at 7.5% of the
‘Book Profit’ and the ‘Book Profit’ is deemed to be Total Income, whereas in the
earlier provisions, 30% of the ‘Book Profit’ was deemed to be the Total Income
in cases where the Total Income of the Company was found to be less than 30% of
its ‘Book Profit’. This and certain other differences in such provisions are not
relevant for the purpose of this write-up.
1.3 Under all the abovereferred three provisions,
one common thread is that the basis of working of ultimate tax liability is the
‘Book Profit’. In all these provisions, one common provision can be noticed that
the Company shall prepare its Profit & Loss Account for the relevant Previous
Year, in accordance with the provisions of Parts II and III of Schedule VI to
the Companies Act, 1956. In this context, the provisions of S. 115JB have been
made more stringent with which also we are not concerned in this write-up. By
and large, the profit shown in such Profit & Loss Account cannot be disturbed by
the AO in view of the judgment of the Apex Court in the case of Apollo Tyres
Ltd. (255 ITR 273). This judgment we have analysed in this column in the June,
2002 issue of this Journal.
1.4 In all the abovereferred three Sections, the
‘Book Profit’ is defined in the relevant Section. In such definition, starting
point, in each of the Section, is net profit means ‘Net Profit as shown in the
Profit & Loss Account for the relevant Previous Year’ and the definition further
specifies certain items for adjustments to increase such net profit
(‘Specified Items for Upward Adjustments’) and items for adjustments to
reduce the net profit so increased, (‘Specified Item for Downward
Adjustments’) as provided therein. One such ‘Specified Item for Downward
Adjustment’ provided in all the three provisions relates to the amount withdrawn
from any Reserve or Provision, if any such amount is credited to the Profit &
Loss Account. In S. 115JB, ‘Book Profit’ is defined in Explanation 1 to S. 115JB
(the said Explanation). In the said definition, the ‘Specified Item for
Downward Adjustment’ relating to such withdrawal from Reserve/Provision
appearing in clause (i) reads as under :
“(i) the amount withdrawn from any reserve or
provision (excluding a reserve created before the 1st day of April, 1997
otherwise than by way of a debit to the profit and loss account), if any
such amount is credited to the profit and loss account;
Provided that where this Section is
applicable to an assessee in any previous year, the amount withdrawn from
reserves created or provisions made in a previous year relevant to the
assessment year commencing on or after the 1st day of April, 1997 shall not
be reduced from the book profit unless the book profit of such year has been
increased by those reserves or provisions (out of which the said amount was
withdrawn) under this Explanation or Explanation below second
proviso to S. 115JA, as the case may be; “
Hereinafter, the above Clause is referred as
the said Clause (i), reduction with respect to the amount of
withdrawal provided in the said Clause (i) is referred to as “Exclusion
from the ‘Book Profit’ ’’ and the restriction on such exclusion provided
in the Proviso to the said Clause (i) is referred to as “Restriction on
Exclusion from the ‘Book Profit’ “.
1.5 In cases where the Company revalues its Fixed
Asset resulting into increase in the value of such assets in the books of the
Company, the increased amount is credited to Revaluation Reserve Account in
accordance with the accepted accounting principles. In view of such revaluation,
the Company is required to provide depreciation on fixed assets on the revalued
amount of such assets instead of on the basis of historical costs. At the same
time, the Company is permitted to withdraw from the Revaluation Reserve Account
differential amount of depreciation (i.e., the amount of depreciation
related to revalued amount of fixed assets). In such cases, effectively, the
amount of charge of depreciation to Profit & Loss Account equals to the
depreciation, which would have been otherwise charged on historical cost. This
is accepted accounting practice.
1.6 In the past, the issue was under debate as to whether in such cases, the amount withdrawn from Revaluation Reserve Account should be reduced from the net profit for the purpose of computing the ‘Book Profit’ by treating the same as item of “Exclusion from the ‘Book Profit’ ’’ as provided in the said Clause (i) or the same should not be so excluded as it falls in the category of “Restriction on Exclusion from the ‘Book Profit’ ’’. The Delhi High Court in the case of Indo Rama Synthetics (I) Ltd. (184 Taxman 375) has decided the issue against the assessee. However, some of the professionals still held the view that such withdrawal from the Revaluation Reserve Account should be treated as item of “Exclusion from the ‘Book Profit’ ’’, mainly on the ground that at the time of creation of Revaluation Reserve, as per the accepted accounting principles and practices, the amount of revaluation was never required to be routed through Profit & Loss Account and hence, the restriction contained in the Proviso to the said Clause (i) should not apply.
1.7 It may be noted that by virtue of the amendment made by the Finance Act, 2006 with effect from A.Y. 2007-08, a specific provisions are made in the definition of ‘Book Profit’ in S. 115JB because of which, effectively, depreciation relating revalued amount is required to be ignored.
1.8 Recently, the Apex Court had an occasion to consider the abovereferred judgment of the Delhi High Court in the case of Indo Rama Synthetics (I) Ltd. and the issue has now got settled. Though, now there is a specific provision in S. 115JB referred to in para 1.7 above, this judgment will be relevant for pending cases as well as for general principles in the context of the computation of ‘Book Profit’. Therefore, it is thought fit to consider the same in this column.
Indo Rama Synthetics (I) Ltd. v. CIT (unreported):
2.1 In the above case, the brief facts were : during the previous year ending 31-3-2000 (A.Y. 2000-01), the Company had revalued its fixed assets resulting into increase in book value of such assets by Rs.288.58 cr. During the previous year relevant to A.Y. 2001-02, in the Profit & Loss Account, a charge of depreciation was shown at Rs.127.57 cr. which was reduced by the transfer from Revaluation Reserve Account to the extent of Rs.26.12 cr. resulting in a net debit on account of depreciation at Rs.101.45 cr. The net profit as per Profit & Loss Account of the Company was Rs.18.74 cr. In the return of income, while computing ‘Book Profit’ for the purpose of MAT liability u/s.115JB, the asses-see treated the amount of Rs.26.12 cr. withdrawn from the Revaluation Reserve Account as item of “Exclusion from the ‘Book Profit’ ’’ under the said Clause (i) and accordingly, reduced the amount of profit by that amount. During the assessment proceedings, the Assessing Officer (AO) disallowed the claim of such reduction of Rs.26.12 cr. while computing the ‘Book Profit’ on the ground that the Revaluation Reserve Account was created in the A.Y. 2000-01 and this amount was not added back to the net profit for the purpose of computing the ‘Book Profit’ as provided in the said proviso to the said Clause (i) and accordingly, this amount falls in the category of “Restriction on Exclusion from the ‘Book Profit’ ’’. The assessee did not succeed in his appeals before the first Appellate Authority, ITAT as well as the High Court. Accordingly, at the instances of assessee, the issue referred to in para 1.6 above came up for consideration before the Apex Court.
2.2 Before the Apex Court, on behalf of the assessee, it was, inter alia, contended that the creation of Revaluation Reserve does not impact the Profit and Loss Account in the year of creation; such Revaluation Reserve is not a free reserve; the same is not available for distribution of profits; unlike revenue reserves, such reserve is not an appropriation of profits and the same is never debited by way of debit entry through Profit & Loss Account; the Revaluation Reserve is in the nature of adjustment entry to balance both the sides of balance sheet, etc. It was further contended that the treatment of Revaluation Reserve is governed by the Accounting Standards 10 and 6 (AS) and the Guidance Note on Treatment of Reserves Created on Revaluation of Fixed Assets (Guidance Note) issued by the Institute of Chartered Accountants of India (ICAI) and on that basis the amount of such reserve is not debited to Profit & Loss account in the year of creation and the amount of revaluation is directly credited to Revaluation Reserve Account. Since in the year of creation of such reserve, the ‘Book Profit’ suffers full tax, without being affected by creation of such reserve, in the year of withdrawal, the amount withdrawn would be liable to be reduced while computing the ‘Book Profit’. It was also pointed out that by virtue of the amendment made by the Finance Act, 2006 (referred to in para 1.7) the deprecation on historical cost would only be taken into account while computing the ‘Book Profit’ and the same is applicable from A.Y. 2007-08.
2.3 After considering the arguments raised on behalf of the assessee, the Apex Court proceeded to decide the issue and for that purpose noted the provisions of S. 115JB. The Court also referred to the historical background of the provisions relating to MAT starting from S. 115J onwards referred to in paras 1.1 and 1.4 above. The Court then stated that even in the S. 115J certain adjustments were required to be made to the net profit as shown in the Profit & Loss Account which included the re-duction of the amount of net profit by the amount withdrawn from any reserve, if any such amount is credited to the Profit & Loss Account. The Court then noted that some companies have taken advantage of this provision u/s.115J by decreasing their net profit by the amount withdrawn from the reserve created in the same year itself, though the reserve when created, had not gone to increase the ‘Book Profit’. According to the Court, such adjustments led to lowering of profits resulting in the reduction of tax liability based on the net profits. In view of this, S. 115J was amended and it was provided that the ‘Book Profit’ will be allowed to be decreased by the amount withdrawn from any reserve only in the following two cases:
“*(i) if such reserve has been created in the pre-vious year relevant to the assessment year commencing w.e.f. 1-4-1998
OR
(ii) if the reserve so created in the previous year has gone to increase the book profit in any year when S. 115J was applicable.”
* This should be reserve created prior to the previous year relevant to the assessment year commencing on 1-4-1988.
2.4 The Court further stated that under the ap-plicable provisions, the first step for determining the ‘Book Profit’ is that the net profit as shown in the Profit & Loss Account for the relevant year has to be increased by the items specified [Clauses (a) to (f)] in the definition (if the amount of such item is debited to Profit & Loss Account) which includes [in Clause (b)] the amount carried to any specified reserve by whatever name called. The second step is that the amount so increased has to be reduced by the items specified [Clauses (i) to (vii)] in the definition which includes [in clause (i)] an amount withdrawn from any reserve (with some exception), if any such amount is credited to the Profit & Loss Account. The Court also noted the “Restriction on Exclusion from the ‘Book Profit’ ’’ as provided in the Proviso to the said Clause (i).
2.5 The Court then noted that the following question needs consideration in this case:
“Q.: Could Rs.26,11,74,000, being the differential depreciation recouped from the revaluation reserves created during the earlier A.Y. 2000-01, be said to be credited in the P & L Account during the assessment year in question in terms of clause (i) to the explanation to S. 115JB(2)?”
2.6 Explaining the effect of the definition of ‘Book Profit’, the Court stated that the said Clause (i) mandates reduction for the amount withdrawn from the reserve earlier created if the same is credited to Profit & Loss Account. The said Clause
(i) contemplates only those reserves which actually affect the net profit as shown in the Profit & Loss Account. The object of providing “Specified Exclusion from the ‘Book Profit’ ” is to find out true working result of the Company.
2.7 Dealing with the case of the assessee, the Court noted that the adjustment made in the Profit & Loss Account by the assessee, is as per AS and the Guidance Note of the ICAI which is in conformity with the provisions of S. 211 of the Companies Act, 1956. The Court also noted that before considering the effect of withdrawal of Rs.26.12 cr. from the Revaluation Reserve, the Company had a loss of Rs.7.38 cr. Accordingly, on account of such withdrawal from the Revaluation Reserve, the said loss has got converted into profit of Rs.18.74 cr. The said adjustment primarily is in the nature of contra adjustment in the Profit & Loss Account and it is not the case of effective credit to the Profit & Loss Account as contemplated in the said Clause (i). Credit in the Profit & Loss Account under the said Clause (i), implies the effective credit and therefore, as per the accounting principles, the contra adjustment does not at all affect any particular account. According to the Court, unless an adjustment has the effect of increasing the net profit as shown in the Profit & Loss Account the amount cannot to be said to be credited to the Profit & Loss Account. Therefore, through the amount has been literally credited to the Profit & Loss Account, in substance, there is no such credit. After taking such a view and con-sidering the object for which the MAT provisions were introduced, the Court held as under:
“….In the present case, had the assessee deducted the full depreciation from the profit before depreciation during the accounting year ending 31-3-2001, it would have shown a loss and in which event it could not have paid the dividends and, therefore, the assessee credited the amount to the extent of the additional depreciation from the revaluation reserve to present a more healthy balance sheet to its shareholders enabling the assessee possibly to pay out a good dividend. It is precisely to tax these kinds of companies that MAT provisions had been introduced. The object of MAT provisions is to bring out the real profit of the companies. The thrust is to find out the real working results of the company. Thus, the reduction sought by the assessee under clause (i) to the explanation to S. 115JB(2) in respect of depreciation has been rightly rejected by the AO.”
2.8 Having taken the above view, the Court further stated that the matter can be examined from another angle under the said Clause (i). The assessee becomes entitled to reduce the amount withdrawn from such reserve only if at the time of creation, the reserve had gone to increase the ‘Book Profit’ u/s.115JB/115JA. From the factual position of the assessee, it is clear that neither the amount of Rs.288.58 cr. nor Rs.26.12 cr. had ever gone to increase the ‘Book Profit’ in the said year ending on 31-3-2000. As such amount has not gone to increase the ‘Book Profit’ at the time of creation of reserve, there is no question of reducing the amount transferred from such reserve to the Profit & Loss Account. Restriction contained in the Proviso comes in the way of such reduction. The Court also stated that by interplay of the balance sheet items with Profit & Loss Account items, the assessee has sought to project the loss of Rs.7.38 cr. as profit of Rs.18.73 cr.
Conclusion:
3.1 From the above judgment of the Apex Court, it is clear that in all such cases of withdrawal of the amounts from Revaluation Reserve, the assessee would not be entitled to reduce such amount under the said Clause (i) for the purpose of computing the ‘Book Profit’.
3.2 The said Clause (i) contemplates that the credit of the amount of such withdrawal to the Profit & Loss Account must be real (and not literal) and the same must in effect impact the net profit shown in the Profit & Loss Account. Under the said Clause (i), such reduction is permissible only in those cases where, at the time of creation of reserve, the ‘Book Profit’ is increased by the amount of the said reserve.
3.3 From the above judgment, it also appears that unless the assessee is in a position to show that at the time of creation of reserve the ‘Book Profit’ was increased by the amount of such reserve, the reduction under the said Clause (i) on account of withdrawal is not permissible and for this purpose, it is not relevant that at the time of creation of reserve the assessee was not required to route the amount of reserve through the Profit & Loss Account in accordance with the accepted and settled accounting principles and practices.
3.4 The above judgment is delivered in the con-text of the provisions of S. 115JB as applicable to the A.Y. 2001-02. As mentioned in para 1.7 above, the definition of the ‘Book Profit’ in S.
115JB is further amended by the Finance Act, 2006 from the A.Y. 2007-08 and specific provisions are made for adjustments with regard to the amount of depreciation debited to the Profit & Loss Account because of which, effectively, depreciation relating to revalued amount of assets is required to be ignored and the amount withdrawn from the Revaluation Reserve Account relating to such depreciation is required to be separately deducted under clause (iib) of the said Explanation. Therefore, from the A.Y. 2007-08, in such cases, the issue may arise with regard to the treatment of the amount withdrawn in excess of the amount referred to in clause (iib), if any from the Revaluation Reserve Account and credited to the Profit & Loss Account while computing the ‘Book Profit’.
Note : The above judgment is now reported in 330 ITR 363.
26 Recovery of tax : Dues from company cannot be recovered
from its directors who are partner in firm.
The petitioner is a partnership firm originally constituted
in the year 1984 and it is running a cinema theatre under a duly granted licence.
The partnership firm was registered under the Indian Partnership Act, 1932. The
petitioner firm is also an assessee on the file of the respondent under the
Tamil Nadu Entertainment Tax Act, 1939.
M/s. Sri Mappillai Vinayagar Spinning Mills Ltd. and M/s. Sri
Manicka Vinayagar Spinning Mills Ltd. are limited companies incorporated under
the Indian Companies Act, 1913 and some of the partners in the petitioner firm
are directors of the said limited companies.
According to the petitioner, the petitioner is not having any
arrears of entertainment tax. A notice of attachment in Form No. 5 had been
issued by the respondent u/s.27 of the Revenue Recovery Act and by the said
notice the respondent had attached the petitioner’s property for the sales tax
arrears of other two private limited companies and another partnership firm.
Being aggrieved by that, the petitioner filed the above writ petition.
The Court observed that the properties of the petitioner, a
firm, were attached by the Commercial Tax officer for non-payment of sales tax
arrears under the Tamil Nadu General Sales Tax Act, 1959 of two other companies
and another firm on the ground that the partners of the petitioner firm were
also admittedly the directors of the two companies and partners of the assessee
firm.
The Court held that the company being a legal entity by
itself could sue and be sued as a legal entity and any dues from the company had
to be recovered only from that company and not from its directors. Therefore,
the proceedings for attachment of the properties of the petitioner firm on the
ground that the partners of the petitioner firm were also directors of the two
private limited companies, could not be sustained.
[Sri Mappillai Vinayakar Cine Complex v. Commercial Tax Officer,
(2008) 146 Comp. Cas 110 (Mad.)]
25 Recovery : Loan taken by cooperative society cannot be
recovered from secretary of the society : Bihar Co-op. Societies Act, S. 52.
The petitioner Jay Mangal Singh was at the relevant time
secretary of the Ajanta Tel Utpadak Sahyog Samiti Ltd. duly registered under the
Bihar Co-op. Societies Act, 1935. The co-op had taken a loan from Central Co-op
Bank Ltd, Aurangabad. Having taken
the loan, it defaulted in repayment, the consequence, thereof, was that for
recovery of outstanding dues a certificate proceeding was initiated against the
said co-op. While doing so, petitioner was made a party to the certificate
proceeding and shown as a certificate debtor. This was done specifically
mentioning that the petitioner was the secretary of the said co-op. when the
loan was granted.
A co-operative is a body incorporate and an independent
juristic entity. That being so, it is distinct from not only its member but
members elected as office bearers. This distinction as between the co-operative
and its constituents is well established. That being so, the loan having been
taken by the co-operative, it cannot be recovered from petitioner who was
secretary of society. Especially, as petitioner was being proceeded against only
because he happened to be elected secretary of co-operative. He was not being
proceeded against on ground of having underwritten or guaranteed repayment of
loan. He had no personal liability in the matter, except, to the extent he may
be liable for any loan or advance taken and remaining unpaid from his
co-operative. That was not the case of the respondents. That being so, the
certificate proceedings as against the petitioner cannot be sustained and would
be wholly without jurisdiction.
[Jay Mangal Singh v. Bihar State Co-op. Bank Ltd.,
AIR 2008 Patna 192]
23 Precedent : Non-challenge of order by Revenue preclude
from challenging similar order passed in respect of another unit.
The respondent M/s. Surcoat Paints (P.) Ltd. is engaged in
the manufacture of paints and varnishes. A show-cause notice was issued for
short payment of duty to the tune of Rs.40,33,903.73 on the goods cleared by the
manufacturer. As per the show-cause notice the SSI benefit is not available to
the respondents on the ground that SSI registration certificate was not
correctly given to the respondent.
The assessee being aggrieved by the order, filed an appeal
before the Tribunal. The Tribunal reversed the order passed by the Commissioner
of Central Excise, Allahabad, primarily relying upon the earlier decision of the
Tribunal in CCE v. Agra Leather Goods P. Ltd., (2000 (39) RLT 674 (T).
This appeal has been filed by the Revenue against the
judgment and order passed by the Customs, Excise and Gold (Control) Appellate
Tribunal, New Delhi.
The Court held that since the Revenue has accepted the
decision given by the Tribunal in Agra Leather Goods case (supra), the
Revenue is precluded from challenging the similar order passed in respect of
another unit. Since the order passed in Agra Leather Goods case (supra)
has attained finality, the present appeal deserves to be dismissed on this
ground alone and accordingly dismissed the appeal.
[Commissioner of Central Excise, Allahabad v. Surcoat
Paints (P) Ltd., 2008 (232) ELT 4 (SC)]
22 Appeal : Condonation of delay : High
Court is empowered to condone delay in filing appeals u/s.35G of the Central
Excise Act, 1944.
In view of conflicting decisions of two Division Benches of
the Bombay High Court on the issue of whether this Court is empowered to condone
the delay in filing appeals u/s.35G of the Central Excise Act, 1944, which are
filed beyond the prescribed period of 180 days, a Full Bench of three judges was
constituted.
One Division Bench in the case of Commissioner of Customs
v. M/s. Sujog Fine Chemicals (India) Ltd., by a judgment and order dated
13th August 2008 held that in the light of S. 29(2) of the Limitation Act, 1963,
in any appeal filed u/s.130 of the Customs Act, 1962, this Court is empowered
u/s.5 of the Limitation Act, 1963 to condone the delay.
Whereas another Division Bench in a group of cases in
Commissioner of Central Excise v. M/s. Shruti Colorants Ltd., by a judgment
and order dated 29th August 2008 involving appeals u/s.35G of the Central Excise
Act, 1944 held that this Court is not empowered to condone the delay taking
recourse to S. 5 of the Limitation Act, 1963.
The Full Bench after analysing the aspect in depth, came to a
conclusion that in such appeals, the High Court is empowered to have recourse to
S. 5 of the Limitation Act.
Unfortunately the two judgments of the Supreme Court in the
case of Mukri Gopalan v. Chepplat Puthanpurayil Aboobacker, AIR 1995 SC
2272 and also of State of West Bengal & Ors v. Kartik Chandra Das, (1996)
5 SCC 342 were not brought to the notice of the Division Bench which decided the
Shruti Colorants Case. In fact the above two judgments of the Supreme Court deal
with the scope and purport of S. 29(2) of the Limitation Act exhaustively,
clearly holding that unless expressly excluded, Civil Courts are empowered to
have recourse to S. 5 of the Limitation Act to condone the delay.
Similarly the Full Bench judgment of the Bombay High Court in
the case of Commissioner of Income-tax v. Velingkar Brothers, (2007) 289
ITR 382 (Bom.) (FB) was not brought to the notice of the above Division Bench
which dealt with the case of Shruti Colorants. In fact in that case the
expression appeal ‘shall’ be filed within 120 days was interpreted to mean that
it did not take away the Court’s power to condone delay having recourse to S. 5
of the Limitation Act.
The Full Bench observed that the High Court being the
Superior Court, the power to condone the delay in filing the appeal must be read
to be existent, more so by virtue of S. 29(2) of the Limitation Act, unless
there is a clear indication of its exclusion by implication.
The Full Bench also held that the word ‘shall’ and the longer
period of limitation (120 days) were not indicators of such exclusion.
In Mukri Gopalan’s case, it was found that there was no
express exclusion anywhere in the Rent Act, taking out the applicability of S. 5
of the Limitation Act. In the present case also there is no express exclusion of
S. 5 of the Limitation Act in S. 35G of the Central Excise Act, and the same
cannot be lightly implied or inferred.
Thus the Full Bench held that S. 5 of the Limitation Act will
be applicable to appeals filed u/s.35G of the Central Excise Act, 1944.
[The Commissioner of Central Excise v. M/s. Shree Rubber
Plast Co. P. Ltd. Notice of Motion No. 1485 of 2008 in CEXAL No. 88 of
2008 Bombay High Court (Full Bench), dated 19-12-2008. Source : itatonline.org]
The current crisis of confidence in institutions of
governance is an opportunity for reform. Ill fares the land, to hastening ills a
prey, where wealth accumulates, and men decay.
— Oliver Goldsmith
A group of 14 prominent and well-regarded citizens have
written an ” Open Letter To Our Leaders” to express alarm at the “governance
deficit” in “government, business and institutions”, and underline the “urgent
need” to tackle the “malaise of corruption, which is corroding the fabric of our
nation.”
It is a rare move and goes to show how quickly the mood of
the nation appears to have shifted from a sense of satisfaction with political
stability and high growth rates, to one of grave concern over the recent spate
of scandals and the sense of drift in the government which, it is feared, could
affect the growth story.
The letter, which follows a meeting in Mumbai, has been
signed by businesspersons Azim Premji of Wipro, Keshub Mahindra of Mahindra &
Mahindra, Jamshyd Godrej of the Godrej Group and Anu Aga of Thermax; HDFC
chairman Deepak Parekh; ICICI chairman emeritus N Vaghul; former Hindustan Lever
chairman and now Rajya Sabha MP Ashok Ganguly; former Reserve Bank of India
governors Bimal Jalan (also an RS MP) and M Narasimham; Justices Sam Variava and
B N Srikrishna, who heard the Harshad Mehta and Mumbai riots cases respectively;
chartered accountant and architect of key SEBI and RBI regulations Yezdi Malegam;
member of the PM’s Economic Advisory Council Prof A Vaidyanathan and
banker-turned-social worker Nachiket Mor.
Many in this group have played crucial roles towards the
India Story, advising successive governments and at critical junctures, playing
conscience-keepers. Some of them are, in fact, said to be close to Prime
Minister Manmohan Singh.
The group has said that among “several urgent steps to tackle
corruption”, the most critical is to make the “investigative agencies and
law-enforcing bodies independent of the Executive… in order to ensure citizens
that corruption will be most severely dealt with”.
“In the last few months, the country has witnessed the
eruption of a number of egregious events, thanks to an active media eagerly
tracking malfeasance. There are, at present, several loud and outraged voices,
in the public domain, clamouring on these issues, which have deeply hurt the
nation,” the letter says.
On the crisis of governance, the letter says, “Widespread
discretionary decision-making has been routinely subjected to extraneous
influences… The judiciary is a source of some reassurance but creation of
genuinely independent and constitutionally constituted regulatory bodies, manned
by persons who are judicially trained in the concerned field, would be one of
the first and important steps to restore public confidence.”
The group has called for the setting up of “effective and
fully empowered Lok Ayuktas” in every state and “early introduction of the Lok
Pal Bill at the national level for the purpose of highlighting, pursuing and
dealing with corruption issues and corrupt individuals”.
Without naming environment minister Jairam Ramesh, the group
appears to tilt in favour of industry in the raging development vs conservation
debate. “It is widely acknowledged that the benefits of growth are not reaching
the poor and marginalised sections adequately due to impediments to economic
development. This is because of some critical issues like environmental concerns
and differences in perspectives between central and state governments,” the
letter says.
The group is also implicitly critical of the opposition for
blocking almost the entire Parliament
session gone by. It says elected representatives need to “distinguish between
dissent and
disruption”.
The G14 has decided to meet again later this month and come
up with suggestions on economic issues should there be a positive response from
the political leadership to its offer, a member of the group told TOI.
(Source: Times of India dated 18-01-2011)
Many parties are being floated to launder money, warns
Election Commission
The Election Commission believes fraudulent political parties
are being floated to launder money which finds its way into the stock market and
is also used to buy jewellery, but has little to do with electoral campaigning
or any other political expenses.
It says tax evasion and dubious donations could be behind a
high number of defunct political parties. The commission says only 16% or 200 of
1,200 registered parties are actually involved in political activities. Most of
the other parties are floated to park money illegally as donations to exploit
the tax exemptions enjoyed by registered political outfits.
Although not all inactive parties are dodgy, several
instances of cash transfers ranging from Rs 15 lakh to Rs 30 lakh, have been
detected by the commission which, it feels, were for non-political purposes.
Chief Election Commissioner S Y Quraishi told TOI, ” We have
repeatedly written to the government about defunct political parties asking for
powers to strike them off the rolls.” He said the commission had proof about
party funds being “channelled into the stock market and also used to purchase
jewellery.” But little has been done to check
fraudulent parties.
Documents accessed through the RTI Act show the EC has been
raising the alarm over a rise in dud parties since 2006.”
The then CEC N Gopalaswami had in a letter to the PM
expressed concern over donations collected by political parties. “The commission
has reason to believe there could be something more than what meets the eye in
these donations,” he said in a communication on July 31, 2006.
The letter said, “Recently the commission has come across
many cases of little known unrecognised political parties receiving donations
running into lakhs of rupees, many times in cash, from individuals and
companies.”
The commission had also asked the Finance Ministry and the
Central Board of Direct Taxes (CBDT) to examine the accounts of some parties.
RTI documents, accessed by the Association for Democratic Reforms (ADR), shows
two registered unrecognised political parties — Parmarth Party and Rashtriya
Vikas Party — received cash and came under scrutiny.
On March 3, 2006 EC secretary K F Wilfred asked CBDT to
scrutinise the transactions.
Parmarth Party received Rs 15 lakh in just one transfer in 2004 while Rashtriya Vikas Party received two “donations” of Rs 75 lakh and Rs 50 lakh from one company within two months.
(Source: Extracts from News Story by Himanshi Dhawan in Times of India dated 14-01-2011)
24 Property : Minor : Permission for sale of immovable
property of minors can be granted only if in the interest of minors : Hindu
Minority and Guardianship Act 1956, S. 8.
The petitioner filed a petition u/s.8 of the Hindu Minority
and Guardianship Act seeking permission to sell immovable property belonging to
her minor sons, which came to their share by inheritance. The daughter of the
petitioner was also having right by birth in the property inherited from Babu
Aade, husband of the petitioner and father of the minor children Krishna,
Ratansingh (Sons) and Mangala Aade (daughter). Permission was refused by learned
District Judge on the ground that besides the two sons, one daughter of the
petitioner also had share in the property, but the petitioner signed on her
behalf as a consenting party without the permission of the Court, which was
mandatory and as such excluding the name of the minor daughter was an attempt to
ignore her interest.
Perusal of the provisions of S. 8 of the said Act would show
that natural guardian of a Hindu minor has power, subject to the provisions of
this Section. to do all acts which are necessary or reasonable and proper for
the benefit of the minor or for the realisation, protection or benefit of the
minor’s estate. The import of this Section is that protection of the interest of
minors alone should be the necessary criteria. Further, Ss.(2) of S. 8 of the
said Act specifically bars the natural guardian to mortgage or charge, or
transfer by sale, gift, exchange or otherwise, any part of the immovable
property of the minor, or lease out any part of such property for a term
exceeding five years or for a term extending more than one year beyond the date
on which the minor will attain majority or disposal of the immovable property,
etc., without permission of the Court.
On appeal the Court observed that the petitioner had signed
as consenting party on behalf of daughter who is minor. It is nowhere the say of
the present petitioner that she sought permission u/s.8 of the Hindu Minority
and Guardianship Act, 1956 before signing as consenting party, because such
permission was mandatory.
The Court held that the claim of the petitioner that she
wants to sell the property which is standing in the name of her minor two sons
is erroneous because apart from these two sons, daughter of the petitioner,
namely, Mangal Aade has also right in the said property.
While giving consent on behalf of the minor daughter Mangal
Aade in the partition deed, the petitioner had not sought any permission from
the Court and the permission which is applied for the sale showing only two
minor sons as holders of the property and excluding the minor daughter, is also
an attempt by the petitioner to ignore completely the interest of the minor
daughter. The petition which was filed by the petition u/s.8 of the said Act
totally ignoring the interest of the minor daughter was rightly rejected by the
District Judge. The petitioner had acted in suspicious manner and excluded the
interest of the minor daughter.
[ Smt. Dropadabai, Aurangabad, v. State of Maharashtra, 2008 Vol.
110 (10) Bom L.R. 3600]
Accounting year :
1. Normally every sovereign state provides a legal framework
to decide about the accounting year. Every entity carrying on a business is
required to prepare the final accounts as understood by us for pre-defined
accounting year. Besides annual report to various stakeholders, collection of
tax revenue is also based on this pre-determined accounting year. In India, such
an accounting year is financial year starting from 1st April and ending on 31st
March. Earlier in India, sentimental luxury relating to choice of an accounting
year was given to every business entity. No longer is such a luxury permissible.
2. However, business entities are no longer national but one
invariably finds a multinational or a conglomerate of cross-border
holding/subsidiary and associate companies. When different countries have
different accounting years, there is a perpetual problem of consolidation of
group accounts. One will argue that a good business entity would be, in any
case, preparing quarterly accounts for presentation to various stakeholders.
Once quarterly accounts are made available, consolidation is merely an exercise
of year on year inclusion and exclusion of either one quarter or at the most two
quarters.
3. Year-end consolidation exercise, however, is not a simple
arithmetical affair but involves lot of work. The question is “What is the value
addition” as a result of this avoidable exercise ? When the world community is
accepting a common accounting language, should one not address this issue ? I
submit that at a macro level, it is necessary to have a debate and discussion
and the issue needs to be sorted out amicably. Government budget in our country
used to be presented in India at 5 p.m. on 28th February, every year, because
time zonewise it suited British colonial rulers for whom it used to be 11 a.m.
We continued this practice for almost over 50 years after independence. It is an
example of how in some convenient matters we choose to be rather causing
inconvenience perpetually.
II. Currency expression of accounting figures :
The illustrative schedule of Comprehensive Income Statement
and Statement of Financial Position as per IFRS are figures expressed in
thousands of currency unit. It would mean expressing the figures in millions and
billions and trillions. In India, we enjoy the luxury of expressing figures in
units, hundreds, thousands, lacs and even crores. There is no uniformity. Do we
wait for legal compulsion or would like to follow what is globally acceptable
and understood ? I submit that this apparently no impact area from the point of
view of results of operation needs to be changed so as to conform to the
International Standards.
III. Presentation of annual report :
An annual report is required to be presented to all the
stakeholders who are not necessarily shareholders. How should the annual report
look like ? Although it is a mandatory requirement as to what should appear in
annual report, there are companies which provide certain information on
voluntary basis. However, one finds a lot of diversity in use of paper, use of
type-setting, use of photographs, order of contents, etc. One must have come
across annual reports where not only the quality of paper is very poor, but the
type-setting is such that one cannot read without a binocular. This is the
information which the stakeholder is expected to read. I remember a couplet
written in the context of a prospectus and some of the poetic lines are as
under :
Before you invest, read the Prospectus,
It provides information, which is given to protect us.
Summarised in it are all the figures which are composed.
It contains all the risks to which you are exposed
Don’t you know where to start ?
Smaller the print, greater the hazard.
Well, I do not mean that in every case a small print is a
hazard (except to your eyesight), but standardisation in this apparently no
operational impact area is also necessary.
IV. Limitations of written figures :
1. Many times, the figures may not convey full meaning and
disclosure by way of written text without a legal compulsion may not be
forthcoming. I believe that even IFRS contains such areas. Alternatively, the
meaning would materially change with context explanation. Some years back, a
theatre personality was being interviewed on TV. A simple sentence of 3 words
‘Police caught thief’ was shown by him to have 3 different meanings depending on
which word you emphasise; and with different body language, he showed 10 more
meanings of a simple sentence of 3 words.
2. It is not the purpose of this article to write
specifically about what happened in Satyam. That would be a matter of a separate
article involving lot of debate and discussion and even perhaps a shock
treatment. However, I do reiterate that IFRS compliance is not much of a
difference qualitatively from classical accounting theory, but a classical
example of how to make simple things look extremely complex. And yet could be
far away from transparency, accountability due to window-dressing.
I write this because ‘Satyam’
claimed to be the first company to be IFRS compliant three years ahead of the
date of its applicability and its annual report for the year ended 31-3-2008 on
pages 125 to 167 contains complete conversion of accounts if IFRS is followed.
V. Adoption, adaptation and convergence :
1. News from USA :
The discussion between IASB and FASB continues. Just as we
have political and economic summits, the two bodies met and entered into what is
known as ‘Norwalk Agreement’ in 2002. At the end of the summit they made joint
announcements that they would undertake some joint research projects to iron out
difference between the two, some projects would be short term; others may take
little more time. In substance, they agreed that they should be together in long
term in defining and dictating (in a nice way — no pun intended) the world
accounting language. I am reminded of a famous satirical novel ‘Animal Farm’,
written by George Orwell where you get a message that “all animals are equal
but some are always more equal than others”.
2. Process of unification :
As a part of a move to extend a co-operative hand, SEC in the USA will review the faithfulness and consistency of foreign private issuers IFRS compliant Financial Statements from 2005. SEC issued a statement around that time that if few areas are looked into, SEC will not insist on reconciliation of IFRS compliant accounts with US GAAP, for US listing. This would avoid multiple accounting presentations. On its part, IASB also modified its several standards in line with US GAAP. As a result of the process, IASB assumes that countries will adopt IFRS 11 as issued by IASB without any modification”. This is based on the theory that IASB adopts some US GAAPs; some areas are jointly researched and issued as new IASB, other complicated and complex areas would be soon investigated to iron out the differences and then world accounting language would be the same.
3. Position in EU countries:
a) Countries in EU (European Union) have made IFRS mandatory for all listed companies and it is reported that starting 1st January 2005, 8000 EU listed companies adopted IFRS and proposed listed companies will follow suit.
b) Beyond listed companies, however, there appears to be a lot of confusion. Out of EU countries, only Greece, Italy and Denmark (effective from 2009) require IFRS for individual accounts of listed companies and none of them require it for non-listed companies. Germany allows companies to provide individual accounts using IFRS, but still requires them to prepare primary statements following German National Standards. Newly joined 10 countries in EU also require annual statements according to their own national accounting standards – a system of dual accounting (national and international standards !). National pride continues and legal adoption is still delayed. Some countries would like to adopt IFRS one by one and not as a package. In Europe, there are IASB approved IFRS as well as EU endorsed IFRS, besides national accounting stan-dards. Each of these serve a different purpose for different state of stakeholders. Though statements continue to be issued from time to time, the picture is far from clear and although a road map is constructed, there is always a difference between a map on a paper which looks very clear, and the actual road which is not an expressway or freeway. It has lot of potholes, blockages and rough patches.
4. Indian scenario:
Our Institute (ICAI) is awakening members, holding seminars, workshops for them. What was a trickle in 2007-08, is likely to become a flowing stream, but with a restricted speed. The members are bound to follow ICAI with respect and would become as usual, studious students. The revenue departments, the company law department and various industry associations, however, are still not enthusiastic supporters. The recent ‘Satyam Episode’, where the company claimed to be the first to be IFRS compliant, would also come in the way of proper studies because lot of defense mechanism will have to be used in damage control exercise. Regulatory authorities also may put lot of hurdles with justifiable reasons. One of the principles of investigation is ‘Distrust the obvious’ and that would come in the way of smoother regulatory work for some time. Members of the public would say with one voice, “Let the accounts be basically transparent” – whether they are Indian GAAP compliant or IFRS compliant or US GAAP compliant can be examined later.”
VI. Micro level simple examination of a part of Accounting Standard:
1. Having examined some macro issues, let me turn attention to a specific Accounting Standard, namely, Revenue Recognition (AS-9) to examine the Standard with reference to :
a) Accounting Theory and Practice.
b) IAS Standard.
c) IFRS Requirement
2. Case study accounting theory and practice:
As a case study for the purpose of this examination, I have taken a very simple example of sale of goods on credit, pure and simple. ABC Ltd. has sold goods worth Rs.50 crores to 100 different customers. Since these are the goods manufactured by ABC Ltd., beside sales price, the actual invoices also include excise duty and Vat at 16% and 12%, respectively. The credit term is 30 days and interest is to be charged @ 18% p.a. for non-payment in time. I am not involving additional complications such as export sales or sales out of the state, in our own country, but both these may be having implications in collection of indirect tax revenue with exceptions and exclusions on specific grounds.
3. In such a scenario, the accounting theory and practice, which is age-old and based on common sense and business experience and wisdom has taught us that
(a) Revenue generated is to be taken to the credit of profit and loss account to the extent of Rs.64.96 crores.
(b) Amount receivable at the end of the year is to be shown sundry debtors on the asset side, under the heading current assets exactly to the same extent.
(c) Mercantile system of accounting is to be followed.
(d) Actual bad debts must be written off.
(e) Depending on experience, a provision must be made for doubtful debts.
(f) If there is a policy, a provision is to be made for discount on prompt payment of debtors.
(g) A businessman should be conservative, i.e., he should quickly recognise losses and expenses, but should be slow in recognising possible gains. Interest on delayed payments by debtors is normally accounted for on actual receipt basis.
4. In accordance with the above principles, the businessman would pass the accounting entries and each of the entries that he passes, there would be impact on the actual revenue to be recognised and also debtors in the form of current assets to be shown. The conventional presentation, however make all fluctuating adjustments on the debit side of profit and loss account, without touching the figure of revenue by way of sales recognised. However, in the case of presentation of debtors, on the asset side, he would make all the adjustment to the figure of debtors. Common sense, uniformly applied acquires the force of law and Sch. VI, Form of profit and loss account and balance sheet also required us to do the same thing over a number of years.
5. Other permutations and combinations of accounting entries would follow depending on varying degrees of a contract of sale (Basically governed by the Sale of Goods Act.) Theses variations as per the Sale of Goods Act would not materially be different than the accounting entries as mentioned in para 3 above. However, for the sake of completeness, they are just narrated below:
(a) Changes in delivery schedule.
(b) Conditional delivery subject to installation and inspection
(c) Sale on returnable/approval basis
(d) Hire-purchase sales.
(e) Sales where there is time-bound after-sales service and guarantee
(f) Consignment sale
(g) Transit insurance claim as a result of loss of goods.
VII. Requirements of AS-9 :
1. If one goes through the actual standard parameters, it has accepted the conventional wisdom in its complete form, except for the fact that it has tried to visualise as many different possibilities as possible. Such an attempt at detailing, to my mind, is an attempt to make every businessman an ‘Arjun’ who could pierce the eye of a moving fish, by looking at its mirror image. Alternatively it could also be contended to be an attempt to count feathers of a flying bird.
2. The only difference is treatment of Indirect Taxes like State-level Vat and Central Excise Duty. The guidance note issued by ICAI on treatment of State-level Vat tells us that no economic benefit is earned by an enterprise in collecting and paying Vat on behalf of State Government and hence from the total turnover, State-level Vat should be excluded and the payment thereof should also not be taken as expenses. In our above illustration, 6.96 crores being Vat collection will have to be excluded and the turnover should be shown at Rs.58 crores. Adjustment arising out of input credit on Vat should be made in the purchase of goods shown on the debit side of the profit and loss account.
3. In case of Excise Duty however, it has been held to be a manufacturing cost by the decision of various courts, but instead of showing it on the debit side of the profit and loss account, it is required to be shown as a deduction from the turnover. As a result, on the credit side, one is expected to show turnover at 58 crores less ED Rs.8 crores and the net figure of 50 crores is to be shown. In addition to this there would always be some difference in the opening and closing inventory of finished goods which must be inclusive of Excise Duty and the difference between closing and opening inventory. Excise Duty of finished goods should be shown either on the debit side or the credit side separately and should not be mixed with the turnover, or with Excise Duty deducted from it.
4. There is no requirement of fair valuation of debtors because debtors is not treated as a Financial Instrument. However, AS-l ‘Disclosure of Accounting policy’ would invariably contain a statement indicating that adjustments are made to the realisation probability of debtors based on past experience on grounds of conservative policy.
VIII. IAS and IFRS requirement:
(a) Objective
(b) Disclosure policy
(c) Recording of transaction
(d) Presentation in final accounts
2. It is a nice way of presentation and makes understanding of a standard easy. IFRS and IAS is no exception and our AS also follows the same policy. Some standards are pure standards of disclosure, whereas in some standards one would come across a combination of all the 4 ingredients.
3. In IFRS and IAS, our conventional dear ‘Sundry Debtors’ and ‘Sundry Creditors’ of so many years would acquire a new name of ‘Accounts Receivable and Accounts Payable’. They would acquire a new status of a ‘Financial Asset’ and since it is capable of being sold or bought in the market by way of securitisation, they would get a further status of a ‘financial instrument’. An instrument could be tangible or intangible and capable of being stated cost less estimated expenses of realisation or could be valued under ‘Valuation Rules’ in the absence of a market and could be valued at market value if there is an active market for it. So our figure of conventional ‘Sundry Debtors’ of yester-years would get a designer status due to different clothing and make up, and naturally its valuation would always present lot many difficulties.
4. It is not my intention to describe the entire dress material, but the essential thing appears to be a quick attempt to convert everything into an instrument so that it could be sold, it could be provided as a margin and could also be used for the purpose of leveraging, so as to have the fastest of turnover of these figures involving mark-to-market valuations. Most of the complications are the result of this exercise which is required to be carried on when we turn to IFRS. Such an exercise will require mathematical modules.
IX. Limitations and reservations on IAS, IFRS :
Having examined a part of a standard AS-9 from a very limited angle, although it may be considered very late, I would like to express some limitations and reservations which are bound to be faced in the years to come and some of them could be listed as under:
1. The exercise in making a fair valuation is going to be a very subjective affair and what is described as fair value would be based on many assumptions incapable of remaining true in a dynamic business scenario.
2. Whereas common accounting language need not be a utopia, it should be a gradual process of adaptation one by one or a group of standards instead of a total adoption at one go from a predetermined date. Our ancestors have told us that one morsel of a food should be chewed 32 times before we take the second, so that the food is digested properly. If we gallop the food of these IFRS and that too imported food, we could be suffering from indigestion and all other diseases.
3. If substance over form is to be accepted as a proper understanding of a subject and if we want to prepare the accounts which are not only rule-based but based on the underlying intention, then there is no distinction between Excise Duty and state-level Vat. If the Vat does not have any economic benefit for an enterprise and therefore needs to be excluded from turnover and also as an ex-pense, then the same logic in substance can also be applied to Excise Duty. Different treatment for different elements of indirect tax appears difficult to digest and lot of time is wasted in trying to make these niceties in accounts rather than going into the business substance of the results of the operations. If only some more vigilance was shown by those connected with Enron, Worldcom or Satyam in finding the substance of the business rather than spending time in making the accounts IFRS compliant or US GAAP compliant, stakeholders at large would benefit and would curse the accounting less than what is done today.
4. Although there was a lot of pressure on our government and RBI to make the rupee fully convertible in late 90s including some intellectuals from our country, our RBI did not do it and we were spared from the currency crisis of late 90s in South-East Asia. This is the recent history. Most of our banking sector top brass taking decision is above the age of 40 and they do not fully understand currency derivatives and all other derivatives and mark-to-market mechanism fully. We are therefore substantially saved from the ‘Sub-prime’ crisis which has engulfed US and Europe although our country is also affected to some extent. People say that we were saved because of our relative ignorance in new financial instruments.
5. There is another reason for advocating adaptation stagewise instead of adoption. The main reasons for reservation on a national basis emanates from a fear of tax laws. Fiscal policy in any country determines the taxation policy – whether direct or indirect. It is accepted in a pure Brahminical way that Accounting Standards are basic accounting principles and they cannot be in any way remain fluctuating with a yearly fiscal policy with conse-quential changes in tax laws. However one cannot afford to totally neglect the strong feelings of a business community to prepare accounts in compliance with taxation laws to avoid conflict and tax litigation. Even in Europe the national spirit and multiple accounting standards is the result of tax orientation of a nation. One cannot neglect this tax consideration altogether.
6. The standard-setting exercise appears to be an intellectual exercise of bodies handed over to the fellow members without many times active support either from the Government or the business community. If it was not so, there would not have been such a resistance. How many years you have read notes on accounts stating that “Inventory of finished goods is exclusive of Excise duty. This is contrary to the Accounting Standard issued by the ICAI. However it has no impact on the profits of the year”. Business community was doing it only for the purpose of improving their ability to get higher working limits from the banks.
7. Feelings expressed in above paras are not only the feelings as a CA, but these are the feelings heard from a small and medium-size business entity with which I have spent a lot of time. It is felt many times that the complicated standards are only a burden on the accounting profession, because the business entities do not many times see any value addition to the exercise, but their voice does not get heard under the weight of what is ‘Big’ in every sphere.
x. Conclusion:
1. It is not the intention of this article either to downplay the AS, IAS or the attempt at convergence to make IFRS the world accounting language. However, a mathematical model required visualising every possible situation is bound to be a complex exercise when the global business itself is very dynamic. It is not only dynamic in value and volume, but is also largely unpredictable and based on shifting sands of precarious nature and future. Moreover I refuse to believe that stakeholder in a globe is a dumb animal who needs to be fed every bit of a detail. One should believe in his intelligence to make proper adjustments required to safeguard his own stake subject to normal risk. In such a scenario, a gradual adoption after proper understanding may be a better alternative rather than full and complete adoption at one time. A longer court-ship and dating may be a better idea to a love at first sight and marriage. Otherwise, there could be more chances of a divorce petition or a discord affecting marital bliss.
2. Even in the absence of a common language, a true love and affection between a man and a woman could flourish and let Adam eat the prohibited fruit to get his Eve and suffer the consequences. This is not only true for love making between a man and a woman, but also is true for love and affection in every human being. What is required is a standard of human integrity and this is something which cannot be laid down in black and white in any common language but is something, which is required to be examined and felt on an ongoing basis. This requires avoidance of greed and fear and building a confidence level, irrespective of a language barrier. Do you get me my dear friends?
As corporate India approaches IFRS convergence commencing
from 1st April 2011 (and extending over the next few years for most companies),
internal audit function arises within most corporate entities need to consider
what this process of convergence means to them and what is it that they should
be doing to participate in the process to safeguard the interests of their
organisations.
In many organisations, the IFRS convergence process is led by
and primarily owned by the finance and reporting function and other support
groups like taxation, information technology and systems and internal audit have
a relatively limited role to play in practice.
However, given that IFRS convergence means a fundamental
change in financial reporting and measurement processes, the implications and
therefore the onus on internal audit is significant. While it is obvious that
internal audit needs to look at the training and skill enhancements relating to
IFRS for the internal audit team itself, there are a number of areas where
internal audit can, and should, look to provide assurance to senior
management/board of directors on whether the process of convergence itself
(within a company) is being handled appropriately.
I have tried to set out below five of the top
areas for internal audit to focus on as this process unfolds.
Organisational readiness :
Internal audit function should assess how the organisation
has planned and is implementing the IFRS convergence process. Critical factors
to consider include :
Training, skills and awareness :
IFRS convergence brings with it a significant challenge in
terms of technical skills and the need to learn new concepts and unlearn old
practices for most affected parties. Internal audit function should consider how
structured and thought through the training and awareness plan relating to IFRS
convergence is and consider the following key factors :
Information technology change management :
One of the areas that is often neglected by companies working
on IFRS convergence is the impact that IFRS changes could cause to information
technology infrastructure within the organisation. Internal audit functions
should ideally focus on this area from an early stage as a poorly executed IT
change program can have significant and long-lasting repercussions for entities.
Key areas to focus on include consideration of how MIS, taxation and other
statutory/regulatory-related reporting and IT needs are going to be catered for
on a post-IFRS convergence basis; what are the checks and controls (including
reconciliation controls) that are being put in place for this purpose and the
robustness of the IT solution being implemented.
Another fundamental area relating to IT changes would be in
the context of business acquisitions and carve-outs proposed in the Indian
context. For business combinations/acquisitions, etc., given that the IFRS
standards require fair valuation to be performed on the acquisition date, the
post-consolidation cost basis would differ from the standalone cost basis for
various financial statement captions. Accordingly, entities need to have the
systems and IT ability to be able to manage the reporting and measurement
requirements on a parallel basis post acquisition. Additionally, if theentity
desires to report/measure performance on pure IFRS (as issued internationally by
the IASB) in addition to the Indian IFRS like standards (IND AS) because it is
listed overseas or wants to provides such information to its investors, IT
systems need to be able to cope with these requirements too. Internal audit
teams should consider the robustness of all IT solutions that are being applied
in the context of the above challenges.
Keyman risk :
There is a dearth of IFRS conversant and experienced resources in India currently. Accordingly talent management and control over key-man/ personnel risk is an important aspect for organisations to think about as they approach IFRS convergence. If too few people are involved in the IFRS convergence process, it can create/accentuate concentration and keyman risk and exposes organisations to more risk than they budget for.
It is critical therefore this risk is recognised and dealt with appropriately from an early stage. Adequate consideration should be given to the size of team involved in the IFRS convergence process, succession planning and most importantly the level and quality of documentation of the process and decisions associated with IFRS convergence, so that organisational interests are protected and the collateral of knowledge/decisions is retained even if there is an increase in staff turnover levels.
Quality control:
Probably the most tricky and challenging aspect of managing the IFRS convergence process in an organisation is ensuring quality control. This aspect is both difficult to measure and often even if a process is managed poorly, the effects may not be evident till well after the convergence process is considered complete. In today’s age where accounting restatements and errors can cause serious reputational and organisational damage, maintaining quality in the convergence process is critical. Internal audit should focus on what are the checks and balances in place to ensure a certain level of quality is maintained in the convergence process and the post convergence environment. For instance, a few areas that require careful consideration are:
Conclusion:
IFRS convergence is certainly a significant challenge for many organisations and internal audit functions would best serve their organisational mandate if they did not only react to the change once it happens, but instead look to provide their inputs and insights into the process by which convergence is being achieved. A number of board of directors and audit committees are interested in understanding these aspects and internal audit can provide an independent and timely view that assists them in steering the organisation through the maze that is IFRS convergence in a effective and efficient manner.
Recognizing the
increasing usage of such complex contracts worldwide, a comprehensive solution
in the form of detailed measurement, accounting, presentation and disclosure
norms has been prescribed in International Accounting Standard (IAS) 39
Financial Instruments: Recognition and Measurement.
From India’s
standpoint, these specific norms for accounting of financial instruments are
expected to be one of the major impact on convergence with International
Financial Reporting Standards (IFRS). Come 2011, entities will have to exercise
diligence when drafting contracts, bearing in mind their accounting
repercussions. The implication can be best understood with an example: a vanilla
convertible debenture will no longer be merely disclosed as a ‘Secured Loan’
with its Terms of Redemption or Conversion in parenthesis. Now, based on its
substance and true economic effect, it will be accounted as two contracts- a
‘debt instrument with an early settlement provision’ and ‘warrants to purchase
equity shares’, with both elements being assigned their fair values.
This need not
be perceived as a conceptual whirlwind. By unlearning what has been learnt and
letting go of structured thinking, the exemplified explanation that follows
will be enlightening and would help understand the true meaning of ‘Substance
over form’!
Derivatives
As per IAS 39,
a ‘derivative’ is a financial instrument or other contract with all three of
the following characteristics:
a) its value changes in response to the change in an underlying variable
such as interest rate, commodity or security price;
b) it requires no initial investment, or one that is smaller than would be
required for a contract with similar response to changes in market factors; and
c) it is
settled at a future date.
Futures
contracts, forward contracts, options and swaps are the most common types of
derivatives. Examples of underlying relative to derivative contracts include:
Derivative
instruments may either be free-standing or embedded in a financial instrument
or non-financial contract.
Embedded derivatives
Literally, the
term ‘embedded derivative’ would lead one to believe that it is a derivative
embedded in another contract. However, an ‘embedded derivative is just a
modification of cash flows (the definition of derivative, as can be seen above,
focuses only on change in value).
IAS 39
describes an embedded derivative as ‘a component of a hybrid (combined)
instrument that also includes a non-derivative host contract—with the effect
that some of the cash flows of the combined instrument vary in a way similar to
a stand-alone derivative.’
To put it in
simple terms, embedded derivative is part of a host contract (a clause or
section) i.e. a contract feature which causes the cash flows from that contract
to be modified, based on any specified variable such as interest rate, security
price, commodity price, foreign exchange rate, index of prices or rates or other
variables which frequently change.
For example, an
Indian company enters into a sales contract with another Indian company,
creating a host contract. If the contract is denominated in a foreign currency,
such as USD, to be settled at a future date, an embedded derivative viz. a
foreign exchange forward contract is created.
In practice,
there are generally a handful of common types of host contracts that have
embedded derivatives.
When an
embedded derivative is required to be separated from a host contract, it must
be measured at fair value on balance sheet date, with changes in fair value
being accounted for through the income statement, consistent with the
accounting for a freestanding derivative. The host contract’s carrying value
initially is the difference between the consideration paid or received to
acquire the hybrid contract and the embedded derivative’s fair value.
If an entity
finds it difficult to determine the fair value of the embedded derivative, the
entity will have to fair value the entire contract with gains and losses
recognised in the income statement.
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Host Contract |
Embedded Derivative |
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Equity Instrument |
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Irredeemable convertible preference shares |
Ordinary shares/ |
Written call option |
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Equity shares |
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Convertible bond |
Debt instrument |
Call option on equity |
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securities |
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Callable Debt |
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Prepayment Option |
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Leases |
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Executory |
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Accounting & Measurement – separation of embedded derivative from host contract
An embedded derivative is required to be separated from the host contract if, and only if all three conditions are met:
These requirements are designed to ensure that mark-to-market through the income statement cannot be avoided by including – embedding – a derivative in another contract or financial instrument that is not marked-to-market through the income statement.
What does “Closely related” mean?
IAS 39 does not define ‘closely related’. Instead, the Application Guidance to the standard provides examples of situations where the embedded derivative is, or is not, closely related to the host contract (some of these examples have been discussed below).
In general terms, an embedded derivative that modifies an instrument’s inherent risk would be considered as closely related (such as fixed rate to floating rate swap – where the inherent risk of change in fair value of loan is modified to interest rate risk & where both the risks depend on the market rate of interest). Conversely, an embedded derivative that changes the nature of the risks of a contract would not be closely related (such as operating lease contract with contingent rentals based on related sales – where one risk of change in lease rentals is modified to risk of change in demand of a product, unrelated to the former risk).
Common Transactional Examples
Leverage embedded features in host contracts
Even if the embedded derivative is closely related to the host contract, it would have to be separated from the host if there is a ‘leverage’ effect. IAS 39 does not define the term ‘leverage’. In general, a hybrid instrument is said to contain embedded leverage features if the cash flows are modified in a manner that multiply or otherwise exacerbate the effect of changes in underlying.
Example Leverage embedded features
ABC Ltd. takes a loan with a bank. The contractually determined interest rate is calculated as [15 % – 3 X LIBOR]
Here, had the interest rate been [15% – LIBOR], the embedded derivate would have been said to be closely related to the underlying LIBOR rate and hence not separable. However, since the rate of interest depends on a multiple of LIBOR (called ‘leverage’ effect), the embedded derivate shall be separated.
Conclusion: Leverage embedded features – Separate accounting
Debt host contracts
The value of a debt instrument is determined by the interest rate that is associated with the contract. The interest rate stipulated is usually a function of the following factors:
Thus, the embedded derivatives that affect the yield on debt instruments because of any of the above factors would be considered to be closely related (unless they are leveraged i.e. or do not change in the same direction).
Example Issuer’s call option (similar to a loan payable on demand)
ABC Ltd. issues five year zero coupon debt for proceeds of Rs. 8 crores (face value of Rs. 10 crores). The debt is callable at face value in the event of a change in control.
The application guidance to IAS 39 explains that such options embedded are not closely related unless the option’s exercise price is approximately equal to the host debt instrument’s amortised cost on the exercise date.
Here, if the debt is called by the issuer, the option’s exercise price (face value) would not be the same as the debt’s amortised cost at exercise date.
Conclusion: Not closely related – Separate accounting
Example Pre-payment option
ABC Ltd. takes a fixed rate loan with a bank for Rs. 10 crores. It is repayable in quarterly install-ments. There is a pre-payment option that may be exercised on the first day of each quarter. The exercise price is the remaining capital outstanding plus a penalty of Rs. 1 crore.
An entity may opt to pre-pay if the potential gain (say fall in interest rate) from pre-payment is more than the penalty.
Here, as ABC Ltd. makes repayments, the amortised cost of the debt will change. Given the penalty payable is fixed, the option’s exercise price (outstanding principal + penalty) will always exceed the debt’s amortised cost (present value of outstanding prin-cipal) at each exercise date.
Conclusion: Not closely related -Separate accounting
Example Term extending option
ABC Ltd. issues 9% fixed rate debt for a fixed term of 2 years. The entity is able to extend the debt before its maturity for an additional 1 year at the same 9 % interest.
IAS 39 prescribes that such an option to extend the term is not closely related to the host debt instrument, unless there is a reset of interest rate to current market rate.
Here, ABC Ltd. can extend the term at the same interest rate and there is no reset to current market rates. Hence it is not considered to be closely related to the debt host. It is clearly a derivative that gives the option to the issuer to refinance the debt at 9% if the market rates are rising.
Conclusion: Not closely related – Separate accounting
Example Equity conversion features
ABC Ltd. invests in 10,000 debentures of XYZ Ltd. ABC Ltd. has the option to convert each debenture after 1 year into one equity share per debenture at Rs. 500.
ABC Ltd. perspective (investor)
Such an option represents an embedded call option on the issuer’s equity shares. Here, the host contract is the debentures and the underlying is the equity shares and equity is never closely related to debt.
Conclusion: Not closely related – Separate accounting
XYZ Ltd. perspective (issuer)
The written equity conversion option is an equity instrument.
Conclusion: Accounted as equity
Lease host contracts
Embedded derivatives may be present in lease host contracts, whether the lease is an operating lease or a finance lease. The approach for determining whether the derivative is closely related is similar to that used for a debt host.
As evident from the table above, rent payments determined with reference to local consumer price index and foreign currency denominated rent payments could represent embedded derivatives in a lease host contract.
It is to be noted that since lease host contracts are not financial instruments, the question of the con-tract being classified as ‘fair value through profit or loss’ doesn’t arise. Therefore, in such cases, if the embedded derivative is not closely related to the lease host, separate accounting would be mandatory.
Example Inflation indexed rentals
ABC Ltd. (India) leases a property in UK to XYZ Ltd. The rentals are paid in pounds and increase annually with the increase in inflation in UK.
As per AG 33(f) of IAS 39, an embedded derivative is closely related to its host lease contract if it is an inflation-related index (such as an index of lease payments to a consumer price index) provided
Here, the rent payments will change in response to changes in the inflation index of UK. The embed-ded derivative is not leveraged and relates to the economic environment in which the leased asset is located. Therefore, it is closely related to the host lease.
Conclusion: Closely related -No separate accounting
Example Rentals based on sales
ABC Ltd. leases a property in India to XYZ Ltd. The rentals consist of a base rental of Rs. 100,000 plus 5% of the lessee’s sales.
As per AG 33(f) of IAS 39, lease contracts may include contingent rentals that are based on sales of the lessee. Such an embedded derivative is considered to be closely related to the lease host contract.
Conclusion: Closely related – No separate accounting
In the Indian scenario, though many lease contracts have an escalation clause that is an estimate of inflation, seldom is it directly related to an inflation index. Thus, we may henceforth be required to compare the escalation with the inflation index to decide whether the derivative is closely related.
Further, the termination clause in the lease agreement that allows the lessee to terminate the contract on payment of a penalty is also an embedded derivative. This situation is similar in substance with the prepayment option in debt instrument discussed above.
Executory contracts
Executory contracts are not financial instruments and are scoped out of IAS 39. However, the following executory contracts may contain embedded derivatives:
Price adjustment features, inflation related features (similar to lease contracts) and volume adjustment features are examples of embedded derivatives in executory contracts.
Example Coal purchase contract linked to changes in the price of electricity
ABC Ltd. enters into a coal purchase contract that links the price of coal to changes in the prevailing electricity price on the date of delivery.
The coal purchase contract is the host contract. The pricing formula is the embedded derivative.
In assessing whether the embedded derivative is closely related to the host executory contract, it would be necessary to establish whether the underlying in a price adjustment feature is related or unrelated to the cost/fair value of the goods or services being sold or purchased.
Here, although coal may be used for the production of electricity, the changes in electricity prices do not affect cost or fair value of coal. Therefore, the embedded derivative (the electricity price adjustment) is not closely related to the host contract.
Conclusion: Not closely related Separate accounting
Example Variable penalty on non-fulfillment of buyer’s commitment
ABC Ltd. enters into a contract guaranteeing to purchase 50 cars for ‘own use’ from XYZ Ltd. during 2010. Subsequently, ABC Ltd. decides not to purchase the cars from XYZ Ltd. A penalty of 20% of the market price of the cars on the date of payment of penalty is charged.
A minimum annual commitment does not create a derivative as long as the entity expects to purchase all the guaranteed volume for its ‘own use’. However, if it becomes likely that the entity will not take the product and, instead pay a penalty under the contract based on the market value of the product
or some other variable, an embedded derivative will arise. On the other hand, if the amount of penalty is fixed or pre-determined, there is no embedded derivative.
Here, changes in market price of the cars will affect the penalty’s carrying value until the penalty is paid. Since it has become clear that non-performance is likely, the embedded derivative needs to be separated.
Conclusion: Not closely related Separate accounting
Reassessment of Embedded Derivative
International Financial Reporting Interpretations Committee (IFRIC) 9 Reassessment of Embedded Derivative, while addressing the question of whether separation is required to be reconsidered throughout the life of the contract, describes that an entity shall assess whether an embedded derivative is required to be separated from the host contract and accounted for as a derivative when the entity first becomes a party to the contract.
Subsequent reassessment is prohibited unless there is a change in the terms of the contract that significantly modifies the cash flows.
IFRS 9: Phase 1 of new standard to replace IAS 39
In November 2009, International Accounting Stan-dards Board issued IFRS 9 Financial Instruments on classification & measurement of financial assets. This Standard will eventually replace IAS 39 and is effective from 2013. Consequent to its introduction, once the new Standard is applied, majority of the contracts would be measured as a whole (i.e. host contract and embedded derivative) at fair value, and hence no separation would be required.
However, in India, ICAI has issued AS 30 Financial Instruments: Recognition and Measurement, which is based on IAS 39. From the Indian standpoint, all entities other than Small and Medium -sized Entities would have to apply the provisions of AS 30/ IAS 39. This implies that gaining knowledge of identification and separation of embedded derivatives is absolutely inevitable for all accountancy professionals.
Dilemma :
It is often said
‘. . . . when hospitality becomes an art, it loses its very soul’. Yet, delivery
of soulful services requires unfettered independence. Controls and curbs in such
a scenario are inhibitions, to say the least. Where subjectivity is the name of
the game, the truth may be puzzling. It may take some work to grapple with. It
may be counter-intuitive. It may contradict deeply held prejudices. It may not
be consonant with what we desperately want to be true. But our preferences do
not determine what’s true. We have a method, and that method helps us to reach
not absolute truth, only asymptotic approaches to the truth — never there, just
closer and closer, always finding vast new oceans of undiscovered possibilities.
Approach :
‘We make our world
significant by the courage of our questions and the depth of our answers’. We
can judge our progress by our willingness to embrace what is true rather than
what feels good. In the business of hospitality, the guest is god — begin by
respecting the dictum. After all, class in the business of hospitality is always
more subtle, more intricate, more elegant than what most auditors would like to
imagine.
Knowledge gathering :
Trade nuances :
You have to know the past to
understand the present. Inquiry and interaction are handy tools. In exchange for
freedom of inquiry, the auditor is obliged to appreciate the subtlety of the
oft-hidden controls. A gentle ‘housekeeping’ turndown service in the evening,
for instance, doubles up as a reality check on the profile and preferences of
guests, even room occupancy discrepancies. Numerous are such nuances of the
trade; universally true, and not difficult at all for an open minded auditor to
pick up, gauge or rely upon. Obsolescence, though, is an important word here.
With the changing times, customs need to be tested and disproved assertions be
proved worthless.
Marketing innovations :
From dynamic demand-based
pricing concepts to global distribution systems, luxury hospitality today
embraces the A to Z of marketing, perceptions that auditors often grapple to
come to terms with, not to speak of the efforts to evaluate these. Experience
shows however, that even modern techniques such as these are often prone to
fallacies, and the cure for such fallacious arguments is better arguments. To
counter fallacies, auditors need imagination and skepticism both; not to be
afraid to speculate, but careful to distinguish speculation from fact.
Technological advancements :
Like most trades, high-end
hospitality products and services imbibe the best of technology in all spheres,
be it environment consciousness, information technology or engineering marvels.
Unfortunately, there is no short cut here — either go through the grind yourself
or seek help of experts.
Statutes :
Name a statute and it is
applicable to hotels — ranging from labour laws, indirect and direct taxes,
licences for almost everything you see in operation, food and hygiene,
pollution, GAAPs — the list is endless . . . . this is possibly an area however,
where not much advocacy would be required for auditors; supposed to be their
core competence. I may however caution here that ‘while it is of interest to
note that some dolphins are reported to have learned English — up to fifty words
used in correct context — no human being has been reported to have learned
dolphinese.’ Over confidence does no good.
Creating checkpoints :
Prevention :
Finding the occasional straw
of truth awash in a great ocean of confusion and bamboozle requires
intelligence, vigilance, dedication, and courage. But if we don’t practise these
tough habits of thought, we cannot hope to solve the truly serious problems that
face us.’ Easier said than done — eh ! Not really. For instance, like banks,
hotels have daily revenue closing systems such as ‘Night Audits’ and ‘Income
Audits’. The real challenge in a typical hospitality set-up is the multiplicity
of transaction points; while you rack your brains to repair one leak, another
one crops up. The best use of the gigantic risk and control matrices most
hospitality giants employ, to my mind, would be when robots eventually replace
human employees in the hospitality industry — human brains are far too suave and
thoughtful to be restricted by a ‘risk and control’ matrix.
Inquisitiveness :
Far from straightjacket
operations, the hospitality industry renders detective controls by far the most
effective tool in the hands of internal auditors. A probing mind together with
IT-empowered tools such as CAATs do wonders to dig out clues from unsuspecting
areas. Contrarian thoughts such as ‘The hen is the egg’s way of making
another egg’ work wonders, says experience. ‘What is called for is an exquisite
balance between two conflicting needs : the most skeptical scrutiny of all
hypotheses that are served up to us and at the same time a great openness to new
ideas. If you are only skeptical, then no new ideas make it through to you. On
the other hand, if you are open to the point of gullibility and have not an
ounce of skeptical sense in you, then you cannot distinguish useful ideas from
the worthless ones . . . .’
Conclusion :
The luxury hospitality
industry is in perpetual ‘floatation’, so to say; thus straightjacket auditing
means are often ineffective. Given the multiplicity and voluminous transaction
points, this industry is particularly susceptible to irregularities/frauds. To
get a grip, one must sway with the wave to be in total control.
The business environment is increasingly dominated by complex
corporate group structures. This brings forth the desire to tax a group by
reference to its overall performance and not merely along its legal structure.
To meet this need, a few countries have in place a ‘fiscal consolidation’ or a
‘group taxation’ regime, which taxes the group as a whole.
There is no uniform basis adopted by various countries in
their approach. However, the underlying object is to permit offsetting of losses
against the profits of the group. While group taxation is popular within the
confines of a particular jurisdiction, in a few instances, foreign subsidiaries
are also covered. For success of such a regime, it is essential that it must be
simple to administer, flexible enough to take into consideration business
exigencies such as intra-group transactions and corporate restructuring, and
have low compliance costs. Additionally, anti-abuse provisions may also need to
be built into the provisions, especially if this regime provides for
cross-border consolidation.
Broadly, the mechanism of the group taxation regime can be
classified into three distinct categories :
à
Consolidation system : Here, the income at the level of each member
company is considered and the results are combined at a group level. As the
group operates as a single entity for tax purposes, the parent company is
liable to pay the tax on behalf of the entire group.
à
The group contribution system : Here, profitable companies within the
group are permitted to make tax deductible contributions to group companies
that have incurred losses. Usually each company in the group remains liable
for its own tax obligations and files its own returns.
à
Group relief model : This system enables transfer of tax losses from
one company in the group to another. Even though these models allow for the
netting of profits and losses within the group, each company in the group
files its own tax return and pays its own tax.
Some countries adopt the ‘all-in or all-out approach’ whereby
all member companies that come within the group definition have to be included
for the purpose of group taxation. However, in some other countries, ‘cherry
picking’ is allowed, where companies within a group can elect participation.
In the following paragraphs we have provided a broad and
general overview of the group taxation regime or its variant as it exists in a
few countries.
Austria :
Definition of a group :
A new group taxation regime has been introduced in Austria
from 2005. It permits the parent Austrian company to consolidate its taxable
income with that of its subsidiaries, provided the parent Austrian company holds
directly or indirectly at least 50% of the voting rights in the subsidiary
companies, since the beginning of the subsidiary’s fiscal year. Only
corporations (not partnerships) qualify as group members.
Mechanism :
In such instances, where the shareholding criteria is met,
the entire taxable income (profit or loss) of domestic subsidiaries is allocated
to the taxable income of the parent Austrian company, regardless of the
percentage of shareholding in the subsidiary. Thus, even if 50% or 75% is held
in the subsidiary company, the entire taxable income of the subsidiary is
allocated to the taxable income of the Austrian parent. An application that is
binding for three years must be filed with the tax authorities.
Cross-border tax consolidation is permitted, but it is
limited to first-tier subsidiaries, provided that the foreign entity is
comparable to an Austrian corporation from a legal perspective. Losses from
foreign group members can be deducted from the Austrian tax base, but only in
proportion to the shareholding. Profits of a foreign group member are generally
not included in the Austrian parent’s income. Provisions exist for prevention of
dual utilisation of foreign losses. For instance, foreign losses that have been
deducted from income of the Austrian group shareholder are added in Austria, if
the losses can be offset in the foreign jurisdiction at a subsequent time.
Consequently, if the foreign country takes into account the losses in the
sub-sequent years (as a part of a loss carry forward), the tax base in Austria
is increased by that amount in order to avoid a double dip. Foreign losses must
also be added to the Austrian income tax base if the foreign subsidiary leaves
the group. Relief is provided only in the event of a liquidation or insolvency.
Italy :
Definition of a group :
The group taxation regime was introduced in 2004. To qualify
for consolidation, more than 50% of the voting rights of each subsidiary must be
owned, directly or indirectly, by the common Italian parent company. Italian
parent corporations can elect consortium relief if they hold more than 10% but
less than 50% of the voting rights in their Italian subsidiaries.
Mechanism :
This regime allows the offsetting of profit and losses of
members of a group of companies. Italian tax consolidation rules provide two
separate consolidation systems, depending on the residence of the companies
involved. A domestic consolidation regime is available for Italian resident
companies only. A worldwide consolidation regime, with slightly different
conditions, is available for multinationals.
Where more than 50% of the voting rights of each subsidiary are owned, directly or indirectly, by the common Italian parent company, the tax consolidation includes 100% of the subsidiary company’s profits and losses, even if the subsidiary has other shareholders. For a domestic tax consolidation, the election is binding for three fiscal years. However, if the holding company loses control over a subsidiary, such subsidiary must be immediately excluded from the consolidation. To prevent abuse, tax losses realised before the election for tax consolidation can be used .only by the company that incurred such losses. For groups of companies linked by more than a 50%direct shareholding net value-added tax (VAT) refundable to one group company with respect to its own transactions may be offset against VAT payable by another, and only the balance is required to be paid by, or refunded to, the group.
Cherry picking is permitted. The domestic tax consolidation may be limited to certain entities, leaving one or more otherwise eligible entities outside the group filing election.
Further, Italian parent corporations can elect consortium relief if they hold more than 10% but less than 50% of the voting rights in their Italian subsidiaries. Under this election, the subsidiaries are treated as look-through entities for Italian tax purposes and their profits and losses flow through to the parent company in proportion to the stake owned. These profits or losses can offset the shareholder’s losses or profits in the fiscal year in which the transparent company’s fiscal year ends. Tax losses realised by the shareholders before the exercise of the election for the consortium relief cannot be used to offset profits of transparent companies.
In general, in Italy, intra-corporate dividends are 95% exempt (i.e., 5% of the dividends are taxable). In this context, it is pertinent to note that dividends distributed by an eligible transparent company are not taken into account for tax purposes in the hands of the recipient shareholders. As a result, Italian corporate shareholders of a transparent company are not subject to corporate income tax on 5% of the dividends received.
The election does not change the tax treatment of dividends distributed out of reserves containing profits accrued before the exercise of the election. Another benefit from consortium relief is that an eligible transparent company does not pay corporate income tax. The consortium relief election is binding for three fiscal years and requires the consent of all the shareholders.
Netherlands:
Definition of a group:
The group taxation regime was revised, effective from January 1, 2003. To elect for the same, a parent company must own at least 95% of the shares of a subsidiary. Both Dutch and foreign companies may be included in a fiscal unity if their place of effective management is located in the Netherlands. A permanent establishment (PE) in the Netherlands of a company with its effective management abroad may be included in a fiscal unity. A subsidiary may be included in the fiscal unity from the date of acquisition.
Mechanism:
This group taxation regime permits losses of one subsidiary to be offset against profits of other members of the group. As a Dutch parent company and its non-resident subsidiary cannot apply for a group tax consolidation if that subsidiary does not have a PE in the Netherlands, the Dutch Supreme Court has on July 11, 2008, requested a preliminary ruling from the European Court of Justice (ECJ).
The ruling relates to whether the group taxation regime is compatible with the freedom of establishment principle in the EC Treaty.
We need to trace back the reason for such referral. In Marks & Spencer’s case, the UK-based group sought to offset the losses incurred by subsidiaries in several member states against the profits derived in the UK. As the UK group relief system only allowed for surrender of losses from UK resident companies, Marks & Spencer was denied the offset of the losses incurred in the non-resident subsidiaries. Even though the UK restriction was justified based on merits of the case (requirement to preserve a balanced allocation of taxing powers between the member countries; the need to prevent a double use of losses and the right to counter tax avoidance), the ECJ held that its objectives could be attained by less restrictive measures.
Even as ECJ’s ruling in the Marks & Spencer case suggests that the restriction that limits the fiscal unity regime to companies with their place of effective management located in the Netherlands does not violate EU law, it now remains to be seen how the ECJ will view the Dutch regime.
United Kingdom (UK) :
Definition of a group:
UK laws do not provide for group tax consolidation. However, a voluntary group relief system is available. In short, UK companies in a 75% or more economic relationship can opt to offset certain losses with profits for the same period realised by another UK company within the group.
Mechanism:
As mentioned above, a trading loss incurred by one company within. a 75%-owned group of companies may be grouped with profits for the same period realised by another member of the group. Similar provisions apply in a consortium situation; for this purpose, a UK resident company is owned by a consortium if 75% or more of its ordinary share capital is owned by other UK resident companies, none of which individually has a holding of less than 5%. However, the consortium-owned company must not be a 75%-owned subsidiary of any company.
In a 75%-worldwide group, the transfer of assets between group companies does not result in a capital gain if the companies involved are subject to UK corporation tax. This rule applies regardless of the residence status of the companies or their shareholders. The transferee company assumes the transferor’s original cost of the asset plus subsequent qualifying expenditure and indexation. However, under an anti-avoidance provision, if the transferee company leaves the group within six years of the date of the transfer of the asset, that company is deemed to have disposed of the asset at market value immediately after the start of the accounting period of departure or, if later, the original date of the transfer.
United States (U.S.) :
Definition of a group:
A limited consolidation system exists in the US. In general, an affiliated group consists of a U.S. parent corporation and all other US. corporations in which the parent holds directly or indirectly at least 80% of the total voting power and value of all classes of shares (excluding non-voting preferred shares).
Mechanism:
An affiliated group of U.S. corporations (as described above) may elect to determine their taxable income and tax liability on a consolidated basis. The consolidated return provisions generally allow electing corporations to report aggregate group income and deductions in accordance with the requirements for financial consolidations. Consequently, the net operating losses of some members of the group can be used to offset the taxable income of other members of the group, and transactions between group members, such as intercompany sales and dividends, are generally deferred or eliminated until there is a transaction outside the group. Under certain circumstances, losses incurred on the sale of consolidated subsidiaries are disallowed.
Conclusion:
In today’s business environment, a group taxation regime, which permits offsetting of losses against the profits within a group, would provide relief to corporate entities. The above paragraphs provide a bird’s-eye view of the group taxation regime, as it exists in a few developed tax economies.
Keeping in mind the factors which need to be considered in designing such a regime, it would be much simpler to initially introduce a domestic consolidation regime in India. At a later stage, after giving consideration to anti-abuse issues, the mechanism could be extended to cover cross-border situations.
24 Stock exchange —
Membership card — Not personal property of member — Cannot be attached and sold
in execution of a decree against member.
[ Cochin Stock Exchange
Ltd v. Dhanalakshmi Bank Ltd & Ors., (2010) 159 Comp. Cas. 365 (Ker.)]
In a suit filed by the bank
against the second and third respondents, the petitioner stock exchange was
impleaded as a party. A decree was sought against it for realisation of the
plaint claim by sale of the membership card of the second respondent in it and
it was granted. The bank i.e., decree holder applied for sale of the
membership card of the second respondent. The petitioner stock exchange filed
objections to the execution contending that the membership card was not a
private property which could be attached and sold in execution of a decree and
that the petitioner stock exchange could not be compelled to sell the card of
the second respondent.
The High Court allowing the
petition held that since the membership was only a personal privilege, which on
a declaration that he was a defaulter vested with the stock exchange, the
direction issued in the decree was without jurisdiction and in violation of the
statutory provisions. Even though the stock exchange failed to challenge the
decree, the directions issued in violation were not executable. The bank was
free to realise the decree debt from the property of the second and third
respondents in accordance with law and also against their person, if the decree
provided so.
25 Substituted service —
Only when the Court is satisfied that defendants cannot be served personally —
Civil Procedure Code, Order 5, Rule 20.
[ Harbhajan Singh & Anr.
v. L.Rs. of Gardhara Singh, AIR 2010 Raj 170]
In the year 1983, the
respondent/plaintiff filed a suit for specific performance of the contract
against the appellants/defendants. The summons issued by the Court could not be
served in the ordinary course and therefore, on an application preferred on
behalf of the respondent/plaintiff, the service upon the appellants/defendants
was directed to be effected by way of substituted service i.e., by
publication of the summons in the daily newspaper. On publication of the summons
as directed by the Court, the service upon the appellants/defendants was treated
to be complete and since nobody appeared on their behalf when the matter was
called out, ex parte proceedings were ordered against them. Ultimately,
the suit was decreed ex parte.
The appellants/defendants
filed an application under Order IX, Rule 13, CPC for setting aside the ex
parte decree. It was stated therein that at the relevant time, when the suit
was filed, the appellant/defendant Harbhajan Singh was residing at Village
Rodala, Tehsil Ajnala, district Amristar and the appellant/defendant Amritpal
Singh was in defence service, however, the summons were not served upon
them personally.
The Court held that the mode
of substituted service can be resorted to only when the Court is satisfied that
there is reason to believe that the defendant is keeping out of way for the
purpose of avoiding service or that for any other reason, the summons cannot be
served in the ordinary way. The personal service of summons in the ordinary way
is a rule and the substituted service is an exception. Therefore before passing
any order for substituted service on the basis of the material on record, the
Court must be satisfied that the conditions stipulated in O.5, R.20 exists.
However, there is a presumption that service substituted by the order of the
Court shall be as effectual as if it had been made on the defendant personally.
In the instant case the
Court had directed for substituted service upon the defendants by way of
publication in the newspaper on mere asking of the plaintiff without recording
any finding as to in what circumstances the defendants could not be serviced in
the ordinary course. The substituted service being presumptive in nature should
not be resorted to by the Court unless on the basis of the material on record,
it stands satisfied that the defendants are avoiding the service or for any
other reason, the summons cannot be served upon them personally in the ordinary
way. On the facts and in the circumstances of the case, the Court could not have
proceeded to pass an order for substituted service in a casual manner solely on
the basis of the plaintiff’s desire to serve the defendants by substituted
service. Hence service of summons cannot be considered to be sufficient and in
accordance with law. The ex parte order was set aside.
23 Right to Information —
Notes or jotting by Judges or their draft judgments cannot be said to be
information held by public authority — Right to Information Act, 2005, S. 2.
[ Secretary General, SC
of India v. Subhash Chandra Agarwal, AIR 2010 Del. 159 (FB)]
The appeal is against the
order passed by the ld. Single Judge whereby the request of the respondent (a
public person) for supply of information concerning declaration of personal
assets by the Judges of the Supreme Court was upheld.
One of the issue that arose
for consideration was the meaning of term information u/s.2(f) of the Act. The
Court held that the preamble to the Act says that the Act is passed because
‘democracy requires an informed citizenry and transparency of information which
are vital to its functioning and also to contain corruption and hold Govt. and
their instrumentalities are accountable to the governed’. The Act restricts the
right to
information to citizens (S. 3). An applicant seeking in formation does not have
to give any reasons
why he/she needs such information except such details as may be necessary for
contracting him/her. Thus, there was no requirement of locus standi for
seeking information.
The Court further held that
the source of right to information does not emanate from the Right to
Information Act. It is a right that emerges form the constitutional guarantees
under Article 19(1)(a) of the Constitution of India. The Right to Information
Act is not repository of the right to information. Its repository is the
constitutional rights guaranteed under Article 19(1)(a). The Act is merely an
instrument that lays down statutory procedure in the exercise of this right. Its
overreaching purpose is to facilitate democracy by helping to ensure that
citizens have the information required to participate meaningfully in the
democratic process and to help the governors accountable to the governed. In
construing such a statute the Court ought to give to it widest operation which
its language will permit. The Court will also not readily read words which are
not there and introduction of which will restrict the rights of citizens for
whose benefit the statute is intended.
The words ‘held by’ or
‘under the control of u/s. 2(j) will include not only information under legal
control of public authority, but also all such information which is otherwise
received or used or consciously retained by the public authority in the course
of its functions and its official capacity. There are any numbers of examples
where there is no legal obligation to provide information to public authorities,
but where such information is provided, the same would be accessible under the
Act. For example, registration of births, deaths, marriages, applications for
election photo identity cards, ration cards, PAN cards, etc.
The apprehension that unless
a restrictive meaning is given to S. 2(1)(j), the notes or jottings by the
Judges or their draft judgments would fall within the purview of the Information
Act was misplaced. Notes taken by the Judges while hearing a case cannot be
treated as final view expressed by them on the case. They are meant only for the
use of Judges and cannot be held to be a part of a record ‘held’ by the public
authority. However, if the Judge turns in notes along with the rest of his files
to be maintained as a part of the record, the same may be disclosed. It would be
thus retained by the registry. Even the draft judgement signed and exchanged is
not to be considered as final judgments, but only tentative view liable to be
changed. A draft judgment therefore, obviously cannot be said to be information
held by a public authority.
21 Nominee rights — Bank
account — Death of depositor — Banking Regulation Act, 1949 S. 45ZA(2).
[ Ram Chander Talwar &
Anr. v. Devender Kumar Talwar & Ors., (2010) 159 Comp. Cas. 646 (SC)]
The appellant who was the
nominee in the bank account held by his deceased mother claimed full rights over
the money lying in the account, to the exclusion of the respondent who was none
else than his full brother. The claim is based on S. 45ZA of the Banking
Regulation Act, 1949, which according to him, made the nominee of the depositor
the sole beneficiary, vested himwith all the rights of the sole depositor.
The Supreme Court held that
S. 45ZA(2) of the Banking Regulation Act, 1949 merely puts the nominee in the
shoes of the depositor after his death and clothes him with the exclusive right
to receive the money lying in the account. It gives him all the rights of the
depositor so far as the depositor’s account is concerned. But by no stretch of
imagination does it make the nominee the owner of the money lying in the
account. The Banking Regulation Act, 1949 is enacted to consolidate and amend
the law relating to banking. It is in no way concerned with the question of
succession. All the monies receivable by the nominee by virtue of S. 45ZA(2)
would, therefore, form part of the estate of the deceased depositor and devolve
according to the rule of succession to which the depositor may be governed.
22 Partnership at will —
Notice given by one partner specifically stating that thereby he was dissolving
the firm — Partnership would stand dissolved — Partnership Act, 1932; S. 7 and
S. 42.
[ Hukumchand Bhaulal
Patani & Ors. v. Dhanlal Premraj Kale & Ors., AIR 2010 (NOC) 1106 (Bom.)]
The Respondent Nos. 1 to 3
were the original plaintiffs. They had filed the suit for declaration that the
partnership firm in the name and style ‘H.B. Patani & Company’ had been
dissolved and for settlement of accounts with interest on the amount due. The
Trial Court decreed the suit declaring that the partnership had been dissolved
on 20-1-1980 and the share of the plaintiffs in the partnership firm was ½ and
that of the present appellants ( original defendants Nos. 1 to 5) was ½.
The partnership was for
dealing in kerosene and crude oil. Premchand Kale had ½ share and the appellant
Nos. 1 to 5 who formed a joint family had ½ share in the partnership. The
partnership was at will and therefore a partner had a right to terminate
partnership with three months’ notice. The appellant No. 1 Hukumchand had joined
the partnership as Karta of the Joint Undivided Hindu Family (‘HUF’) of the
appellant Nos. 1 to 5. By notice dated 26-10-1979, Premraj Kale terminated the
partnership. In the circumstances suit was filed. It was also stated that due to
death of Premraj Kale on 14-12-1980 also, the partnership had come to an end. It
was also said that after the dissolution of the partnership firm, the defendant
appellants did not have right to do business in the property of the plaintiffs.
The decree passed by the Trial Court for declaration and settlement of account
was confirmed, which was challenged in the second appeal. The Court held that S.
7 of the Indian Partnership Act, 1932 defines ‘partnership at will’ to mean that
where no provision is made by contract between the partners for the duration of
their partnership, or for the determination of their partnership, the
partnership is ‘partnership at will’. S. 43 prescribes the manner for
dissolution of partnership at will. It says that where the partnership is at
will, the firm may be dissolved by any partner by giving notice in writing to
all the other partners of his intention to dissolve the firm. As per S. 42(c),
subject contract between the partners a firm is dissolved by the death of a
partner. In the case, there was nothing to show that the partnership deed
indicates that even after the death of one partner, another partner was entitled
to continue the partnership firm. So, in the absence of any specific term in the
deed of partnership for its continuation after the death of one of the partners,
it is to be presumed that after the death of Premchand, the partnership firm
stood dissolved in terms of S. 42(c) of the Partnership Act.
There were only two partners
in the partnership firm, namely, Hukumchand who was admitted as Karta on behalf
of HUF and Premchand who was admitted in his individual capacity. There was no
provision in the partnership deed to include any new partner by either partner
or by the surviving partner. So, it does not appear that the partnership firm
was expected to continue even after the termination notice by Premchand or
subsequent to his death. There was no provision in the partnership deed for
taking a new partner in place of the retired or died deceased partner. The
partnership was at will and it had come to an end and stood dissolved as a
result of notice given by Premchand specifically stating that he was dissolving
the partnership firm, so also by his subsequent death.
25 Practice of Law – Foreign law firms are not eligible to
open liaison offices or to practice law in India. Even giving an opinion on a
legal matter amounts to “practise of law”: Advocates Act
Lawyers Collective vs. Bar Council
(Bombay High Court)
(itatonline.org)
White & Case, a foreign law firm, was granted permission by
the RBI, u/s 29 of FERA, to open a liaison office in India. A PIL was filed
contending that such permission was in contravention of S. 29 of FERA as well as
S. 29 of the Advocates Act. Upholding the challenge, the Hon’ble High Court held
as hereunder:
(i) The liaison offices opened by the foreign law firm to
act as a coordination and communications channel between the head office/
branch offices and its clients, in and outside India, related to providing
legal services to the clients.
Similarly, the
liaison activity of providing “office support services for lawyers of those
offices working in India on India related matters” and drafting documents,
reviewing and providing comments on documents, conducting negotiations and
advising clients on international standards and customary practices relating
to the client’s transaction etc. was nothing but the practice of the
profession of law in non litigious matters;
(ii) U/s 29 of FERA, the RBI has power to grant permission
to carry on “activities of a trading, commercial or industrial nature”. There
is a fundamental distinction between professional activity and the activity of
a commercial character. As the liaison activities of foreign law firms relate
to the profession of law, no permission could be granted to the foreign law
firm under Section 29 of FERA;
(iii) S. 29 of the Advocates Act which provides that there
shall “be only one class of persons entitled to practice the profession of
law, namely, advocates”, applies not only to persons practicing as advocates
before any court/authority in litigious matters, but also to persons
practicing in non litigious matters as well. Practising the profession of law
involves a larger concept while practising before the courts is only a part of
that concept.
(iv) The argument of the UOI that if it is held the
Advocates Act applies to persons practising in non-litigious matters, then no
bureaucrat would be able to draft or give any opinion in non-litigious matters
without being enrolled as an advocate is without merit because there is a
distinction between a bureaucrat drafting or giving opinion during the course
of his employment and a law firm or an advocate drafting or giving opinion to
clients on a professional basis. Further, while the bureaucrat is answerable
to his superiors, a law firm or an individual engaged in non litigious matters
is answerable to none. To avoid such anomaly, the Advocates Act has been
enacted so as to cover all persons practising the profession of law, be it in
litigious matters or in non-litigious matters.
Consequently, the RBI was not justified in granting permission to the foreign
law firms to open liaison offices in India u/s 29 of FERA. Further, the foreign
law firms were not entitled to practise in non litigious matters in India
without following the provisions of the Advocates Act.
24 Co-operative Societies – Housing Society – Redevelopment:
Minority members of co-operative society bound by the resolution passed by the
majority: Co-operative Societies Act.
Girish Mulchand Mehta and Durga Jaishankar Mehta Vs. Mahesh
S. Mehta and Harini Co-op. Hsg. Soc. Ltd. & Ors
Appeal No. 338 of 2009 (unreported Bombay High Court)
Dated 10.12.2009
The respondent society entered into an agreement dated
7.5.2008 to demolish an existing old building and to develop the plot/ property
as agreed.
There is no dispute that the agreement provides a time bound
schedule: to complete the project within 18 months from the date of receipt of
the full commencement certificate from MCGM. It also provides that pending
construction, the developer has to provide alternate suitable residential
accommodation to the respective members. Out of the 12 members, 10 members have
already shifted to the premises provided by respondent society.
The appellants are the members who objected in the Special
General Body Meeting, dated 2.3.2009, by endorsing ‘not agreeable’. However, the
resolution was passed by a majority. This resolution remained unchallenged.
The dispute was pending before the Arbitrator as the society
was unable to handover the possession to the developer. As the relief claimed in
the petition could not be granted under Sec. 17 of the Act, the Society had
invoked Sec. 9 of the Arbitration Act in the given background. The Hon’ble High
Court allowed the petition of the respondent society by appointing a receiver.
Against the said order, the minority members had preferred the present appeal.
The Hon’ble Court held that the appellant minority members
were bound by the agreement between the developer and the society. The purpose
of the society which is governed and run in pursuance of the MCS Act is to have
cooperation from all its members to fulfil its aims and objectives as per the
bye-laws of the society. Therefore, merely because two members are objecting to
the said resolution, it in no way affects the special resolution passed by the
majority and the agreement entered into between the parties accordingly. The
parties are bound by the same. It was a well established position that once a
person becomes a member of the co-operative society, he loses his individuality
with the society and has no independent rights except those given to him by the
statute and the bye-laws. The member has to speak through the society or rather
the society alone can act and speaks for him qua the rights and duties of the
society as a body. So, as long as the resolutions passed by the general body of
the Respondent No. 2 Society were in force, and not overturned by a forum of
competent jurisdiction, the said decisions would bind the appellants.
Sec. 9 of the Act, as invoked in the present matter, was
basically against Respondent No. 1 Society, as in its reluctance, it was unable
to hand over the premises, and, therefore the necessary commencement certificate
could not be obtained to proceed and complete the construction within 18 months;
because the minority members were not cooperating. Any delay was not in the
interest of the parties as well all the society members. The society has no
objection if the relief as prayed was granted by way of appointing a receiver.
Thus
Sec. 9 was rightly invoked in aid of the main relief/claim
which was pending before the Arbitral Tribunal. The appellants were not parties
to the agreement in question. The society had entered into the said agreement,
where there was a clause of arbitration. At this stage, all the members are
bound by the same. The relief under Sec. 9 of the Act, therefore, was rightly
granted against the consenting society.
In the present case the majority decision/ resolution
followed by the agreement binds the society and its members under the law.
Hence, the receiver appointed to handover vacant possession to the developer for
demolition and redevelopment was upheld.
Each person has an equal right to a fully adequate scheme of equal basic liberties which is compatible with a similar scheme of liberties for all.
Social and economic inequalities are to satisfy two conditions. First, they must be attached to offices and positions open to all under conditions of fair equality of opportunity; and second, they must be to the greatest benefit of the least advantaged members of society.
It is worth recalling Rawls’ views on justice and equality. He stressed the so called “primary goods” which are necessary to achieve various objectives, and he included in primary goods liberties, opportunities, income and self-respect.
It will be apt to remember Rawls when we talk of justice in the context of India. It is generally agreed that the economy has seen unprecedented growth this decade, even after allowing for the blip last year. It is also an accepted view that post-1991, the years have unleashed the entrepreneurial spirit of Indians and the realization of aspirations of many. So far, so good! But have all Indians seen the improvement in the standard of living and also the increase in opportunities?
The GDP figures do not convey the complete picture. It gives a macro picture of an economy whose people may be growing (or de-growing) economically at varying percentages. To talk optimistically or pessimistically about the economy based on the GDP growth for the population as a whole is akin to the person wanting to cross a river which has an average depth of 4 ft, but much greater depth at several points.
We do not have to reinvent the wheel to understand how we are doing in eradicating poverty or achieving uniform primary education and so on.
Nine years ago, in September, 2000 the heads of states of various governments met at the Millennium Summit, and then committed to the Millennium Development Goals (MDG) by 2015. It was arguably the largest gathering of world leaders in history. MDGs are broadly eight goals ranging from eradication of poverty to ensuring environmental sustainability.
Unfortunately, our pursuit towards achieving these MDGs has not received the attention it deserves. Neither has it captured the headlines nor our politicians’ bytes. When I was the Chairman of the Confederation of Indian Industry (CII), Karnataka last year, on occasions when one could talk on this matter to senior government officials and ministers, one could not see in most of them the imperative to achieve the Millennium Development Goals, although there was awareness.
With only six years to go, a reality check is due.
Goal No. 1: Eradicate extreme poverty and hunger
Halve, between 1990 and 2015, the proportion of people whose income is less than 1.25 dollar a day
We still have 41.6% of the population living on less than 1.25 dollars a day. This was 49.4% in 1994, the earliest year for which data is available.
Achieve full and productive employment and decent work for all, including women and young people
The employment to population ratio was 55.4% in 2007, marginally lower than 59% in 1991.
Halve, between 1990 and 2015, the proportion of people who suffer from hunger
This proportion for India is 21%, down by only 3% from the early 90s.
Goal No. 2: Achieve universal primary education
Ensure that by 2015, children will be able to complete a full course of primary schooling
The net enrolment ratio in primary education has gone up to 94.3%. However, only 65.8% of the pupils will complete primary education. Even Pakistan scores higher with 69.7%! Sri Lanka is way ahead with 93%.
Goal No. 3: Promote gender equality and empower women
Eliminate gender disparity in primary and secondary education, preferably by 2005, and in all levels of education no later than 2015
The ratio of girls to boys in secondary education is 0.83, indicating a vast gender inequality.
Goal No. 4: Reduce child mortality
Reduce by two-thirds, between 1990 and 2015, the under-5 mortality rate
The under-5 mortality rate (per 1000 live births), though has fallen from 117 in 1990, is still 72. This is higher than even Bangladesh’s 61.
Goal No. 5: Improve maternal health
Reduce by three-fourths, between 1990 and 2015, the maternal mortality ratio
Maternal mortality (per 100,000 live births) in India was 450 in 2005 (the latest year for which data is available). China has a mortality rate of 45.
Achieve, by 2015, universal access to reproductive health
Antenatal care coverage (percent of live births) is 74. Sri Lanka is much higher at 99%.
Goal No. 6: Combat HIV/AIDS, malaria, and other diseases
Have halted by 2015, and begun to reverse, the spread of HIV/AIDS.
HIV prevalence (percentage of population 15
– 49 years) is 0.3% in India, down from 0.5% in 2001.
Achieve, by 2010, universal access to treatment of HIV/AIDS for all people who need it
Statistics on the proportion of population with advanced HIV infection with access to antiretroviral is not available for India. This is an important mea-sure about which we do not have public data.
Have halted by 2015, and begun to reverse the incidence of malaria and other major diseases. Incidence of tuberculosis (per 100,000 population) is 168 — not undergone any change since 1990
Goal No. 7: Ensure environmental sustainability
Proportion of land area covered by forests has increased from 21.5% in 1990 to 22.8% in 2005. Carbon dioxide emission, however, has more than doubled in the same period.
Halve, by 2015, the proportion of people without sustainable access to safe drinking water.
Population using improved water sources (percent-age) has gone up from 71 in 1990 to 89 in 2006. Population using improved sanitation facilities though has doubled in terms of percentage, it is still very low at 28%. Consider Sri Lanka, which has a figure of 86 %.
Goal No. 8: Develop a global partnership for development
Deal comprehensively with debt problems of developing countries through national and international measures, in order to make debt sustainable in the long-term
Debt service as a percentage of exports has come down from 29.3 in 1990 to 3.7 in 2007.
In cooperation with the private sector, make available the benefits of new technologies, especially information and communications
Telephone lines per 100 heads of the population have increased from 0.6 in 1990 to 3.2 in 2008. The cellular subscription has dramatically increased from 0.35 in 2000 to 29.24 in 2008.
Amartya Sen, in his book “The Idea of Justice” has remarked that our mental make-up and desires tend to adjust to circumstances; particularly to make life bearable in adverse situations. The hopelessly de-prived may lack the courage to desire any radical change and typically tend to adjust their desires and expectations to what little they see as feasible. They train themselves to take pleasure in small mercies. He further writes that to overlook the intensity of their disadvantage merely because of their ability to build a little joy in their lives, is hardly a good way of achieving an adequate understanding of the demands of social justice.
If a certain proportion of the population has been able to have greater opportunities in the last few years, it will be sheer injustice if this is not avail-able to everyone in the country. The tragic part is, as the data quoted above indicates, we are a long way from achieving what was thought as minimum development goals. The greater tragedy is that the central and state governments do not even talk about where they are vis-à-vis these goals, and what they are doing to reach them.
Come to think of it: If the politician in each constituency sets for himself the above goals and initiates measures to realize them, people will enthusiasti-cally vote for him.
We may be the 12th largest economy in terms of GDP with over $1 trillion gross output, but if 42% of the population still lives on less than 1.25 dollar a day or the availability of improved sanitation facili-ties is only 28%, there is a deep rooted malady.
Our poor may have adjusted themselves to the above circumstances, but to regard this as a normal and acceptable situation is the greatest injustice of all.
Takeaways
Convergence with IFRS, by implication, would mean that entities will have to completely change the way contracts are drafted and accounted for. In a nutshell, for every contract, one would have to follow a systematic process involving some basic tenets:
The trading environment is amongst the inherently more risky
control environments in any organisation. The susceptibility to fraud and the
ability of financial errors tends to be inherently higher in this area. The last
two decades have witnessed a large number of incidents comprising of frauds,
mismarking (valuation) and trading with excessive positions. Let’s get a closer
look at auditing a trading environment.
A typical trading environment is centred around the trader in
an organisation. The control environment around the trader comprises of a
supervisor who oversees his activities, back office or operations which performs
confirmation and settlement function, mid office which performs valuation and
analysis, finance, risk management and other control environment functions. Mid
office is known by different names in different organisations (including finance
and back office). However, the reference here is to the function which performs
valuations and analyses the profit & loss.
The following aspects tend to be the key areas in an audit of
trading environment :
1. Supervision :
Oversight by the trader’s supervisor(s) is a major control
point in a trading business. While this is not an independent function, the
supervisor will be in best position to spot any untoward trading or frauds. Key
elements of the audit should include a review of nature and quality of
information available on trading positions from independent functions, ability
of the supervisor to review the risks of trading positions on real-time basis
and role of the supervisor in monitoring abnormal events such as abnormal spurts
in profitability, risk positions and number of trades. Special emphasis should
be on review of trades at abnormal rates and surveillance mechanism to detect
circular trading, market manipulation and rate reasonableness review for
non-exchange traded products.
A number of frauds have occurred as trades have been
cancelled and rebooked or modified before being valued by valuation teams
(finance or mid office) and restored back to original status after a valuation
is done. This is done to artificially lower the cost of purchases before
securities or positions are valued (and calculation of profitability) and then
bring them to realistic values again after this is done. To counter this, all
cancellation of trades or modification of trades should be reviewed by the
supervisor as well as someone independent in back office/operations along with
reasons for the cancellation/modifications on a daily basis. The auditor should
assess if this process is working effectively.
Apart from daily trade reviews, it is important that the
traders are subjected to a mandatory leave policy without access to office
resources or communication and that they have no edit access to systems used for
valuation of securities/positions.
2. Settlement and confirmations functions :
Settlement function pertains to payment and receipt of funds
or securities (including shares and bonds). Confirmation pertains verifying
genuineness of trades either by matching with the exchange or with the
counterparty.
This function is commonly conducted by a back office (or
operations). This function may not be complex if the products are traded on
exchanges (like equity shares) or has a clearing house (like the bond trades
done on Negotiated Dealing System — Order matching) or has a confirmation
platform (like swap derivative trades). This is because the confirmation and/or
settlement is centralised with a clearing house which makes the process more
simple and quick. In all other cases, this may be complex.
The most important aspect to review in this area is the level
of independence of the back office/operations — both in form as well as
substance. While it is easy to assess the formal reporting lines to establish
independence, it is difficult to review whether the back office is independent
in substance. Matters such as exception reports, rigour of follow-up of open
items, decisions taken by the back office/operations head in conflicting
situations generally demonstrate their independence.
Apart from this, a review of design of process, adequacy,
quality and past experience of staff are important.
One of the other big risk factors in the back
office/operations processes pertains to segregation of duties and oversight to
avoid one person having too much control in their hands :
In case, the products are not exchange-traded or not settled via a clearing house, confirmations are obtained from each contracting party (counter-party) separately. At times, it may take time to obtain this. In such cases, focus on follow-up of aged outstanding confirmations and ability to enforce the legality of trade in light of confirmation being challenged are additional factors to be reviewed.
3. Valuations:
Valuation of portfolio/positions is usually performed by a mid office (in case there is one) or finance team. This may be a simple matter of picking last traded rates from an exchange quotation or can be complex in case the prices for valuation are not easily available. These have historically been areas of a number of frauds and mismarking incidents globally.
The auditor should review the policies and procedures for valuation. In case the products are exchange-traded (or valuation rates are easily available) the following matters should be looked at with a significant sense of judgment?:
In case, rates for valuations are not easily available, additional factors such as independence of those agencies or parties providing rates and ability of them to be able to correctly capture market be-haviour also needs to be reviewed.
Lastly, one also needs to consider the nature of profitability analysis. The valuation function should analyse and circulate a P&L explain statement regularly (preferably daily) which highlights where and why the organisation made trading revenues and losses. This goes a long way in understanding what trading activity is being conducted and whether profits are from genuine trading opportunities.
4. Risk management:
Risk management, is usually an independent group which oversees various risks emanating out of trad-ing. The most closely watched risk in a trading environment is market risk followed by credit risk.
Market risk:
While organisations having significant trading ac-tivities would usually implement a key element of market risk, such as Value at risk/DV01 or DeAR, depending on size and complexity, the auditor needs to evaluate whether a more granular structure is needed. In more complex trading scenarios, market risk should have a granular limit structure to monitor all applicable metrics (or Greeks) of market risks. The auditor also needs to consider reviewing the accuracy of risk metrics generated by risk systems/risk management. At times, use of external experts may be desirable to confirm accuracy of risk and valuation models. Market risk utilisation reports should be circulated to an important level of management and governance committees (where applicable). Finally, the limit setting process itself and level of limit utilisation are important factors to be looked at.
Credit risk:
While this may not apply in certain products, it is essential that any credit risk pertaining to customers and counterparties is monitored and captured. In case of derivative instruments, a reasonable measure needs to be devised to convert notional exposure to measurable credit risk metric.
5. Regulatory reporting:
Regulatory reporting requirements for organisations trading in equity shares (companies) are not significant. However, they are significant for a bank, insurance or an NBFC which trades more in fixed income or foreign exchange products.
Sustainability of reporting process including adequacy of staff, timeliness of reporting and accuracy of reporting tend to important from a regulatory reporting standpoint. Sustainability can be achieved by adequate trained back-up staff. Timeliness needs to be monitored by use of calendars and reporting checklists. Accuracy needs to be evaluated carefully. For automated reports the logic of items captured for reporting needs to be evaluated. For manually prepared reports, experience of staff and adequacy of documented procedures becomes important.
6. Technology and continuity:
Technology or systems are the back bone of trading environment. While system development, vendor support, etc. may be linked to an audit of trading activity, strictly this may not fall in a routine review of trading activities. Instead, robustness of systems, stability, capacity, security, access controls and reconciliations assume more importance in trading. The first three aspects may be investigated along with help of technology department by use of technical reports.
System security and access controls go a long way in avoiding unauthorised access and trading frauds. A regular review of access privileges (both at system and database end) is a must. Care should be taken to verify if access controls have not been ‘cleaned’ only for the purpose of a specific audit.
Trading environment usually comprises of a number of systems. Trade flow between systems and reconciliation controls to ensure that all systems have correctly captured information need a close review. A few frauds could have been avoided if this detective control would have worked correctly.
Business continuity planning helps manage disruptions. Auditors should consider evaluation of business continuity testing conducted and ability of trading activity to resume business in various critical scenarios.
7. Oversight and governance routines by management:
Finally, the management oversight routines and governance routines form the next line of security for an organisation. Senior management reviews over performance of the trading activity is important. Performance review should not be confined to profitability — but should include how well the desk manages risks and adheres to internal guidelines. In larger organisations, governance groups like asset liability committees (ALCO) are formed. It is important to evaluate the substance of their review through MIS.
Trading environments continue to become more complex with increasing number of products. This area also witnesses more and more sophisticated techniques for frauds. Internal audits in these areas go a long way in safeguarding an organisation’s assets.
Some well-known incidents which led to large trading losses in history with reasons:
Accounting standards are becoming increasingly complicated.
Though the standard-setters have their heart in the right place, and would want
to simplify the standards, the end result is that accounting standards are
becoming incomprehensible. The more the standard-setters try to simplify, the
worse it gets. One reason may very well be that businesses are getting
complicated, and transactions are not as simple as they used to be. A few years
ago, Indian GAAP had only 15 accounting standards; now that number has more than
doubled. Even International Financial Reporting Standards (IFRSs) would soon
cross 3000 plus pages.
Indian standards are inspired by IFRS. Therefore it would be
more appropriate to look at the development of IFRSs. These standards were
written over several years and with the assistance of different national
standard-setters. Consequently the lay out of the standards, the manner of
drafting and the use of English differ substantially. Recent IFRSs are drafted
more methodically, with a clear segregation of scope, definitions, recognition
and measurement, measurement after recognition, retirement and disposal,
disclosures, basis of conclusion, implementation guidance, etc. Therefore it is
of utmost importance that all old IFRS be drafted afresh, to make them
consistent with the recently issued standards.
There are a number of terms (see box) that have been used
frequently throughout the standards, which could mean different things to
different people; particularly given the fact that IFRSs would be used worldwide
and English in different countries is influenced by local culture. Therefore, a
term such as ‘may be accounted for in the following manner’ may be
interpreted in India as providing an alternative, though that may not be the
intention of the standard-setters. So also terms such as near term, current
period, short term, foreseeable future, long term, etc. or probable terms such
as probable of recovery, possible that it would be recovered, likely that it
would be recovered, highly unlikely that it would not be recovered, certain that
it would be recovered, etc. can create confusion. Firstly, these terms should be
reduced to a few standard terms and they should be used consistently across the
standards. Also, it would be more preferable to put some mathematical threshold
to these terms so that when it is being said that it is probable of recovery, it
should be known whether a 51%, 75% or 95% chance of recovery is applicable. In
India, we have already struggled with these terms, a prime example being the
requirement of virtual certainty with regards to recognition of deferred tax
assets in situations of unabsorbed losses and unabsorbed depreciation. Quite
clearly there is a lot that can be done in this area to clear the clutter.
Another debate is whether standards should be principle-based
or rule-based. It may be noted that though US GAAP is called rule-based
standards, it has a number of principles which are not translated
into detailed rules. So also though IFRS are principle-based, standards on
financial instruments almost read like a detailed rule book. In my view, the
whole argument of whether standards should be rule-based or principle-based is
futile. What we need is to hit that sweet spot where standards can be understood
easily and consistently.
Easier said than done, but with some hard work this can be achieved. Take for example, the accounting of multiple element contracts. Consider an example, where along with sale of software licence, post-contract customer support (PCS) will be provided over the next 6 months to a customer under a single contract. There are many accounting possibilities in this case. If there is price evidence for PCS, the price for software licence could be derived. This is known as the residual method. Alternatively, if there is price evidence for the software licence, the price for the PCS could be derived. This is known as the reverse residual method. Alternatively, the price for both elements may be known, and consequently the over-all discount on the contract may be allocated to the two elements, based on their relative fair values. A fourth possibility is the determination of revenue for the two elements by adding a uniform margin on their respective cost. The fifth possibility would be to keep the margin on the two elements different, to reflect their relative value and pricing in the market place. As can be seen, IFRS lends itself to multiple interpretations. Under US CAAP, the only method that is permitted is the residual method. Therefore under US CAAP, if there is no vendor-specific objective evidence (VSOE) of the undelivered element (in this case the PCS), no revenue can be recognised on the sale of licence. In such circumstances, the entire licence fee revenue is recognised ratably over the period during which the PCS is to be provided, rather than on delivery of the licence. As can be seen from the above example, US CAAP is very harsh and extensively rules-driven in this area. IFRS, takes the other extreme, is nebulous and lends itself to multiple interpretations. Quite clearly, this is an example where the sweet spot can be found and a common ground found between the two extreme approaches. US CAAP’s rule-based approach is founded by the fear that there would be abuse of standards if they are not fairly detailed. However, experience suggests otherwise – those who want to abuse the standards, would abuse them irrespective of whether those are based on principles or rules. Besides in many cases it is easier to abuse rules, by structuring the transaction in a desired manner. This is clearly seen in the area of leases, where lessees structure deals to escape finance lease classification. Another area which needs serious attention is the availability of too many accounting choices under IFRS. For example, fixed assets, intangibles, investment properties can be accounted using either the fair value model or cost model, actuarial differences in the case of employee benefits can be accounted for in a number of ways. Similarly choices are available in the case of government grants, impairment, financial instruments, etc. Too many choices result in inconsistency, lack of comparability and put to question the ability of standard-setters to make up their mind on the appropriate basis of accounting. Accounting is an art, not a pure science, and it should remain that way. Therefore, what is being suggested is not the elimination of judgment in the application of the standards. Nor is it being suggested that standards should be reading like rule books with too many bright line tests. What is being suggested is the use of appropriate and standard terminologies that should be used consistently, the removal of too many accounting choices, and principles that are not only easily understood, but tell you how the accounting should be done.
Adios to the Abyss.
Most of the RRC Participants reached Mahabaleshwar by lunch time on 9th January 2014. Around 50 of them used the travel arrangements made by BCAS from Mumbai to Mahabaleshwar. This time the Seminar Committee made special arrangements to welcome all the participants with a personalised pen and a gift hamper which was well appreciated.
DAY 1:
The RRC began with the Group Discussion on the paper written by CA Vishal Gada on Case Studies in Taxation.
In the Inaugural function which was held in the evening, CA Naushad Panjwani, President of the Society welcomed the members and gave an overview of the activities which are conducted by the Society.
CA Narayan Pasari, Convenor of the Seminar Committee proposed a hearty Vote of Thanks to the Chief Guest.
After the inaugural session, CA Amarjit Chopra, Past President of ICAI gave his presentation on “Companies Act, 2013 – Challenges in Accounting and Auditing” in his own humorous style covering all the issues related to the topic including some very serious and harsh provisions of the Act. He was concerned about the impact of some stray incidences like “Satyam” on the important enactments like the Companies Act, 2013. His underlying message to be vigilant while performing any professional duty was well received by all the participants.
This session was ably chaired by CA Uday Sathaye, Past President of the Society. The Vote of Thanks was proposed by CA K. K. Jhunjhunwala, a managing committee member .
The day ended with a sumptuous dinner in the huge dining hall of the Hotel.
DAY 2:
After breakfast, the participants discussed the paper written by Adv. K. Vaitheeswaran on Issues in Service Tax.
This session was ably chaired by CA Dr. Rakesh Gupta, an Ex-ITAT member, a participant from Delhi, who also raised few fundamental questions to the paper writer CA Vishal Gada, which were addressed by him during his presentation. CA Mulesh Savla, member Seminar Committee proposed the Vote of Thanks to the Paper Writer as well as the Chairman of the Session.
In the afternoon, all the participants got together for a group photograph.
The evening was free to the participants for some outings, refreshment and study for the subsequent papers. Some of the participants enjoyed playing cricket in the Hotel campus.
The day ended with a hot soup in the chilling atmosphere and a sumptuous dinner.
Unfortunately, a sad incident happened at night on the second day. One of our very senior members and a regular participant of the BCAS RRCs, CA Vinod S. Kothari expired due to severe heart attack. The committee members, along with a few other participants tried their level best to give him immediate medical assistance. However, he could not recover from the fatal heart attack.
DAY 3:
After breakfast, the participants discussed the paper written by CA Karishma R. Phaterphaker on “Domestic Transfer Pricing – Law, Issues & Documentation”.
This session was ably chaired by CA Anil J. Sathe, Past President of the Society and CA Raman Jokhakar, Jt. Secretary proposed a very well deserved Vote of Thanks to all the Brain Trustees.
The Entertainment Programme to be held in the evening was cancelled and the Presentation of the discussion paper by Adv. K. Vaitheeswaran was taken up in the evening session. Adv. K. Vaitheeswaran dealt with all the case studies of his paper in a very lucid and humorous way. He gave different dimensions to the controversial issues. With the increasing importance of the Service Tax practice, his guidance on the issues will go a long way and help participants in their day to day practice.
This session was chaired by CA Pranay Marfatia, Past President of the Society. CA Saurabh Shah, Seminar Committee Member, proposed the Vote of Thanks.
The day ended with tempting dinner followed by a variety of desserts.
DAY 4:
The session was chaired by CA Nitin Shingala, vice president of the Society and the Vote of thanks was proposed by CA Ravi Shah.
In the concluding session, CA Nayan C. Parikh, Past President of the BCAS and a senior member of the Seminar Committee took an overview of the 47th RRC and recognised the contribution made by everybody expressing his gratitude for the efforts put in by them. He specially thanked the President for his whole hearted support and lead in organising the Residential Refresher Course. One of the participants CA Keyur R. Thakkar presented a very nice poem composed by him covering each and every event of the RRC. CA Naushad Panjwani, President of the Society, thanked everybody for making the RRC memorable. Participants departed after lunch to their respective destinations by cherishing the memories of 47th RRC and with a promise to meet again next year at the 48th RRC.
Whether activity of installation of heating, ventilation or air-conditioning including related pipe & duct work was exigible to service tax before 16-06-2005?
Facts:
Appellant engaged in the execution of various HVAC projects on turnkey including activities of fabrication, installation and commissioning, obtained service tax registration and started paying service tax and filing of returns from 16-06-2005 onwards. Revenue demanded service tax for HVAC work done from 01-07-2003 to 15-06-2005 after 2 years of submission of details. They challenged the said SCN on the ground that the activity of installation of heating, ventilation, air-conditioning (HVAC) along with related pipe & duct work was included first time in the definition of “erection, commissioning or installation” service with effect from 16-06-2005 onwards and therefore the same was not covered under the definition of erstwhile service and also challenged the demand on the ground of limitation. Respondent confirmed the service tax demand rejecting both the arguments.
Held:
Referring to the definition of “erection, commissioning & installation” service as existed in the statue before and after 15-06-2005 it was held that, though the heating, ventilation, air–conditioning (HVAC) is specifically included in the definition after 15/06/2005, the earlier definition used to cover within its purview ‘installation of plant, machinery or equipment’ and HVAC is nothing but a plant which provides heating, ventilation & air-conditioning and therefore the same gets covered from earlier period and therefore the service tax is applicable on the HVAC installation. However, on the ground of limitation, Tribunal observed that, Appellant had submitted the details pertaining to period 2003 to 2005 on 05-09-2005 and therefore Respondent should have issued SCN within 1 year from this date. The Tribunal held that the SCN was time-barred and demand unsustainable on the limitation ground.
Reimbursable expenses not to be included in the taxable value related to Clearing & Forwarding agents service.
Facts:
The revenue was in appeal against the order of the Hon. Tribunal holding that reimbursable expenses received by the assessee was not includible in the taxable value and that only the amounts received as remuneration / commission from their principals was assessable to tax and referred to the decision of Sri Sastha Agencies Pvt. Ltd. vs. Asst. Commissioner 2007 (6) STR 185 (Tri-Bang).
Held:
Upholding the Tribunal’s view, the Hon. High Court stated that in the absence of any material to show the understanding between the principal and the client that the commission payable was all inclusive, it was difficult to hold that the gross amount of remuneration/commission would include expenditure incurred by the assessee and that all incidental expenses would also form part of the assessable value.
